Law Memo

Foreign Trusts

August 15th 2016

Even if the settlor of a domestic asset protection trust (“DAPT”) resides in the DAPT jurisdiction and all the assets of the trust are located in the DAPT jurisdiction, the efficacy of a DAPT may be challenged under the Supremacy clause of the U.S. Constitution, under the applicable fraudulent transfer statute, or because the settlor retained some prohibited control over the trust.       

The only possible way of avoiding all these obstacles when planning with trusts is through the means of a foreign trust.  A foreign trust, per se, does not have any asset protection benefits.  The benefits come from the jurisdiction which governs the trust.  Several jurisdictions compete in the foreign trust arena and have drafted their trust laws to address all or most of the problems and issues discussed above.

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Advanced Tax Planning for Corporate Transactions

July 21st 2016

Jack and Jill have a hillside widget manufacturing plant.  Widget manufacturing being a highly competitive industry (everyone seems to manufacture widgets) and prone to lawsuits, Jack and Jill incorporate their business on the advice of their attorney.  J&J, Inc. elects to be a C corporation, as the two shareholders zero out its income through salaries.  Over the years, the competitors of J&J, Inc. begin manufacturing real products, leaving J&J, Inc. the major player in the widget market.  J&J, Inc.’s net income quickly rises from $1 million to $100 million.

At that level of earnings the shareholders are no longer able to zero out the corporation’s net income and now find themselves subject to a corporate level tax.  What can they do now?

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Asset Protection: The Basics

July 12th 2016

What is Asset Protection?

For the past several years asset protection has been one of the fastest growing areas of law.  It is also one of the most controversial – the goal of asset protection is to shield assets from the reach of creditors. 

Asset protection should simply be about structuring the ownership of one’s assets to safeguard them from potential future risks.  Most asset protection structures are commonly used business and estate planning tools, such as limited liability companies, family limited partnerships, trusts and the like.  Properly implemented asset protection planning should be legal and ethical.  It should not be based on hiding assets or on secrecy.  It is not a means or an excuse to avoid or evade U. S. taxes.  

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An Overview of Hungary: Its Legal System, Investment Climate & More

June 15th 2016

Hungary is an independent, democratic, constitutional country located in Central Europe. Through its membership of the European Union and its diplomatic ties, Hungary offers an entry to the whole market of the EU. With highly skilled and educated work force, inexpensive and high-quality raw materials, Hungary is strategically located within the EU; furthermore, it acts as an important transit hub between Western and Eastern Europe. 

The main strengths of the country are its low employment, excellent IT and communication infrastructure and low legal risk. In addition, Hungary is a member of the Customs Union allowing for significant savings in time and administration when trading with other member states. 

 

Learn more about Aliant Hungary and get to know our attorneys based out of that office. 

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A Primer on International Taxation

June 13th 2016

There is a multitude of issues that drive a cross-border business transaction.  Sale of shares versus sale of assets; statutory mergers; joint ventures; security for enforcement of representations and warranties; governing law and venue; earn-outs and holdbacks; restrictions on foreign ownership; due diligence; local customs; privacy and many other.  Most non-tax considerations are not country specific. They are driven by the economics of the deal and the negotiating position of the parties. When a transaction touches the U.S., tax has the center-stage.

From a U.S. standpoint, none of the other issues are as important as the tax consequences.  Taxation of an M&A transaction will very often determine the deal structure.  The parties can negotiate and agree to all the other terms, but tax will determine how the transaction is structured, what is possible and what is not.

For U.S. tax purposes, cross-border transactions are divided into two classes: inbound (foreigners doing business or investing in the U.S.), and outbound (Americans doing business and investing overseas).  The tax rules that apply to inbound and outbound transactions are entirely different.  We will examine both, and will then delve into the related subjects of pre-immigration tax planning (foreigners immigrating to the U.S.) and expatriation (Americans emigrating from the U.S.).

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Captive Insurance Companies – New Law Passed by Congress

February 01st 2016

Captive insurance companies were introduced into the Tax Code in 1986 and have remained one of the most popular income tax planning tools.  A “captive” is an insurance company owned by the policyholder or in some way related to the policyholder through common ownership.

Internal Revenue Code Section 831(b) allows an insurance company to elect not to be taxed on its premium income so long as the premium income does not exceed $1.2 million.  This allows policyholders to write off insurance premiums as ordinary and necessary business expenses, without including those premiums in the income of the insurance company.  If the policyholder and the insurance company are owned by the same person, there is a net tax gain.

Captives were introduced as a means of allowing farming (and other) cooperatives to effectively self-insure, without taxing the self-insurance arrangements or forcing the farmers to seek tax-exempt status for the insurance companies.  There are significant non-tax uses of captives, but they are primarily used by taxpayers for tax minimization.

The PATH Act (Protecting Americans from Tax Hikes Act) was passed by Congress on December 18, 2015.  It contained the first revision to Code Section 831(b) since the 1986 Tax Reform Act.  Pushed through by Sen. Grassley (his constituents are Iowa farmers), the revised Code Section 831(b) raises the captive premium ceiling to $2.2 million, but introduces two new alternative requirements.

Diversification Test: To make an 831(b) election, a single policyholder may not pay more than 20% of the aggregate premiums paid to the captive.  Related policyholders are treated as one.  This means that if George owns 10 farming corporations that all purchase casualty insurance from George’s captive insurance company, this test is failed.  This test is also failed if each of the farming corporations is owned by one of George’s ten kids.

Ownership Mirror Test: If the owners of the policyholder and the captive insurance company are spouses or lineal descendants (i.e., parents own the policyholder and kids own the captive), then the two entities must be owned in exactly the same way by the same persons (within a 2% margin).  This test is specifically intended to deter ‘creative’ estate tax planning by family businesses.  It is somewhat common to set up structures where the policyholder is owned by an older generation and the captive by the younger generation.  This creates a significant wealth shift from the older to the younger generation without incurring transfer taxes.   In the above example, George fails the ownership mirror test if he owns the policyholder and his kids own the captive.

One of the above two tests needs to be satisfied, but not both.  The diversification test is satisfied by something like a farming cooperative, or a group of independent business owners – each business is unrelated to the other.  It is not clear how some clients with existing captives insuring several related policyholders will satisfy this test.  It is possible that each captive will require access to at least four risk sharing pools to meet the 20% test.  Keep in mind that the diversification test is avoided if the ownership mirror test is satisfied.  If, in the earlier example, George owns the captive and each farming corporation, he meets the ownership mirror test and does not have to satisfy the diversification test.  George is effectively allowed to use a captive as income tax planning tool, but not an estate tax planning tool.

The captive’s world is still waiting on guidance from the IRS and an industry consensus as to these rules.  Some of the above tests are not well defined and their application is not clear.  It is also not yet clear how existing case law and guidance from the IRS fits with the revised Section 831(b).  Please stay tuned for that.

The new law for captives goes into effective January 1, 2017.  Those with existing captives should urgently consult their tax advisors to determine if their structures work, need an adjustment or should be dismantled.

Jacob Stein specializes in complex tax planning and has over ten years of experience structuring captive insurance arrangements. Please contact Jacob with any questions.

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April 15th 2015

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