Tag Archives: NEVADA TRUST

Tax Planning – Transferring Appreciated Property to a Trust & Avoiding the Assignment of Income Tax Law

American has two sets of tax laws.  The set that you read about is the laws passed by Congress and administered by the White House (through the IRS).  Most tax planners know these laws.
This blog explains the second set of tax laws and explains tax planning with a Nevada trust. 

saving taxes with the Supreme Court

Saving taxes with the Supreme Court tax laws.  These laws are known as “doctrines.”

Another equally important set of tax laws are created by the courts.  America is a common law country.  In a common law country courts create laws. For example, the concept of a trust exists only in common law countries.

Tax laws created by courts are known as  “doctrines.”  Ignoring a doctrine in your tax planning subjects you to an IRS penalty and in some cases prison.

One of the first doctrines is income must be taxed to him that earned it.[1]

This principle was well stated by the United States Supreme Court in Lucas  Earl,[2] as follows: 

    “… this case is not to be decided by attenuated subtleties. It turns  on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them  and provide that the tax could not be escaped by anticipatory      arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned  it.”

    “That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to  the arrangement by which the fruits are attributed to a different tree from that on which they grew.” 

In Helvering v. Horst,[3]  the Supreme Court stated:  

     “The taxpayer has equally enjoyed the fruits of his labor or  investment and obtained the satisfaction of his desires whether he  collects and uses the income to procure those satisfactions, or  whether he disposes of his right to collect it as the means of      procuring them.”

The idea that anticipated earnings may not be assigned to another has been upheld in the courts in the transference of securities.[4]   For taxpayers living on the West Coast, the Ninth  Circuit Court of Appeals[5] made the point about securities as follows:

 “Under the anticipatory assignment of income doctrine, once a right to receive income has ripened”.

“The taxpayer who earned or otherwise created that right will be taxed on any gain realized from it, notwithstanding the fact that the taxpayer has  transferred the right before actually receiving the income.” 

The key word is “right”.   “Right” does not mean appreciation.  “Right” means that the sale is in process or has been completed (and you are waiting for payment). 

An old income tax regulation regarding the use of a trust to avoid taxes[6]  provides that a person who transfers his right to future income earned by his services is taxed on the income.  

This regulation applies despite the assignor not having control over the trust. This type of trust is used for estate planning and asset protection.   

Let me provide you an example of what is not the assignment of income.  

You live in high tax state such as New York or California.  You decide to form a trust in Nevada (see more on the IRS designer trust used to avoid state income taxes on this link)

You own shares of stock in a company.  The shares have appreciated in value. You gift the shares to our Nevada trust.  The trust sales the shares. The trust is taxable on the gain.  The gift of the shares to the trust is not an assignment of income.

On the other hand, a buyer enters into a contract with you to purchase your shares.  While the buyer is due his due diligence, you gift the shares to the trust.  The gift of the shares  is an assignment of income and you are taxable on the gain.

Need help your tax planning?  Then contact me, Brian Dooley, CPA, MBT at  [email protected]

[1] Commissioner v. Culbertson, 337 U.S. 733; Helvering v.

Clifford, 309 U.S. 331 (1940); National Carbide Corp. v. Commissioner, 336

U.S. 422 (1949).

[2] 281 U.S. 111 (1930),

[3] 311 U.S. 112 (1940),

[4] Hallowell v. Commissioner, 56 T.C. 600 (U.S. Tax Ct., 1971)

[5] Ferguson v. Commissioner, 174 F.3d 997 (U.S. App., 1999).

[6] Treas. Reg. Section 1.671-1(c)

Treasury Department Leads the Way in Saving Taxes and Protecting Assets with a Foreign Trust

saving taxes, how to save taxes, tax planning,

Saving taxes by requesting a private letter ruling from the IRS National Office.

At the end of last century, the Department of the Treasury led the way in making foreign trust attractive.  The IRS issued a legal memorandum providing the blueprint for protecting assets and saving taxes. 

Nevada  provides unique asset protection for these trusts.  A new IRS regulation allows the Nevada trust to be classified as a foreign trust. 

The tax advantage of a foreign trust is its classification as a “grantor trust.”  This tax plan uses a special asset protection section of the tax code, section 679.

Unlike a domestic trust, all assets transferred to a foreign trust are allowed “grantor trust” status (with one tax planning exception explained below).  They are also excluded from the taxable estate of the settlor.

As a “grantor trust,” the tax law allows the transfers of assets to the trust to be income tax-free.  Thus, you can do what you want to protect your assets and reduce estate taxes without worrying about income taxation.  

This IRS blueprint on foreign trust tax planning is the explained in this episode of my radio show, Tax Talk below.

The play time is about 22 minutes.  Or, If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a consultation.

If you want to defer income taxes, then fund the foreign trust with a loan due within five years.  Such a loan is called a “qualified obligation.”  This makes the trust a tax deferral vehicle.  The tax deferral can last for more than a century.  This type of a trust is named “non-grantor foreign trust.” 

The IRS Form 3520-A (filed by the trustee) details the tax planning structure for a tax-deferred foreign trust.  You will want to use the “qualified obligation” found on page 3 of the Form 3520 (filed by the settlor).   

Learn the basics on offshore trust on this short video.  Be an expert with my easy to read book, International Taxation in America, available at Amazon.

U.S. International Tax Planning for the Canadian and U.K. Investor in U.S. Real Estate

Canadian and the United Kingdom citizens are caught in a double tax issue.  On one side, there is income tax.  On the other hand, there is inheritance tax (for the U.K. citizen), estate tax in the U.S. (which will be repealed but only for a few years) and the Canadian deemed sale at death tax.

We all want the American 20% long-term capital gain tax rate.  However, this means the foreign investor can’t own the U.S. real estate in a corporation.    Both a domestic corporation and a foreign corporation incur two U.S. income taxes.    For the domestic corporation, the second tax is called “the accumulated earnings and profits tax”.

For the foreign corporation, the tax is called the “branch profits tax”.   Foreign shareholders of a corporation owning U.S.  real estate are subject to the U.S. estate tax (but not the gift tax).

Wealthy Americans have the same tax problem.  They solve the problem by using a special type of a trust.  Here is a short video on reducing U.S. taxes with the use of a trust.   If you want to learn more about a Nevada Self-directed trust for your tax planning, then please call me, Brian Dooley, CPA, at 949-939-3414.

Five Best Tax Saving And Smart Planning Tips For Small Business Owners

No,  this is not another blog about lame tax ideas.   Big Business has many tips that are not known by most CPAs.   The best five tax planning tips are:
1.  Use more than one entity.  Have one use the accrual basis of account.   This allows you to avoid taxes on prepayments  (more on this link) and expense costs before they are paid.   Have one entity be a corporation.    Corporations can be taxed as a separate entity (which means they pay their own taxes) or a pass through (by election subChapter S of the tax code).

Each of these corporate taxation methods has a unique advantage.   For a start-up, the separate entity has the benefit of allowing you be late on paying income tax on the profits.  Thus, you have more money to invest in growth.

Have one corporation doing business in a tax-free state such as Nevada.

2.  If you have only part-time employees or no employees fund your business  with the little-known tax savings of a solo 401K plan  (more on this link).  This works only if you have no full-time employees.  Big businesses use the ESOP retirement plan.  It is a fantastic tool but most small business can not afford the annual compliance cost.

3.  If you make sales via your website, place your website on a server in a tax-free state (learn more here) Also, have the server and website owned by a corporation in the same state.  If your website sells a service or another intangible item, use a tax haven corporation to own the site.  The server needs to be in the same country as the corporation.

4.  Use an irrevocable non-grantor trust to own any passthrough entities.   Of course, have the trust in a tax-free state such as  Nevada.   A non-grantor trust has almost no audit risks.  This type of a trust files its own tax return (Form 1041) and pay its own taxes.  By moving income to this return, you have a lower “adjusted gross income.”

A lower adjusted gross income allows you larger itemized deductions and more tax credits.  It also reduces your chances of a tax audit.

5.  Don’t rely upon year-end planning.  It is a suckers move.  Usually, you end up spending money to be able for a deduction.  Big Business plans a year in advance and not a month before year end.  Each time they add a product or service, they think about tax planning.   The most effective tax planning looks at income and not expenses.

If you need help creating a strategic tax plan, then contact me, Brian Dooley, CPA, MBT at 949-939-3414.  A recent Government study showed that tax planning businesses are taxed at 14%.  For every one dollar spent in tax planning,  ten dollars are saved in taxes.

 

 

Tax Planning Tricks of Cross-Border Tax Accountants (CPAs)

Just how do cross-border tax accountants (usually a CPA or Chartered Accountant) use different nations tax laws to legally avoid taxes?

One term you will see on the internet is “hybrid” such as a hybrid company or a hybrid trust.

The USA is the biggest source of hybrid companies.   I am sure you have heard of them; they are known as limited liability company (LLC).    Only in America, the tax authorities (the IRS) treats the LLC as non-existing.  Yep, the single member LLC does not file a tax return.  It is completely invisible.

Meanwhile, Europe and even Mexico has complained to the U.S.  The Panama Papers disclosed that the Wymoing LLC is the most invisible tax haven company on the planet.   For example, if a French person owns a Wyoming LLC his government will never know.  Yet, this company can do worldwide cross-border business.  It can open U.S. and foreign bank accounts.

Hybrid Trusts are usually created in Nevada.  Cross-border accountants know that trusts only exist in form British colonies.  Yep, that includes America.   For reasons the baffle many, the U.S Department of the Treasury issued regulations that allow a Nevada trust to be taxed (in the U.S. and only the U.S) as a foreign trust.  Yep, it is as if the Nevada trust is in a  foreign (non-existing) country.

This allows the cross-border family to avoid inheritance tax in their home country and estate and income tax in the U.S.  Below is a fifteen minute audio of my radio show  (BlogTalk Radio Show; see just below my picture, above) on the Nevada Tax Haven Trust.

By the way, the corporate trustee fee is usually $2,500 per year.