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One of the reasons that you won’t often find me commenting on US tax issues is that the US government have a lot of very nasty laws that they are prepared to use on anyone they think might be encouraging their citizens to evade or even just avoid tax – even though tax avoidance is perfectly legal. Many of these are frankly draconian and supposedly designed to deal with terrorism and money laundering but in reality are designed to deal with tax avoidance. The result is that most PI (Professional Indemnity) insurance companies are unwilling to offer insurance to tax advisers like myself, and if they do the premium charged is astronomic.

However, from time to time something does come along where I feel I can reasonably make a comment safe in the knowledge that I’m not risking arrest if I ever visit the US nor of being extradited on some trumped up charge.

In this case all I am doing is pointing out a golden opportunity offered to US taxpayers by their own government. This is not some clever tax-efficient scheme making use of loopholes or grey areas of tax law but US government legislation – or a combination of several pieces of legislation, that could save each US taxpayer $2.2 million and move $5 million of their capital outside any future tax charge. Don’t have $5 million – don’t worry just read on….

What’s This All About?

Late last year Congress passed the 2010 Tax Act which amongst other things included special gift and estate tax rules that apply only in 2011 and 2012. Compared to the rules they replaced, and compared to the rules that will take effect in 2013, they are especially permissive. The tax savings I’m talking about come from utilising these temporary rules before they expire but in addition, by taking advantage of other existing legislation along with this one there are even better benefits to be obtained – even if you don’t have $5 million in cash or assets.

The 2010 Tax Act allows US taxpayers a temporary $5 million exemption from gift tax. Anyone who can afford it could write a check or checks or transfer assets of any kind to their children or grandchildren up to a total of $5 million without having to pay any gift tax. But before you recoil in horror don’t worry – you won’t have to let your kids loose with that sort of dough because you can still control the assets.

This temporary exemption only lasts from now until 31st December 2012. After that the exemption drops to just $1 million and the rest will be taxed at the new higher 55% rate. If you could utilise the full $5 million your estate would save a massive $2.2 million. Double that for a husband-and-wife.

So What is So New About This?

Frankly, nothing. What I am going to tell you now has always worked and probably will always work. The fact is that Estate Tax has always been an avoidable tax. Regardless of the level of wealth, for those who planned well and planned early, the tax eventually incurred was trivial. The 2010 Tax Act doesn’t change that, it just makes it easier and the potential savings higher, until the end of next year, to exploit the fact. Even so, most people will let the opportunity pass by because they always have done so, and if the headline-grabbing title of this article can get some of you to sit down with your advisers and consider the subject then it will have done the job I intended it to do.

Why Do Most People Ignore Estate Tax Planning?

There are many reasons concerns or objections. Here are some of the most common ones:

  • Haven’t Got Round To It

Estate planning is not the kind of topic that many people want to think about. It means they have to consider their own mortality and most of us would rather put that off. When we are young it is so far (we hope) in the future, so it’s easy to tell ourselves that there will be plenty of time to deal with it later. If that sounds like you, maybe the $5 million opportunity that Congress is offering for just the next 21 months will spark some action.

  • Already Did It

If you’ve already addressed your estate planning great, but you probably don’t want to reopen the matter. However if you have a large estate, making that effort could save your heirs $2.2 million in estate tax.

  • Can’t Trust the Kids Not to Waste It

Indeed, this is such an obvious objection that I don’t need to say anything more. Allied to this is the understandable concern that gifts would remove capital from the control of the family’s most astute investor and cunning financial manager (you).

  • I Might Need It

Again an entirely understandable  concern. Whilst it is nice to save tax and give future generations a good financial start in life, you don’t want to end up in the poorhouse unable to look after yourself or relying on your offspring bunging you a few dollars from what is left of your capital after they have squandered it!

The Solution

All the above concerns, and many others are easily dealt with by using a trust. Instead of gifting cash or other assets to your children or grandchildren you can make a gift to an irrevocable trust of which you are the trustee. The property escapes the reach of estate tax, but you continue to decide how the money is invested and when it turns into spendable cash for the beneficiaries.

The Better Solution

As a US taxpayer you are entitled to transfer assets into a trust located almost anywhere in the world, not just one established or managed in the USA. Non US trusts are called “offshore trusts” and whilst in most cases there can be tax disadvantages if you put assets into such trusts in the case of a trust set up for estate-planning you can use your full tax exempt gift allowance of, for the next 21 months, $5 million.

The Benefits of an Offshore Trust

A US trust is good, but an offshore one provides the same advantages and a whole lot of other advantages which you can’t get from a US trust.

For example, an offshore trust provides unbeatable protection for your assets – protection from aggressive lawsuits, protection from lightning asset seizures and protection from the possible gold confiscation and currency controls that have many investors worried. It gives you entry to all types of foreign financial institutions, most of which no longer want to deal directly with Americans. That means more and better opportunities for profit and for truly effective diversification, and it means access to tax-efficient investment products you can’t get in the US.

An offshore trust can accommodate every estate-planning strategy your lawyer has told you about. You won’t need to reinvent your estate plan, you’ll just need to relocate it. And while you’re doing so, you can bring it up to date to exploit the opportunity that was handed to you by the 2010 Tax Act.

Moving your estate plan offshore achieves an additional, highly attractive advantage. After your lifetime, the trust completely disconnects from the US tax system. Distributions to your survivors will be reportable and partly taxable, but no one will be subject to US tax on earnings the trust accumulates. The trust needn’t be in anyone’s taxable estate ever again. And no one will have a  US reporting obligation for the trust itself. That’s as clean and free as money can lawfully get.

An offshore trust can do as well as a domestic trust in dealing with the spendthrift problem, and maybe a little better. It has an edge because it provides better protection from the creditors some of your heirs someday might attract. In the meantime, it allows you to continue to manage the underlying investments just as you do now.

If you transfer money to a trust, whether offshore or not, and you include yourself as a discretionary beneficiary (one who is eligible to receive a distribution but who has no fixed right to demand a distribution), and you later discover that you need the money for yourself, the trustee will have the power to give it to you. But if the trust is formed in the US, the money in the trust probably will remain in your taxable estate, because courts in the US generally will tap into such a trust to satisfy your creditors.

By the standards of US gift tax rules, if something is still available to your creditors, you haven’t really given it away. (A few states have passed laws that attempt to protect such a trust from the grantor’s creditors, but those laws can’t protect a trust formed in the US from lawsuits in federal courts. If the money is still available to at least some of your creditors, it’s still in your estate.)

The situation in some offshore jurisdictions is different. You can include yourself as a discretionary beneficiary of your trust, and if you later have a problem with a creditor, the courts there will tell your creditor to go away. Because the trust is protected from your personal creditors, your transfers to it move the money out of your taxable estate – even though the trustee has the authority to give the money back to you if you later need it.

With an offshore trust, the money’s continued availability for your own support makes it far easier to exploit the $5 million opportunity that Congress has handed to you. And if you are married, it’s a $10 million opportunity, but it runs out at the end of 2012.

So, now is the time for US taxpayers to speak to their professional advisers and look into getting themselves an offshore trust. Even if you don’t have $5 million investigating the use of an offshore trust is well worth doing. James Green & Co will not advise US taxpayers on setting up offshore trusts – our Professional Indemnity Insurers don’t let us – but we can put you in touch with US based advisers if you don’t already have one or offer you some generic advice if you want some more general information.

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Category: Taxation

5 Responses to “US Government Introduce a Five-Million-Dollar Incentive to Move Offshore”

  1. James Green says:

    Andrew, your question is answered towards the end of the article.

  2. Andrew says:

    What are the benefits of setting up a trust outside of the US vs. inside?

  3. James Green says:

    Hi Emily, you might be better advised to seek an advisor who is based outside the US but who has knowledge of the US situation particularly in regard to which country in Europe it is where you live. Send me an email with contact details and I’ll find someone suitable. Email james (at) jamesgreenandco.co.uk

  4. Emily Emerson says:

    Hello. I am a US citizen living in Europe who is interested in forming an offshore trust for my estate. Could you recommend a US-based adviser?

    Thank you.

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