Asset Protection Blog

2009 Year-End Memo

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 and to reflect upon a few of our significant accomplishments in 2009.

I. Reduce Your Estate Taxes Via 2009 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 currently 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, 2009 to effectuate a gift for calendar year 2009.  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 general partner, 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 initiate 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).

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

• Facing a criminal indictment for encouraging and facilitating tax fraud, UBS settled with the US Government and paid a $780 million fine in 2009.  The US then served a “John Doe” summons in a parallel civil case, and UBS settled again, revealing the names of some 4,500 Americans with accounts they were assured were “secret”.
• The IRS is also investigating HSBC, Credit Suisse, Bank Julius Baer and others.  Banks in other countries will also be targeted.  The IRS announced that it is establishing field offices in Panama, Australia and China.
• The OECD (Organization for Economic Co-Operation and Development), a multi-governmental organization based in Europe, is pursuing its own campaign against “tax havens”.  In March, 2009, virtually all of the formerly “secret” tax haven jurisdictions, including Switzerland, Liechtenstein and Monaco, agreed to the exchange of banking information with foreign governments, including the US.  This ends decades and in some cases centuries of banking secrecy.
• Domestically, President Obama and prominent Senators have introduced proposed legislation targeting foreign accounts and Americans who own them.  President Obama’s legislation seeks to increase the IRS budget and manpower to pursue undeclared money offshore, including hiring 800 IRS special agents to investigate foreign accounts.
• Government officials of Caribbean and Central American jurisdictions have advised us that the Obama administration has already indicated to them that Tax Information Exchange Agreements (TIEs) are on the way and are non-negotiable.  Under these TIEs, the US Treasury Department can request assistance directly from foreign banks in cases of IRS civil audits.

B. Offshore Asset Protection And Complaint Tax 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 2009 decision by the highest court in Liechtenstein, in favor of one of our clients’ Liechtenstein trust, established 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 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?

Option One: come forward now.  The IRS will still welcome your voluntary disclosure, even after October 15.  In fact, the IRS has welcomed voluntary disclosures long before the most recent, widely publicized program for foreign accounts.  The difference is that after October 15, the penalties are higher.  Still, criminal prosecution is usually avoided if you come forward before you are caught.  Thus, if you did not enter the Voluntary Disclosure Program, you may still come forward; you will pay penalties higher than those before October 15, but they will still be significantly lower than if you dont 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 2009 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 TIEs 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 Become Law In 2009

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.

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 has become the world’s premier jurisdiction for offshore asset protection.

While we are proud of our achievement in having drafted legislation that was debated, discussed and ultimately passed by the Government of Antigua, we would be remiss in not discussing the Stanford matter which unfortunately was centered in Antigua and came to light in 2009.  Stanford’s alleged Ponzi scheme is unrelated to the laws we drafted, and to the stability and safety of Antigua as an asset protection jurisdiction.  None of our clients had an account at Stanford or was invented in a Stanford financial product.  Moreover, at last count, some 130 banks have failed in the US during 2009, while the banks in Antigua which hold our client assets continue to operate, unaffected by mortgage backed securities, credit default swaps and other speculative derivatives.  In short, Stanford’s rougue criminality is unrelated to the laws we wrote for Antigua, nor to the stability and safety of Antigua as an asset protection jurisdiction.

E. 2009 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, 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 And Other Professionals

Medical practitioners should be aware of several 2009 developments which mandate having a proper asset protection plan in place.

A. Doctors: Protect Your Assets Because Insurance Fees Will Soon Go Higher

In March of 2009, 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 similar 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. Doctors: Not Collecting Co-Payments Could Mean Lawsuits

In 2009, doctors  witnessed a new threat to their assets: now, insurers are claiming that a physician’s failure to collect co-payments or deductibles from patients constitutes insurance fraud.

Horizon Blue Cross Blue Shield of New Jersey  recently sent a letter to non-participating physicians, which condemns practitioners “routinely waiving applicable patient liability amounts (i.e., deductibles, co-payment and coinsurance amounts, and the difference between the submitted charges and our plan payment).”  Horizon Blue Cross Blue Shield further states that it has filed lawsuits, alleging that waiving such member liabilities is fraud.  Further, “the Office of Inspector General has already identified the waiver of co-payments and deductibles as a potential violation of the Medicare and Medicaid Anti-Kickback Law.”

Thus, in addition to routine and minor billing errors constituting “fraud”, now a medical service provider who neglects to collect a co-payment of $20 can expect a State and Federal lawsuit.

Doctors have always been “deep pocket” targets.  Now, doctors can expect additional threats to their business and personal assets .

Doctors are well advised to protect their business and personal assets from all external threats, whether from patients, patients’ lawyers, insurers or the government.

C. Asset Protection for Landlords and Property Owners

Landlords are facing 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.

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.  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.  Last year, 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. Looking Ahead to 2010

The current state of the economy, the election of a new government, as well as other recent changes, will make 2010 a pivotal year for taxpayers:

A. Tax Increases

The new administration is raising income and capital gains taxes.  It will 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 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 new administration taxes 401(k)s.
3. Clients should also consider taking income in 2009, rather than deferring income to 2010 with its likely higher tax rates.  As a corollary, clients may wish to defer losses to 2010 to offset expected 2010 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.  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.

The government’s need for cash, and its pursuit of tax dollars, has been well-publicized.  See, for example, “IRS Brings New Focus to Auditing the Rich”, The Wall Street Journal, October 28, 2009 (stating that the IRS is not only looking at the 1040 returns filed by wealthy Americans, but “the entire economic picture of the enterprise controlled by the wealthy individual”); “New York, Needing Cash, Pursuing Tax Delinquents”, New York Times, November 10, 2009 (discussing the hundreds of thousands of tax warrants filed, across a diverse spectrum of individuals and businesses, and the millions of open and active tax cases by the New York State Tax Department); “IRS Begins Major Initiative To Audit 6,000 Companies”, Mondaq, November 24, 2009 (“all companies, large and small, as well as for-profit and not-for-profit, are within the potential scope of the IRS’ new initiative”).

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 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.

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 of 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.

VII. Website/Media Attention

In 2009, our new website and blog went “live”.  We continue to update both 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 has been recognized by media around the world.  In 2009, Ken and Asher Rubinstein were both interviewed, appeared and were published in: Bloomberg TV, CNBC (US, Europe and Asia), Yahoo! Finance, CNN.Money, Dow Jones/Wall Street Journal, The Jerusalem Post, Swiss TV (Schweizer Fernsehen),  Swedish TV,  Reuters, The Times of London, Fortune.com, Forbes, National Public Radio (NPR), Investment News, Wealth Briefing, World Wide Tax Daily, Tax Notes International, Financial Times, The Antigua Sun, The Journal of Taxation and Regulation of Financial Institutions, Hedge Fund Alert, Hedge Fund Law Report, Hedge Co. 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.