:: JURIS MAGISTER Servicios Corporativos Internacionales - Sociedades Internacionales - FIDEICOMISOS

Uso Creativo de Entidades Extranjeras
para la Protección de Activos y Planificacion Fiscal
(versión original en inglés)

Autor: Alan R. Eber

Creative Use of Foreign Entities For Asset Protection and Tax Planning
Alan R. Eber

The Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997, contained a number of provisions which appeared to threaten, if not undermine, the use of offshore trusts for meaningful tax savings. Nonetheless, this article suggests that all is by no means lost. In fact, under the right circumstances creative use of foreign non-grantor trusts by American Settlors, combined with other entities may prove to be a new and effective tax planning vehicle.

To illustrate, let’s compare the almost parallel (hypothetical) experience of Lois and Victor, two friends who went to college together. They were very close and shared everything...except nationality. Lois Los Angeles was an American, Victor Vancouver a Canadian. They both dreamed the same dream...build a successful business and retire secure at age 55. For 25 years they labored and both built fine enterprises. They both had "C" corporations and both paid the same amount of corporate tax, they both drew about the same salary and paid the same amount of income tax. They both retired at age 50. Both hired in professional management for their corporations. Victor went to Barbados to "chill out", Lois to Big Sur. Five years later both decided that absentee management was not worth the effort and both decided to sell their corporation.

Both Lois and Victor started their business with $10,000 they had saved from summer jobs. Currently both of their corporations are worth $2,000,000. Both clients are 55 years of age married with children, are good at making investments and believe they could easily grow their money at 12% per year They both visited their accountants to see what their retirement would look like financially. Now the Differences in Their Situations Began to Emerge. ²

Analysis: Lois Los Angeles

$2,000,000 Fair Market Value Corporation - $10,000 Adjusted Basis = $1,990,000 gain

$1,990,000 Capital Gains x 30% tax3 = $597,000 Capital Gains Tax

$1,990,000 - $597,000 = $1,393,000 Sales Proceeds

$1,393,000 X 12% investment yield - 30% tax³ = 8.4% after Tax Yield

$1,393,000 x 8.4% x 20 Years = $7,430,600

Analysis: Victor Vancouver

$2,000,000 Fair Market Value Corporation - $10,000 Adjusted Basis = $1,990,000 gain

$1,990,000 Capital Gains x 00% Tax = $00 Capital Gains Tax

$2,000,000 - $00 = $2,000,000 Sales Proceeds

$2,000,000 X 12% investment yield - 00% tax = 12.0% After Tax Yield

$2,000,000 x 12% x 20 Years = $21,785,000

Even Worse News. Lois was startled, she would only have $7,430,600. Victor would have $21,785,000. She did the only thing she could do - she visited Victor's accountant, Ira International, where she received even worse tidings. Victor's $21,785,000 would go to his children Estate Tax-free. Her $7,430,600 would be subject to $4,086,800 in Estate Tax (55%). Her children would only get $3,343,800.

The Accountant Explains. Lois is an American and is subject to U.S. tax wherever she lives. The U.S. is one of less than a handful of countries that taxes it's citizens on worldwide income. Victor, never became an American. When he retired to Barbados, from an American tax point of view he became a Non-Resident Alien ("NRA").

Tax Advantages of Being a Non-Resident Alien. Provided that: (i) a NRA is NOT physically present in the United States for 183 days or more during the taxable year;⁴ and (ii) the income does not relate to the operation of a U.S. trade or business;⁵ a NRA will normally be taxable only on U.S. source, Fixed or Determinable, Annual or Periodic ("FDAP") Income at a flat rate of 30%.⁶ Gains derived from the disposition of foreign-source assets, current income generated from foreign sources, U.S. portfolio income,⁷ and U.S. capital gains,⁸ can all be earned free from U.S. taxation by NRA's.

The Problem. Now Lois is really upset. I see she says, Victor and I went to the same school, worked equally hard for 25 years and he gets $22 million and I get $7.4 million, his children get $22 million, mine $3.3 million. Is there nothing I can do? Will I lose $15 million? Will my estate have to pay $4,086,800 when Victor's pays nothing?

The Solution. Ira International explained that if Lois did not want to pay $15 million extra during her life and did not want to pay $4.1 million in estate tax - she might not have to. There are two different offshore tax structures which would allow her to transfer her stock offshore. The structures would own the stock, and the structures would be taxed in the same way as an NRA so that present transfer (and later sale) of the stock would result in no tax or deferred tax.

In this article we will explain how to create the Foreign Non-Grantor Trust Structure, in the second part of this article we will discuss the Variable Universal Life Structure.

TYPES OF OFFSHORE TRUSTS

FOREIGN NON-GRANTOR TRUST ("FNGT")10

CONSEQUENCES OF THE FNGT BEING A NON-RESIDENT ALIEN

FUNDING THE OFFSHORE STRUCTURE

MORE IMMEDIATE USE OF THE OFFSHORE STRUCTURE

ENDNOTES

1221 Brickell Avenue, Suite 1100 - Miami, Florida 33131 - Tel 1-305-373-5802 Fax 1-305-373-5803