2011 YEAR-END NOTES

     As the year comes to a close, we take this opportunity to remind our clients, colleagues and interested parties of several important issues that might impact upon their estate, tax and asset protection planning, to reflect upon a few significant happenings in 2011, and to offer suggestions for effective year-end tax planning.

I. Year-End 2011 Tax Planning & Anticipating the 2012 Tax Increases

     A. Historic Opportunity to Avoid Tax on Over $10 Million+ of Assets

Every year, we remind our clients that year-end gifting is an easy, tax-efficient way to reduce their taxable estate. This year, the message is all the more significant because this year, for the first time, a person can gift up to $5 million of assets and get $5 million out of the reach of the estate and gift tax ($10 million for a married couple). This means that if your net worth is below $5 million ($10 million for a married couple), you could avoid gift and estate taxes entirely. If your net worth is above $5 million, that amount can still go to your family and loved ones, tax- free. If your assets are owned by family limited partnerships (FLPs), then even more can be gifted out of your estate via the principle of discounting, as discussed below.

The amount that an individual may gift to another individual, without tax consequences or a reporting requirement, is now $13,000. Gifting is an effective strategy to utilize in reducing estate tax liability. For example, if a husband and wife each gift $13,000 to three children, the value of the couple's estate is decreased by $78,000.

In addition, you may utilize your "unified lifetime credit" to avoid gift taxes and make one or more gifts of limited partnership interests equal in value to $5,000,000 ($10,000,000 together with your spouse; total value for all gifts). You will be required to file a gift tax return, but the gift taxes will be offset by your $5,000,000 unified lifetime credit. A husband and wife, together, may make joint tax-free gifts equal in total value to $10,000,000 in this manner. Read that again. Yes, $10 million in assets passing to your heirs, free of tax!

Clients with FLPs should consider gifting an equivalent amount of limited partnership interests, so as to decrease the value of their estate. Clients have until December 31, 2011 to effectuate a gift for calendar year 2011. Clients should, in fact, make annual gifts of limited partnership interests, so that the value of their estates, over time, will decrease for estate tax purposes. As long as clients retain their general partner interests, clients will continue to control all assets within their partnership. Yes, you can escape the estate tax and still control the assets.

Gifting of partnership interests works hand-in-hand with the principal of discounting of those interests. Once discounted, more FLP interests can be gifted tax-free to the next generation, which results in more assets passing out of an individual's taxable estate and thus decreased estate taxes.

One short example may clarify how discounting and annual gifting work together to lower estate tax liability. If a client owns real property valued at $130,000, the client might gift the property to his or her child over a ten year period ($13,000 annual gift tax exclusion, over ten years). However, if the same property is owned by an FLP, the client may claim a 50% discount in the value of the limited partnership interests (for lack of marketability and lack of control). Now, with a discounted value of limited partnership interests of $65,000 (50% discount on $130,000), via annual gifts of $13,000 worth of partnership interests, it would take the client only five years to gift away her partnership interests and eliminate estate taxes due on that property. This is because a $13,000 gift equals 10% of the non-discounted FLP value ($13,000 = 10% of $130,000), but $13,000 equals 20% of the discounted FLP value ($13,000 = 20% of $65,000).

The same discounts, applied to an FLP containing $20,000,000 of non-liquid assets would allow for the total elimination of estate taxes on the $20,000,000 via a tax-free gift of $10,000,000 worth of limited partnership interests by a husband and wife.

Further, in the current recessionary economy, now is the time to consider gifting assets that are presently at abnormally low values. The severe decline in the stock and real estate markets have created further built-in discounts for many assets. When the economy rebounds, these assets will begin to increase in value, and that future appreciation will occur outside your estate.

Further, it is likely that the federal government will make unfavorable changes to the estate and gift tax laws in order to compensate for government deficits. If passed by Congress, proposed legislation will eliminate the ability to discount the value of FLP gifts. Clients should consider taking advantage of current favorable laws while they still exist. The $5 million gift and estate tax exemption only applies during calendar years 2011 and 2012. Thereafter, the exemption will go back down to $1 million. Now is the time to capitalize on this window of opportunity to avoid gift and estate taxes on your assets.

We realize that discounting and gifting are not simple concepts, and we welcome your questions. We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you, as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).

     B. Looking Ahead to 2012: Tax Increases and What To Do Now

We can expect higher income and capital gains taxes. The following are scheduled to occur at the end of next year:

1. Expiration of top 35% income-tax rate and reset to 39.6%;
2. Expiration of top 15% rate on long-term capital-gains and reset to 20%;
3. Expiration of top 15% rate on qualified dividends and jump to 39.6%;
4. Expiration of current estate and gift tax rates and exemption (as much as $10 million of wealth passing tax-free - see above section) and reset to only $1,000,000 passing tax-free per person.

Beginning in 2013, a 3.8% tax on net investment income will be imposed on joint filers with an AGI greater than $250,000 ($200,000 for single filers). This additional 3.8% tax is in addition to the already heightened rate that will apply and will be assessed on taxable interest, dividends, rents, some annuities and capital gains including on the sale of real estate.

There are additional tax benefits expiring by the end of 2011 and 2012 and additional new taxes that will be imposed. For instance, by the end of 2011, a 2% social security tax cut will expire.

Congress may also amend other tax laws to eliminate some favorable tax planning strategies. Clients are therefore advised to engage in tax planning now, in order to have the benefit of "grandfathering" current beneficial tax strategies before changes in the tax law. Further, with the current $5 million dollar ($10 million for a married couple) exemption from estate tax, the time to lower your taxable estate, thus leaving more for your family and heirs and less to the IRS, is now. We can help explain tax changes, how they may effect your specific situation, and how to legally minimize your taxes.

There are various steps that taxpayers should consider now for effective tax minimization:

1. Sell appreciated property before loss of favorable capital gains treatment and avoid tax via Charitable Remainder Trusts and international tax planning strategies (e.g. tax advantaged foreign annuities and foreign private placement life insurance).
2. Convert 401(k)s to Charitable Remainder Unitrust IRAs before the government taxes 401(k)s.
3. Clients should also consider taking income in 2011, rather than deferring income to 2012 with its likely higher tax rates. As a corollary, clients may wish to defer losses to 2012 to offset expected 2012 income at higher tax rates.
4. Engage in income tax planning via tax-compliant strategies that take advantage of favorable reciprocal tax treaties, before the new tax increases.
5. Consider a Dynasty Trust. Such a trust allows the preservation of assets for one's immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations. The trust can distribute income to beneficiaries (who will pay income tax on these distributions of income), but principal is preserved, asset-protected and grows tax-free. The estate tax would potentially apply at the eventual distribution of principal, many generations down the line, but your descendants would have many years to plan around the estate tax.
6. Consider a Charitable Remainder Trust. Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust is a good way to avoid the increased capital gains tax. You and your beneficiaries can enjoy distributions from the trust, and at the end of the trust term, a remainder equal to ten percent of the original contribution to the trust may go to a qualified charity. You will receive an additional tax benefit: a deduction equal to the present value of the remainder that may be left to charity. The benefits: a low-tax income stream for you and your beneficiaries, philanthropy of your choice, a charitable deduction and significant capital gains tax minimization.
7. It is also possible to minimize the tax on appreciated assets by exchanging such assets in return for a foreign annuity policy. Capital gains within the annuity policy would not be taxable. Annuity payments can be deferred until retirement or advanced age, at which point tax would be due on the income component of the annuity payments. Moreover, the annuity policy and the assets within the policy would be completely asset-protected from future creditors. For complete tax elimination, a foreign life insurance policy can be incorporated, which would allow one to borrow against the cash value of the policy, completely free of taxation (the amounts borrowed, rather than having to be repaid, would be deducted from the ultimate death benefit). Such tax strategies involving foreign annuities and foreign life insurance offer the most advanced asset protection from civil creditors, as well as significant tax minimization or even tax elimination.

Please call us to discuss any of these tax minimization strategies.

II. Offshore Considerations

During 2011, The IRS and U.S. Department of Justice (DOJ) continued to successfully eradicate offshore banking "secrecy". The IRS' success against UBS eroded Swiss banking secrecy, effectively ending "going offshore" to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant.

     A. Erosion of Offshore Tax Secrecy and Encouraging Tax Compliance

• 2011 witnessed the expanding offensive against offshore "tax havens". Following UBS' providing banking data to the IRS on 4,500 Americans with accounts at UBS, Credit Suisse also agreed to hand over once-secret banking data to the IRS.
• The IRS is also investigating HSBC, Bank Julius Baer, the Swiss Kantonal banks, Bank HaPoalim, Bank Leumi, Liechtensteinsche Landesbank and others. Banks in Switzerland, Liechtenstein, Israel and India are now under investigation and we expect more banks, in other countries, to be targeted in 2012.
• The Swiss Parliament changed long-standing Swiss banking secrecy laws to allow for cooperation and exchange of information with the IRS for both criminal and civil tax investigations. In 2011, the Swiss government allowed Swiss banks to provide once-confidential bank account information to the IRS. In 2011, the Swiss highest court also approved the release of banking information.
• Domestically, Congress passed the HIRE Act (P.L.111-147) in 2010 which included various provisions designed to combat offshore tax avoidance by targeting foreign accounts and Americans who own them. While having an offshore account is still legal, the account is subject to increased reporting requirements.
• In light of the above events, many clients have retained us to make their foreign accounts tax-compliant. We represented many clients in the 2009 Offshore Voluntary Disclosure Program (OVDP) and 2011's Offshore Voluntary Disclosure Initiative (OVDI).
• Clients should bring their accounts into tax compliance on the state level as well. Some states, such as Connecticut and New Jersey, had formal programs for offshore accounts. Other states, such as New York, encourage compliance via a general voluntary disclosure. The IRS shares information with state governments, including that a federal tax return was amended to report foreign income. Please contact us regarding tax compliance on the state and federal levels.
• Clients who had UBS accounts should also be aware of a class action litigation against UBS filed in 2011 by American account holders. We are in contact with legal counsel representing this class of account holders against UBS and we can introduce you and assist you in pursuing your rights against UBS.

     B. Offshore Asset Protection and Tax-Compliant Planning Is Still Legal and Effective

We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore "secrecy" in order to avoid taxation is unlawful, unwise and would negate effective asset protection. Indeed, we have always emphasized that effective asset protection does not rely on secrecy; it is based on the careful use of domestic and foreign asset protection laws.

Although "secret tax havens" no longer exist for non-compliant accounts, politically, socially and economically stable and secure jurisdictions do exist for tax-compliant asset protection planning and for tax-compliant strategies to minimize U.S. taxation on foreign income. Foreign annuities, international insurance, offshore non-grantor trusts and other international vehicles still serve as the centerpieces of effective tax minimization plans that comply with U.S. and foreign tax laws.

We have various tax-compliant offshore strategies to accomplish both asset protection and tax minimization benefits. These strategies do not rely upon secrecy. Rather, the strategies involve complete disclosure, compliance and safety in utilizing well-credentialed offshore institutions. In a 2008 ruling, U.S. v. Boulware, 128 S. Ct. 1168, the U.S. Supreme Court reaffirmed that it is the legal right of a taxpayer to decrease the amount of his or her taxes by means which the law permits. Clients can be assured that their offshore assets, and the tax-favorable profits that they earn, may be absolutely legally protected. We will be pleased to answer your questions regarding tax compliant offshore planning.

A 2010 decision by the highest court in Liechtenstein, in favor of one of our clients' Liechtenstein trust, reaffirmed that offshore asset protection is still sound, legal and totally effective. The trust funds were administered and controlled by a licensed, bonded, qualified and reputable trustee in Liechtenstein. The trustee and the trust assets were outside the reach of U.S. court jurisdiction. The client's creditor was forced to commence a new lawsuit in Liechtenstein, at great effort and expense. That creditor ultimately lost. Our client's assets remain absolutely safe and secure in her Liechtenstein trust.

     C. What If You Still Have a Non-Disclosed Foreign Account?

The deadline for the 2011 IRS Offshore Voluntary Disclosure Initiative (OVDI) for foreign accounts expired on September 9, 2011. If you are the owner of a foreign account, and you did not come forward under the Voluntary Disclosure Initiative, what are your options now?

Option One: come forward now. The IRS will still welcome your voluntary disclosure, even after September 9, 2011. In fact, the IRS has welcomed voluntary disclosures long before this most recent, widely publicized program for foreign accounts. The difference is that after September 9, 2011, the penalties are higher. Still, criminal prosecution is usually avoided if you come forward before you are caught. Thus, if you have not entered the Voluntary Disclosure Initiative, you may still come forward; you will pay penalties higher than those who came forward in 2011, but the penalties will still be significantly lower than if you don't come forward and the IRS catches you. In that case, jail time for criminal tax fraud is also a frightening possibility.

But some people will not voluntarily come forward. They do not want to disclose their offshore accounts, and they do not want to give any portion of their foreign assets to the IRS. What can they do?

Option Two: convert your account to a tax-compliant structure. We have long counseled the use of tax-compliant strategies to minimize U.S. taxation of foreign accounts. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients regarding the proper steps to transform a non-compliant offshore account into one that complies with current U.S laws. Although we cannot erase a non-compliant past, we can counsel on full compliance going forward. Such steps may significantly reduce the risk of prosecution for previous violations.

Option Three: do nothing and hope that the IRS does not discover your account. You would be relying on past banking secrecy as a means of future protection. However, as the events of 2011 have proven (see II.A. on page 5 above), foreign banking secrecy no longer exists. We need only look to UBS' 2009 disclosure and Credit Suisse's current intention to disclose thousands of names of Americans with accounts they thought were protected under so-called Swiss banking secrecy, or the proliferation of tax information exchange (TIE) agreements between the U.S. and numerous foreign tax havens. In light of this new world order, sooner or later the IRS will likely find your foreign account and then it will be too late. Even if you somehow remain "under the radar", any attempts to access the foreign funds could raise "red flags" and thus your foreign assets would essentially be inaccessible. This "do nothing" strategy is not recommended.

Failing to remedy a non-compliant offshore account by voluntary disclosure (even after 2011) or by converting to a tax-compliant structure puts you at serious risk of harsh penalties in the event of discovery, including IRS criminal prosecution. As recent events have proven, discovery is very likely. Contact us before the IRS finds you.

     D. A Few Voluntary Disclosure Successes

Many of our offshore voluntary disclosure cases settled during 2011. We'd like to look back at a few cases where our advocacy, coupled withe the good sense and understanding of some IRS agents, allowed us to close some Offshore Voluntary Disclosure Program (OVDP) cases with excellent results for our clients. As our Wall Street colleagues tell us, past performance is not a guarantee of future results. In addition, all clients are different and have different facts. Those qualifications aside, here are a few cases where our clients came out of the OVDP with good results.

• One client, an elderly retired professor, established a bank account in Europe many decades ago when he temporarily lived there while teaching on sabbatical. He established the bank account for his day-to-day living expenses. After his return to the U.S., the account remained in Europe, slowly earning passive interest for many years. The client did not know that he was obligated to disclose the account on an annual FBAR and pay tax on the interest that had accrued each year. The client came to realize that he had not been in tax compliance and therefore entered the OVDP.
• This particular client had already signed a will that dictates that at his death, his assets, including the foreign assets, will go to a scholarship fund at a U.S. university. The full OVDP penalty would have significantly reduced the amount left for the scholarship fund. We argued that our client did not willfully fail to report the foreign account; that the account was set up not to evade U.S. taxes; that the client is elderly and did not know his FBAR obligation and that the foreign account was passive. Under these facts, we were able to persuade the IRS to limit the penalties to only $5,000 per year for the last five years. This was a great deal less than the standard penalty of 20% of the highest value of the foreign account and much more was left for the scholarship fund.
• Another client and his brother were Hungarian Jews who survived the Holocaust, including time at Auschwitz. After the war, they went back to their family home in Hungary and discovered that their father, who did not survive the Holocaust, had hidden his nest egg from the Nazis by excavating a niche under the basement floor. The brothers deposited the family money in a Swiss bank. Ingrained with the psychology of both refugees and survivors, they viewed the Swiss account as providing stability in case of the next calamity. The client emigrated to the U.S., but the account stayed in Switzerland. Unbeknownst to the client, when he became a U.S. resident, the account in Switzerland became tax non-compliant.
• Again, we argued that these are not the facts of a tax evader; they are the facts of a tragic family history. We persuaded the IRS that any tax non compliance was not willful. We were successful in getting the IRS to apply penalties of only $5,000 per year for the last four years, rather than 20% of the account that by now had grown to close to $2 million.
• In another case, all of our client's foreign accounts were subject to a 20% penalty for various factual reasons. However, the IRS also included the value of our client's foreign life insurance within the value of the foreign assets subject to the full 20% penalty. We argued that, until guidance issued by the IRS only in 2011, the law was far from clear that foreign insurance is reportable on the FBAR. Further, if the law until 2011 was far from clear, then our client could not have been in non-compliance before 2011. In addition, the foreign insurance policy did not produce any taxable income. The IRS accepted our arguments and withdrew the value of the foreign life insurance from the client's penalty base.
• Next, we had a case where a U.S. taxpayer worked overseas for a foreign company and received shares of stock of the employer as compensation. The stock was contributed by the employer into a foreign account. The client entered the voluntary disclosure program because that account had not been reported via FBARs. However, when we analyzed the relevant documents, we learned that all foreign income had been reported. We removed the client from the voluntary disclosure program in order to avoid the 20% penalty. One year later, the IRS came back and said the equivalent of "not so fast", requesting the underlying documents. But, in the end, we were able to get the IRS to close the matter without assessing any penalty.
• Finally, we represented a family of Greek heritage that had been living in Turkey. The family patriarch opened Swiss accounts for reasons of safety and stability because of the precarious status of Greeks living in Turkey at that time. Years later, the family immigrated to the U.S. and the Swiss accounts were not U.S. tax-compliant. The full penalty under the OVDP would have been over $100,000. However, we were able to persuade the IRS to lower penalties to $40,000 on the basis of the family history and the clear facts of non-willful tax non-compliance.

All of the above are actual cases where we achieved success for our clients. However, it must be noted that there is no guarantee that future cases will have similar outcomes. In particular, the penalty regime of the 2011 OVDI is very different from the penalty regime under the 2009 OVDP. Foreign life insurance is now explicitly covered by the 2011 OVDI. Significantly, arguments of non-willful tax non-compliance and of reasonable cause for non-compliance, are of no consequence under the 2011 OVDI. Nevertheless, these case evidence that our good advocacy obtained favorable results for our OVDP clients.

     E. Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein

In 2007 and 2008, we advised the Government of Antigua on Antigua's asset protection, trust and LLC legislation.

In February 2009, the Antigua International Trust Act, International Foundations Act and International LLC act, all of which were drafted by Rubinstein & Rubinstein, became law.

In 2010 and 2011, we utilized the new Antigua laws on behalf of numerous clients, whose assets are protected in Antigua.

The new laws offer the world's most secure and confidential environment for offshore asset protection, wealth preservation and tax minimization. The new laws make it nearly impossible for foreign creditors to reach assets protected by Antigua trusts or foundations. The statutes include a very short statute of limitations for creditor claims and limit a creditor's ability to prove fraudulent conveyance claims. In addition, the legislation contains strong protections against asset repatriation, which prevent foreign courts and creditors from reaching assets protected in Antigua. As a result, Antigua is a premier jurisdiction for offshore asset protection.

     F. Asset Protection Victories: Foreign Trust Survives Creditor Challenge

Our clients have enjoyed more than a few significant victories in the areas of domestic and offshore asset protection. Here is one noteworthy example.

In 2004, our client established an irrevocable asset protection trust in Liechtenstein with funds totaling $1.2 million. The client filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income. In 2006, a U.S. creditor obtained a judgment against the client. However, the client had minimal attachable assets in the U.S.

In 2008, the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. Every Liechtenstein court, from the trial court all the way up to the highest court of Liechtenstein in 2010, ruled against the creditor and determined that the Liechtenstein courts lacked jurisdiction over our client. Thus, the trust assets could not be taken to satisfy the creditor's judgment. Our client's assets will remain safe in Liechtenstein.

This case proves that offshore asset protection, when done properly and lawfully and with complete disclosure to the IRS, is completely legal and 100% effective.

     G. New IRS Offshore Reporting Requirements

Finally, we wish to remind clients of new IRS reporting requirements with respect to foreign assets.

In 2011, the U.S. Treasury Department issued new regulations regarding Form TD 90.22.1., the Report of Foreign Bank and Financial Accounts ("FBAR"). FBAR filing now applies to foreign annuity policies, foreign life insurance policies that are owned by U.S. taxpayers and to some beneficiaries, along with U.S. grantors, of foreign trusts.

These new regulations are in addition to the already applicable disclosure requirements, e.g., Forms 3520, 3520A, 5471, 8621, Form 1040 Schedule B "check the box", etc.

In addition, the recently enacted Foreign Account Tax Compliance Act (FATCA) now applies additional IRS reporting requirements, including new IRS Form 8938 that will disclose foreign financial assets with an aggregate value in excess of $50,000. Form 8938 will apply to offshore assets owned during 2011. Form 8938 will be due, along with Form 1040, by April 15, 2012.

As we have advised, it is crucial to preserve the integrity of your offshore planning and be tax-complaint. Contact us to assist you with offshore tax compliance issues.

III. Asset Protection Considerations

     A. Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

During 2011, we have seen the emergence of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals. This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. As investors seek to blame others for investment losses, plaintiffs are now suing fund managers personally, in addition to suing the fund itself. In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but something that we are seeing in increasing numbers.

In addition, government investigation and prosecution of financial firms add a further challenge for investment advisors and financial professionals. Individual professionals can be investigated and charged, in addition to the firm or fund itself. A finding of wrongdoing, or criminal charges, could form the basis of a civil suit by investors against the investment advisor or money manager.

While in the past, hedge fund managers and investment advisors could take comfort in the indemnification offered by their funds or investment houses, these days, adequate indemnification is far from certain. For one thing, indemnification would not occur in case of negligence or activity determined to run afoul of law, or even activity deemed to be contrary to internal fund or investment house policy.

In addition, indemnification is "after-the-fact"; it seeks reimbursement after you have already lost your assets. Proper asset protection is pre-emptive; it is designed to discourage lawsuits in the first place and to protect your assets from future claimants. It eliminates the need for indemnification or, at the least, may significantly reduce the amount of indemnification needed.

Proper asset protection strategies offer financial professionals piece of mind and provide the protection their hard-earned assets need to withstand the inevitable attacks by investors looking to blame someone else for their investment losses.

     B. Doctors: Protect Your Assets Because Insurance Fees Are Getting Higher

Medical practitioners should be aware of recent developments which mandate having a proper asset protection plan in place.

In March of 2009, former New York State Governor Patterson and the NY legislature agreed to remove the limitations on legal fees for medical malpractice attorneys. This will result in larger legal fee awards for plaintiff lawyers who target doctors, hospitals and other medical professionals. Insurance companies will soon be paying bigger legal fee awards, which will cause medical malpractice insurance rates to rise, yet again.

Plaintiffs already have an incentive to sue a doctor: doctors are perceived as wealthy deep pockets. Moreover, plaintiffs often believe that a doctor's insurance company will offer some money in settlement to make the case go away. Now, after the legislative change removing the maximum legal fee awards, plaintiffs' attorneys have even greater incentives to sue doctors.

Doctors must take steps to protect themselves from lawsuits.

Domestic asset protection (for example, a family limited partnership) will, if done properly, be 100% effective against all future claims, and should serve to discourage future lawsuits. Tax compliant offshore asset protection will absolutely protect assets against all claims.

Asset protection is designed to give defendants (including doctors and any other professional in a high-liability industry) leverage to force a favorable settlement within the parameters of their malpractice coverage. One caveat: it is imperative that physicians protect themselves before the commencement of a lawsuit.

     C. Asset Protection for Landlords, Property Owners and Real Estate Investors

Landlords continue to face substantial increases in liability exposure as a result of a 2008 New York Court of Appeals decision, Sanatass v. Consolidated Investing Co., which expanded the scope of the "scaffold law". Now, property owners are absolutely liable for elevation-related injuries (those involving the use of ladders, scaffolding, hoists, etc.) on their property. The case held that a property owner was liable even when the contractor was hired by a tenant in direct violation of a lease provision prohibiting the tenant from altering the premises without the property owner's permission. Most importantly, this liability is absolute; i.e., the owner is liable even if, as in this case, he did nothing wrong!

With the new broad and absolute interpretation of the "scaffold law", owners of real property can expect more lawsuits resulting from elevation-related injuries. This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges from slips and falls, lead paint, mold, asbestos, fiberglass, Chinese drywall and other lawsuits. In addition, the current recession, the decline in property values and the increase in vacancy rates create an increased risk of lawsuits from lenders, regulators and unhappy investors. Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take proactive steps to protect their assets.

Effective asset protection will discourage lawsuits and offer security against future creditors. It will also allow landlords, doctors and other professionals to reduce the amount of liability insurance they must carry to normal, affordable levels.

     D. Protecting Assets From Divorce: New Law Requires Anticipatory Planning

In New York, under a 2009 court rule and a parallel new state law, a couple's assets are automatically frozen upon the filing or receipt of a summons in a matrimonial action. In 2010, New York State passed "no fault" divorce law. This new regime necessitates advance asset protection planning if divorce is contemplated.

In the past, if one spouse wanted to protect assets from impending divorce, he or she could do so, provided he or she had not already received a Restraining Order from a court. Under the new law, as soon as one spouse files an action for divorce, marital assets are automatically frozen. The new rule restraining asset transfers is binding on a plaintiff immediately when the summons is filed, and on a defendant upon receipt of service of the summons. Thus, persons facing the threat of divorce must plan ahead. The bottom line: Don't wait for a divorce; if the marriage is shaky, protect your assets well in advance.

     E. Limited Liability Company (LLC) Weakness

We also note in passing that 2011 saw yet additional court rulings that question the efficacy of LLCs for asset protection purposes, especially single-member LLCs. If you have an LLC, you should give thought to whether you are sufficiently protected. Other entities and asset protection structures may offer better asset protection than LLCs. Contact us for assistance.

IV. Family Limited Partnerships (FLPs)

     A. Reminder to Properly Maintain FLPs

The U.S. Tax Court on November 2, 2011 issued its opinion in Estate of Paul H. Liljestrand v. Commissioner. In that case, the Tax Court determined that assets held by a Family Limited Partnership were included in the estate of a wealthy deceased taxpayer and were subject to estate tax. The basis for this negative decision was that the decedent did not properly follow FLP formalities and co-mingled personal and FLP assets.

We take this opportunity to remind our FLP clients that the proper maintenance of an FLP and adherence to FLP formalities are crucial for both effective asset protection and estate tax planning.

FLP clients must be aware of the following:

• Open and maintain separate accounts for FLP and non-FLP assets.
• Do not commingle FLP and personal assets.
• Hold FLP meetings and keep minutes of the meetings.
• Keep proper FLP books and records.
• Properly "paper" FLP transactions such as loans, sales, distributions, additional capital contributions, etc.
• Do not use FLP assets to pay for personal expenses. Do not treat the FLP as a personal "piggy bank".
• Keep sufficient assets outside of the FLP to pay for personal and living expenses.
• Make sure distributions from the FLP are proper according to the FLP governing documents (e.g., distributions are pro rata to all parties).
• Maintain proper capital accounts for each partner.
• If individuals contributed a note in return for partnership interests, then the requirements of the note must be met; make regular interest payments.

Proper FLP formalities must be observed in order to safeguard the asset protection benefits of FLPs and to avoid negative tax consequences. Contact us for further assistance.

     B. Should your FLP Stay in Nevada?

Clients with FLPs established in Nevada may have recently received letters from the Nevada Secretary of State. The Secretary of State is "conducting a review" of FLPs claiming an exemption from business licensing.

We believe that this is an example of yet another government attempting to obtain revenue by coercing additional fees and closing loopholes. We do not believe that the Nevada Secretary of State's apparent position, that the business must be physically located in Nevada, is contained within the applicable Nevada limited partnership statute.

Nevertheless, it may be cheaper and easier to re-domicile the FLP to another favorable jurisdiction, like Wyoming. This can be accomplished with as little as $350.00 in legal fees for drafting the appropriate FLP documents. Wyoming registration fees will also apply. Contact us if you would like our assistance.

V. What's on the Horizon for 2012?

The current state of the economy, an election year, new offshore reporting requirements, as well as other recent changes will make 2012 a pivotal year for taxpayers.

     A. More Tax Audits and More IRS Scrutiny

In addition to raising taxes, at every level (local, state and federal) governments are also more aggressively enforcing tax laws, tightening or closing loopholes and pursuing tax evaders. The IRS is stepping up its investigations of possible tax abuse and tax evasion, pursuing improper "tax shelters" and other abusive transactions, and increasing audits and tax investigations.

What should you do?

First, work with competent, experienced tax counsel, who utilize proven, tax-complaint strategies.

Second, have tax counsel conduct a "friendly audit" - review your financial activities, bookkeeping and record keeping procedures, and accounting practices to uncover and correct sensitive areas before they are discovered in an IRS audit. Become essentially "audit proof".

We have earned a reputation for experience, expertise and creativity in the development of sophisticated tax-complaint domestic and offshore tax strategies, designed to maximize asset preservation and to minimize taxes. We have been instrumental in the development of creative, tax compliant domestic and offshore strategies for the elimination, deferral or minimization of capital gains tax, income tax and estate tax.

If you are being audited or investigated by the IRS or a state tax authority, hire legal counsel with a proven track record of success against the government.

Rubinstein & Rubinstein, LLP has been advocating on behalf of taxpayers for twenty years. Our attorneys have extensive experience in representing clients before the IRS and before state tax departments.

     B. Continued IRS Offensive Against Non-Compliant Foreign Accounts

Following its success against UBS (see II.A., above), we expect the IRS to continue to pursue offshore tax fraud investigations of many foreign banks in many foreign countries. If you have a non-compliant or undeclared foreign account, we can help you bring it into compliance. If you are being investigated by the IRS, we can represent you, defend you and negotiate for lower fines and penalties and for civil, rather than criminal, prosecution.

VI. Website/Media Attention

We continue to update our website (www.assetlawyer.com) and blog regularly, alerting clients to legal developments in the asset protection and tax worlds. We encourage you to check in regularly and we welcome your questions, comments and suggestions.

Finally, we take a moment to alert you that our performance and expertise have been recognized by media around the world. In 2011, Ken and Asher Rubinstein were interviewed, appeared and were published in:

• The New York Times
• CNBC
• Reuters
• Forbes.com
• Newsday.com
• Wealth Briefing
• Tax Notes International
• AccountingToday.com
• WebCPA
• Indus Business Journal
• Der Sonntag (Switzerland)
• Swiss National Television
• Bilanz (Switzerland)
• Business & Economy Magazine (India): Banking, Finance and Markets
• Eurasia Review, News and Analysis
• Swissinfo.ch
• ACA (American Citizens Abroad), and others.

We are very proud and humbled by this favorable recognition, and hope that you, our clients, see it as an endorsement of the quality of our legal services on your behalf.

We at Rubinstein & Rubinstein, LLP wish you a happy and healthy holiday season and a happy, prosperous and well-protected new year.