by Asher Rubinstein, Esq.

Over the last few years, the U.S. government has enacted a series of laws and regulations designed to create greater transparency of assets held overseas by U.S. taxpayers.  In order to track and tax those foreign assets, the IRS has created Form 8938, Statement of Specific Foreign Financial Assets, a new form which requires taxpayers who own certain specified foreign assets to disclose these assets annually to the IRS.  Many taxpayers who own such specified foreign assets are now required to file Form 8938, or risk being penalized by the IRS.  The requirement to file new Form 8938 is already effective.  The form is due by April 17, 2012, along with your Form 1040, for calendar year 2011.

The new form is broad in its coverage of foreign assets that require disclosure.  Foreign assets required to be reported include:

  • foreign bank and brokerage accounts (which are already reportable on Form TD 90-22.1, Report of Foreign Bank and Financial Accounts, known as the “FBAR”);
  • stock of foreign corporations and interests in foreign limited liability companies (LLCs), partnerships and other entities, whether publicly traded or privately held;
  • interests in foreign Exchange Traded Funds (ETFs) (but interests in Passive Foreign Investment Companies [PFICs] that are reported on IRS Form 8621 need not be repeated on new Form 8938);
  • interests in a foreign entity such as a trust or foundation;
  • ownership of investment instruments and contracts issued by a foreign entity, including foreign annuity contracts and insurance policies (also already subject to FBAR disclosure);
  • interests in a foreign investment fund, hedge fund, mutual fund and private equity fund (but note the PFIC exemption above);

Note that even though certain foreign assets may not be reportable on new Form 8938, these assets may still be reportable on other IRS forms and on the FBAR.  Note also that even though an asset is already reportable on, e.g., the FBAR, it may be reportable on Form 8938 as well, notwithstanding the resulting redundancy.  It is also important to note that even if a foreign asset is not reportable if directly owned (e.g., real estate or bullion), if such asset is owned by a foreign entity, a U.S. taxpayer’s interest on the foreign entity is reportable.

Form 8938 requires details of the foreign assets, along with their values.  Form 8938 is required if the total value of all foreign assets exceeds certain predefined threshold amounts, depending on the taxpayer’s residency during the tax year.  In general, reporting is required for assets valued in excess of $50,000 for a single U.S. taxpayer and $100,000 for a married couple filing jointly, living in the U.S.  If the U.S. taxpayer lives abroad, he or she must report any assets in excess of $200,000 for a single taxpayer and $400,000 for a married couple filing jointly.  Financial accounts, and the assets in those accounts, held at a foreign branch of a U.S. financial institution or a U.S. branch of a foreign financial institution are not subject to reporting on Form 8938.

If a taxpayer has reported the foreign assets on another IRS form (e.g., Form 3520 for foreign trusts, Form 5471 for foreign corporations, etc.), he or she need not report these assets on Form 8938,  but must still complete Part IV of Form 8938 and specify on which other tax form the assets were reported.  The amounts reported on the other IRS forms will count towards the aggregate threshold amount for Form 8938.  Therefore, if the amounts reported by the taxpayer on the other IRS forms meet the Form 8938 threshold amount, then any other foreign assets not reported on the other forms must be disclosed on Form 8938.

There are numerous IRS penalties associated with a failure to report foreign assets, as well as potential fines and criminal prosecution.  Taxpayers who own foreign assets and are unsure whether they must file new Form 8938 should seek guidance from an experienced offshore tax compliance attorney.

Additional Important Points

  • The disclosure requirements for Form 8938 are already effective.  While FATCA regulations are coming into effect over time, this new Form 8938 is due this year, i.e., with your 2011 tax return, due April 17, 2012, or later if you receive an extension.
  • Form 8938 is an informational return, whereby ownership interests in foreign assets are reported.  However, Form 8938 does not assess tax on foreign income.  Income from foreign assets is reported on other forms such as Form 1040, Form 8621, etc.  The U.S. Internal Revenue Code assesses income from all sources world wide.  Income includes interest, capital gains, dividends, royalties, etc., from all foreign sources.
  • Any interest in social security, social insurance or other similar foreign government program need not be reported on Form 8938.
    However, an interest in a foreign pension plan or foreign retirement account requires reporting.
  • A mere signatory authority (e.g., power of attorney, co-signatory) over a foreign account does not require disclosure via Form 8938.  However, the FBAR form is still required for a power of attorney or co-signatory authority.
  • Taxpayers filing Form 8938 may still be required to file an FBAR in addition.
  • Form 8938 requires the reporting of the value of foreign assets.  Many cases, e.g., ownership of a fraction of a foreign entity or investment fund, may require complex valuation and obtaining financial information from foreign sources.
  • With respect to beneficiaries of foreign trusts, whereas such beneficiaries are required to file an FBAR if they have a “present” beneficial interest (defined as the right to receive a mandatory distribution, or actual receipt of 50% of trust income or assets), Form 8938 is required if the trust beneficiary receives a distribution that, together with other specified foreign assets, meets the Form 8938 specified threshold (e.g., $50,000 for a single taxpayer; see supra).  If the foreign trust is a discretionary trust and the U.S. taxpayer does not receive a distribution (or receives a distribution that, when combined with his/her other specified foreign assets, does not exceed his/her reporting threshold), the value of his/her interest in the trust is zero and therefore not subject to reporting.
  • For the time being (until the IRS issues additional regulations), Form 8938 reporting requirements apply only to U.S. individuals.  U.S. corporations and other entities are not required to report ownership or interest in foreign assets on Form 8938.  (Note, however, that the FBAR does apply to entities like corporations).
  • Form 8938 applies to various components of offshore asset protection structures (e.g., foreign trusts).  However, the offshore asset protection is still intact, because Form 8938 is for IRS reporting purposes only and does not impact the integrity of a foreign asset protection structure.  This form merely makes an already reportable offshore entity or asset more transparent to the government.  As we have long counseled, foreign asset protection structures do not rely on secrecy and give no expectation of tax secrecy.  However, vis-a-vis private civil creditors, tax complaint offshore strategies still offer concrete asset protection.

Taxpayers who own or have interests in specified foreign financial assets may have to report the existence and value of those assets on new IRS Form 8938, or face penalties.  We have long assisted clients with the many compliance and disclosure requirements for offshore assets.  We can assist in determining whether you are subject to new Form 8938, and can answer any other questions you have regarding U.S. tax compliance for foreign assets.

2010 End of Year Memo to Clients

2010 End of Year Memo to Clients

To:  Clients, colleagues and interested parties
From:  Rubinstein & Rubinstein, LLP
Date:  December 2010

Year-End Notes

 As the year comes to a close, we take this opportunity to remind clients of several important issues that might impact upon their estate, tax and asset protection planning, to reflect upon a few significant accomplishments in 2010, and to offer suggestions for effective year-end tax planning.

I. Year-End 2010 Tax Planning & Anticipating the 2011 Tax Increases
A. Reduce Your Estate Taxes Via 2010 Gifting
 Every year, we begin this memo by reminding 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  legislation that is still pending in Congress would limit the tax benefit of such gifting.
 The amount that an individual may gift to another individual, without tax consequences, 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.
 Additionally, 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 $1,000,000 (total value for all gifts).  You will be required to file a gift tax return, but the gift taxes will be offset by your $1,000,000 unified lifetime credit.  A husband and wife, together, may make joint gifts equal in total value to $2,000,000 in this manner.
 Clients with Family Limited Partnerships should consider gifting an equivalent amount of limited partnership interests, so as to decrease the value of their estate.  Clients have until December 31, 2010 to effectuate a gift for calendar year 2010.  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, however, clients will continue to control all assets within their partnership.
 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).
 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.
 Furthermore, 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, pending 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.
 We realize that these 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 2011: Tax Increases and What To Do Now
 We can expect higher income and capital gains taxes in 2011.  Congress may also amend the 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 estate tax revival in 2011, 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 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 2010, rather than deferring income to 2011 with its likely higher tax rates.  As a corollary, clients may wish to defer losses to 2011 to offset expected 2011 income at higher tax rates.

4. Engage in income tax planning via tax-complaint 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.  One of the uncertainties facing taxation is how much will capital gains tax increase?  Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust during 2010 is a good way to avoid 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 for a foreign annuity policy.  The exchange of assets for an annuity policy is not taxable nor reportable (at least until 2012).  Further, 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 our office to discuss any of these tax minimization strategies.

II. Offshore Considerations
 This year was dramatic in the offshore world.  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 complaint.
  A. Erosion of Offshore Tax Secrecy and Encouraging Tax Compliance
 Facing a criminal indictment for encouraging and facilitating tax fraud, in 2010 UBS revealed the names of some 4,500 Americans with accounts they were assured were “secret”.

  • Switzerland’s Parliament in 2010 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.
  • The IRS is also investigating HSBC, Credit Suisse, Bank Julius Baer, Bank Leumi, Liechtensteinsche Landesbank and others.  Banks in other countries will also be targeted.  The IRS is establishing field offices in Panama, Australia and China.
  • Domestically, Congress passed the HIRE Act (P.L.111-147) which included various provisions designed to combat offshore tax avoidance by targeting foreign accounts and Americans who own them.  New legislation seeks increases to the IRS budget and manpower to pursue undeclared money offshore, including hiring 800 IRS special agents to investigate foreign accounts.  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 represent dozens of clients in the IRS Voluntary Disclosure Program (VDP).  Although the VDP officially ended in 2009, the IRS still maintains a general voluntary disclosure policy.  Throughout 2010, we continued to represent taxpayers with foreign accounts before the IRS, making their accounts compliant, repatriating the foreign funds and avoiding criminal prosecution.
  • Clients in the IRS Voluntary Disclosure Program should bring their accounts into tax compliance on the state level as well.  Some states, such as Connecticut and New Jersey, had formal programs in 2010 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.

 B. Offshore Asset Protection and Tax-Complaint 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 US 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 US 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 the position that it is the legal right of a taxpayer to decrease the amount of his 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 US 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 IRS Voluntary Disclosure Program for foreign accounts expired on October 15, 2009.  If you are the owner of a foreign account, and you did not come forward under the Voluntary Disclosure Program, what are your options now?
  Option One: come forward now.  The IRS will still welcome your voluntary disclosure, even after October 15, 2009.  In fact, the IRS has welcomed voluntary disclosures long before this most recent, widely publicized program for foreign accounts.  The difference is that after October 15, 2009, 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 Program, you may still come forward; you will pay penalties higher than those who came forward in 2009, but they 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 US laws.  Although we cannot erase a non-compliant past, we can ensure 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 2010 have proven (see II.A. above), foreign banking secrecy no longer exists.  We need only look to UBS’ disclosure of thousands of names of Americans with accounts they thought were protected under so-called Swiss banking secrecy, or the proliferation of tax exchange agreements between the US 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.  This “do nothing” strategy is not recommended.
 Failing to remedy a non-compliant offshore account by voluntary disclosure (even now) 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. 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, 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.
 E. 2010 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 US tax annually on all trust income.  In 2006, a US 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.
  III. Asset Protection for Physicians, Property Owners, Financial Professionals/Investment Advisors and Others
A. Doctors: Protect Your Assets Because Insurance Fees Will Soon Go 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.

B. 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.
C. Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors
 During 2010, we’ve 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, including the 2010 charges against previously-untouchable Goldman Sachs, 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 from 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.  Of greater importance, indemnification is “after-the-fact”; it seeks fund 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, significantly reduces 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.

IV. 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, she could do so,  provided she had not already received a Restraining Order from a court.  Under the new law, as soon as a 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.
V. Rubinstein & Rubinstein Star Exemption Court Victory Now Codified as Law
 Rubinstein & Rubinstein’s 2003 court victory against a New York State municipality that had denied the STAR exemption for personal residences owned by Family Limited Partnerships has been codified as law in New York.  In 2009, the New York State Legislature amended section 425 of the Real Property Tax Law to include dwellings owned by qualified limited partnerships, including FLPs, as eligible for the STAR exemption.
 There is an opportunity here for clients interested in pursuing refunds based upon an improper denial of the STAR exemption in past years.  If you are interested in pursuing the opportunity of refunds for past denials, please contact our office.
VI. What’s on the Horizon for 2011?
 The current state of the economy, the election of a new Congress, new offshore reporting requirements, as well as other recent changes will make 2011 a pivotal year for taxpayers.

  A.  More Tax Audits and More IRS Scrutiny
 In addition to raising taxes, the government is 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 close to twenty years.  Our attorneys have extensive experience in representing clients before the IRS and before state tax departments.

B. New Disclosure Requirements for Offshore Entities, Investments and Financial Accounts
 The HIRE (Hiring Incentives to Restore Employment) Act was signed into law in March 2010 and imposes strict reporting and disclosure requirements for foreign financial accounts, trusts and other entities.  In addition, in 2010 the Treasury Department proposed new rules which bring foreign annuities and foreign life insurance (which previously were not subject to government reporting) within the scope of disclosure requirements.  The new reporting rules will begin to take effect in 2011 and 2012.  The new rules are complex.  Please contact us to discuss offshore tax compliance and reporting issues.

 C. Continued IRS Offensive Against Non-Compliant Foreign Accounts
 Following its success against UBS (see II.A., above), we expect the IRS to pursue offshore tax fraud investigations at other banks and in other 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.
 VII. Website/Media Attention
 We continue to update our website ( 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 2010, Ken and Asher Rubinstein were interviewed, appeared and were published in:

  •  Bloomberg TV and radio
  • CNBC (US, Europe and Asia)
  • Yahoo! Finance
  • CNN.Money
  • Dow Jones
  • Wall Street Journal
  • Swiss TV (Schweizer Fernsehen)
  • Reuters
  • The Times of London
  • National Public Radio (NPR)
  • Wealth Briefing
  • Tax Notes International
  • Financial Times
  • Hedge Fund Alert
  • Entrepreneur Magazine
  • The Atlanta Post
  • WebCPA
  • Family Wealth Report
  • Indus Business Journal
  • Physician’s Money Digest
  • National Post (Canada)
  • Fox Business
  • The New York Times Deal Book
  • Tribune de Geneve (Switzerland)
  • Cash (Switzerland)
  • Valori (Italy)
  • 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.

Asset Protection for Money Managers, Investment Advisors and Financial Professionals

Asset Protection for Money Managers, Investment Advisors and Financial Professionals

(Or, We hate to say “I told you so” #2, but look here)

by Asher Rubinstein, Esq.

New York’s attorney general has sued Ivy Asset Management, a hedge fund manager, and two of its former executives, its CEO and its CIO, claiming that they knew years ago that Bernard Madoff was a fraud, but did not disclose that knowledge to the fund’s investors.

Attorney general suits against hedge funds are not new.  Lawsuits related to Madoff’s fraud are not new.  But recently, we have seen more and more lawsuits filed against fund managers and investment advisors personally.  In other words, the plaintiffs not only target the funds or financial institutions, but the people who make the investment decisions, naming these people personally and putting their personal assets at risk.

We wrote about this development just last week; please click here.

In that article, we discuss why indemnification is often of little comfort.  We outlined domestic and international asset protection strategies that will effectively protect personal assets from these kinds of claims.

Recent events make clear the need for asset protection by financial professionals.  Following the charges filed last month by the Securities and Exchange Commission against Goldman Sachs, there is a real possibility that individual Goldman Sachs executives may face government investigation and charges.  Investors in Goldman products may also file civil charges, in addition to charges filed by the government.  In today’s news, Morgan Stanley is being investigated for wrongdoing in connection with investment activities.  Actions against Morgan Stanley executives are a possibility also.  The need for asset protection by financial professionals is continually reinforced in today’s climate.

Contact us for additional information.

Ken Rubinstein quoted in Investment News regarding Hedge Fund Taxation

Ken Rubinstein quoted in Investment News regarding Hedge Fund Taxation

Tax hikes may spell trouble for hedge funds

Emphasis on short-term returns leaves them vulnerable

By Jeff Benjamin
October 4, 2009

The Achilles heel of hedge funds . tax inefficiency . could soon send investors limping toward other options.

“If investors feel they are getting less after-tax income, they will find other alternative investments,” said Ken Rubinstein, senior partner at the law firm Rubinstein & Rubinstein LLP, which specializes in hedge funds.

Historically, investors have overlooked the tax consequences of hedge fund investing because the funds have outperformed other asset classes. But last year hedge funds lost 18% of their value, on average, which although better than the 38.5% decline in the S&P 500 stock index, demonstrated that they are not invincible.

If tax rates rise, as most ob-servers expect given the ballooning federal deficit, hedge funds may find themselves in a structural bind should investors become more conscious of after-tax returns.

“The nature of what hedge funds do doesn’t lead to a lot of tax efficiency,” said Jeffrey Mindlin, chief operating officer at Advanced Equities Asset Management Inc.

Hedge funds are characterized by high portfolio turnover, which leads to lots of short-term gains taxed at ordinary income rates. But managing a portfolio to avoid short-term gains can adversely affect performance and hedge fund manager income.

“Why should a hedge fund manager care about tax efficiency if he doesn’t get anything out of it?” said Maury Cartine, a partner at the accounting firm Marcum LLP, which specializes in hedge fund services.

Consider what happens when a manager sells a stock held for 11 months.

If the sale generates a $50 profit, a shareholder’s tax bill would be $17.50. But if the stock were sold a month later, the capital gain would be considered long term and the tax bill, based on the 15% long-term rate, would drop to $7.50.

But, if during that one-month wait the stock price fell and profits dropped to $40, the manager would see a significant decline in his or her performance fee, which typically ranges from 10% to 20% of profits.

“There are lots of examples of how a manager can do himself a disservice by trying to be more tax-efficient,” Mr. Cartine said. “Basically, providing tax efficiency to investors in a hedge fund comes with a cost that has to be absorbed by the manager.”

The tax-versus-performance dilemma can get even stickier when it comes to master feeder funds, which involve managing the same strategy for both offshore and domestic hedge fund investors.

Because most offshore investors are not subject to U.S. taxes, a hedge fund manager could be charged with shirking his fiduciary duty by managing for tax efficiency over performance.

Mr. Mindlin, whose firm oversees $500 million in separately managed account portfolios, has started focusing on alternatives to hedge funds in order to reduce the tax hit, even if those other choices are not a perfect replacement.

Several strategies use simple instruments such as mutual funds to mimic the return stream of a broad hedge fund index. Such replicators, including The Goldman Sachs Group Inc.’s Absolute Return Tracker Fund, which simulates the average return of 4,000 hedge funds, can be more tax-efficient than a pure hedge fund but aren’t nearly as nimble or precise as the hedge funds themselves.

Some structured notes also can be a more tax-friendly alternative to certain hedge fund strategies, but that introduces a risk that the issuer could go belly up like Lehman Brothers Holdings Inc. did last year.

“The problem is, anytime you start playing around with engineered products to try and avoid taxes, you lose in the long run because the IRS will find a way to block it,” said Charles Gradante, managing director at Hennessee Group LLC, a hedge fund advisory firm.

“Most clients criticize hedge funds for generating a lot of short-term profits that are taxed as ordinary income,” he added. “But over a long period of time, we think it’s still more beneficial to own hedge funds.”

Some advisers also prefer to stick with hedge funds despite their tax flaws.

“First and foremost, we’re using hedge funds to reduce risk and enhance returns, and I would welcome moretax-efficient strategies, but not at the expense of performance,” said Thomas Orecchio, principal at Modera Wealth Management Inc., which has $450 million under advisement.

In the meantime, advisers such as Mr. Mindlin are trying to help clients by investing in hedge funds through qualified retirement accounts.

But that channel can be narrow since most hedge funds, in an effort to avoid additional regulatory oversight, try to limit qualified assets to less than 25% of the fund.

“Going forward in an environment where capital gains taxes are likely to go up, it seems like the time is right for some tax efficiency in the hedge funds space,” Mr. Mindlin said.

Marc LoPresti, a partner in Tagliaferro & LoPresti LLP, shares that point of view. “Investors would love to see more tax efficiency, but I don’t know anybody who has come up with a secret sauce.” he said.

E-mail Jeff Benjamin at



as seen onbloombergcnbcforbesnytimeswall street