your 2013 guide wealth - amazon s3...your 2013 guide to 2 invaluable wealth protection techniques...

YOUR 2013 GUIDEYOUR 2013 GUIDE TO 2 INVALUABLE TO 2 INVALUABLE

WEALTH WEALTH PROTECTIONPROTECTIONTECHNIQUESTECHNIQUES

Foreign TrustsForeign Trusts Foreign Limited LiabilityForeign Limited LiabilityCompaniesCompanies

WEALTH THREATSWEALTH THREATS

ProbateProbate Estate TaxEstate Tax Gift TaxGift Tax Income TaxIncome Tax LitigationLitigation Privacy InvasionPrivacy Invasion Risk Risk NondiversificationNondiversification

PROBATE PROBLEMSPROBATE PROBLEMS COST COST

TIME TIME

PUBLIC INFORMATION ACCESS PUBLIC INFORMATION ACCESS

MULTIPLE PROBATES MULTIPLE PROBATES

ESTATE TAXESTATE TAX

UNITED STATES TAXPAYERSUNITED STATES TAXPAYERSARE SUBJECT TO FEDERALARE SUBJECT TO FEDERAL

ESTATE TAX ON THEESTATE TAX ON THETRANSFER OF PROPERTY UPON DEATHTRANSFER OF PROPERTY UPON DEATH

REGARDLESS OF WHERE THEREGARDLESS OF WHERE THEPROPERTY IS LOCATEDPROPERTY IS LOCATED!!

EFFECTIVE EXCLUSION OF $5,125,000 FOR U.S. CITIZENSEFFECTIVE EXCLUSION OF $5,125,000 FOR U.S. CITIZENSWHO DIE IN THE YEAR 2013.WHO DIE IN THE YEAR 2013.

($5,340,000 FOR U.S. CITIZENS WHO DIE IN THE YEAR($5,340,000 FOR U.S. CITIZENS WHO DIE IN THE YEAR2014.)2014.)

TOP ESTATE TAX RATE = 40%TOP ESTATE TAX RATE = 40%

GIFT TAXGIFT TAX

U.S. TAXPAYERS ARE SUBJECT TO FEDERALU.S. TAXPAYERS ARE SUBJECT TO FEDERALGIFT TAX ON THE TRANSFERS OFGIFT TAX ON THE TRANSFERS OFPROPERTY BY GIFT, WITH A FEDERALPROPERTY BY GIFT, WITH A FEDERALGIFT TAX EXCLUSION OF GIFT TAX EXCLUSION OF $5,125,000$5,125,000..

- $5,340,000 for year 2014 gifts.- $5,340,000 for year 2014 gifts.

A TRANSFER TO A U.S. CITIZEN SPOUSE ISA TRANSFER TO A U.S. CITIZEN SPOUSE ISEXEMPT FROM FEDERAL GIFT TAXATION.EXEMPT FROM FEDERAL GIFT TAXATION.

INCOME TAXINCOME TAX

UNITED STATES TAXPAYERSUNITED STATES TAXPAYERSARE TAXABLE ON THEIRARE TAXABLE ON THEIRWORLDWIDEWORLDWIDE INCOME!! INCOME!!

INTERNATIONAL TAX PLANNINGINTERNATIONAL TAX PLANNINGEXAMPLESEXAMPLES

Foreign Business PlanningForeign Business Planning Foreign Earned Income ExclusionForeign Earned Income Exclusion

ElectionElection$97,600 in 2013$97,600 in 2013$99,200 in 2014$99,200 in 2014

Foreign Variable AnnuityForeign Variable Annuity Foreign Life InsuranceForeign Life Insurance Foreign Grantor TrustForeign Grantor Trust

COMPLIANCECOMPLIANCERESPONSIBILITIESRESPONSIBILITIES

ARE CRUCIALLY IMPORTANTARE CRUCIALLY IMPORTANT

FOREIGN TRUSTSFOREIGN TRUSTSTrust Parties:Trust Parties:

SettlorSettlor

TrusteeTrustee

BeneficiariesBeneficiaries

ProtectorProtector (Optional) (Optional)

FOREIGN TRUSTSFOREIGN TRUSTS

Trust Jurisdiction Features:Trust Jurisdiction Features:

Common Law Common Law Competent Trust Companies Competent Trust Companies Lack of Taxation on Trust, Lack of Taxation on Trust,

Parties, & Transactions in theParties, & Transactions in theForeign Jurisdiction.Foreign Jurisdiction.

Asset Protection Legislation Asset Protection Legislation


Protect Trust Assets From CreditorsProtect Trust Assets From Creditorsof The Settlor & The Beneficiariesof The Settlor & The Beneficiaries

Access Foreign Investments Access Foreign Investments

Avoid Probate Avoid Probate

Save Estate Taxes Save Estate Taxes

FOREIGN TRUSTSFOREIGN TRUSTS FOREIGN TRUST CONCERNS:FOREIGN TRUST CONCERNS:

CONTROLCONTROL TAX COMPLIANCE & PENALTIESTAX COMPLIANCE & PENALTIES GENERALLY, INCOME TAX NEUTRALGENERALLY, INCOME TAX NEUTRAL GIFT TAXGIFT TAX Gift Tax might be avoidable:Gift Tax might be avoidable:

Incomplete GiftIncomplete Gift Unified Credit Use ($5,250,000 for Gifts madeUnified Credit Use ($5,250,000 for Gifts made

during the year 2013 ($5,340,000 for Gifts madeduring the year 2013 ($5,340,000 for Gifts madeduring the year 2014)during the year 2014)

Private AnnuityPrivate Annuity

Foreign Trust with a Private AnnuityForeign Trust with a Private Annuity

•U.S. Settlor (Mom)•U.S. Beneficiary (Junior)•Mom transfers cash and/or appreciated assets to the foreign trust for a private annuity of equal value.

Foreign Trust with a Private AnnuityForeign Trust with a Private AnnuityTAX CONSEQUENCES:TAX CONSEQUENCES: NO GIFT TAX on transfer by Mom.NO GIFT TAX on transfer by Mom. NO INCOME TAX on transfer by Mom. NO INCOME TAX on transfer by Mom. (Revenue Ruling(Revenue Ruling

85-13)85-13) ANNUITY PAYMENTS to Mom are TAX-FREE!ANNUITY PAYMENTS to Mom are TAX-FREE! DISTRIBUTION of trust income TO BENEFICIARIES isDISTRIBUTION of trust income TO BENEFICIARIES is

reportable to the I.R.S., but can be TAX-FREE to them ifreportable to the I.R.S., but can be TAX-FREE to them ifthe income was earned during Momthe income was earned during Mom’’s lifetime.s lifetime.

NO ESTATE TAX on ANNUITY if it terminates upon deathNO ESTATE TAX on ANNUITY if it terminates upon deathof Mom. Windfall accrues to the beneficiary of the trust.of Mom. Windfall accrues to the beneficiary of the trust.

NO ESTATE TAX on TRUST ASSETS if trust instrument isNO ESTATE TAX on TRUST ASSETS if trust instrument isappropriately drafted.appropriately drafted.

Trust income is taxable to Settlor (Mom) during herTrust income is taxable to Settlor (Mom) during herlifetime, but the Trust might purchase a FOREIGNlifetime, but the Trust might purchase a FOREIGNVARIABLE ANNUITY to attain tax VARIABLE ANNUITY to attain tax ––deferral on thedeferral on theincome until the foreign variable annuity payments areincome until the foreign variable annuity payments arepaid to the trust.paid to the trust.


PROBATE CONSEQUENCES:PROBATE CONSEQUENCES: Annuity is EXEMPT from Probate if itAnnuity is EXEMPT from Probate if it

terminates upon death of Mom.terminates upon death of Mom. Trust assets are EXEMPT from Probate.Trust assets are EXEMPT from Probate.


ASSET PROTECTION FEATURES:ASSET PROTECTION FEATURES:

Trust assets can be protected against claims of creditorsTrust assets can be protected against claims of creditorsof of SettlorSettlor..

Trust assets can be protected against claims of creditorsTrust assets can be protected against claims of creditorsof of BeneficiariesBeneficiaries..

AnnuitantAnnuitant’’ss asset protection depends on Annuitant asset protection depends on Annuitant’’ssjurisdiction. However, normally a private annuity isjurisdiction. However, normally a private annuity isafforded excellent asset protection.afforded excellent asset protection. (Annuity(Annuityextinguishes upon Annuitantextinguishes upon Annuitant’’s deaths death! ! Lack of U.S.Lack of U.S.jurisdiction over the trusteejurisdiction over the trustee! In ! In some jurisdictionssome jurisdictionsannuities are annuities are exemptexempt from creditor attachments from creditor attachments oror are areotherwise otherwise beneficially treatedbeneficially treated! At best, the creditor can! At best, the creditor cannormally merely attach an annuity payment when it isnormally merely attach an annuity payment when it isbeing paid, but being paid, but cannot reach the unpaid annuitycannot reach the unpaid annuitypayments and cannot accelerate their paymentpayments and cannot accelerate their payment.).)


The Private Annuity must be expertlyThe Private Annuity must be expertlycalculated by a qualified calculated by a qualified actuary actuary to avoidto avoidgift tax.gift tax.

The non-cash assets exchanged for theThe non-cash assets exchanged for thePrivate Annuity must be expertly valued byPrivate Annuity must be expertly valued bya qualified a qualified appraiserappraiser to avoid gift tax. to avoid gift tax.

FOREIGN REVOCABLE LIVINGFOREIGN REVOCABLE LIVINGTRUSTTRUST

• Nonresident alien Settlor.• United States Beneficiaries (Mom & her family).• Settlor funds the trust with the Settlor’s personal

funds. The funds must not emanate from a U.S.beneficiary! The U.S. beneficiaries must nottransfer funds to the trust!

• Trust invests in non-U.S. assets. (The trust canalso invest in U.S. based assets, but a taxanalysis needs to first be undertaken to considerU.S. withholding tax and tax on the dispositionof a U.S. real property interest.)


Trust assets can be PROTECTED FROMTrust assets can be PROTECTED FROMCREDITORS from creditors of the beneficiaries.CREDITORS from creditors of the beneficiaries.

As beneficiaries do not transfer assets to theAs beneficiaries do not transfer assets to thetrust, a potential fraudulent transfer argument istrust, a potential fraudulent transfer argument iseffectively eliminated.effectively eliminated.

Enhanced financial PRIVACY.Enhanced financial PRIVACY. Trust assets AVOID PROBATE upon death of aTrust assets AVOID PROBATE upon death of a

beneficiary.beneficiary. Trust assets AVOID U.S. ESTATE TAX uponTrust assets AVOID U.S. ESTATE TAX upon

death of a beneficiary.death of a beneficiary. Excellent ACCESS to FOREIGN INVESTMENTS.Excellent ACCESS to FOREIGN INVESTMENTS.


U.S. TAX CONSEQUENCES:U.S. TAX CONSEQUENCES:1.1. No U.S. reporting to the I.R.S. upon establishing or fundingNo U.S. reporting to the I.R.S. upon establishing or funding the the

trust as no U.S. party is transferring assets to the trust.trust as no U.S. party is transferring assets to the trust.2.2. Trust income can be tax-free and non-reportableTrust income can be tax-free and non-reportable in the U.S. in the U.S.3.3. DistributionsDistributions of trust income to a U.S. beneficiary are of trust income to a U.S. beneficiary are reportablereportable to to

the I.R.S. on Form 3520, the I.R.S. on Form 3520, butbut the distribution is the distribution is nontaxable nontaxable if earnedif earnedduring the lifetime of the settlor! (Revenue Ruling 69-70)during the lifetime of the settlor! (Revenue Ruling 69-70)

4.4. A A trust loan to a U.S. beneficiary is reportabletrust loan to a U.S. beneficiary is reportable to the I.R.S. on Form to the I.R.S. on Form3520, 3520, butbut the loan is the loan is nontaxablenontaxable if from trust corpus or income if from trust corpus or incomeearned during the lifetime of the settlor!earned during the lifetime of the settlor!

5.5. A A U.S. beneficiary can use trust assetsU.S. beneficiary can use trust assets without paying a reasonable without paying a reasonablefee for the use of the assets, and such use is fee for the use of the assets, and such use is nontaxablenontaxable to the to thebeneficiary,beneficiary, but but it is it is reportablereportable on to the I.R.S. on Form 3520 if on to the I.R.S. on Form 3520 ifsettlor is living.settlor is living.

6.6. The trust can establish a foreign corporation which is The trust can establish a foreign corporation which is exempt fromexempt fromcontrolled foreign corporation and passive foreign incomecontrolled foreign corporation and passive foreign incomecorporation status and taxationcorporation status and taxation if the Settlor is alive. if the Settlor is alive.

7.7. Generally, NO FBAR + NO FATCA I.R.S. FORM 8938 (Statement ofGenerally, NO FBAR + NO FATCA I.R.S. FORM 8938 (Statement ofSpecified Foreign Financial Assets) REPORTING IF A SPRINKLINGSpecified Foreign Financial Assets) REPORTING IF A SPRINKLINGTRUST WITH NO DISTRIBUTIONS!!TRUST WITH NO DISTRIBUTIONS!!

FOREIGNFOREIGNLIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIES

INTERNALINTERNALASSET PROTECTION FEATUREASSET PROTECTION FEATURE

Generally, each Member is Generally, each Member is notnot personally personallyliable as to Claims asserted against theliable as to Claims asserted against theLLC!LLC!

FOREIGNFOREIGN LIMITED LIABILITY COMPANIES LIMITED LIABILITY COMPANIES

EXTERNALEXTERNALASSET PROTECTION FEATURE:ASSET PROTECTION FEATURE:

FOREIGN LIMITED LIABILITYFOREIGN LIMITED LIABILITYCOMPANIESCOMPANIES

LLC PLANNING:LLC PLANNING: LLC can be used in conjunction withLLC can be used in conjunction with

a Foreign Trusta Foreign Trust LLC can be used in conjunction withLLC can be used in conjunction with

a Domestic Trusta Domestic Trust Multiple LLCS can be used.Multiple LLCS can be used. Minority & lack of MarketabilityMinority & lack of Marketability

DiscountsDiscounts


FOREIGN LLC TAX POINTERS:FOREIGN LLC TAX POINTERS: A Foreign LLC is taxable as a foreign corporation unless itA Foreign LLC is taxable as a foreign corporation unless it

qualifies to make an Entity Classification Election (IRS Formqualifies to make an Entity Classification Election (IRS Form8832) and files a timely election.8832) and files a timely election. (A Nevis LLC qualifies to(A Nevis LLC qualifies tomake the election.)make the election.)

If the Foreign LLC is operating an active foreign trade orIf the Foreign LLC is operating an active foreign trade orbusiness it is generally desirable to forego making thebusiness it is generally desirable to forego making theelection, because tax-deferral in the U.S. is possible.election, because tax-deferral in the U.S. is possible.(However, a tax analysis that examines extensive U.S. Treasury(However, a tax analysis that examines extensive U.S. TreasuryDept. Regulations needs to be undertaken.)Dept. Regulations needs to be undertaken.)

Conversely, if the Foreign LLC has passive income (e.g.,Conversely, if the Foreign LLC has passive income (e.g.,interest dividends, rents, royalties, etc.) it is generallyinterest dividends, rents, royalties, etc.) it is generallyadvantageous to file the election to be taxable as a pass-advantageous to file the election to be taxable as a pass-through entity, such as a foreign disregarded entity orthrough entity, such as a foreign disregarded entity orpartnershippartnership.. (However, a tax analysis needs to be undertaken.(However, a tax analysis needs to be undertaken.For example, a hotel normally earns rental income but it would likelyFor example, a hotel normally earns rental income but it would likelyqualify as an active business!)qualify as an active business!)

FOREIGN LIMITED LIABILITY COMPANIESFOREIGN LIMITED LIABILITY COMPANIESIRA-OWNED FOREIGN LLCIRA-OWNED FOREIGN LLC

An IRA can own a Foreign LLC, but the LLC needsAn IRA can own a Foreign LLC, but the LLC needsto contain to contain special termsspecial terms, , andand needs to needs to avoidavoidengaging in engaging in disqualifying transactionsdisqualifying transactions..

In certain cases, the Foreign LLC can operate anIn certain cases, the Foreign LLC can operate anactive foreign trade or business and serve as aactive foreign trade or business and serve as aFOREIGN BLOCKERFOREIGN BLOCKER for the IRA. (The Foreign LLC for the IRA. (The Foreign LLCincome can be treated as income can be treated as EXEMPT fromEXEMPT fromUNRELATED BUSINESS TAXABLE INCOMEUNRELATED BUSINESS TAXABLE INCOMEtreatment and pay its income to the IRA in a treatment and pay its income to the IRA in a TAX-TAX-FREE DIVIDENDFREE DIVIDEND manner! manner!

Each situation needs to be Each situation needs to be individually analyzedindividually analyzedto determine whether the to determine whether the Entity ClassificationEntity ClassificationElectionElection (IRS Form 8832) should be made. (IRS Form 8832) should be made.


U.S. MANAGER ISSUES:

* RETAIN CONTROL

- BUT -

* POSSIBLE STATE TAXATION

* EXPOSURE TO U.S. COURT JURISDICTION+

FOREIGN TRUST: FOREIGN LLCFOREIGN TRUST: FOREIGN LLCCOMPARISON CHARTCOMPARISON CHART

FOREIGN TRUSTFOREIGN TRUSTPOSSIBILITIESPOSSIBILITIES

1.1. PROBATE AVOIDANCEPROBATE AVOIDANCE2.2. ESTATE TAX AVOIDANCEESTATE TAX AVOIDANCE3.3. EXCELLENT ESTATE PLANNINGEXCELLENT ESTATE PLANNING

VEHICLEVEHICLE4.4. PERSONAL EFFECTS O.KPERSONAL EFFECTS O.K5.5. GIFT TAX AVOIDANCEGIFT TAX AVOIDANCE6.6. INCOME TAX NEUTRALITYINCOME TAX NEUTRALITY7.7. INCOME TAX BENEFITS IFINCOME TAX BENEFITS IF

FOREIGN GRANTOR TRUST ORFOREIGN GRANTOR TRUST ORDECEASED SETTLORDECEASED SETTLOR

8.8. ASSET PROTECTIONASSET PROTECTION9.9. FINANCIAL PRIVACYFINANCIAL PRIVACY10.10. ACCESS TO FOREIGNACCESS TO FOREIGN

INVESTMENTSINVESTMENTS11.11. NO LEGAL NO LEGAL CONTROLCONTROL RETENTION RETENTION12.12. NO DIRECT NO DIRECT BUSINESSBUSINESS

OPERATIONOPERATION13.13. MORE MORE EXPENSIVE EXPENSIVE GENERALLYGENERALLY

FOREIGN LLCFOREIGN LLCPOSSIBILITIESPOSSIBILITIES

1.1. PROBATE PROBATE AVOIDANCE (if trust used)AVOIDANCE (if trust used)2.2. ESTATE TAX AVOIDANCEESTATE TAX AVOIDANCE3.3. ESTATE PLANNINGESTATE PLANNING INCOMPLETE INCOMPLETE4.4. PERSONAL EFFECTSPERSONAL EFFECTS NOT O.K. NOT O.K.5.5. GIFT TAX AVOIDANCEGIFT TAX AVOIDANCE6.6. INCOME TAX NEUTRALITYINCOME TAX NEUTRALITY7.7. INCOME TAX BENEFITS IF ACTIVEINCOME TAX BENEFITS IF ACTIVE

FOREIGN BUSINESSFOREIGN BUSINESS8.8. ASSET PROTECTIONASSET PROTECTION9.9. FINANCIAL PRIVACYFINANCIAL PRIVACY10.10. ACCESS TO FOREIGN INVESTMENTSACCESS TO FOREIGN INVESTMENTS11.11. LEGAL CONTROL RETENTIONLEGAL CONTROL RETENTION

POSSIBLE.POSSIBLE.12.12. BUSINESS OPERATION O.K.BUSINESS OPERATION O.K.13.13. LESS EXPENSIVE GENERALLYLESS EXPENSIVE GENERALLY

FOREIGN PRIVATE INTERESTFOREIGN PRIVATE INTERESTFOUNDATIONSFOUNDATIONS

Private Interest Foundation Parties:Private Interest Foundation Parties:

FOUNDERFOUNDER

FOUNDATION COUNCILFOUNDATION COUNCIL

BENEFICIARIESBENEFICIARIES

PROTECTOR PROTECTOR (OPTIONAL)(OPTIONAL)


Foreign Investment AccessForeign Investment Access Asset ProtectionAsset Protection PrivacyPrivacy Probate AvoidanceProbate Avoidance Estate PlanningEstate Planning Charitable PlanningCharitable Planning


Gift TaxGift Tax Loss of ControlLoss of Control Tax UncertaintyTax Uncertainty Tax Reporting IssuesTax Reporting Issues Tax Imposed on Whom?Tax Imposed on Whom?

CHATZKY & ASSOCIATES,CHATZKY & ASSOCIATES,A LAW CORPORATIONA LAW CORPORATION6540 LUSK BOULEVARD6540 LUSK BOULEVARDSUITE C121SUITE C121SAN DIEGO, CALIFORNIA 92121SAN DIEGO, CALIFORNIA 92121

Telephone: (858) 457-1000Telephone: (858) 457-1000Fax: (858) 457-1007Fax: (858) 457-1007E-Mail: E-Mail: mgchatzky@[email protected]

your 2013 guide wealth - amazon s3...your 2013 guide to 2 invaluable wealth protection techniques...

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