Tag Archives: asset protection trust

U.S. Pre-Immigration International Tax Planning with Trusts

The Wealthy have used trusts to avoid taxes for almost one thousand years.  Trusts started in the United Kingdom during the Great Crusades.   Over the last ten centuries, trust law has evolved.    In the U.S., each state has its own set of trust laws.   Every trust is uniquely drafted to fit the needs of you and your family.

The most popular types in America are:
Revocable Trusts
Irrevocable Trust
Spendthrift Trust Irrevocable Trusts
Spendthrift Trust  Asset Protection Irrevocable Trust
Charitable Trust
Constructive Trust- usually not planned
Special Needs Trust for disabled family members
Tax By-Pass Trust (used by Americans only)

The Best Pre-Immigration International Tax Strategy is a Trust

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Using Foreign Trust to Protect Your Assets and Avoid Taxes

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,Way before trusts was a key vehicle for estate and income tax planning; trusts protect assets. When I say “Way before…”, I mean a 1,000 years before. Trusts started with the Great Crusades (there was more than one Crusade, and they last for almost three centuries).

Despite their importance, the tax code does not define a trust. The IRS has a hint of a definition in a regulation.

This regulation defines the term “trust” an “arrangement” whereby trustees take title to property for the purpose of protecting or conserving it for beneficiaries under the ordinary rules applied in chancery or probate courts.

So, let us stop here with the words “take title to property.” A nominee takes title of ownership and is not a trustee. You can learn how to save taxes with a nominee arrangement on this link.

America has trusts because our mother country is England. Trusts were “invented” during the Great Crusades. Knights went off to the Middle East. If they returned, it was after many years. If you died, the King took all your land to distributed it to another knight or lord. To protect the wife and children, the knight would place the title of the land in the name of his best friend. Often the King would not know that the knight died because he did not return.

Court cases decided the duties of his best friend over the last ten centuries.

Under IRS regulations, the classification of an arrangement as a trust is resolved by examining whether the arrangement protects assets under the law of equity for beneficiaries. As you can see, protecting assets is a key part of a trust.

All trusts can protect assets for everyone except for the settlor. When the settlor includes himself as a beneficiary, the trust is called a self-settled trust. A few states and a few countries have a law that allows a self-settled trust asset protection to the settlor.

IRS CONCERN ABOUT FOREIGN TRUSTS. THEY JUST AREN’T SURE WHY.

While the trust is a well-recognized estate-planning creature of the legal system, the IRS has expressed its concern about trust arrangements that abuse the tax regime. The IRS fears that some trust arrangements are not acceptable and they avoid taxes. The IRS collects information on Form 3520-A. This form tells the IRS nothing.

Oh yes, the IRS knows that the Form is useless. The American Institute of CPAs sent the IRS a long letter with suggested improvements. The IRS promptly put the letter in the “circular file” aka trash can.

INTENT OF CONGRESS — IS TO  ALLOW FOREIGN  TRUSTS

While the IRS has concerns about the misuse of trusts, and in particular foreign trusts, Congress responded in 1974 and 1976 by deciding, essentially, that foreign trusts will not be prohibited.
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Saving Taxes with IRS Explanation of Domestication of a Foreign Trust

Domestication of a foreign trust

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

Below is an outstanding IRS guide as to the method of domesticating a foreign trust.  Why would one want to make an offshore trust an onshore trust?   

Here is the private IRS letter from an IRS attorney to another IRS employee.  This letter defines key terms which will improve international tax planning and save you taxes.  Now, you may find this letter boring, but your tax planner needs to read this.

This is why.  It defines the key terms in domesticating a foreign trust.  But, there are bigger tax savings,  It defines the key terms in taking a domestic trust offshore tax-free.  And there is one more tool.  A Nevada trust can be designed to qualify as a foreign trust for tax law.  You get the best of both worlds.. great tax savings and great state trust law.   Nevada trusts are a popular asset protection trust.

Lastly, always apply for an IRS private letter ruling.   Since no two trusts are the same, you will never know how your trust is going to be taxed by the IRS without a ruling.  Yes, it is expensive.  However, if you want to be in the international tax world with the wealthy, you will need to behave like the Wealthy.

Remember a foreign trust files an IRS information return each year (Form 3520-A), and you will file a form 3520.

Need help with your offshore trust tax planning?  Then email me to set up an appointment with you and your tax team at [email protected].

IRS Release Date: 2/27/2015

Sent: Monday, April 28, 2014 7:40:45 AM
From: ***
To: * * *

Subject: RE: Domestication of Foreign Trust

In answer to your questions posed below, § 301.7701-7(a)(1) provides that a trust is a United States person if:
(i) a court within the United States can exercise primary supervision over the administration of the trust (court test); and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust (control test). In order to be a domestic trust, the trust must meet the court test and the control test based on the terms of the trust itself and the applicable law. See § 301.7701-7(b).

When applying the court test, the term “is able to exercise” means that a court has or would have the authority under applicable law to render orders or judgments resolving issues concerning the administration of the trust. § 301.7701-7(c)(3)(iii).

Primary supervision means a court has the authority to determine substantially all issues regarding the administration of the entire trust. § 301.7701-7(c)(3)(iv).

Administration of the trust means carrying out the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions. § 301.7701-7(c)(3)(v).

The regulation also provides a safe harbor. A trust will satisfy the court test if:
(i) the trust instrument does not direct that the trust be administered outside of the United States;
(ii) the trust is administrated exclusively in the United States; and
(iii) the trust is not subject to an automatic migration provision. § 301.7701-7(c)(1).

With respect to the * * * (which will be the only trust document described in this email, the * * * includes these same provisions), a court within the United States is able to exercise primary supervision over the administration of the trust. Thus the court test is met.

The  Trust Agreement explains that the intent of the Settlors is that the trust not constitutes a “foreign trust” as defined in § 7701(a)(31)(B).    To that end, the Trust Agreement provides that the place of administration shall be the state of resident of the “First Trustee,” who is a United States person living in * * *.

Under this provision, the First Trustee administered the Trust in * * *. The paragraph continues that if that person is no longer a Trustee, the place of * * * administration shall be the state of residence or domicile of the longest-serving Trustee who is a resident in the same country as a majority of the Beneficiaries.

Also, there is no automatic migration provision in the trust document, as defined by § 301.7701-7(c)(4)(ii). Because a United States court is able to exercise primary supervision over the administration of the trust, the court test is met.

To meet the control test, one or more United States persons (within the meaning of § 7701(a)(30)) must have the authority to control all substantial decisions of the trust. The term “substantial decisions” means those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial. § 301.7701-7(d)(1)(ii).

Substantial decisions include but are not limited to, decisions such as whether and when to distribute income or corpus, the amount of any distribution, and whether to remove, add, or replace a trustee. Id.

Control means having the power, by vote or otherwise to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions. To determine whether U.S. persons have control, it is necessary to consider all persons who have authority to make a substantial decision of the trust, not only the trust fiduciaries. § 301.7701-7(d)(1)(iii).

When created, the Trust had two trustees, a United States person trustee, and a foreign trustee. (Author note:  This is an advance income tax planning tool.  A foreign grantor trust often becomes a nongrantor trust once it is domesticated.  If it leaves the U.S., the trust reverts to a grantor trust.  This is called a “switch” and the IRS is telling you how to turn it off and on.  By changing the trust situs, you can completely change the tax planning.)

You informed us that the foreign trustee was effectively fired in * * * when the trustee fees that were being paid to the foreign trustees were no longer paid. No other foreign trustee was named as a replacement. The only trustee at that point forward was the United States person trustee. As such, United States persons are the only persons who have the power to make the substantial decisions of the trust from * * * forward.

Furthermore, even before * * *, United States persons controlled all the substantial decisions of the trust. There were only two trustees named, the United States person and the foreign trustee. * * *

Trust document provided that a majority of the trustees must agree to decisions, but if there are only two acting, the joinder of both is required “unless at such time one (1) of the Trustees is a resident of or domiciled in the same country as Settlor and the other of the Trustees is not a resident of or domiciled in the same country as Settlor, in which case the determination of the Trustee who is a resident of or domiciled in the same country as Settlor shall govern.”

Effectively, the United States person trustee could make decisions without the input of the foreign trustee.

Also, * * * Trust document provides the Protector (who is the Settlor and a United States person) with a veto power over any decisions to be made by the trustees. As such a United States person (the United States trustee) has the power to make, all of the substantial decisions of the trust and another United States person (the Settlor) has the power to veto any of those substantial decisions.   All powers of control over substantial decisions rest in United States persons under § 301.7701-7(d)(1)(iii). See also § 301.7701-7(d)(i)(v) Example 4.

Author Note:  This is one of the most important educational statement for the client: Disclaimer: This discussion only applies to the trust documents we reviewed and cannot be applied to trust documents governing different trusts. The analysis under § 301.7701-7 depends on the terms of the trust and the applicable law.  Author note: No two trust are same.  Reading about trusts on the internet will confuse you because you do not know what is written in the trust agreement.  You need to license tax professional to do it right.

This is how the Wealthy Save Taxes with their Private Charities

For decades (well actually more than half a century), the wealthy easily and legally avoids income taxes with their private charity.  The tax term for a private charity is “private foundation.”   All of us heard of the Clinton Foundation.  The Clintons’ did a impressive job avoiding taxes with their private charity.

Presumably, the tax law has a big penalty for what is called self-dealing transactions with your charity.  However, the IRS has exceptions… great exceptions.

This blog will show you how the tax law was created to help you legally avoid taxes with your private charity.  The IRS started a “streamline” process for a small private charity to obtain their tax exemption.

The rules regarding self-dealing are found in IRS regulations.  Keep in mind that the IRS is an agency of the White House.  Why?  The Executive Branch (one of our three branches of government, along with the legislature and the courts) is responsible for the IRS.  It appoints the IRS commissioner.

The wealthy in both parties have their private charities. It is not just Republicans.  For example, the Clinton Foundation is often in the news.   The Foundation does great works, and it keeps the Clinton name is the public eye.

Bill Gates is another role model.  While the Gates Foundation promotes farming in Africa with Monsanto GMO foods seeds, Bill Gates invests in Monsanto.   Your foundation can have symmetry with your business or investment.

Another way is speaker fees or personal service fees.  When someone pays a foundation, you do not have taxable income unless it is clearly instead of an existing invoice.

For example,  pretend that I have a private charity.   Its mission is to provide education on tax law (such as maintaining a  blog like this one).  You want to learn how to avoid tax with an offshore trust. You could sponsor my charity to make a report by making a donation.   Of course, my charity would write a report and post it to this blog.

Universities often received a grant from a profit making business to undertake a study that includes their product. When the study is released, it bolsters the product.

Okay, back to the tax law.  When the start your private charity, the tax law gives you a tax deduction for your “charitable contribution”.

So, let’s say I have an extra $100,000.  I also live in California where the combine U.S. and state tax bracket is 53% (we call this the sunshine tax).  And my extra $100,000 is Apple stock that purchased a long long, time ago.  In my example, my gain on the sale of my Apple stock is $50,000.

If I sell the stock the U.S. & California tax is $20,000.  If I gift the stock to my charity, I get a charitable tax deduction of $100,000.  I will save $53,000 in tax.  But it gets better.  When my charity sales the Apple stock, it pays $0 tax versus my $20,000.

So, far I am $73,000 ahead, and now I have cash of $100,000 in my charity for my next investment.

Now, I have my charity, and it is making a fortune on its new investments.  Of, course it does not pay tax on this wealth.  Thus, the wealth compounds many times faster.  For example, fast forward 20 years.  My $100,000 increased by $220,000 (at six percent) versus $80,000 (at 3%).  So, now I have $320,000.

Being 20 years older, I am in the retirement stage of my life.  It is time for me to start to get some money out.  As you will read below in the IRS regulations, I can charge my charity for my time as an executive or as the CPA (at the same rates I bill my clients).

As a retired person, my income is less and so is my tax rate.

Well, enough of the “how to do it” writing.  Here are the IRS’s tax planning examples (with my tax planning notes included).  Yes, the IRS tells you examples just in case you can’t you come up with some of your schemes.

IRS regulation “section 53.4941(d)-3.  EXCEPTIONS TO SELF-DEALING (author note: Yes, the IRS wants to be sure you find the loopholes, so they place the title in all Caps.  Remember that the IRS is an agency of the White House.  By the way, Congress writes these laws… yes, the Democrats and Republicans can work together).

(2) EXAMPLES.  The provisions of this paragraph may be illustrated by  the following examples:

EXAMPLE (1). M, partnership, is a firm of 10 lawyers engaged in the practice of law (Author note: in my case a CPA).  A and B, partners in M, serve as (for me, it just myself)          trustees to private foundation W and, therefore, are disqualified persons.  Also, A and B own more than 35   percent of the profits interest in M, thereby making M a disqualified person. M performs various legal services for W   from time to time as such services are requested.  

The payment of  compensation by W to M shall not constitute an act of self- dealing if the services performed are reasonable and necessary  for the carrying out of W’s exempt purposes and the amount paid by W for such services is not excessive (Do you get it?  They are   a “disqualified person” but can still get paid at their high billing rates).

EXAMPLE (2).  C, a manager of private foundation X, owns an investment counseling business.  Acting in his capacity as an investment counselor, C manages X’s investment portfolio for which he receives an amount which is determined to be not excessive.  The payment of such compensation to C shall not constitute an act of self-dealing  (By the way, I also do investment management).  

EXAMPLE (3). M, a commercial bank, serves as a trustee for private foundation Y. In addition to M’s duties as trustee, M  maintains Y’s checking and savings accounts and rents a safety deposit box to Y. The use of the funds by M and the payment of compensation by Y to M for such general banking services shall be treated as the payment of compensation for the performance of personal services which are reasonable and necessary to carry out the exempt purposes of Y if such compensation is not excessive.

EXAMPLE (4). D, a substantial contributor to private foundation  Z, owns a factory that manufactures microscopes.  D contracts with Z to produce 100 microscopes for Z.  Any payment to D  under the contract shall constitute an act of self-dealing, since such payment does not constitute the payment of compensation for the performance of personal services     (Obliviously, I am not going to manufacture microscopes).

These examples are just the tip of the iceberg.  Only one’s imagination limits the ways of exploiting your private charity.   Besides income tax savings, a private charity is exempt from inheritance taxes.  They also make a fantastic asset protection entity.  

If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, at [email protected]

So, if you are wanting to become wealthy and have a passion for any social cause including love for animals, the environment, feeding the poor, educating the public and religion, then get with your tax team.  The sooner you start, the sooner you will create wealth for yourself.

Dem’s and Republic Ok’ iron curtain for unpaid income taxes.

Senate Expected to Pass Bill that would Revoke Passports of  Delinquent US Taxpayers.  What is next?

Pay the IRS or Lose Your Passport

You may want to read about the use of debtor prisons for taxes on this link.  Small business owners are hurt by the tax law’s concept of a calendar year.  Many times, a loss in one year does not offset income in another law.   So, they have unpaid taxes.  They also created more than half of all new jobs.  The money due in taxes in paying their employees. 

Many times, a loss in one year does not offset income in another law.   So, they have unpaid taxes.  They also created more than half of all new jobs.  The money due in taxes in paying their employees. 

The Senate has unanimously approved a law revokes the passports of people with delinquent tax debts.   There is no trial.  Your Government decides who is delinquent.

But there are more  iron curtain type laws.   This addition to the bill would allow the State Department to deny, revoke or limit a passport for any individual whom the Internal Revenue Service has certified as having a having more than $50,000.

A delinquent tax debt would be one for which a notice of a federal tax lien or a notice of a levy has been filed.   Levies and liens are filed without a court hearing.  Yep, some bureaucratic employee files a simple form.

An exception is allowed when the debt is being paid promptly under an agreement with the IRS, or if collection on the debt has been suspended because of a collection due process hearing or other relief has been requested or is pending.

The Senate is expected to vote on the overall bill and pass it later this week.   The House will take up the bill in the coming weeks.  Keep in mind this both parties.   As the National Debt increases, the Government gets more desperate.  They would rather take your money than reduce spending.   What you can do.   Do like the wealthy do.  Have your taxable income in other entities.

 Here are some of the entities:
1.  A Nevada self-directed trust- they save state income taxes and protect assets.
2.  A corporation tax under Subchapter C (and not Subchapter S) – they save income taxes.
3.  A self-directed solo 401K plan- they avoid taxes and protect assets.

Need help to take your tax planning to the next level.  Then give me, Brian Dooley, CPA, MBT, a call at 949-939-3414.