10 Mistakes to Avoid When Working with Offshore Trust
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MISTAKES TO AVOID WHEN USING OFFSHORE TRUSTS FROM A U.S. TAX PLANNING POINT OF VIEW
PRESENTED BY: Lazaro J. Mur, Esq. AV Preeminent Rating - Founder, The Mur Law Firm, P.A. www.murlaw.com ABOUT PRESENTER
LAZARO J. MUR, ESQ. AV Preeminent Rating Founder, The Mur Law Firm, P.A. www.murlaw.com
Lazaro J. Mur, Esq. Founder of The Mur Law Firm, P.A. Mr. Mur has been serving the international business community since 1985, has an AV Preeminent Rating from Martindale-Hubble, has been quoted by the Wall Street Journal, is Former Chair of the Florida State Hispanic Chamber of Commerce, lectures on the topics of Global Asset Protection and International Tax Planning on behalf of the National Business Institute, LawPractice CLE; LawPro CLE and myLawCLE; and is a contributing Author for Mundo Offshore, EB-5 Investor Magazine and other World Class Journals.
2 COURSE SUMMARY
Offshore Trusts have become more prevalent to practitioners over the years. Many have come across Offshore Asset Protection Trusts and/or Offshore Pre- Immigration Tax Planning Trusts. Both of these types of Offshore Trusts are very sophisticated and require special attention to detail in order to avoid serious mistakes when drafting and implementing the same.
3 Mistakes To Avoid When Using Offshore Trusts
1.Not Knowing All the Facts 2.Not Understanding What “Irrevocable” Means 3.Not Understanding the Specific Provisions of the Trust 4.Not Properly Funding the Trust 5.Not Doing Corporate Due Diligence 6.Not Knowing Your Offshore Trustee 7.Not Choosing the Proper Jurisdiction 8.Not Understanding the U.S. Reporting Requirements 9.Not Taking into Account Family Needs 10.Not Considering a Change of Mind
4 INTRODUCTION
If you are thinking about moving to the United States, you should be thinking about pre-immigration tax planning. Otherwise, you may face significant U.S. income and estate tax consequences as a result.
Proper and timely pre-immigration tax planning may involve establishing an offshore trust. In this presentation we present the top 10 most common mistakes to avoid when using offshore trusts from a U.S. point of view. 5 1. Not Knowing All the Facts
Many readers thinking about moving to the United States do not understand the nature of the U.S. tax regime because they may be coming from a jurisdiction that has a totally different tax system.
6 Once you move to the United States with your green card, you become a U.S. resident for income tax purposes, you will be taxed on your world-wide income and if you are deemed domiciled in the United States as a result of moving to the United States, then your entire world-wide holdings will be subject to estate taxes.
Needless to say, this is a harsh reality for some to understand, much less accept. This is why pre-immigration tax planning is of critical importance if you are thinking of moving to the United States.
7 2. Not Understanding What Irrevocable Means
For the offshore trust to protect you from the exposure of U.S. estate taxes, it must be irrevocable.
Irrevocability is an issue that many have a difficult time with. After all, it implies a complete loss of control over the assets being transferred to the trust. However, if the offshore trust is revocable, then all of the trust estate will be included in your estate for U.S. tax purposes.
This is why the offshore trust must be irrevocable. Even then, if the irrevocable trust contains provisions that are indicative of retained interests and control, you will have an estate tax issue.
8 3. Not Understanding the Specific Provisions of the Trust
The offshore trust will probably have language you are not familiar with and simply may not understand. This type of trust will usually contain language specifically used for U.S. statutory planning and compliance purposes and may not appear to make any sense at first glance. So if you come across language in a provision contained in the trust that you are simply not sure about, stop and ask:
9 • What does this mean?
• Why is it relevant?
• What are the real life implications to me?
• How will this impact my family’s needs in the future if I am not around?
10 It is important that you read and understand each and every provision contained in the offshore pre-immigration trust because the trust will be irrevocable.
Remember, you will have to respect and abide by each and every provision in the offshore irrevocable trust, as failure to do so may bring about significant adverse tax consequences.
11 4. Not Properly Funding the Trust
You may have a perfectly drafted offshore pre-immigration trust, one that you can live with because you understand each and every single provision contained in it. Yet, unless you actually and properly fund the offshore trust, it will be of no benefit to you.
Assets not properly transferred to the offshore pre-immigration trust will be included as part of your taxable estate for U.S. estate tax purposes and subject to U.S. estate taxation at a rate of 40 percent. As such, the failure to fund the offshore trust means that your objective of minimizing exposure to U.S. estate taxation will not be achieved.
12 5. Not Doing Corporate Due Diligence
You need to know exactly what you own and where. Too often clients forget about an offshore company or foundation they established years ago.
Failure to take this into account will have an adverse effect in achieving your planning objectives. You may forget that you have a company with other shareholders and that your ownership interest in said company is not freely transferrable under an existing shareholders’ agreement. This may require you to contact the other shareholders and many times this may present a privacy issue, as you may not want everyone to know that you are planning on moving to the United States.
13 In addition, you may have limitations on the transferability of your ownership interests under the laws of your particular home jurisdiction, especially transfers to an offshore trust.
In some cases, your home jurisdiction may even try to impose an exit tax on transfers to an offshore trust. That is why your corporate due diligence is of critical importance.
14 6. Not Knowing Your Offshore Trustee Many times little consideration is given to the important question of “who will be the trustee of the offshore trust?" In many cases, a professional corporate trustee will have to be appointed, and this often raises concerns.
You will probably be thinking, who are these people and can I truly trust them with all of my assets? What if they take all that I have worked for all my life and disappear into the sunset? Do your own due diligence on the trust company, their reputation and operations. Do not take anyone’s recommendation at face value.
15 The decision of who to appoint as your offshore trustee is as important as choosing which bank to use. The critical difference is that if you don’t like your bank or banker, for any reason, you can simply close the account and take your hard earned money elsewhere.
Not so easy with the trustee of your irrevocable offshore trust. For this reason, you need to be very clear on what power(s) you have under the terms of offshore trust to terminate the existing trustee and appoint another trustee.
16 Equally important, you need to understand what fees will be charged, not only for accepting the trust, (acceptance fee) and the annual ongoing fees, (annual fees), but also the fees involved in case you decide to terminate the trustee relationship, (termination fee).
Look, there are many qualified trust companies out there. Make sure you find the one that best fits your needs and that they are in-fact experienced and familiar with this type of pre-immigration offshore trust structures and the related U.S. compliance requirements.
17 7. Not Choosing the Proper Jurisdiction
Not all offshore jurisdictions are the same. Some offshore jurisdictions are not suitable for this special type of pre-immigration offshore trusts. Some may not have the infrastructure you have come to expect in these days of complete comfort and connectivity.
If you plan on visiting the trustee, make sure the jurisdiction has a suitable airport and adequate hotel accommodations. Determine ahead of time the logistics of how you can get to their location if you choose to visit your trustee in person.
18 You will of course want to know that the laws of the selected jurisdiction favor the use of this type of offshore trust and that the offshore trust is in full compliance with all applicable laws. Therefore, you are going to want to speak with independent counsel in that jurisdiction and even request a legal opinion on the matter at hand.
Remember, this pre-immigration trust is not an aggressive offshore asset protection trust which requires a very special type of jurisdiction with favorable fraudulent transfer statutes. However, if properly drafted and funded, the offshore pre-immigration trust may also protect your assets from future creditors.
19 8. Not Understanding the U.S. Reporting Requirements
Once you become a U.S. resident, you now have a number of somewhat complex reporting obligations. Anonymity is a myth. There is no such thing as secret bank accounts or invisible bearer shares these days.
For this reason, you be must thorough with your comprehensive corporate due diligence and make a complete list of all your world-wide bank accounts and global holdings. Otherwise, if you don’t make full and complete disclosure to your trusted certified public accountant, they will not be able to properly inform you of all your new U.S. reporting obligations.
Mind you, failure to properly comply with applicable reporting obligations can result in substantial tax penalties, regardless of how well the offshore trust is drafted.
20 9. Not Taking into Account Family Needs
Often times, your desire to avoid U.S. estate taxation by fully funding an offshore pre- immigration trust may run afoul of your family’s current financial needs.
How are you going to pay for your lifestyle? How are you going to get your hands on money if you have already transferred all of your assets to the offshore trust?
More importantly, will dipping into the offshore trust result in unanticipated income taxation or even U.S. estate taxation because you are deemed to have a retained interest (control) over the assets transferred to the offshore trust?
That is why it is so important to have your certified public accountant and financial advisors as part of your pre-immigration tax planning team.
21 10. Not Considering a Change of Mind
It may well be that after you move to the United States, you may have a change of heart. You may want to pack up and leave. What then? What will you do now that all of the assets are held inside the offshore pre-immigration trust?
First, depending on how long you have resided in the United States, you may find yourself facing an exit tax. Moreover, since the offshore trust is irrevocable, how can you decant the offshore trust once you leave?
These are critical questions that should be considered because nothing is certain, except death and taxes.
22 Myths & Mistakes Behind Panamanian Foundations
1. Panama foundation overview 2. Benefits of a Panama Foundation 3. Conventions of the Panama Foundation 4. Uses for a Panama Foundation 5. Panama Foundation Council 6. U.S. Taxation of a Panama Foundation
23 Myths & Mistakes Behind Panamanian Foundations
The other time you will probably be exposed to Offshore Trust is when dealing with an Offshore Asset Protection Trust.
The question you will most likely be asked is whether you can use a Panamanian Hybrid Foundation as an Offshore Trust for Asset Protection.
24 We are all familiar with Panama and most recently, the Panama Papers.
The stories have been in the News.
But Panama remains one of the most respected financial centers in the World and may be a viable asset protection jurisdiction in most cases.
25 We start by noting that Panama Hybrid Foundations are not a vehicle to "secret or hide" assets.
Anonymity is not an asset protection tool.
26 There are significant "fraudulent transfer" statutes to be aware of when dealing with asset protection and transfers offshore which may make the initial transfer void or voidable.
Also, if you file for bankruptcy within ten (10) years after establishing a Panamanian Hybrid Foundation, the Bankruptcy Court may have the power, depending on the facts and circumstances, to order you to decant the Foundation and may even hold you in contempt.
27 While the offshore trust, especially the Cook Island Trust, has a longer history, the modern Panama Foundation costs less to set up and maintain, and you don’t need to pay a professional trustee or protector.
With a Panama Foundation, you can appoint anyone you like to handle your estate should you become incapacitated. Also, unlike a Belize Trust, you can be the manager of the Foundation, controlling its investments for the benefits of your heirs.
28 Panama Foundation Overview
The Foundation, as defined in the Panama Law in 1995, and as updated and improved over the years, is a separate and distinct entity from its owners.
As a result, the Panama Foundation is now recognized, not only Panama, but by the United States and other countries, as one of the most efficient asset protection tools.
29 The Panama Foundation is one of the very few foreign structures approved in the Cayman Islands, among other reputable offshore jurisdictions. which contrary to popular believe, is an extremely conservative jurisdiction.
Being recognized around the world gives you access to more foreign banks, currencies and investments. It also means you can move quickly out of Panama if sued there.
30 Also, the Panama Foundation does not require members or shareholders.
All that is needed is the Founder (you, the settlor), the Foundation council (which you provide), and a beneficiary.
31 You may act as both the Founder and the beneficiary and may appoint any three people or any one company as the counsel.
It is usually this counsel that manages the assets should you become unable or unwilling to do so (such as if you are in litigation or otherwise incapacitated).
That’s the basic structure.
32 It is NOT recommended that the Panama Foundation list the Settlor as the beneficiary.
It is recommended that you appoint an asset manager as the protector or foundation counsel.
If the primary purpose of the Foundation is asset protection, taking these steps at inception is critical.
33 Benefits of a Panama Foundation
There are many benefits of a Panama Foundation for asset protection.
The first is that the Foundation won’t be taxed in Panama and no local accounting or audit will be required.
So long as the Foundation’s income is from outside of Panama, it will be tax free.
If you plan to establish a business or conduct business in Panama, you will pay Panamanian tax on the profits.
That is why it is important to consult with Panamanian counsel when utilizing Panamanian Foundations.
34 Next, the Panama Foundation is a hybrid entity between a trust and a corporation.
Therefore, it may act as an offshore trust, but it is far more cost effective to form and operate than other Offshore Trusts.
35 Also, the Panama Foundation is a separate entity and, as such, may enter in to contracts and agreements on behalf of its Founder (you).
The Foundation’s ability to contract and operate as a company separate and distinct from its owner is why it’s called the Panama Foundation Hybrid Structure.
While a trust is one with its settlor, a Panama Foundation is a legal entity like a corporation or LLC (which some refer to it as a company).
36 Limitation
The only limitation is that a Panama Foundation may not operate an active business.
If you want to hold a business in a Panama structure, your Foundation may form a Panama corporation, but may not own the business directly.
37 A Panama Foundation may be established for the benefit of any third party.
Beneficiaries may be any person(s) or company(ies).
Beneficiaries are not public record.
38 Your comprehensive estate plan may be simple or complex, depending on the facts and circumstances.
• You might decide to work with the $11,200,000 ($22,400,000, plus, for married couples) U.S. gift tax exclusion today before it goes away in 2025;
• or the Foreign Earned Income Exclusion for a business in Panama;
• or create a charitable remainder structure, a generation skipping Foundation, or any variation thereof.
39 You may control the disposition of assets by lodging a simple or complex list of instructions with the Foundation council.
This “letter of wishes” will tell the banks, brokerages, and property managers what and how to dispose or manage your assets upon your passing and may be changed or updated as often as you like.
40 This "letter of wishes" must be carefully drafted so as not to render the Foundation to be deemed a mere revocable trust from an asset protection point of view.
Nor should the “letter of wishes" contain any language that are tantamount to "retained interests" causing the inclusion of the foundation asset in your estate for U.S. estate tax purposes.
41 Also, the Panama Foundation requires no annual meeting or formalities. With a U.S. structure, if you fail to keep up appearances, creditors may pierce the corporate veil and reach your assets. In Panama, no such laws apply and your assets are secure. As stated above, no audit, accounting, or tax filing will be required in Panama.
42 Conventions of the Panama Foundation
A Panama Foundation may use any name available.
You’re not required to use your last name, as is the customary with a trust.
Though, you do need to include the word “Foundation” in the name.
43 A Panama Foundation must have a local address and local agent for service of process.
Just as when you form an out-of-state company or LLC in the U.S., you need to have a local representative to receive legal correspondence.
The Founder of a Panama Foundation may be any person or entity (a foreign or domestic corporation, trust, LLC, etc.)
44 Uses for a Panama Foundation
The most common uses of a Panama Foundation are:
• To hold shares, patents, collect royalties, manage trademarks and other passive activities;
• Offshore asset protection for those who want to diversify out of the U.S.;
• Moving assets out of your U.S. estate to minimize U.S. estate tax;
• Investment management and private asset management by firms or outside of the United States, especially where the provider is unwilling to do business with a U.S. person directly, as is sometimes the case in today’s global financial environment.
45 Panama Foundation Council
A Panama Foundation may be as simple or complex as necessary.
One of the reasons for this flexibility is the Foundation Council, which is unique to Panama. It is this council that allows you to maximize asset protection and, should you come under duress, allows you to separate yourself from the structure and the assets.
46 You may choose to manage the Panama Foundation directly until or unless you have an issue (come under attack by a creditor). You may elect to retain a professional trust company or lawyer to act as your trustee/protector.
This person would be appointed by your foundation council and act at your direction.
You may then add an investment manager or lawyer as you see fit.
47 Alternatively, you can manage your Panama Foundation and then seek professional assistance only if you come under duress or litigation becomes likely.
Of course, you can provide the Foundation council.
48 Your Panama Foundation Council may consist of three or more persons or one legal entity (a corporation or LLC).
These people or company may be from any country… they need not be Panamanians.
Though, U.S. persons or companies as council members may adversely impact the asset protection benefits of the Panama Foundation because they would be subject to the jurisdiction reach of U.S. Courts.
49 U.S. Taxation of a Panama Foundation
Foreign source and passive income are not taxable in Panama.
So long as the foundation is not operating a business in Panama, you’ll pay no local tax.
If you are living in the United States, you (the Founder) are the beneficial owner of the assets of the Foundation for U.S. tax purposes.
50 In other words, the Founder is the deemed owner of the assets for U.S. tax purposes (but not litigation purposes) held by the Foundation.
Any income generated therefrom will be taxable in the U.S.
51 The U.S. taxes its citizens on our worldwide income.
The fact that you are using a Panama Foundation for asset protection does not change the U.S. tax code.
The use of Panamanian Foundation is not to evade U.S. taxation, but rather, protect assets from the reach of future creditors.
52 To summarize, the major benefits of a Panama Foundation over other asset protection vehicles are:
• Exemption from all Panamanian taxes on profits generated outside of Panama
• Relatively inexpensive to maintain
• Separate legal entity with capacity to execute agreements and acquire obligations and property.
• No shareholders, members, directors, or officers required
• Any person or company may create a foundation for the benefit of any third party
• Assets transferred to the Foundation in a "proper and timely" manner may be beyond the reach of creditors
• Accounting and audited financials are not required
• No foreign exchange controls 53 CONCLUSION
If you are thinking of moving to the United States, plan ahead and be sure you don’t make the mistakes outlined for you in this presentation. Otherwise, you may have unexpected adverse U.S. income and estate tax consequences as a result of the move.
54 Remember, you don’t necessarily need to have a crystal ball and have everything planned out and finalized five years before the day you actually move to the U.S., although doing so would be helpful in avoiding the dreaded five-year income tax lookback rule that may be applicable if you do move to the U.S. within five years from the date you establish and fund the offshore pre-immigration trust.
However, contrary to popular misconception, that five-year income tax look back rule has no application with respect to U.S. estate taxation and your efforts to minimize your U.S. estate tax exposure with proper pre-immigration tax planning utilizing an offshore pre-immigration trust.
55 Q&A
Presented by: Lazaro J. Mur, Esq. THE MUR LAW FIRM, P.A. (561) 531-1005 Email: [email protected]
56 Disclaimer
Disclaimer: This presentation does not constitute a legal opinion and as such should not be relied upon without first consulting with a US tax attorney experienced in the field of International Tax Planning. The materials presented herein constitute a compilation of research materials from numerous previously published articles, commentaries and presentations by respected authors on the topic, which are readily available on-line, and as such credit is given herein for their contributions to the field of international tax planning.
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