The new WikiLeaks-style disclosures and “revelations” about offshore and domestic “secret trust” agreements will reveal a large number of legitimate and perfectly legal family planning agreements that are typically established for non-tax purposes by US taxpayers and non-Americans.
The asset protection trust
It is perfectly legal and it is the right of any US taxpayer to establish an irrevocable trust in an offshore jurisdiction which may offer legal arrangements that are not available or considered to be as reliable in the United States.
For example, in Private Letter Ruling 200944002, which was issued to a taxpayer requesting specific tax advice on the proposed transfer to an Alaskan asset protection trust, the person wanted to place assets in an irrevocable trust as gift using part of his estate. tax exemption so that the assets placed under the trust, as well as the future income and growth thereof, can be held for family members without being subject to federal inheritance tax in the same manner as these Trusts are usually established in the home state where the settlor / contributor lives.
In this situation, Alaska was one of the few states in 2009 to allow the establishment of irrevocable trusts that can benefit the settlor / contributor without allowing their creditors to access the trust. While the creditors of a contributor to a trust can access the trust and the trustee can make distributions for that contributor, the estate tax law considers the trust to be owned by the contributor and therefore taxable on the death of the contributor. contributor.
We learned from the 2009 private letter decision that the IRS understands that a contributor could donate to an irrevocable trust that would benefit them if and when needed, but could still be excluded for the purposes of protection against losses. creditors.
Full faith and credit clause
It would work well for a person who resides in Alaska and creates this type of trust, but the rules for creditor protection are not as clear when a person residing in a state that does not recognize asset protection trusts (like New York, California, or Florida) creates a trust in Alaska for this purpose. The reason this is not clear is that the full faith and credit clause of the United States Constitution generally states that a state court must give “full credit” and follow the judgment of a court of another state, unless it is clearly wrong. .
As a result, no one can be sure that Florida or Alaska law should apply if a Floridian establishes an asset protection trust in Alaska and is then sued by another Floridian for an incident in Florida. There is support for the proposition that Alaska law should still apply in determining whether a creditor could seize the Alaska trust, but we have no test cases that have gone to the appeal level. on this subject.
The offshore trust
For this reason, it is safer for U.S. taxpayers who do this type of conventional planning to use a trust company located in an offshore jurisdiction, such as Nevis, Belize, or the Cook Islands, which have special legislation to help secure. that individuals anywhere in the world can establish a trust there without any creditors that arise later on reaching the trust.
Offshore trusts are “disregarded” for income tax purposes under Article 684 of the Tax Code, so all income of the trust is considered income of the settlor (s). , and therefore reportable and taxable on Form 1040, Personal Income Tax Return. . This results in a situation where there are no savings or income tax costs other than following the proper reporting and normal tax rules that would generally apply.
In addition to tax planning purposes, every U.S. citizen has the right to set up a financial structure that will exclude creditors who do not exist and are not expected at the time the structure is established, and some states allow the creation of such structures even after the arrival of a creditor on the scene.
Just as almost all states have a law that protects a number of categories of assets from creditors, US nationals have the right to use offshore laws by creating offshore trusts, and have been doing so for decades, if not centuries. .
It is therefore not surprising that a large number of well-advised American individuals have established and maintained offshore trusts and similar structures, and that the vast majority of these structures are fully income tax compliant.
In particular, the tax law requires extensive disclosure of the assets and activities of offshore trusts to the IRS, and there are significant penalties for non-disclosure. You can read about this by looking at IRS Form 3520, IRS Form 3520-A, and Treasury Department Form FinCEN 114 (FBAR Form) and reading the related instructions.
Sometimes the guardianship under these trusts established by US taxpayers will consist of a foreign trust company and a domestic trust company acting as co-trustees, to avoid having to deposit as a foreign trust. Under these “hybrid trusts,” the trust agreement provides that the US-based co-trustee will have control of the trust’s assets and decision-making and that US law will apply to the trust. , unless or until the US Trustee resigns. This avoids having to file a Form 3520, 3520A, or FBAR when it is properly written, implemented and operated. All of this is permitted under section 7701 (a) (30) (E) of the IRC, which defines a “foreign trust” and describes what Treasury regulations call the “control test” and the “control test”. court ”to determine whether a trust is a foreign trust.
Confidentiality in estate planning
Because of the above, it is painful to see a presumption or assumption that individuals and families who have formed and maintained offshore trusts or trusts in national jurisdictions are breaking the law or acting illegally for any reason. It is especially painful to see that reputable trust companies with which our law firm and other law firms have worked for several decades see their files and their clients’ affairs disclosed indiscriminately as if they were regularly involved. in some kind of financial or tax fraud, which is certainly not the case from what we have seen and experienced over the past 30 years.
International bankers and trust companies are well aware of the importance of operating ethically and accurately, and of protecting the confidentiality of client information, except for government disclosures and reports required under numerous laws. which they must navigate and with which they must comply.
As for non-U.S. Individuals and families who have placed their assets in international trusts, which now typically include trusts in Nevada and South Dakota, the vast majority of these arrangements also comply with U.S. tax and must be compliant in the country of the constituent. / origin of the contributor.
It is generally against US law for a US professional to participate in violating the law of a foreign country. There is nothing wrong, however, in helping a foreign individual to establish a trust or trusts which may be immune from being attacked by creditors, or to form and operate trusts which can leverage. foreign tax laws that allow trusts formed outside the jurisdiction of the owner’s place of residence to facilitate the avoidance or deferral of income tax.
For example, many foreign countries have tax laws that essentially provide that only income from inside the foreign country is taxable, and that income from outside the foreign country that is held under special trusts. will not be taxable unless or until they are reintroduced into the country. country in which the grantor / contributor resides.
In fact, such trusts were commonly used by American citizens until the early 1960s, when the United States began to pass legislation prohibiting American taxpayers from engaging in such strategies, in part due to the efforts of the United States. of President John F. Kennedy, whose family used these trusts for tax avoidance and other purposes before he became president.
Now, U.S. companies can still engage in similar strategies with respect to foreign income that is earned under structures where a foreign company known as a “blocker” is not subject to the tax. tax in the country where it is incorporated, so that income is not taxed before it is imported into the United States.
Transparency against harassment
Journalists who have found and disclosed sensitive and confidential information about large numbers of individuals and families around the world can act nobly and with good intentions to expose tax evasion and crime, which undoubtedly exists to some extent. in the international arena, but at the same time, they disrupt private families and lives that are in full compliance with all US and international laws, and are exposed to possible financial and even personal harm due to assumptions and d insinuations that may be completely incorrect and unwarranted.
This will encourage more U.S. taxpayers to resort to smaller trust companies, law firms, or other persons or entities that provide foreign trustee services to reduce the likelihood of them being exposed to exposure. massive public of this nature.
In some cases, it is not uncommon for foreign individuals and families to entrust assets to a trust that will not be accessible to the government of the country they live in for fear of improper or illegal retaliation / foreclosure. In fact, a provision in a trust agreement that indicates a government reversal of the jurisdiction in which the trustee is located is called a “Cuba clause”.
US citizens can continue to use appropriately formed, funded and declared offshore trusts for legitimate tax planning and creditor protection purposes when the circumstances are right. Unfortunately, they risk having their personal information exposed to the general public in such circumstances, and being subjected to unnecessary criticism or mockery as a result.