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.
I. Reduce Your Estate Taxes Via 2008 Gifting
The amount that an individual may gift to another individual, without tax consequences, is now $12,000. Gifting is an effective strategy to utilize in reducing estate tax liability. For example, if a husband and wife each gift $12,000 to three children, then the value of the couple’s estate is decreased by $72,000.
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 the clients’ estate. Clients have until December 31, 2008 to effectuate a gift for calendar year 2008. Clients should, in fact, make annual gifts of limited partnership interests, so that the value of their estates, over time, would decrease for estate tax purposes. As general partner, however, clients will continue to control all assets within the 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. When FLP interests are discounted, more of those interests can be gifted away, resulting in 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 $120,000, the client might gift the property to his or her child over a ten year period ($12,000 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 $60,000, via annual gifts of $12,000 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 $12,000 gift equals 10% of the non-discounted FLP value ($12,000 = 10% of $120,000) but $12,000 equals 20% of the discounted FLP value ($12,000 = 20% of $60,000).
Further, in the current recessionary economy, now is the time to consider gifting assets that are at presently 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 Obama government will initiate unfavorable changes to the estate and gift tax laws in order to compensate for government deficits. 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).
II. 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 2008, the New York State legislature in Albany 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.
III. Victory for Rubinstein & Rubinstein: Real Property Transfer Tax Exemption
While on the subject of important developments during 2008, Rubinstein and Rubinstein was successful in arguing that the City of New York improperly taxed an upfront, lump-sum payment of rent in a long term lease. Our client was the owner of two brownstone buildings on Madison Avenue in Manhattan. The client entered into a long-term lease in return for a single, upfront rent payment. The City then assessed Real Property Transfer Tax (RPTT) against our client, claiming that the upfront payment was not rent because it was paid in a single payment rather than periodically. We successfully argued that the legal definition of “rent” does not include a requirement that rent be paid in installments. This decision should pave the way for the proper characterization of rent for tax purposes in long-term leases.
Recently, Rubinstein & Rubinstein was also successful in arguing that RPTT imposed by the City of New York on transfers of real property from an individual to an FLP were improper. Rubinstein & Rubinstein also successfully represented clients in income tax audits. We have achieved significant reductions in tax assessments and penalty abatements and we have successfully negotiated favorable settlements for unpaid taxes.
We can assist you in protesting improper assessments of transfer taxes, in seeking refunds on transfer taxes already paid, or in any other local, state or federal tax matter.
IV. Offshore Considerations
The past year brought with it several significant developments in the offshore world:
A. Tax Compliant Asset Protection Still Safe; “Hiding” Assets Not Safe
Two 2008 news stories have led to hasty and unfounded pronouncements of the “death of offshore asset protection”. The first was the theft of confidential banking information from Landesbank and its sale to German tax authorities. The second was the exposure of banking giant UBS as a complicitor in U.S. tax fraud. We are pleased to report that none of our clients need be concerned by these events. Both stories have at their core tax fraud involving strategies based on “hiding assets”. 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.
This firm has 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.
B. Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein, Passed in 2008
Both chambers of the Parliament of Antigua voted on and passed the advanced asset protection, trust and foundation laws drafted by Rubinstein & Rubinstein and the legislation has been signed by the island’s Governor-General. 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, 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 has become the world’s premier jurisdiction for offshore asset protection.
C. 2008 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. A Liechtenstein court 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. There is an appeal currently pending with the highest Liechtenstein court. However, based on the positive appellate opinion and relevant Liechtenstein law, we expect the favorable appellate decision to be upheld. 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.
D. Pro-Debtor Offshore Development
In United States v. Grant (Federal Court, Southern District of Florida), Mr. Grant established two offshore trusts. Several years later, the I.R.S. determined that Mr. Grant and his wife owed back taxes. When the Grants failed to pay, the I.R.S. went to court and obtained a judgment against the Grants. In the interim, Mr. Grant passed away, leaving his wife as the beneficiary of the offshore trusts. Mrs. Grant had no significant U.S. assets, so the I.R.S. filed a motion to force her to bring the offshore assets back to the U.S. The court decided in favor of the I.R.S and ordered Mrs. Grant to dismiss the foreign trustees and repatriate the assets. She complied with the court’s order and wrote to the trustees, requesting distribution of the trust assets to her and advising that she was dismissing the foreign trustees. The Trustees refused to comply.
In 2008, the I.R.S. urged the Court to jail Mrs. Grant for contempt of court because the assets had not been repatriated. The judge refused and held that because she had repeatedly written to the trustees, requesting distributions and dismissing the trustees, she had complied with his order and had sufficiently established that she was not able to repatriate the assets.
This case is illustrative of the actual law: jail was not warranted because Mrs. Grant complied with the court order, even though the foreign trustees refused to comply.
The result after Grant confirms what we have long counseled: that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective. We can also advise regarding repatriation and/or legitimization of non-compliant offshore assets and any other offshore matters.
V. Asset Protection for Doctors, Landlords and Other Professionals
In recent years, doctors have faced an ongoing, well-publicized “insurance crisis”, as malpractice insurance policies become smaller, while plaintiffs’ malpractice awards grow larger. Insurance companies are not writing new policies and are not renewing existing policies. This has resulted in doctors closing their practices and leaving medicine rather than enduring the risk of lawsuits and inadequate, expensive insurance coverage.
Landlords, in addition, are facing substantial increases in liability resulting from 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 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, such as lawsuits resulting from slips and falls, and from the presence of lead paint, mold, asbestos, fiberglass and other toxic substances. 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 of coverage.
VI. Looking Ahead to 2009
The current state of the economy, the election of a new President, as well as other recent changes, make 2009 a pivotal year for taxpayers:
A. Tax Increases
The new presidential administration is likely to raise income and capital gains taxes for the coming year. It 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 current estate tax structure set to expire in 2010, changes are inevitably on the horizon. For many taxpayers, the impact may be significant. We can help explain these 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 maximum tax minimization, such as:
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 new administration taxes 401(k)s, which is expected.
3. Clients should also consider, if possible, taking income in 2008, rather than deferring income to 2009 with its likely higher tax rates. As a corollary, clients may wish to defer losses to 2009 to offset expected 2009 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 administration raises taxes.
Please call our office to discuss any of these tax minimization strategies.
B. Offshore Changes
1. Deterring the Use of Offshore Jurisdictions for Tax Evasion
In 2007, Senator Carl Levin, together with then-Senator Obama, presented a bill to the Senate to prevent tax shelter abuses and increase disclosure requirements for assets held in many offshore jurisdictions. With Obama set to take office in January 2009, it is very possible that this proposed measure could gain the support required to become law. However, since our firm has long counseled complete transparency and proper disclosure with respect to foreign asset protection planning, our current and prospective clients will not be adversely effected if such laws are passed by the incoming administration.
2. Liechtenstein Announces Intent to Cooperate in Tax Matters
Finally, 2008 brought with it an announcement from the Liechtenstein government that it is willing to cooperate in tax matters involving other countries and that it has renegotiated its Mutual Legal Assistance Treaty with the U.S.. Again, since our firm has always advised our clients to follow tax-compliant asset protection and tax planning strategies and to avoid strategies based on merely “hiding” assets, none of our clients will be negatively impacted by Liechtenstein’s change in policy.
We at Rubinstein & Rubinstein, LLP wish you a happy and healthy holiday season and a happy, prosperous and well-protected new year.