Financial Resources Group Ltd. is a Massachusetts corporation devoted to providing international tax and business planning to wealthy individuals and corporations who wish to minimize their tax exposure and to protect their assets from capital gain and estate taxes, creditors, litigation judgements and divorce settlements.
The U.S. tax law has now become confiscatory. Ordinary income taxes peak at a level of 39.6%. This amount combined with social security taxes and state income taxes put the burden on the highly compensated or wealthy person or corporation at over the 50% level. Estate taxes are now maximized at 55%.
As a consequence, wealth is seeking a more benign climate for wealth accumulation and for the preservation of capital. Major news publications comment on this flight capital and infer that the volume of capital exodus is reaching significant proportions.
There are many "experts" who advise on how to flee the U.S. but most recommend programs that rely upon non-reporting of the flight and hope that the IRS does not track the funds and question their legitimate transfer. The IRS reserves the right to tax U.S. residents or citizens on any income earned anywhere in the world. Should you choose to change residence but not citizenship, the IRS reserves the right to tax you for a period of ten years after the change of domicile!
Financial Resources Group Ltd. has operated in the international planning field since 1976 when the Tax Reform Act of 1976 attempted to "corral" the wealth in the U.S. and to restrict the flow of funds into offshore tax free jurisdictions. While effecting transfer of assets to foreign climes, we have complied with the Internal Revenue Code with respect to non-taxable transfers of property into non-taxable, non-reporting trusts or corporations.
As a consequence, we are able to advise our clients on the most efficient use of assets and income while minimizing taxes and possible unreasonable confiscation.
Should you wish to learn more about our techniques and successes, please feel free to call our President, Peter J. Peggs, at any time.
INTERNATIONAL TAX PLANNING
CHOICE OF JURISDICTION
When making the decision to utilize the tax advantages offered by an "offshore purpose trust" the choice of where to locate the trust and corporation is important. Several of the well known jurisdictions have signed an "exchange of information" treaty with the US. Recently, others, under the supervision of Great Britain, have just been told that a "Company Formation Agent" must be used to form an exempt corporation and all information on beneficial ownership, directors and officers of corporations established in their jurisdiction must be recorded and on file with the CFA and available to the Registrar in the jurisdiction. This information is not available to the public but could be passed on to the UK and the US. Such information must be available to any "regulatory or criminal investigation, whether by the local authorities or, when permitted by law, by an overseas authority".
The jurisdictions covered by the UK edict are:
Bermuda, The Caymans, The British Virgin Islands, Turks & Caicos, Gibraltar, Guernsey, Jersey, Hong Kong and Isle of Man.
Those jurisdictions that have signed the exchange of information treaty are:
Bermuda and Barbados.
To make the selection one must first be comfortable with the stability of the region. This is followed in importance by the sophistication and capability of the financial infrastructure. Last, but not least, is the personnel with whom you would be working. Obviously, confidentiality of your personal situation should not be available to the US authorities unless they have a sustainable claim of criminal fraud.
In the event that you do not wish to have information potentially available to the UK or US authorities, your choices are now somewhat circumscribed. The island of Nevis is emerging as a significant force in the field and is independent. The Bahamas are independent but suspect of being "in the pocket" of the IRS. Panama is emerging from their "dark ages" and becoming a viable jurisdiction again despite the potential for the US to apply pressure to the government.
Obviously, one can have business activities in any of the jurisdictions without revealing the details of the owners of the foreign corporation or trust that is engaged in that business activity. This enables the use of Bermuda to act as custodian or broker for securities. BVI can be used for the enforcer corporation. However, we recommend the use of Nevis as the primary site for trust and corporation formation.
THE FOREIGN PURPOSE TRUST
Financial Resources Group Ltd. has been advising its clients as to the usage of "foreign trusts" since 1976. FRG claims to be ahead of the changes in US Tax Law and consequently has anticipated the changes to the Internal Revenue Code that resulted from the Small Business Job Protection Act and the Health Insurance Portability and Accountability Act.
These new Acts require reporting from a) US grantor foreign Trusts, b) US beneficiaries of distributions from any foreign trust, c) receipt of gifts exceeding $10,000 in any one year. The transfer of funds to a foreign trust by a US person is not considered funding if the transfer takes place at fair market value where any gain was recognized in the year of transfer. US beneficiaries of non-grantor foreign trusts will suffer an accumulation tax, when a distribution occurs, which is determined at the IRS underpayment interest rate and compounded annually for the period in which the accrual occurred.
FRG has used the foreign "purpose" trust format for the last few years to avoid any of the above reporting or taxation requirements. A "purpose" trust is based in the UK law and was initially devised to enable family members to use the funds in the trust to acquire burial plots. Its usage has since been expanded but its purpose must be considered to provide a social or community benefit. It has a finite life and a minimum charitable funding amount. There are two controlling factors; a) The "Protector" who ensures that the trustee is fulfilling the purpose of the trust and who can terminate the trust prior to its expiration date. When the trust is terminated, the Protector has the responsibility to appoint remaindermen for the funds remaining in the trust or to appoint another trust with specified beneficiaries. b) The authority to change the Trustee to any foreign person but not to themselves or to change the jurisdiction of the trust. These last powers can be assigned to a US person if so required but we frequently use a foreign fiduciary to handle that task. The IRS has conceded that the power to change the Trustee and jurisdiction are not sufficient to make the protector a grantor of the trust (Rev. Rul. 95-58).
FRG recommends that the Protector be a foreign fiduciary corporation (Bank, Trust Company or Law Firm) who will be responsive to the US counsel of our client for direction. In the event that the Protector resigns or dies, the Trustee can appoint a new Protector as long as he is not a US person. The average charges for the Protector function are $1,000 per year for the services that it renders.
In order to meet the requirements of its purpose an unaffiliated Nevis corporation forms a new corporation in the same jurisdiction as the Purpose Trust. Its founder provides the new corporation with working capital. It is then contributed to the Purpose Trust and becomes an underlying company of the trust. The founder retains preferred stock in the underlying company. That preferred stock will share in the net profits of the new corporation when they exceed a specified amount. The underlying company may enter into any transaction or business and is available to receive funds from the US person in exchange for a deferred private annuity. (Rev. Rul. 78-356) It may also conduct international business for the US person.
The Purpose Trust will form a corporation that has the characteristics and function of a Foundation. This entity would be responsible for the purpose of the trust and could have a gift committee consisting of US persons who would have knowledge of the value of the trust assets and could recommend the usage of those assets. The foundation would have a Board of Directors, one of whom would be a US specialist in the purposesof the Foundation. This US person would also be on the Board of the Trust's underlying company.
The terms of the Purpose Trust would limit the Protector, when the Trust is terminated, to being able to distribute no more than 49% to U.S. persons. The remainder would go for the benefit of the Foundation.
The members of the gift committee could be recompensed for their efforts and could also have their expenses reimbursed by the foundation. The foundation could also make gifts to US persons these would be reportable but may not be taxable.
This mechanism is easily understood by US tax counsel and meets all US tax law with respect to foreign trusts and corporations such that no reporting or taxation is required. FRG has a "more likely than not" tax opinion letter from a prestigious law firm which is prepared to provide such an opinion to a client if requested. At a cost of 1/2% of the assets transferred to the Corporation.
FRG started its offshore business in Bermuda and changed jurisdictions to the British Virgin Islands when the professionals were charging $400 per hour for work that we were completing. We have used the US Virgin Islands for our insurance company due to benefits offered by USVI being an ERISA State and offering a 20-year tax holiday for the company. We also use Nevis in the West Indies as we are able to influence emerging law to be beneficial to our clients.
There has been a recent edict from the British Foreign Office, which requires that each jurisdiction having UK oversight will have any trust, or international Business Company declare its owners, beneficiaries or transferors to a local agent. This means that even if bearer shares were used, the owner or beneficiary of those shares would be available to the British Foreign Office. This means that there is a covert pipeline to the US IRS. Bermuda is already suffering such requirements and is chafing under the requirement.
Henceforth FRG will use Nevis, the Bahamas and similar jurisdictions for its operations.
PRIVATE ANNUITY DESCRIPTION
A PRIVATE ANNUITY is described thus:
An exchange of property between two "persons" whereby the seller passes title to property to the buyer in exchange for a promise from the buyer to pay an annual amount to the seller throughout the lifetime of the seller.
This is similar to an installment sale but is open-ended as the transaction is completed only when the seller dies. The seller retains no interest in the property transferred and remains a general creditor of the buyer.
This "private annuity" is acknowledged by the Internal Revenue Service as an annuity that is issued by someone other than a commercial insurance company. The Service has published tables for the calculation of the amount of the regular payment, whether it is annual, quarterly, monthly or daily. These tables are dependent on the age of the seller and the current IRS approved interest rate.
The amount of the payment is also dependent on the value of the property transferred and the IRS specifies that this be fair market value. Should the discounted present value of the annuity be less than the fair market value of the property, the IRS will treat the difference as a gift with possible gift tax consequences.
The annuity is similar to a commercial annuity in that the annuity payments can be made for the life of the annuitant with no further payment due to anyone upon the death of the annuitant. The annuity can also be paid on a joint and survivor basis. It can be for a period certain with specified payments being completed to the annuitant over a specified period of time and if not completed prior to his death will be completed to a named beneficiary.
The taxation of this sale of property is interesting!
The annual payment, when received, is broken down into three parts for tax purposes. The first portion is return of capital, which is non-taxable. The second part is capital gain, which is taxable up to a maximum of 28% of the gain. The last and remaining portion is treated as interest income and is taxable at ordinary income tax rates with a maximum of 39.6%
When the seller dies and if the annuity is a life only annuity with no named beneficiary, none of the value transferred at sale is includable in the estate of the seller.
The only IRS reporting requirement for a private annuity is when the annuity payments are received!
The tax treatment of the buyer is equally interesting!
When the buyer receives title to the property, i.e. at the time of the transaction, the buyer can sell the property at fair market value without taxation. Gain would be recognized if the sale price was higher than the discounted present value of the annuity. The IRS would value the annuity at the time of purchase as the present value of the projected stream of annual payments through the life expectancy of the annuitant i.e. present market value.
Technically, the buyer does not know the basis in the property until the seller dies. At that point, the sum of all payments made would be the buyer's basis in the property. Hence the buyer may have some beneficial treatment of the sale of the property prior to the death of the seller.
A Private Annuity can be used between individuals where it is frequently beneficial for transfer of assets between generations in order to avoid estate taxes at death of the seller. It can be used between an individual and a trust or corporation whereby the property can be set-aside for future benefit of other family members.
As with any commercial annuity, the Private Annuity payments starting date can be deferred at the request of the seller. The seller may choose any starting date to meet their future financial needs. This also means that taxation of the annuity payments can be deferred until the payments commence. The magnitude of the annual payments depends upon the length of the deferral and the prescribed IRS tables provide the method of making the calculation.
Should the annuitant die prior to the commencement of the deferred annuity payments and the annuity is a single life annuity with no specified beneficiary, the purchaser of the property retains the property and has zero basis in it. None of the value of the property is includable in the estate of the insured. The Private Annuity is regulated under Section 72 of the Internal Revenue Code and is treated in the same fashion as a commercial annuity.
Recent regulations relating to "Original Issue Discount" debt instruments (Sec. 1271) would restrict the use of the deferred private annuity by taxing the interest imputed by the IRS on the deferral growth. This applies to annuities that have a guaranteed payout equating to debt. However, the regulations specifically state that, a private annuity where the amount received by the seller is based upon the lifetime of the issuer of the annuity, which contains no loan provisions and will be paid for the full lifetime of the annuitant without change in payout value is not subject to the new regulations.
Reporting to the IRS of the private annuity transaction begins only as annuity payments are received.
The advantages of the PRIVATE ANNUITY can be summarized as follows:
- Estate taxes are eliminated on the property exchanged for the Private Annuity when a single life option with no period certain is chosen.
- A deferred single life only Private Annuity defers all taxes until the payments are initiated.
- Immediate sale of the property by the buyer without taxation as long as the Annuity is valued at fair market value.
When used in conjunction with a foreign grantor foreign trust, and a foreign corporation, the estate and income taxation effects are quite dramatic.
A unique tax planning tool, the private annuity is largely ignored by the professionals as the transaction is unsecured and the buyer could take the property and be unable or unprepared to make payments. With intelligent choice of buyer, the Private Annuity becomes a very sophisticated method of tax avoidance.
IRS publications No. 1457 & 1458. 2Rev. Rul. 72-438, 1972-2 C.B. 38 Rev. Rul. 72-438, 1972-2 C.B. 38, Sec.9 4Sec. 1271 Regs effective 2.9.98 5CA9(Sneed, J.); Stern v. Comr., No. 83-7177, 11/15/84 6USTC(Sterrett, J.); Fabric Estate v. Comr., No. 17536-81, 83 T.C. No. 50, 12/11/84 7Rev. Rul. 78-356, 1978-2 C.B. 226
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
