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Asset Protection Planning (Portfolio 810)

Tax Management Portfolio No. 810-3rd, Asset Protection Planning, begins with a working definition of “asset protection planning” to establish a uniform meaning of that term for use in the portfolio.

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DESCRIPTION

Tax Management Portfolio No. 810-3rd, Asset Protection Planning, begins with a working definition of “asset protection planning” to establish a uniform meaning of that term for use in the portfolio. The portfolio then examines traditional methods utilized in rudimentary preservation planning, as well as the traps and pitfalls associated with such traditional techniques.
The portfolio addresses the estate planner's ethical considerations and obligations in the asset protection arena. The portfolio analyzes fraudulent transfers and special transfer considerations that may arise including potential criminal issues. The portfolio then examines the types of exemptions that may be available to protect assets, including within the context of pre-bankruptcy planning.
The portfolio discusses the asset protection aspects of corporations along with certain corporate income tax issues.
The portfolio proceeds to an in-depth discussion of the use of limited partnerships and limited liability companies in asset protection planning, explaining the charging order concept, its protective effect, and the IRS's position on charging orders. Partnership agreement drafting suggestions are provided. A review of the federal tax consequences of the establishment and use of limited liability entities is also provided.
The portfolio includes a discussion of foreign limited liability entities and a survey of several foreign jurisdictions where parties can protect their assets. The use of trusts in asset protection planning is examined, including sample protective trust provisions, as well as a description of the protective effect of each provision. Following this is a discussion and comparison of the relative protection afforded by domestic and offshore trusts, including an analysis of the factors to be considered in selecting an offshore jurisdiction and an offshore trustee. Also, the U.S. tax consequences of the establishment and use of domestic and offshore trusts in the asset protection context are discussed.
Next, the portfolio surveys 13 domestic jurisdictions and 11 offshore jurisdictions commonly thought of as permitting “asset protection” trusts. General and relevant legislative information is provided for each jurisdiction. The protective legislative provisions of selected jurisdictions are provided in the Worksheets.
This portfolio may be cited as Rothschild and Rubin, 810-3rd T.M., Asset Protection Planning.


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AUTHORS

GIDEON ROTHSCHILD, ESQ.
Gideon Rothschild, B.B.A., Baruch College (1973); J.D., New York Law School (1980, with honors); Fellow of the American College of Trust and Estate Counsel; Academician of the International Academy of Estate and Trust Law; Finance Officer (2006–2010), Chair of the International Estate Planning (2002–2004) and Asset Protection Planning (1997–2002) Committees of the American Bar Association's Real Property, Trust and Estate Law Section, Chair of the New York Chapter of the U.K.-based Society of Trust and Estate Practitioners (STEP); licensed Certified Public Accountant; member, Editorial Advisory Boards of Tax Management Estates, Gifts, and Trusts, and Trusts and Estates; author of numerous articles for publications including the New York Law Journal, Journal of Asset Protection, Trusts and Estates, and Estate Planning; contributing author, Kluwer's Trusts in Prime Jurisdictions, Bloomberg Press's The PPLI Solution and the American Bar Association's Asset Protection Strategies; Adjunct Professor, University of Miami School of Law Graduate Program in Estate Planning; frequent lecturer on asset protection and estate planning to professional groups including University of Miami's Philip E. Heckerling Institute, New York University Federal Tax Institute, the New York State Bar Association, the American Bar Association, the Southern Federal Tax Institute and the American Institute of Certified Public Accountants.

DANIEL S. RUBIN, ESQ.
Daniel S. Rubin, B.A., The George Washington University, Elliot School of International Affairs (1991); J.D., Brooklyn Law School (1994, with honors); LL.M. (Taxation) The New York University School of Law (1995); Fellow of the American College of Trust and Estate Counsel; Director-Law of the New York City Estate Planning Council; Vice Chair of the International Estate Planning Committee of the Trusts and Estates Section of the New York State Bar Association; member of the New York Chapter of the U.K.-based Society of Trust and Estate Practitioners (STEP); author of numerous articles for publications including the Journal of Asset Protection, Trusts and Estates, and Estate Planning; contributing author to Kluwer's Trusts in Prime Jurisdictions, Bloomberg Press's The PPLI Solution and the American Bar Association's Asset Protection Strategies; frequent lecturer on asset protection and estate planning to professional groups including the New York State Bar Association, the American Bar Association, and the American Institute of Certified Public Accountants.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

Introductory Material

A. Working Definition of Asset Protection Planning

B. Need to Consider Asset Protection in Every Clients’ Estate Plan

C. Traditional Asset Protection Methods and Inherent Problems

1. Outright Gifts

2. Gifts in Trust – General

3. Creation of Co-Tenancies

a. Tenancy by the Entireties

b. Joint Tenancy With Right of Survivorship

c. Tenancy In Common

d. Community Property

4. Use of Liability Insurance

5. Other

a. Disclaimers

b. Powers of Appointment

c. Miscellaneous

D. Ethical Considerations and the Estate Planner's Obligation

1. Threshold Considerations

2. Obligation to Client

3. Potential for Attorney Liability

a. Civil Liability

(1) Conspiracy

(2) Aiding and Abetting

(3) Malpractice

b. Criminal Liability

4. Risk Minimization

a. Know Your Client

b. Solvency Analysis

c. “Due Diligence” Procedures

II. Fraudulent Transfers

A. General

1. Definition

a. Transfer

b. Protected Creditors

2. Determination of Intent - Badges of Fraud

3. Effect of Finding a Fraudulent Transfer and Transferee Liability

4. Bankruptcy Issues

B. Special Transfer Considerations - Potential Criminal Issues

1. Concealment of Assets from the RTC, FDIC, Etc.

2. Bankruptcy Crimes

3. Tax Crimes

4. Other Special Considerations

III. Exemption and Pre-Bankruptcy Planning

A. Domicile and Conflict of Law Issues

B. Acceptable Use of Exemptions

C. Exemptions

1. Homestead Exemption

2. Wage Exemptions

3. Annuity Exemptions

a. Domestic

b. Foreign

4. Retirement Accounts

a. Qualified Plans

b. Individual Retirement Accounts

5. Life Insurance

a. Domestic

b. Foreign

6. Miscellaneous Exemptions

IV. Corporations

A. Background

B. Asset Protection Aspects

1. Shareholder Liability

2. Officer and Director Liability

C. Income Tax Issues

1. Creation

2. Ongoing Use

V. Limited Partnerships and Limited Liability Companies

A. Background

B. Asset Protection Aspects

1. Charging Order Concept

a. Background

b. Definition

c. Effect of Charging Order

d. Summary

2. Internal Revenue Service Position

3. Planning Discussion

C. Tax Consequences

1. Income Tax

a. Formation

b. Ongoing Use

2. Transfer Tax Issues

D. Foreign LLEs

1. Choice of Jurisdiction

a. British Virgin Islands

b. Cayman Islands

c. Cook Islands

d. Nevis

e. Samoa

2. Asset Protection Aspects

VI. Trusts

A. Background

B. Protective Trust Provisions

1. Discretionary Distribution Provision

a. Description

b. Effect

2. Spendthrift Provision

a. Description

b. Effect

3. Duress Provision

a. Description

b. Effect

4. Flight or Change of Situs Provision

a. Description

b. Effect

5. Trust Protector Provision

a. Description

b. Effect

6. Other Protective Provisions

a. Extension Provision

b. Principal and Income Allocation Provision

c. Revision of Beneficial Interests

d. Custodian Trustee Provision

C. Trusts in Non-Community Property Jurisdictions

1. Domestic Trusts

a. Working Definition

b. Discussion

c. Summary

2. Offshore (Foreign Situs) Trusts

a. Working Definition

b. Discussion

c. Selecting the APT Jurisdiction

(1) Legal System

(2) Favorable Trust Protection and Tax Laws

(a) General

(b) Statute of Elizabeth

(c) Comity

(d) Effect of Retained Interests, Powers, and Self-Settled Spendthrift Provisions

(e) Tax Laws; Exchange Controls

(3) Other Factors

d. Selecting the Offshore Trustee

e. Funding The Offshore Trust

(1) Limited Partnership/Limited Liability Company Interests

(2) Domestic/Foreign Assets

(3) Equity Stripping Transactions

(4) Sale-Leaseback Transactions

3. Domestic Asset Protection Trusts

a. Background

b. U.S. Constitutional Issues

c. Practical Considerations

D. Trusts For Settlors Owning Community Property - Special Considerations

E. Estate Planning Opportunities Using “Asset Protection” Trusts

F. Use of Traditional Trusts for Asset Protection Purposes

G. U.S. Tax and Reporting Issues

1. Domestic Trusts

a. In General

b. The Gift Tax: Complete or Incomplete Gift?

c. Compressed Income Tax Brackets

2. Offshore Trusts

a. Classification Issues

(1) Introduction: The “Check-the-Box” Entity Classification Regulations

(2) Trust or Something Else?

(3) Foreign or Domestic?

(a) Introduction

(b) Court Test

(c) Control Test

(d) Effective Date and Transition Rules

(e) Potential Consequences of Change from Domestic to Foreign Trust

(f) Subchapter S Issues

b. U.S. Tax Consequences of Creation and Transfer of Assets

(1) Section 684: Recognition of Gain on Transfers to Foreign Trusts

(2) Gift and Estate Tax Consequences

c. U.S. Income Tax Consequences

(1) Section 673: Reversionary Interests

(2) Section 674: Power to Control Beneficial Enjoyment

(3) Section 677: Income for Benefit of Grantor

(4) Section 679: Foreign Trusts with U.S. Beneficiaries

d. U.S. Reporting Requirements

(1) Gift Tax

(2) Income Tax

(3) Information Reporting on Transactions with Foreign Trusts and on Large Foreign Gifts

(a) Introduction

(b) Transfers to Foreign Trusts

(c) Beneficiaries of Foreign Trusts and U.S. Recipients of Foreign Gifts

(d) U.S. Owners of Foreign Trusts

(e) Forms 3520 and 3520-A

(f) Penalties for Failure to Provide Information

(4) Foreign Account Reporting

(5) Withholding Tax

(6) Foreign Partnership/Limited Liability Company/Corporate Reporting

(a) Foreign Corporation Reporting

(b) Foreign Partnership Reporting

H. Civil Law Foundations

I. Challenges to Offshore Trusts

1. In General

2. Contempt of Court

VII. Asset Protection Trust Environment – Overview of Selected Jurisdictions

A. Domestic Jurisdictions

1. Alaska

2. Delaware

3. Nevada

4. Rhode Island

5. Other Domestic Jurisdictions

a. Missouri

b. Colorado

c. Utah

d. Oklahoma

e. Tennessee

6. Comparison with Foreign Asset Protection Trusts

B. Foreign Jurisdictions

1. Cook Islands

a. General Information

b. Legislation and Other Items of Note

2. Cayman Islands

a. General Information

b. Legislation and Other Items of Note

3. Gibraltar

a. General Information

b. Legislation and Other Items of Note

4. Isle of Man

a. General Information

b. Legislation and Other Items of Note

5. The Bahamas

a. General Information

b. Legislation and Other Items of Note

6. Belize

a. General Information

b. Legislation and Other Items of Note

7. Turks and Caicos Islands

a. General Information

b. Legislation and Other Items of Note

8. Cyprus

a. General Information

b. Legislation and Other Items of Note

9. Nevis

a. General Information

b. Legislation and Other Items of Note

10. Liechtenstein

a. General Information

b. Legislation and Other Items of Note

11. Channel Islands

a. General Information

b. Jersey

c. Guernsey


WORKING PAPERS

Working Papers

Table of Worksheets

Relevant Worksheets Appearing in Other Portfolios:

Worksheet 1 Table of Jurisdictions That Have Adopted the Revised Uniform Limited Partnership Act (1976) with the 1985 Amendments

Worksheet 1A Table of Jurisdictions That Have Adopted the Uniform Limited Partnership Act (2001)

Worksheet 2 Revised Uniform Limited Partnership Act (1976) - Sections 702 and 703

Worksheet 2A Uniform Limited Partnership Act (2001) - Article 7

Worksheet 3 Table of Jurisdictions That Have Adopted the Uniform Limited Liability Company Act (1996)

Worksheet 4 Table of Jurisdictions That Have Adopted the Uniform Fraudulent Transfer Act (1984)

Worksheet 5 Table of Jurisdictions That Have Adopted the Uniform Fraudulent Conveyance Act (1918)

Worksheet 6 The Hague Convention on the Law Applicable to Trusts and on Their Recognition (1985)

Worksheet 7 The Bahamas

Worksheet 8 Belize [Trusts Act 1992]

Worksheet 9 Cayman Islands

Worksheet 10 Cook Islands

Worksheet 11 Cyprus [Trustee Law 1955]

Worksheet 12 Gibraltar [Bankruptcy (Amendment) Ordinance, 1990; Bankruptcy (Amendment) (No. 2) Ordinance 1990; Bankruptcy (Register of Dispositions) Regulations 1990; and the Trusts (Recognition) Ordinance 1989]

Worksheet 13 Guernsey [The Trusts (Guernsey) Law 1989, as amended]

Worksheet 14 Isle of Man [Trusts Act, 1995; Trustee Act 1961]

Worksheet 15 Jersey

Worksheet 16 Liechtenstein [Law of Persons and Companies, Articles 897–932]

Worksheet 17 The Nevis International Exempt Trust Ordinance 1994 (as amended, 2000)

Worksheet 18 Turks & Caicos Islands Trust Ordinance 1990

Worksheet 19 Affidavit of Solvency

Worksheet 20 Alaska Trust Act

Worksheet 21 Authorization of Agent

Bibliography

OFFICIAL

Internal Revenue Code Sections:

Statutes - United States:

Statutes - Foreign:

Committee Reports; Public Laws:

Treasury Regulations:

Treasury Rulings:

Miscellaneous:

Cases:

UNOFFICIAL

Tax Management Portfolios:

Text & Treatises:

Articles:

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