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Asset Protection Blog

Historic Opportunity Until December 31, 2012 to Avoid Tax on Over $10 Million+ of Assets

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In addition to taxing your income during life, and your estate at death, the IRS also can tax gifts you make.  The rationale is to prevent someone from giving his or her assets away in order to avoid the estate tax.  Thus, gifts are subject to tax, whether made during your life or at your death.
However, until the end of 2012, 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, and pass your assets to loved ones, free of tax.  If your net worth is above $5 million,  the first $5 million can still go to your loved ones, tax free.  The exemption from gift and estate tax has never been higher and will only last until December 31, 2012.
If your assets are owned by family limited partnerships (FLPs) or Limited Liability Companies (LLCs), then even more can be gifted out of your estate via the principle of discounting, as discussed below.  However, one need not own an LLC or FLP to make gifts and avoid tax.  But, if you own an FLP or LLC, you can get even more out of the reach of taxation.
There are two ways to gift assets and lower estate tax.  The first way is via annual gifting.  The amount that an individual may gift to another individual, without tax consequences or a reporting requirement, is currently $13,000 per annum, per recipient.  Gifting is an effective strategy to reduce 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 ($13,000 x 2 x 3).  The husband and wife can make these gifts annually, and remove $78,000 each year from their estate.
In addition to annual gifts of up to $13,000 per recipient, a second way to lower the value of your taxable estate is via a lifetime gift.  You may utilize your “unified lifetime credit” to avoid gift taxes and make one or more gifts equal in total value to $5,000,000 ($10,000,000 together with your spouse; total value for all gifts).  Such a lifetime gift is in addition to annual gifts of up to $13,000 per recipient.  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 the last sentence again.  Yes, $10 million in assets passing to your heirs, free of tax, but only if you act before December 31, 2012!
Clients with FLPs should consider gifting an equivalent amount of limited partnership interests, so as to decrease the value of their estate.  As long as clients retain their General Partner (GP) interests, clients will continue to control all assets within their partnership.  Yes, you can escape the estate tax and still control the assets.
Here’s how you can get even more than $5 million ($10 million for a married couple) out of the reach of taxation, if you own FLP interests:
Gifting of partnership interests works hand-in-hand with the principal of discounting of those interests.  The IRS recognizes a discount in the value of an LP interest.  The discount is due to a lack of marketability of an LP interest on the open market (you can’t sell a limited partnership interest to an outsider), as well as a lack of control by a limited partner (as contrasted to full control by the general partner).  Thus, LP interests are not “worth as much” in the eyes of the IRS, while the value of the underlying FLP asset remains unchanged.  This is a rare instance where the IRS recognizes a value less than the actual asset value.  Once discounted, more LP 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.  In some cases, after applying a 50% total discount to the value of the LP interests, as much as $20,000,000 of their estate may be gifted by a married couple.  It is important to understand that only LP interests are gifted, not the underlying FLP assets.
In the current recessionary economy, now is the time to consider gifting assets that are presently at abnormally low values.  The 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.
It is possible that the federal government will make unfavorable changes to the estate and gift tax laws in order to compensate for huge 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 until December 31, 2012.  The exemption will go back down to $1 million on January 1, 2013, unless Congress acts before then.  Now is the time to capitalize on this window of opportunity to avoid gift and estate taxes on a significant amount of wealth.
In summary:
– You can lower the value of your taxable estate, and pass $5,000,000 ($10,000,000 for a married couple) to your heirs, tax free;
– If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free (up to $20,000,000 in some cases).
– You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you give away all of the Limited Partnership (LP) interests.
– The gift and estate tax exemption has never been higher.
– The gift and estate tax exemption expires on December 31, 2012.  Beginning January 1, 2013, the exemption is only $1 million.
We realize that gifting and discounting 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).  Please contact us for further information, but don’t wait too long; this historic opportunity ends December 31, 2012.

In addition to taxing your income during life, and your estate at death, the IRS also can tax gifts you make.  The rationale is to prevent someone from giving his or her assets away in order to avoid the estate tax.  Thus, gifts are subject to tax, whether made during your life or at your death.Continue Reading

How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes

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Foreign buyers have purchased more than $83 billion worth of U.S. residential real estate over the past year, representing close to ten percent (10%) of the residential market.  These numbers are a 24% rise from last year, itself a strong year for sales to international buyers.  (Source: Wall Street Journal, June 12, 2012).
The American real estate market is seen as a buying opportunity for wealthy foreigners, in light of the decline in U.S. home prices and the lower value of the U.S. dollar against some foreign currencies.  Foreigners are buying U.S. real estate for their own use, as well as investments – to rent or re-sell.
However, when the foreign buyers later sell these homes, they will have to pay a tax pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”).  The tax is 10% of the gross sale proceeds of the sale, withheld at closing.
There is a way to avoid the FIRPTA tax.  Prior to the actual purchase of U.S. real estate, the foreign party should set up a U.S. trust, with a U.S. trustee, properly established and with an IRS taxpayer number for that trust.  The trust should buy the real estate.  The deed should be in the name of the trustee, as Trustee of the trust.  The trust is recognized as the buyer and owner of the property.  Later, the trust will sell the real estate.  At the time of that sale, the trust will pay capital gains tax on the net capital gain earned on the real estate; the FIRPTA tax would be avoided.  (More sophisticated tax-compliant strategies also exist for the minimization or deferral of even the net capital gains tax through the use of charitable remainder trusts <<https://www.assetlawyer.com/estate_tax_planning_bypassing_capital_gains_tax.htm>>.)
The foreign buyers could be the beneficiaries of the trust and enjoy use of the real estate.  The trust could distribute the net (after capital gains tax) proceeds of the sale to the beneficiaries.  The trust might also offer additional benefits, including asset protection and estate planning.
Please contact us <<https://www.assetlawyer.com/contact_us.htm>> for additional information on how foreign purchasers of U.S. real estate can minimize their tax consequences.

Foreign buyers have purchased more than $83 billion worth of U.S. residential real estate over the past year, representing close to ten percent (10%) of the residential market.  These numbers are a 24% rise from last year, itself a strong year for sales to international buyers. (Source: Wall Street Journal, June 12, 2012).

The American real estate market is seen as a buying opportunity for wealthy foreigners, in light of the decline in U.S. home prices and the lower value of the U.S. dollar against some foreign currencies.  Foreigners are buying U.S. real estate for their own use, as well as investments – to rent or re-sell.

However, when the foreign buyers later sell these homes, they will have to pay a tax pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”).  The tax is 10% of the gross sale proceeds of the sale, withheld at closing.

There is a way to avoid the FIRPTA tax.  Prior to the actual purchase of U.S. real estate, the foreign party should set up a U.S. trust, with a U.S. trustee, properly established and with an IRS taxpayer number for that trust.  The trust should buy the real estate.  The deed should be in the name of the trustee, as Trustee of the trust.  The trust is recognized as the buyer and owner of the property.  Later, the trust will sell the real estate.  At the time of that sale, the trust will pay capital gains tax on the net capital gain earned on the real estate; the FIRPTA tax would be avoided.  (More sophisticated tax-compliant strategies also exist for the minimization or deferral of even the net capital gains tax through the use of charitable remainder trusts.)

The foreign buyers could be the beneficiaries of the trust and enjoy use of the real estate.  The trust could distribute the net (after capital gains tax) proceeds of the sale to the beneficiaries.  The trust might also offer additional benefits, including asset protection and estate planning.

Please contact us for additional information on how foreign purchasers of U.S. real estate can minimize their tax consequences.

Israeli Accounts on the IRS Radar: More Offshore Prosecutions

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Two weeks ago, I wrote The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny. In that article, I discuss the IRS and Department of Justice (DOJ) expanding their global scrutiny of undeclared foreign banking to include accounts at Israeli banks.

This week, DOJ announced indictments against three Israeli-American tax preparers for helping their clients hide monies from the IRS, including moving money to Israeli banks, and using foreign corporations to hide income.

The DOJ press release, “Three Tax Return Preparers Charged with Helping Clients Evade Taxes by Hiding Millions in Secret Accounts at Two Israeli Banks”, can be found here.

Additional reports:

“Tax Shelters: Why Israel Could Be the Next Switzerland“, CNBC.

“Israeli Tax Preparers Snared. Indictment Shows the U.S. Is Broadening Pursuit of Secret Offshore Accounts“, Wall Street Journal.

According to the CNBC report, “the indictment revealed the existence of a grand jury that is almost surely going after much bigger fish.” Further, “the new case is just the beginning of a potential series of indictments, which may snare some of the wealthy American clients who have hidden money in Israel, many for generations. That’s likely to be politically controversial . . . .”

Over a year ago, in my article “IRS Targeting Undeclared Accounts in Israel for Tax Fraud“, I discussed the IRS moving beyond accounts in Switzerland and focusing on accounts in Israel. My most recent article, The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny, discussed the current state of the inquiry into Israeli banks and non-compliant offshore accounts.

In light of the IRS and DOJ enforcement efforts against offshore accounts that are not tax compliant, owners of such accounts should meet with qualified tax attorneys to discuss their situation and their available options. Please contact us for a confidential and privileged discussion about your situation.

FBAR Disclosure Applies to Foreign Annuity Policies, Foreign Life Insurance Policies and Foreign Trusts; Deadline is June 30, 2012

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This is a reminder that the Report of Foreign Bank and Financial Accounts (“FBAR”), T.D. 90-22.1, for calendar year 2011, is due by June 30, 2012.
As discussed previously << https://www.assetlawyer.com/wordpress/?p=955>>, the U.S. Treasury Department in 2011 issued revised regulations regarding the FBAR.  The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts.  If you are subject to the FBAR filing requirement, the 2011 FBAR is due by June 30, 2012.
The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

This is a reminder that the Report of Foreign Bank and Financial Accounts (“FBAR”), T.D. 90-22.1, for calendar year 2011, is due by June 30, 2012.

As discussed previously, the U.S. Treasury Department in 2011 issued revised regulations regarding the FBAR.  The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts.  If you are subject to the FBAR filing requirement, the 2011 FBAR is due by June 30, 2012.

The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

Foreign Annuity Policies

The 2011 FBAR regulations extend the FBAR requirement to foreign annuity policies that have a cash surrender value and are owned by U.S. persons.  Under the new regulations, such annuity policies are considered a “foreign financial account”, reportable via the FBAR by the policy owner.  Such annuities are reportable even if they are deferred annuities and there are no present annuity payments.

Foreign Life Insurance

A foreign life insurance policy is now reportable as a “foreign financial account” if the insurance policy is owned by a U.S. person and the policy has a cash surrender value. The reporting requirement applies to the policy owner, if he/she is a U.S. person.

Foreign Trusts

The 2011 FBAR regulations extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, such as foreign insurance trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in a trust’s assets or if the U.S. person received more than fifty percent of the current income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.

Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Beneficiaries of a foreign discretionary trust may only receive distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.

Foreign trusts also give rise to filing IRS Forms 3520 and 3520-A as well as new IRS Form 8938.

Please also note the following with respect to the FBAR requirement:
  • Even if the annuity policy or insurance policy was cancelled in 2011, and the trust account closed during 2011, if they existed at any point during 2011, an FBAR is required.
  • The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Foreign Financial Assets.  Please see our discussion regarding new Form 8938.
    Ownership of investment instruments and contracts issued by a foreign entity, including foreign annuity contracts and insurance policies, are reportable on Form 8938 as well as on the FBAR.
  • The June 30, 2012 deadline is the deadline for receipt of the FBAR by the Treasury Department (unlike IRS Forms which must be postmarked by, e.g., April 15).
  • Even if you have an extension for filing your tax returns, the 2011 FBAR is still due by June 30, 2012. There are no extensions for the FBAR deadline.
  • A new FBAR form was issued in January 2012. Even though the new FBAR form is substantially similar to the prior version, you should use the new form.
  • It is crucial to preserve the integrity of your offshore planning and to maintain its tax compliance by abiding by all IRS rules and regulations.

Please contact us with any questions.

Offshore Asset Protection Trusts are Subject to FBAR Disclosure; Deadline is June 30, 2012

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This is a reminder that the Report of Foreign Bank and Financial Accounts (“FBAR”), T.D. 90-22.1, for calendar year 2011, is due by June 30, 2012.

As discussed previously, the U.S. Treasury Department in 2011 changed the FBAR filing requirements to now apply to U.S. beneficiaries of foreign trusts, along with their U.S. grantors.

The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year. If you are subject to the FBAR filing requirement, the 2011 FBAR is due by June 30, 2012.

Grantors (also known as settlors) of foreign asset protection trusts are deemed to be the owners of all trust assets for tax purposes. Thus, the FBAR filing requirement applies to such grantors, whether or not they actually control trust assets and whether or not they receive distributions from the trust.

The 2011 revised regulations now extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, including foreign asset protection trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in a trust’s assets or if the U.S. person received more than fifty percent of the income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.

Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Usually, beneficiaries of a foreign asset protection trust received distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.

Please also note the following with respect to the FBAR requirement:

  • Even if the trust account was closed during 2011, if the account existed at any point during 2011, an FBAR is required.
  • The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Foreign Financial Assets. Please see our discussion regarding new Form 8938.
  • The June 30, 2012 deadline is the deadline for receipt of the FBAR by the Treasury Department (unlike IRS Forms which must be postmarked by, e.g., April 15).
  • Even if you have an extension for filing your tax returns, the 2011 FBAR is still due by June 30, 2012. There are no extensions for the FBAR deadline.
  • A new FBAR form was issued in January 2012. Even though the new FBAR form is substantially similar to the prior version, you should use the new form.

We also take this opportunity to remind you again that foreign asset protection trusts also give rise to filing IRS Forms 3520 and 3520-A, as well as new Form 8938.

Having established an offshore asset protection trust to safeguard your assets from attack by creditors and litigants, it is crucial to preserve the integrity of the trust and to be in compliance with all IRS requirements.

Please contact us with any questions.

Liechtenstein’s Disclosure of Bank Information to U.S. Department of Justice

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My last blog post discussed the disclosure of bank documents from Liechtensteinische Landesbank to the U.S. Department of Justice (DOJ). Today’s post offers additional comments as to why this is a significant event in terms of IRS enforcement and DOJ prosecutions related to offshore accounts.

The 2008 Liechtenstein-USA tax treaty was itself significant, because until that point, Liechtenstein offered very strong banking secrecy laws. However, in light of the events at that time – –

  • DOJ success against UBS,
  • erosion of Swiss banking secrecy laws,
  • the OECD initiative against tax haven jurisdictions,
  • the proliferation of tax information exchange agreements with many tax havens, and
  • the theft of “secret” bank documents by an employee of Liechtenstein’s own LGT bank and sale to the German government

– – Liechtenstein saw the writing on the wall, so to speak, and realized that tax secrecy was a thing of the past and was no longer going to be tolerated by countries like the US, UK, Germany, etc.

However, while Liechtenstein agreed to tax information exchange and cooperation, Liechtenstein specifically did NOT agree to IRS “fishing expeditions” – – broad requests for information on a class of unknown taxpayers. Under the 2008 treaty, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name. In other words “we are investigating John Smith, who we believe has an account at Bank XYZ” – that was an allowable request that would give rise to cooperation and exchange of bank information. “We want all records on all US taxpayers with accounts at Bank XYZ” – – that is “a fishing expedition” and would not give rise to cooperation and exchange of information under the treaty.

DOJ’s May 11, 2012 request to the Liechtenstein Tax Administration was not a specific request for information about known, named taxpayers. It was a broad request for unnamed, unknown taxpayers. And yet, the Liechtenstein Tax Administration is cooperating with this DOJ request.

Liechtenstein is cooperating with this DOJ request because, under U.S. pressure, and without any publicity, on March 21, 2012, the Liechtenstein Parliament passed an internal law and quietly amended the 2008 treaty, the result of which is that “fishing expeditions” are now allowed.

This is a game changer in terms of IRS/DOJ enforcement. It means that broad requests will now give rise to governmental assistance. It means that DOJ need not issue “John Doe” summonses, which require court approval, as DOJ did against UBS in 2008 and HSBC in 2011. Instead, DOJ can ask for, and presumably get, banking records quickly (in Landesbank’s case, one month), government-to-government. If Liechtenstein, formerly one of the world’s most secretive jurisdictions, can succumb to US pressure, it means that other countries will do so also.

Liechtensteinische Landesbank to Provide Banking Records to U.S. Investigators; Further Erosion of Offshore Secrecy by Tax Havens

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Offshore banking secrecy, already weakened in recent years by new tax treaties, changing laws, IRS investigations and legal challenges, is now virtually non-existent. Liechtenstein, once the most secretive of tax havens, will soon provide bank account information to U.S. authorities.

In December 2008, Liechtenstein signed a treaty with the United States to share banking information regarding U.S. tax payers with accounts in Liechtenstein. At the time, the treaty explicitly did not allow for “fishing expeditions”, i.e., broad requests from the IRS for information on a class of unknown U.S. taxpayers. Rather, Liechtenstein was only to provide information if asked about a specific, known taxpayer identified by name.

However, under U.S. pressure, and without any publicity, Liechtenstein recently amended the 2008 treaty and passed an internal law, the result of which is that “fishing expeditions” are now allowed. As a result, the U.S. Department of Justice (DOJ) has already requested, and Liechtenstein will provide, banking information for accounts with a U.S. beneficial owner held in Liechtensteinische Landesbank (LLB). LLB has already provided the banking information to the Liechtenstein government, which will soon provide it to the U.S. Similar requests to other Liechtenstein banks are expected to follow.

Following this amendment and change in law, in May, 2012, the U.S. targeted Liechtensteinische Landesbank with a request for banking information regarding any accounts with a value in excess of $500,000 beneficially owned by U.S. persons. Liechtensteinische Landesbank, like Credit Suisse, HSBC and other Swiss and Israeli banks, is already under examination by DOJ for facilitating U.S. tax fraud by providing non-compliant “secret” accounts. LLB is cooperating with the U.S. request and providing the requested information.

Liechtenstein was once the vanguard of offshore banking secrecy, and it was said that Swiss bankers kept their own money in Liechtenstein. Significantly, if the U.S. pressured the Government of Liechtenstein to amend the 2008 tax agreement to allow for “fishing expeditions”, then it can be expected that other foreign governments will follow suit. In practical terms, DOJ will not have to issue subpoenas or “John Doe Summonses”, as it did with great success against UBS, and more recently HSBC in India. Now, DOJ can avoid going to court, and requests for broad banking information on “secret” accounts can now occur government-to-government.

LLB account holders have an opportunity to challenge the release of banking information in Liechtenstein courts until June 15th. Similar legal challenges have had mixed results in Switzerland. It is expected that a legal challenge in Liechtenstein will buy some time, but ultimately, the account data will be revealed to the IRS. DOJ will then begin prosecutions of U.S. taxpayers who failed to disclose the LLB accounts and report foreign income. There have been approximately fifty such criminal cases since 2009, involving accounts in Switzerland, Liechtenstein, Jersey, Isle of Man and other former “tax havens”.

Against this background of tax investigation and criminal prosecution, the IRS re-opened its Offshore Voluntary Disclosure Initiative (OVDI) in January 2012 in order to encourage owners of non-compliant foreign accounts to come forward and become tax compliant. The OVDI provides a means to declare the foreign account to the IRS, bring the account into tax compliance and avoid criminal prosecution. Back taxes and penalties will be due, but the penalties would be far lower than the civil and criminal penalties that would ensue if the IRS learns of a foreign account from other sources and the taxpayer is prosecuted.

Owners of accounts at LLB have a very short window to apply for the OVDI. In light of the ongoing erosion of foreign banking secrecy, the inability of foreign governments to withstand U.S. pressure and the willingness of former tax havens to cooperate with the IRS, U.S. taxpayers with non-compliant accounts, in Liechtenstein and anywhere else, should meet with qualified tax counsel immediately to discuss tax compliance.