why every business owner needs a family dynasty trust€¦ · lawpracticecle unlimited...
TRANSCRIPT
2020 Edition
Why Every Business Owner Needs a Family Dynasty Trust
All Courses. All Formats. All Year.
LawPracticeCLEUnlimited
ABOUT USLawPracticeCLE is a national continuing legal education company designed to provide education on current, trending
issues in the legal world to judges, attorneys, paralegals, and other interested business professionals. New to the playing �eld, LawPracticeCLE is a major contender with its o�erings of Live Webinars, On-Demand Videos, and In-per-son Seminars. LawPracticeCLE believes in quality education, exceptional customer service, long-lasting relationships,
and networking beyond the classroom. We cater to the needs of three divisions within the legal realm: pre-law and law students, paralegals and other support sta�, and attorneys.
If you are interested in teaching for LawPracticeCLE, we want to hear from you! Please email our Directior of Operations at [email protected] with your information. Be advised when speaking for LawPracticeCLE, we require you to provide the bellow items related to your course:
WHY WORK WITH US?At LawPracticeCLE, we partner with experienced attorneys and legal professionals from all over the country to bring hot topics and current content that are relevant in legal practice. We are always looking to welcome dynamic and accomplished lawyers to share their knowledge!
As a LawPracticeCLE speaker, you receive a variety of bene�ts. In addition to CLE teaching credit attorneys earn for presenting, our presenters also receive complimentary tuition on LawPracticeCLE’s entire library of webinars and self-study courses.
LawPracticeCLE also a�ords expert professors unparalleled exposure on a national stage in addition to being featured in our Speakers catalog with your name, headshot, biography, and link back to your personal website. Many of our courses accrue thousands of views, giving our speakers the chance to network with attorneys across the country. We also o�er a host of ways for our team of speakers to promote their programs, including highlight clips, emails, and much more!
1. A Course Description2. 3-4 Learning Objectives or Key Topics3. A Detailed Agenda4. A Comprehensive PowerPoint Presentation
CONTACT US
941-584-9833 www.lawpracticecle.com 11161 E State Road 70 #110-213Lakewood Ranch, FL 34202
LAWPRACTICECLE UNLIMITEDLawPracticeCLE Unlimited is an elite program allowing attorneys and legal professionals unlimited access to all Law-PracticeCLE live and on-demand courses for an entire year.
LawPracticeCLE provides twenty new continuing legal education courses each month that will not only appeal to your liking, but it will also meet your State Bar requirement.
Top attorneys and judges from all over the country partner with us to provide a wide variety of course topics from basic to advanced. Whether you are a paralegal or an experienced attorney, you can expect to grow from the wealth of knowledge our speakers provide.
ACCREDITATIONLawPracticeCLE will seek approval of any CLE program where the registering attorney is primarily licensed and a singlealternate state. The application is submitted at the time an attorney registers for a course, therefore approval may not be received at the time of broadcasting. In the event a course is denied credit, a full refund or credit for another Law-PracticeCLE course will be provided.
LawPracticeCLE does not seek approval in Illinois or Virginia, however the necessary documentation to seek CLE creditin such states will be provided to the registrant upon request.
ADVERTISING WITH LAWPRACTICECLEAt LawPracticeCLE, we not only believe in quality education, but providing as many tools as possible to increasesuccess. LawPracticeCLE has several advertising options to meet your needs. For advertising and co-sponsorshipinformation, please contact the Director of Operations, Jennifer L. Hamm, [email protected].
CHECK US OUT ON SOCIAL MEDIAFacebook: www.facebook.com/LawPracticeCLE
Linkedln: www.linkedin.com/company/lawpracticecle
lnstagram: www.instagram.com/lawpracticecle
Twitter: www.twitter.com/LawPracticeCLE
COURSE CATEGORIESA View From The BenchAnimal LawBankruptcy LawBusiness LawCannabis LawConstruction LawCriminal LawCybersecurity LawEducation LawEmployment LawEntertainment Law
Estate PlanningEthics, Bias, and ProfessionalismFamily LawFederal LawFood and Beverage LawGun LawHealth LawImmigration LawIntellectual Property LawInsurance LawNonpro�t Law
Paralegal StudiesPersonal Injury LawPractice Management & Trial PrepReal Estate LawReligious LawSocial Security LawSpecialized TopicsTax LawTechnology LawTransportation LawTribal Law More Coming Soon ...
WHY EVERY BUSINESS OWNER NEEDS A FAMILY DYNASTY TRUST
P R E S E N T E D B Y: L A Z A R O J . M U R , E S Q .
A V P R E E M I N E N T R A T I N G - F O U N D E R , T H E M U R L A W F I R M , P . A .W W W . M U R L A W . C O M
THE MUR LAW FIRM, P.A.“Serving The World
One Client at a Time”
LAZARO J. MUR, ESQ.
AV Preeminent Rating
Founder, The Mur Law Firm, P.A.
www.murlaw.com
Lazaro J. Mur, Esq. Founder of The Mur Law Firm, P.A. Mr. Mur has
been serving the international business community since 1985, has an
AV Preeminent Rating from Martindale-Hubble, has been quoted by
the Wall Street Journal, is Former Chair of the Florida State Hispanic
Chamber of Commerce, lectures on the topics of Global Asset
Protection and International Tax Planning on behalf of the National
Business Institute, LawPractice CLE; LawPro CLE and myLawCLE;
and is a contributing Author for Mundo Offshore, EB-5 Investor
Magazine and other World Class Journals.
2
ABOUT PRESENTER
OVERVIEW
This course will cover the various types of business succession
strategies and why every Business Owner needs a Family Dynasty
Trust. Clarification of Misconception - Why Revocable Living Trusts
are NOT Family Dynasty Trust. In addition, there will be a detailed
discussion on the benefits of holding the family business in an
Internal Revenue Code Section 678 Trust for Asset Protection
purposes.
3
COURSE SUMMARY
The most critical decision to make from an Asset Protectionpoint of view is choosing the business entity.
While some entity types may make business and economicsense, they provide no asset protection for business owners.
Business owners often utilize various different types of assetprotection trusts, whether DAPT or FAPT.
Holding the family business in a Section 678 Trust not onlyplans for business succession, and minimizing estate taxes, butalso provides asset protection for business owners.
4
TABLE OF CONTENTS
I. Overview of Domestic Asset Protection Trusts, including a Family Dynasty Trust
II. Overview of Offshore Asset Protection Trusts
III. Hold The Family Business Entity Interest in Trust
I. Asset Protection
II. Estate Planning
III. Avoid Probate
IV. Business Succession
IV. The Section 678 Trust and The Family Business
5
A. Introduction What is a Dynasty Trust?
• A dynasty trust is a way to pass wealth to future generations. Perpetual trusts differ from mostother trusts in the length of time they last and the control they offer. The most important functionis that dynasty trusts are designed to last for longer periods of time compared to most trusts.Depending on the state where the generation-skipping trust is established, they can last forseveral generations or over hundreds of years.
• Not all states allow these longer periods, which make dynasty trusts useful. Because a dynasty is ageneration-skipping trust, it avoids some repetitive taxation. It also limits how future generationscan access the family trust. Due to the common law rule against perpetuities, most trusts wouldend no later than 21 years after the death of an involved individual, such as a beneficiary who wasalive at the time it was created. Irrevocable dynasty trust states have adopted some form ofperpetuity reformwhich allows for longer trusts.
• Dynasty or family trust funds are also irrevocable. Once they are formed, the grantor has nocontrol over the assets. However, when creating the trust, the grantor can specify how the trust isto be managed, what control the trustee has, and how distributions will be made to beneficiaries.In contrast, a grantor trust or revocable living trust allows the grantor to withdraw or changeaspects of the trust. A family trust can be set up to allow beneficiaries some levels of flexibility inmanaging assets. These trusts can also stipulate how funds are to be distributed to futuregenerations.
6
7
Dynasty trusts can help you save a great deal of money on taxes. Since this is a type ofirrevocable trust, once the assets are inside, they can avoid some taxable events whichallow for massive compounding power. This is especially valuable if using tax-freeinvestments. The typical flow of the grantor’s estate from parents to children would besubject to gift and estate taxes as well as generation-skipping tax in some cases. Underthe current tax law, using dynasty or legacy trusts means the estate would only facethose taxes once and can thus grow much faster over time. Funding the dynasty trust inthe next few years also takes advantage of the much higher tax exemptions allowed bythe Tax Cuts and Jobs Act. An irrevocable dynasty trust can lock in the exemptions usedto fund it and bypass the need for future generations to claim the exemptions as well.Trust planning is important because these exemption levels are currently set to expire by2025 unless renewed byCongress.
Why You Need a Dynasty Trust
8
Dynasty trusts also allow the grantor to direct how funds will be released tofuture generations. This allows the creator to determine how much and inwhat situations that funds will be released. For example, you could allowdistributions to a beneficiary of a certain age as long as they are completingdesired milestones such as college and not using drugs. The trust can bearranged to payout completely or parcel out assets over many differentgenerations. Finally, dynasty trusts offer asset protection to futuregenerations as well. Because the trust is irrevocable it can be designed todeter creditors from using those assets to settle a beneficiaries’ debt. Thisensures that those funds will go to the future generation you wanted toreceive these assets. Dynasty trusts can also be set up to prevent a futurebeneficiaries’ spouse from attempting to claim those assets in case ofdivorce.
Why You Need a Dynasty Trust
Protection Trust Features
9
An asset-protection trust is a term which covers a wide spectrum of
legal structures. Any form of trust which provides for funds to be held on
a discretionary basis falls within the category.
How do Nevada Trusts, Delaware Trusts and Alaska Trusts Compare to
Offshore Trusts in the Cook Islands, Nevis and Belize?
Intro cont..
A Domestic asset protection trust (DAPT) is a trust formed in the US,under US laws that has one or more US trustees. It is drafted to shielditems of value from being seized in lawsuits. Fairly recently, somestates such as Nevada, Delaware and Alaska have adopted statutesallowing one or more people to form a trust (called a settlor) withspendthrift provisions (that are intended to keep assets fromcreditors). Unlike traditional statutes, the settlor can also be abeneficiary of the trust and enjoy its proceeds while, at the same time,keeping trust assets from his legal enemies.
10
First came Alaska in 1997, which adopted assetprotection trusts that help make assets creditor-remote. Otherstates have followed suit, including Nevada, Delaware, Missouri,Rhode Island, Utah, South Dakota, Wyoming, Tennessee, NewHampshire, Hawaii and Oklahoma. As of this writing, Virginia isthe most recent, which enacted legislation addressing this type oftrust, going into effect on July 1, 2012. The Alaska Trust, NevadaTrust and Delaware trust remain the most popular.
Cont…
11
B. Asset Protection Trust Features
Here is the bottom line. The following features are seen in the
trust laws of the above states:
1. Asset Protection. You can settle the trust (have it created and
put money and property into it), can be the beneficiary of the
trust and, at the same time, can keep trust assets away from
future creditors. Thus, it is called a “self-settled trust” because
you create it and can benefit from it. It has spendthrift
provisions. This means that there are provisions to keep trust
assets out of the hands of your creditors. The states without
these special laws do not allow this type of trust to shield your
assets from creditors.
12
Asset Protection Trust Features cont…
2. Shorter Time for Creditor Challenge. The creditors don’t havemuch time to challenge the transfer of assets into the trust comparedto other states. So, there is a relatively short statute of limitations onfraudulent transfer. In Nevada, for example, you can form a trust, putassets into it, and two years later those assets are theoretically safefrom lawsuits. If you transfer assets into such a Nevada assetprotection trust and properly publish the event, the timeframe can bereduced to six months. In many other states you have six to fifteenyears to file a claim.
3. Higher Barriers to Creditors. Laws make it more difficult for acreditor to try to convince a courtroom that you put the money intothe trust to keep it from creditors.
NOTE: You should always retain the services of a CPA to ascertainwhether the transfers to an Asset Protection Trust would render youtechnically insolvent.
13
C. Compare Domestic to Offshore Trust
For Asset Protection Purposes, How Do Domestic And Offshore Trusts Compare?
14
The Top 10 Reasons Why Offshore Trusts May Be More Beneficial than
Domestic Trusts
1. Offshore trusts are not subject to domestic court orders. In a civil
lawsuit, if a judge orders a US trustee to release the funds or be
thrown in jail for contempt of court, you can guess what the trustee is
going to do. The offshore trustee, however, can simply ignore US
court orders because he is not bound by them.
2. The domestic trustee’s assets may be at risk. We have seen US
plaintiffs sue domestic trustees in civil lawsuits. When the trustee
has the choice of turning-over up your assets or his own, you
already know which one he will choose.
15
3. The domestic trustee is subject to duress tactics. If the plaintiff’s attorney
implies threats of, or actually succeeds in, getting the government
involved and intimidates the trustee with racketeering or money
laundering charges for failure to release funds, the trust is moot. This
drawback, in itself, is enough to adversely affect the asset protection of a
domestic trust. There may be a statute of limitations on fraudulent
transfer. But there is no statute of limitations on trustee intimidation.
16
4. Offshore trust jurisdictions may ignore US judgments. In the Cook Islands,
Belize and Nevis, to name a few, the courts do not acknowledge US
judgments. So, the creditor would have to start afresh and file whole new
lawsuit from the very beginning. This tremendously high expense and time-
consuming undertaking is about enough to deter even the most resolute of
plaintiffs from pursuing an offshore trust. In addition, even after a die-hard
attacker has been exhausted from the foreign battle, you can re-domicile the
trust and change it from a Cook Islands Trust to a Belize Trust, and then to
a Nevis Trust. In each case, your opponent would have to start from the very
beginning and may have to post an expensive bond.
17
5. US states fully recognize out-of-state judgments. In contrast to the
above, if your enemy gets a judgment against you in any US state,
every other US state is required to recognize it. That means that a
creditor can move his judgment to any state and start seizing assets
without having to file another lawsuit. This is very easy and
inexpensive for the creditor and is often done for free by collection
agents who get a percentage when they collect from you.
18
6. US judges consistently rule according to their own state’s
laws. The creditor obtains a judgment against you in California,
but you have assets in a Nevada trust. The California judge is
probably not going to apply Nevada law to property located in
California. The creditor gets your assets and liquidates them.
Then it’s up to you to file an appeal to get them back.
19
7.Federal courts can ignore state law. Federal courts are not
essentially bound by state law. This is even more
concerning when you take into account that the big cases
are usually federal lawsuits.
8. Asset seizure without due process. It is even more
daunting when a federal agency gets involved, where the
policy is “Seize now, ask questions later.”
20
9. Privacy is thrown out. The local trustee of a DAPT is subject to
subpoena and must provide documents that may be used against
you. Each state applies its own laws, the federal courts apply their
own laws, and your trustee must comply regardless of the state in
which he resides. The state in which the trust was formed doesn’t
matter. The trustee of an offshore asset protection trust, on the other
hand, can simply discard and ignore deposition and subpoena
requests.
21
10.Offshore bank accounts. Offshore trust assets are usually
sheltered in offshore bank accounts, outside the reach of US
courts. Even if a DAPT had assets in a foreign bank, the
domestic trustee could be compelled to bring them back. Not
so with a foreign trustee.
22
D. When to Use a DAPT
So, when would you use a DAPT? You stand a fair chance when all
of the following criterion can be met at once:
1. You live in Alaska, Nevada, Delaware, Missouri, Rhode
Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire,
Hawaii, Oklahoma or, Virginia, as of this writing. These states all
recognize self-settled DAPTs. (Incidentally, if you live in one of these
states, we would choose a Nevada trust since it has one of the
smallest windows of time for creditors to challenge transfers into the
trust.
2. You have all of your assets in one or more of the above
states.23
cont…When to Use a DAPT
3. You think you can avoid federal lawsuits.
4. The potentially at-risk assets have been placed into the trust
before problems arise. In Nevada, for example, the creditor must file a
claim within two years after the assets were transferred into the trust or
six months before your creditor knew or should have known that you
transferred assets into the trust.
If you don’t meet all of the above at the same time, use an offshore
trust, because the DAPT probably isn’t going to be the best option.
24
E. Offshore Jurisdictions
The trust laws of the offshore world are typically founded on thetrust laws of the onshore world. For those jurisdictions which arecurrently possessions of the UK, or were former possessions ofthe UK, typically the UK Trustee Act of 1925 is the commonstarting point. From there, each jurisdiction has sought to developand evolve the law in a race to develop the most attractive trustenvironment which maintains acceptable standards, preserves theconcepts of a trust, yet is attractive to potential users. Many ofthese jurisdictions share similar characteristics.
25
Bahamas
The Commonwealth of the Bahamas have traditionally been
associated with offshore planning. However, the Bahamas are
probably more noteworthy for offshore banking. The Bahamas do
not recognize self-settled spendthrift trusts, unlike the Cook
Islands, Nevis, or Belize.
The burden of proof for a claimant to challenge a transfer into a
Bahamian Trust has a limitation period of two years, the same as
Cook Islands.
26
Belize
Belize, offers immediate protection from court action initiated by
creditors which challenges the settlor’s transfer of property into the
trust. However, due to the paucity of credible offshore banks in
Belize, many trusts established in Belize hold assets with a second
trustee or third-party financial institution in another country.
27
Cayman Islands
Cayman Islands trusts are governed principally by the Cayman IslandsTrusts Law (2009 Revision), however elements of the FraudulentDispositions Law 1989 are relevant when considering the asset protectionbenefits of Cayman Trusts.
A number of offshore jurisdictions have enacted modern asset protectionlegislation based on the Cayman Island's Fraudulent Dispositions Law 1989(the "FDL"). The Cayman Islands FDL states "Every disposition of propertymade with an intention to defraud, and at undervalue, shall be voidable atthe insistence of an eligible creditor thereby prejudiced". The burden ofproof is borne by the creditor applying to set aside the trust, and in the caseof the Cayman Islands, the creditor/claimant must bring an action in theCayman Islands courts (not in their home jurisdiction). The bar is set high fora potential claimant to successfully challenge a transfer.
Cont…28
They must demonstrate an intention to defraud on behalf of theSettlor, and they must demonstrate they are an "eligible creditor" -meaning that at the date of the transfer, the transferor owes anobligation to the claimant. They must also be willing to bring an actionin the Cayman Islands, which by itself is an expensive proposition.The burden of proof for a claimant to challenge a transfer into aCayman Trust has a limitation period of six years.
Cont…
Cont…
29
In Cayman it is possible to register a trust as an Exempt Trust; however,it is voluntary registration regime only, so most trusts remainunregistered. As most Cayman trusts are therefore private arrangements,it is hard to give exact figures for the popularity of AP Trusts governed byCayman law. However, the number of licensed trust companies give ussome indication of how the jurisdiction is viewed. As of 30 September2012 the Fiduciary Services Division of CIMA, the body responsible forlicensing and regulating trust companies in the Cayman Islands hassupervisory responsibility for 146 active trust licenses.
As the Cayman Islands are a British Overseas Dependent Territory, thequality of the judiciary is considered excellent, with the islands able todraw on the services of UK lawyers and solicitors when contentiouscases arise and expert lawyers with appropriate experience are required.The quality of banking and investment services are reasonably good.
Cont…
30
Cook Islands
The Cook Islands claims to be the first country to have enacted an explicitasset protection law, implementing particular provisions in 1989 to itsInternational Trusts Act. Several of these changes have been adopted inone form or another in several other countries and a handful of a U.S.states. The most important of these changes permits the settlor of a trustto be named as a spendthrift beneficiary.
The trust laws of the Cook Islands provide a shortened statute of limitations onfraudulent transfer claims. While most U.S. states have a four-year statute oflimitations (and the Statute of Elizabeth in some common law jurisdictions hasno statute of limitations), the general statute of limitations in the Cook Islands isreduced to two years for fraudulent transfers; in certain circumstances, it may beas short as one year. If the trust is funded while the settlor is solvent, then thetransfer cannot be challenged.(i.e., there is no time period for the creditor tochallenge the transfer.)
Cont…31
Cont…
Several provisions of the Cook Islands law specify the form ofpleading that a creditor must establish in order for its claim to beheard in a Cook Islands court. The effect of these provisions is toraise the burden of proof to "beyond a reasonable doubt,"something akin to a criminal law standard, in order for a creditor toestablish a fraudulent transfer. The "constructive" fraudulenttransfer theories are eliminated under Cook Islands law, requiringthe creditor to prove that the transfer was made with specificintent to avoid the creditor's claim.
Cont…
32
Cont…
It is believed that the Cook Islands now has more registered assetprotection trusts than any other country, although it should benoted that in most jurisdictions a Trust is considered a privatearrangement and it is not a requirement to register a Trust. Caselaw is somewhat lacking in the Cook Islands. However, somelandmark decisions show that the Cook Islands Court intends touphold the asset protection trust law. In 1999, the Federal TradeCommission attempted to recover assets from a Cook IslandsTrust. The suit filed by the FTC against a trust company wasunsuccessful. The quality of the judiciary and the associatedbanking and investment services offered from the Cook Islandsare considered poor.
33
Nevis
Nevis was one of the first countries to follow the Cook Islands,duplicating an older version of the Cook Islands law and naming itthe Nevis International Exempt Trust Ordinance, 1994. Onedistinguishing feature of the Nevis legislation is that a creditor mustpost a bond of ECB 25,000 (roughly USD 13,000) to lodge acomplaint against a trust registered in Nevis.
Very little case law exists in Nevis, which many attorneys interpret tomean that creditors are effectively deterred from bringing suit inNevis. It has a small offshore banking industry, with St. Kitts-Nevis-Anguilla Bank and Bank of Nevis International as the only licensedoffshore banks.
Cont…
34
LLC legislation modeled after the Delaware LLC Act was passed in 1996.This has enabled Nevis to distinguish itself as a primary offshorejurisdiction for LLC formations, as opposed to other countries that are wellknown for IBC formations (British Virgin Islands) or trust formations(Cayman Islands). A Nevis LLC is often used in conjunction with an assetprotection trust because it gives the creator of the trust direct control overthe assets if the creator is listed as the manager of the Nevis LLC.
This gives the creator added security in that it keeps the assets one stepremoved from the trustee of the asset protection trust. Because themanagers and members of a Nevis LLC are not public information, thecreator of the trust is able to assume control over the assets withoutdisclosing his control on any public records. But be mindful of US bankaccount reporting obligations which require US reporting and may besubject to discovery.
Cont…
35
Channel Islands (Guernsey and Jersey)
The Channel Islands have been long regarded as being the firstjurisdictions to develop an offshore finance industry, each is oftenregarded as being one of the best quality jurisdictions to use. Fullycompliant with anti-money laundering laws, sharing taxationinformation with an increasing number of countries, modern caselaw indicates that creditors, who have a rightful claim, are able tofreeze trust assets in the Channel Islands.
Tax law initiatives in the UK have largely eliminated the taxadvantages of UK citizens placing assets in trust in the ChannelIslands, which in the early years had been a source of business.While the Channel Islands enjoys a modern banking sector, mostattorneys do not regard the Channel Islands as appropriate forasset protection planning.
36
The judicial systems of the Channel Islands are split into twodistinct Bailiwicks. The Bailiwick of Jersey, and the Bailiwick ofGuernsey (which includes the islands of Guernsey, Alderney Sark,and Herm). The legal systems in each island follows a dualsystem based on Norman-French codified law overlaid withelements of English common law. Whilst specialized training isrequired in order to practice law in each of the Bailiwicks, the Baris not open to everyone, the quality of the judiciary is generallyconsidered very good, if not very expensive. Regulation ofFiduciary companies and the related banking and investmentservices offered in the Channel Islands is also considered good toexcellent.
Cont…
37
Switzerland and Liechtenstein
Switzerland and Liechtenstein are noteworthy for large bankingsectors and sophisticated wealth management services. Whileboth countries now recognize trusts (particularly trusts establishedunder the laws of another jurisdiction, such as Nevis), there is noavailable case law yet which indicates how the courts of those twocountries will enforce offshore asset protection trust laws.
Cont…
38
Many attorneys establish asset protection trusts under the laws ofanother country and deposit the trust assets in Switzerland orLiechtenstein. One question raised by this approach is whether acreditor can seize assets in Switzerland or Liechtenstein withouthaving to bring a claim in the trust-protective jurisdiction. Again, alack of precedent suggests that this is an open issue inSwitzerland and Liechtenstein.
Cont…
Cont…
39
Both countries are also known for offering asset protectionannuities, with a six-month statute of limitations on fraudulenttransfers into an annuity. Unfortunately for most Americans, theseannuities cannot invest in US securities without punitive taxationdue to the offshore status of the insurance carriers that offer theseannuity products. Furthermore, many lawyers promoting theseannuity products to their clients collect commissions from theinsurance carriers. These reasons, among others, may helpexplain why annuities offered in these two countries are notparticularly popular with U.S. persons.
Cont…
40
10 Mistakes To Avoid When Using Offshore Trusts
From A U.S. Tax Planning Point Of View
41
1.Not Knowing All the Facts
2.Not Understanding What “Irrevocable” Means
3.Not Understanding the Specific Provisions of the Trust
4.Not Properly Funding the Trust
5.Not Doing Corporate Due Diligence
6.Not Knowing Your Offshore Trustee
7.Not Choosing the Proper Jurisdiction
8.Not Understanding the U.S. Reporting Requirements
9.Not Taking into Account Family Needs
10.Not Considering a Change of Mind
INTRODUCTION
If you are thinking about moving to the United States, you should be
thinking about pre-immigration tax planning. Otherwise, you may
face significant U.S. income and estate tax consequences as a
result.
Proper and timely pre-immigration tax planning may involve
establishing an offshore trust. In this presentation we present the
top 10 most common mistakes to avoid when using offshore trusts
from a U.S. point of view.
42
1. Not Knowing All the Facts
Many readers thinking about moving to the United
States do not understand the nature of the U.S. tax
regime because they may be coming from a
jurisdiction that has a totally different tax system.
43
Cont…
Once you move to the United States with your green
card, you become a U.S. resident for income tax
purposes, you will be taxed on your world-wide
income and if you are deemed domiciled in the
United States as a result of moving to the United
States, then your entire world-wide holdings will be
subject to estate taxes.
Needless to say, this is a harsh reality for some to
understand, much less accept. This is why pre-
immigration tax planning is of critical importance if
you are thinking of moving to the United States.
44
2. Not Understanding What Irrevocable Means
For the offshore trust to protect you from the exposure of U.S. estate
taxes, it must be irrevocable.
Irrevocability is an issue that many have a difficult time with. After all, it
implies a complete loss of control over the assets being transferred to
the trust. However, if the offshore trust is revocable, then all of the trust
estate will be included in your estate for U.S. tax purposes.
This is why the offshore trust must be irrevocable. Even then, if the
irrevocable trust contains provisions that are indicative of retained
interests and control, you will have an estate tax issue.
45
3. Not Understanding the Specific Provisions of the Trust
The offshore trust will probably have language you are not familiar
with and simply may not understand. This type of trust will usually
contain language specifically used for U.S. statutory planning and
compliance purposes and may not appear to make any sense at
first glance. So if you come across language in a provision
contained in the trust that you are simply not sure about, stop and
ask:
46
• What does this mean?
• Why is it relevant?
• What are the real life implications to me?
• How will this impact my family’s needs in the future if
I am not around?
47
Cont…
Cont…
It is important that you read and understand each and
every provision contained in the offshore pre-
immigration trust because the trust will be irrevocable.
Remember, you will have to respect and abide by each
and every provision in the offshore irrevocable trust, as
failure to do so may bring about significant adverse tax
consequences.
48
Cont…
4. Not Properly Funding the Trust
You may have a perfectly drafted offshore pre-immigration trust, one that
you can live with because you understand each and every single provision
contained in it. Yet, unless you actually and properly fund the offshore
trust, it will be of no benefit to you.
Assets not properly transferred to the offshore pre-immigration trust will be
included as part of your taxable estate for U.S. estate tax purposes and
subject to U.S. estate taxation at a rate of 40 percent. As such, the failure
to fund the offshore trust means that your objective of minimizing
exposure to U.S. estate taxation will not be achieved.
49
5. Not Doing Corporate Due Diligence
You need to know exactly what you own and where. Too often clients
forget about an offshore company or foundation they established
years ago.
Failure to take this into account will have an adverse effect in
achieving your planning objectives. You may forget that you have a
company with other shareholders and that your ownership interest in
said company is not freely transferrable under an existing
shareholders’ agreement. This may require you to contact the other
shareholders and many times this may present a privacy issue, as
you may not want everyone to know that you are planning on moving
to the United States.
50
In addition, you may have limitations on the
transferability of your ownership interests under
the laws of your particular home jurisdiction,
especially transfers to an offshore trust.
In some cases, your home jurisdiction may even try
to impose an exit tax on transfers to an offshore
trust. That is why your corporate due diligence is
of critical importance.
51
Cont…
6. Not Knowing Your Offshore Trustee
Many times little consideration is given to the important question of
“who will be the trustee of the offshore trust?" In many cases, a
professional corporate trustee will have to be appointed, and this often
raises concerns.
You will probably be thinking, who are these people and can I truly
trust them with all of my assets? What if they take all that I have
worked for all my life and disappear into the sunset? Do your own due
diligence on the trust company, their reputation and operations. Do not
take anyone’s recommendation at face value.
52
The decision of who to appoint as your offshore trustee is as
important as choosing which bank to use. The critical
difference is that if you don’t like your bank or banker, for
any reason, you can simply close the account and take your
hard earned money elsewhere.
Not so easy with the trustee of your irrevocable offshore
trust. For this reason, you need to be very clear on what
power(s) you have under the terms of offshore trust to
terminate the existing trustee and appoint another trustee.
53
Cont…
Cont…
Equally important, you need to understand what fees will be
charged, not only for accepting the trust, (acceptance fee)
and the annual ongoing fees, (annual fees), but also the
fees involved in case you decide to terminate the trustee
relationship, (termination fee).
Look, there are many qualified trust companies out there. Make
sure you find the one that best fits your needs and that they are
in-fact experienced and familiar with this type of pre-immigration
offshore trust structures and the related U.S. compliancerequirements.
54
Cont…
7. Not Choosing the Proper Jurisdiction
Not all offshore jurisdictions are the same. Some offshore
jurisdictions are not suitable for this special type of pre-
immigration offshore trusts. Some may not have the infrastructure
you have come to expect in these days of complete comfort and
connectivity.
If you plan on visiting the trustee, make sure the jurisdiction has a
suitable airport and adequate hotel accommodations. Determine
ahead of time the logistics of how you can get to their location if
you choose to visit your trustee in person.
55
You will of course want to know that the laws of the selected
jurisdiction favor the use of this type of offshore trust and that the
offshore trust is in full compliance with all applicable laws. Therefore,
you are going to want to speak with independent counsel in that
jurisdiction and even request a legal opinion on the matter at hand.
Remember, this pre-immigration trust is not an aggressive offshore
asset protection trust which requires a very special type of jurisdiction
with favorable fraudulent transfer statutes. However, if properly
drafted and funded, the offshore pre-immigration trust may alsoprotect your assets from future creditors.
Cont…
56
8. Not Understanding the U.S. Reporting
Requirements
Once you become a U.S. resident, you now have a number of somewhat complex
reporting obligations. Anonymity is a myth. There is no such thing as secret bank
accounts or invisible bearer shares these days.
For this reason, you be must thorough with your comprehensive corporate due
diligence and make a complete list of all your world-wide bank accounts and
global holdings. Otherwise, if you don’t make full and complete disclosure to your
trusted certified public accountant, they will not be able to properly inform you of
all your new U.S. reporting obligations.
Mind you, failure to properly comply with applicable reporting obligations can
result in substantial tax penalties, regardless of how well the offshore trust is
drafted.
57
9. Not Taking into Account Family Needs
Often times, your desire to avoid U.S. estate taxation by fully funding
an offshore pre-immigration trust may run afoul of your family’s current
financial needs.
How are you going to pay for your lifestyle? How are you going to get
your hands on money if you have already transferred all of your
assets to the offshore trust?
58
More importantly, will dipping into the offshore trust result inunanticipated income taxation or even U.S. estate taxationbecause you are deemed to have a retained interest (control) overthe assets transferred to the offshore trust?
That is why it is so important to have your certified publicaccountant and financial advisors as part of your pre-immigrationtax planning team.
Cont…
59
10. Not Considering a Change of Mind
It may well be that after you move to the United States, you may have a
change of heart. You may want to pack up and leave. What then?
What will you do now that all of the assets are held inside the offshore
pre-immigration trust?
First, depending on how long you have resided in the United States, you
may find yourself facing an exit tax. Moreover, since the offshore trust
is irrevocable, how can you decant the offshore trust once you leave?
These are critical questions that should be considered because nothing
is certain, except death and taxes.
60
THE SECTION 678 TRUST &
THE FAMILY BUSINESS
61
• Section 678(a)(1)
• Section 678(a)(2)
• Section 677
• Partial Release vs. Lapse
• Withdrawal Right
• Client Not Treated as Owner
• Sale of Assets to the Section 678 Trust
OVERVIEW
Considering a Section 678 Trust
Typically, when a client is considering options to help protect assets from thereach of creditors and reduce future potential estate taxes, the client mustconsider techniques that require the client to part with at least a portion of theassets he or she has accumulated over the years, as well as part with futureappreciation. For example, many estate planning techniques involve giftingand/or selling the client’s assets to trusts that benefit the client’s children orfamily members. As a result, the client permanently parts with all of the futureappreciation, as well as the income stream from the assets.
In these situations, it can be difficult to balance the client’s desire to protectassets from the reach of creditors and reduce estate taxes with the client’s needto retain sufficient assets to maintain his standard of living.
One vehicle that allows the client to combine asset protection, estate tax savings,and the continued ability to benefit from assets he or she has accumulated overthe years is the “Section 678Trust.”
62
Name & Purpose
The Section 678 Trust is named after the Internal Revenue Code Section uponwhich it is based, which states that a beneficiary who has a withdrawal rightunder a Crummey Power will be treated as the owner, for income tax purposes, ofthe portion of the trust over which the withdrawal power lapsed.
The Section 678 Trust can be structured and customized to fit many differentsituations. For example, a 678 Trust can be a useful tool under two particular factpatterns:
1. The first is when the client is contemplating purchasing an asset,starting a new business venture, or revitalizing and expanding an existingbusiness that has high appreciation or income-generating potential.
2. The second is when the client has significant assets that are alreadymaterial in value, which the client wants to transfer to the Section 678Trust.
Structuring the transfer of the assets to the Section 678 Trust in both fact patternsare discussed in more detail below.
63
Structure of a Section 678 Trust
64
The Section 678 Trust is established by the client’s parents, sibling, or close friend witha gift of $5,000.
This is the only gift that should ever be made to the Trust. It is important that the$5,000 contribution to the Trust be a true gift and that the creator of the Trust receiveno quid pro quo payments or benefits as a result of making the gift.
The Trust is structured as a “Crummey” Trust, so the beneficiary has a period of timeto withdraw the $5,000 gift. If the beneficiary does not demand the gift, hiswithdrawal right lapses after a certain period of time (e.g., thirty days).
In order for the Section 678 Trust technique to work as intended, it is crucial that thebeneficiary not be given a withdrawal right exercisable with regard to any other trustat any earlier point in the year of the gift. NOTE: This may require careful review in theevent the client's parents or relatives are also establishing a Section 678 Trust and/or mayhave an existing Irrevocable Life Insurance Trust which have such standard withdrawalrights.
The Primary Beneficiary
65
The client is the primary beneficiary of the Section 678 Trust and can receive distributions forhealth, education, maintenance, and support purposes. The client can also be named as thetrustee, and is in fact named as Trustee of the Section 678 Trust. The Grantor of said Trust, ifyet to be determined, but could very well be relatives or some other person.
The Trust is structured initially as a “non-grantor” or “complex” trust for income taxpurposes. Therefore, at inception, the Section 678 Trust is a separate taxpayer for income taxpurposes. However, saidTrust also includes a “Crummey”withdrawal right for the client.
When the client allows the withdrawal right over the initial $5,000 contribution to lapse, theSection 678 Trust becomes a grantor trust as to the client (under the authority of Section 678of the Code). Thus, all income tax effects of the Section 678 Trust from that point forwardshould become the responsibility of the client.
While the client is treated as the owner of the Trust for income tax purposes, the client will be responsible for
paying the income tax on the income generated by the Trust’s assets. Assets outside of the Trust can be used to
pay the income taxes, allowing the Trust assets to grow without being depleted by income taxes. This also
allows the client to “spend down” assets that would otherwise be includable in his estate and subject to estate
taxes at death or perhaps be subject to the reach of creditors during his lifetime.
If the time came that the client were unable to pay the income taxes out of his own assets, the Section 678
Trust could make a distribution to the client in the amount of the income taxes under the health, education,
maintenance, and support standard.
Ownership of the Section 678 Trust
66
Benefits of the Section 678 Trust
As discussed above, the assets owned by The Section 678 Trust will not be subject to estate taxes at theclient's death.
While the client is living, he will continue to have access to the funds for health, education, maintenance,and support purposes and can serve as trustee of the Section 678Trust.
In addition, the assets owned by the Section 678 Trust will not be subject to the claims of theclient's creditors.
NOTE: Specifically, Florida Statute Section 736.0504, states that a beneficiary's creditors cannot compel atrustee to make a discretionary distribution of income or principal to a trust beneficiary, even if the trustee isalso the beneficiary, when the distribution would become vulnerable to the claims of the beneficiary'screditors.
Thus, the client's creditors will not be able to reach the Trust’s assets if he or she is also named as thetrustee, so long as the trustee-beneficiary’s distribution standard is limited to health, education,maintenance, and support.
67
As noted above, the Section 678 Trust technique helps reduce estate taxes, provides creditor
protection, and gives the client the ability to continue to benefit from the assets during his or
her life. When compared to other estate planning techniques, such as GRATs, the Section 678
Trust is superior because, among other things:
(i) the client does not have to survive the transaction with the Section 678 Trust by any period
of time in order for the assets to be outside of the client’s estate; and
(ii) the estate tax inclusion period rules do not apply, so that GST exemption can be allocated
to the Trust on its creation.
Advantages of the Section 678 Trust
68
The Section 678 Trust can be utilized by almost any type of client. The most obvious use of a Section 678
Trust is for clients who are expecting to purchase an asset that has high appreciation potential, are starting a
business, or are expanding an existing business (but as discussed below, it can also be used for existing assets
with appreciation potential or that may be subject to valuation discounts). Some examples include buying a
new business opportunity, or investing in the stock market, etc.
In those cases, the client can make a loan to the Section 678 Trust to enable it to buy the asset, start the new
business, or expand the existing business. In order for the loan to be respected by the IRS, it must carry an
interest rate equal to, at a minimum, the applicable federal rate for the type and length of the loan.
As the asset or business grows in value, the loan can be repaid. The asset will continue to be owned by the
Section 678 Trust, where it will not be subject to estate tax at the client’s death and will continue to be beyond
the reach of creditors. Once the Section 678 Trust has built up significant assets, it can simply purchase new
assets using its own credit.
69
Building Value in The Section 678 Trust
The Section 678 Trust should be structured as a GST exempt dynasty trust. When the initial gift is made to the Section
678 Trust, the client’s parents (or other third party who makes the gift) should allocate GST exemption to the Trust,
which will allow it to pass to future generations free of transfer taxes. As a result, the assets owned by the Trust should
not be subject to estate tax at the death of the client or the client’s children.
In addition, the Section 678 Trust should contain a spendthrift provision, in which case the Trust assets should be
protected from the client’s creditors.
Furthermore, assets in the Section 678 Trust do not constitute marital property, protecting the assets if a beneficiary of
the Trust gets a divorce.
With regard to assets sold to the Section 678 Trust, the value of the assets owned by the client is frozen at the value of
the note the client received in the sale and if the sale was in exchange for a Private Annuity, then unlike a promissory
note, the Private Annuity would automatically terminate at the time of death resulting in nothing being included in the
client's estate.
The client can spend down the other assets by paying the income tax liability generated by the Trust’s assets and allow
the assets owned by the Section 678 Trust to grow without being depleted by income taxes, as noted above.
70
Results of Section 678 Trust Planning
The Trustee of the Section 678 Trust has the ability to distribute Trust
assets to the client and his issue for health, education, maintenance, and
support needs, and the client may be given a limited inter vivos or
testamentary power of appointment over the assets of the Section 678
Trust to account for changes in family circumstances or the law.
Upon the client’s death, the Section 678 Trust can be drafted to divide
into separate trusts for his or her children, and those trusts will be
considered “complex” trusts (rather than “grantor” trusts) for income tax
purposes.
71
Assets of Section 678 Trust
The creator of the Section 678 Trust should file a gift tax return reporting
the $5,000 gift to the Trust and allocating GST exemption to the gift. The
gift tax return will be due on April 15 of the year following the year in
which the $5,000 gift is made. When the client transacts with the Section
678 Trust, he or she should file a gift tax return disclosing the sale or loan
in order to start the running of the 3-year statute of limitations. Assuming
that the disclosure is adequate, if the IRS does not audit the gift tax return
within the 3-year period, it will be prohibited from challenging the
transaction later. The gift tax return will be due on April 15 of the year
following the year in which the transaction takes place.
72
Reporting Requirements
Although the beneficiary may be deemed to be the grantor of the trust for income tax
purposes, he or she is not considered the grantor for estate and gift tax purposes. Under
Section 2041 and Section 2514 of the Code, a lapse of a withdrawal right is not deemed to be
a gift to the Trust from the beneficiary so long as the lapse does not exceed the greater of
$5,000 or 5% of the Trust assets (the “5 and 5 power”). As a result, allowing the withdrawal
right to lapse will not cause the assets of the Section 678 Trust to be subject to estate taxes at
the client’s death. (Note that an affirmative release of a withdrawal right may have the
opposite effect. If a holder of a withdrawal right releases the right, he or she could be treated
as having made a gift to the Trust, causing the Trust assets to be subject to estate taxes at the
holder’s death. Therefore, in order to clearly qualify for the statutory “5 and 5” exception, the
plan is for the beneficiary to allow the withdrawal right to lapse, rather than release it.)
73
Discussion of Statutory Authority
Under Section 678(a)(1), a person who “has a power exercisable solely by
himself to vest the corpus or the income” of the Trust in himself will be
treated as the owner of the portion of the Trust over which the power is held.
A withdrawal right gives the beneficiary the right to vest the corpus or the
income of the Trust in himself and, as a result, is a power that will cause the
Trust to be owned by the beneficiary for income tax purposes under Section
678(a)(1) so long as the power remains outstanding. If the withdrawal right
applies to all of the assets owned by the Section 678 Trust (as in the case of
the initial $5,000 gift), then the entire Trust will be treated as owned by the
beneficiary for income tax purposes. Once the withdrawal right lapses,
however, the income tax treatment of the Trust is not as clear.
74
Section 678(a)(1)
Section 678(a)(2)
75
Under Section 678(a)(2), a person who “has previously partially released or
otherwise modified such a power and after the release or modification retains
such control as would, within the principles of sections 671 to 677, inclusive,
subject a grantor of a trust to treatment as the owner thereof” will be treated as
the owner of the portion of the Trust over which the power was partially released
or modified. The question, therefore, is whether the client would be treated as
the owner of the Trust under Sections 671 to 677 of the Code if he or she had
been the initial grantor of the Trust.
Under Section 677, the grantor of a trust will be treated as the owner of
the trust for income tax purposes if the income of the trust may be
distributed to the grantor or held and accumulated for future distribution to
the grantor. the client is the beneficiary of the Section 678 Trust, and as
such, income and principal may be distributed to him. Accordingly, if the
client releases or otherwise modifies his withdrawal right, then he will be
treated as the owner of the Trust for income tax purposes. Based on the
plain language of the statute, it appears that this would apply to the entire
Trust (both the income and the principal) since the withdrawal right exists
over the $5,000 gift, which would comprise the entire Trust at the time the
right was granted.
76
Section 677
Partial Release vs. Lapse
77
Note that Section 678(a)(2) refers to a “partial release” (as opposed to a “lapse”) of a
withdrawal right as the triggering event. Although this terminology does not mirror that
contained in Sections 2041 and 2514, the IRS has issued a recent private letter ruling
interpreting a lapse under Sections 2041 and 2514 to be a partial release under Section
678. PLR 200949012. In addition, the IRS has implied in prior private letter rulings that a
lapse under Sections 2041 and 2514 would have the same effect of a partial release under
Section 678. See, e.g., PLRs 200747002, 200104005, 200147044, 200022035, 9809005,
8342088.
If the IRS changes its policy expressed in the private letter rulings and argues that a lapse
is not treated as a release under Section 678, it is possible that the client will not be
treated as the owner of the Trust for income tax purposes after the withdrawal right
lapses. To help mitigate that result, we propose including additional provisions in the
Section 678 Trust.
First, the withdrawal right granted over the initial $5,000 gift to the Trust could extend until
at least December 31 of the year in which the gift is made (i.e., the withdrawal right does
not lapse until after December 31). Any sales to the Section 678 Trust should occur before
the withdrawal right lapses. During the time that the withdrawal right remains outstanding,
the client should clearly be treated as the owner of the Trust for income tax purposes and
should be able to transact tax-free with the Trust.
Second, in December of each year, the client could be given a withdrawal right over all of
the Trust income earned during that year, to the extent that the income does not exceed the
greater of $5,000 or 5% of the Trust assets. (Note that, if the client dies while the
withdrawal right is outstanding, the amount of assets over which the withdrawal right exists
will be included in the client’s taxable estate.) To the extent that the income is less than or
equal to this amount, the client should be treated as the owner of the Trust income for
income tax purposes. It is not clear whether this withdrawal right would cause the client to
be treated as the owner of the Trust’s principal for income tax purposes.
78
Withdrawal Right
Client Not Treated as Owner
79
If the client is not treated as the owner of the Trust’s principal, then the Trust may be
required to pay any capital gains taxes out of its own assets. As a result, the tax amount
would deplete the assets that will be protected from estate taxes, as opposed to the client’s
assets, which will be subject to estate taxes. In addition, if the client is not treated as the
owner of the Trust’s principal, capital gains taxes could be triggered when the Trust makes
principal payments on the note owing to the client.
The client and the Trust should also consider entering into an agreement that, if the client
pays income taxes and it is later determined that the taxes should have been paid by the
Trust, the client will be treated as having loaned the amount paid to the Trust with interest
at the applicable federal rate. This should help prevent the client being treated as having
made a gift to the Trust by virtue of paying income taxes on the Trust’s behalf.
Nevertheless, the client should, at a minimum, be able to sell assets to the Section 678
Trust while the withdrawal right is outstanding without being required to recognize gain on
the sale.
In addition, if the client sells assets to the Section 678 Trust in exchange for a promissory
note or loans money to the Section 678 Trust, the client should not be required to recognize
the interest payments as income. This characteristic may also cause the Section 678 Trust
to be a permissible owner of S corporation stock, without requiring the Trust to elect to
become a qualified subchapter S trust (“QSST”) or an electing small business trust
(“ESBT”). The IRS has issued a recent private letter ruling stating that a 678 Trust is a
permitted S corporation shareholder under Code Section 1361(c)(2)(A)(i). PLR
201739010. However, it may be advisable to make a protective QSST or ESBT election in
the event that the IRS argues that 678(a)(2) does not apply to the Trust assets.
80
Sale of Assets to the Section 678 Trust
FINAL ANALYSIS
81
So as you can see, a Section 678 Trust is an
excellent tool for holding ownership of the
family business.
Presented by: Lazaro J. Mur, Esq.
THE MUR LAW FIRM, P.A.
(561) 531-1005
Email: [email protected]
82
Q&A
DISCLAIMER
83
Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subject
matters covered. It is published with the understanding that in this publication the author is not engaged in
rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required,
the services of a competent professional person should be sought. (From a Declaration of Principles jointly
adopted by a committee of the American Bar Association and a committee of Publishers and Associations.) In
addition to the Presenters views as expressed herein, these materials represent a compilation of numerous on-
line articles and research materials, see general references included herein intended to give due credit and
recognition to the cites and authors thereof.