Terry Coxon, co-editor of The Casey Report, is
president of Passport Financial, Inc., and for over 30 years has advised clients
on legal ways to internationalize their assets to optimize tax, wealth
protection and estate planning goals. Read here how you can take advantage of
a U.S. tax act and save a lot of money in the process…
Just
when you thought there was nothing more the U.S. government could do to
motivate you to ship your financial life offshore, they came up with another
one. And if you have a sizeable net worth, it’s a big one; you could
save your family $2.2 million in taxes by acting on the opportunity during the
next 21 months. A husband-and-wife effort could save twice as much.
Included in the 2010 Tax Act passed by Congress late
last year are 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 come from
exploiting those interim rules before they expire.
For
this year and next, you are granted a $5 million exemption from gift tax. If
your bank account can handle it, you could write a check today for $5 million
to someone in the next generation and incur no gift tax.
But
it’s a use-it-or-lose-it opportunity. Starting in 2013, the exemption
from gift and estate tax drops to $1 million, and the top tax rate on gifts
and estates rises to 55%. (That’s substantially a reversion to the
rules in effect in 2002.) So if you do nothing, you lose a free opportunity
to reduce your taxable estate by a net amount of $4 million – which, at
a 55% tax rate, means your family loses an opportunity to avoid $2.2 million
in estate tax.
Impediments
Estate
tax has always been an avoidable levy. 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 fact,
it just makes it easier, until the end of next year, to exploit the fact.
Even so, most people will let the $5 million opportunity slip by, as people
always do with estate-tax saving opportunities. Because I hope you won't be
one of them, let’s look at the practical impediments to effective
estate planning, the things that get in the way and eventually cost the
survivors so much in unnecessary tax.
Haven’t Gotten to It. Estate planning
is not the kind of topic that draws most people in. And it’s generally
about the far future, so it’s easy to tell yourself 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 done your estate planning
homework, you probably don’t want to reopen the matter. But if you have
a large estate, making that effort could save your heirs $2.2 million in
estate tax.
They’ll Waste It. The thought of your 16-year-old
grandson touring America on a $50,000 motorcycle likely does not live up to
your highest hopes for posterity. Many wealthy individuals hold back from
making gifts to younger generations because they don’t want to see the
money wasted. Concern that gifts would remove capital from the control of the
family’s most astute investor and cunning financial manager also
discourages gifts. But such concerns are easily dealt with by using a trust.
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.
I Might Need It. You don’t want to do such a thorough job of
estate planning that you plan yourself into the poorhouse. It’s
pleasant to contemplate the financial head start you can provide for future
generations, but not if you see yourself at the margin of the picture signing
up for food stamps.
Offshore Solution
Those
are the four reasons the government is able to collect billions of dollars in
otherwise avoidable estate taxes every year. There's a way to shrink every
one of those reasons and keep your family from eventually contributing to the
government’s annual take: use an offshore trust. Here's what happens
when you put an offshore trust at the center of your financial planning.
Haven’t Gotten to It. For reasons
I’ll touch on, an offshore trust is the optimal environment for estate
planning. But that’s really just a footnote.
An
offshore trust is a cornucopia of benefits you can enjoy now. It 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
U.S.
Because
those benefits begin right from the start, they counter the psychology of
procrastination. And once you’ve established an offshore trust to gain
those benefits, it only takes about 5 minutes of your attention to use the
trust to capture the $5 million advantage I’ve been discussing.
Already Did It. 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
U.S. tax system. Distributions to your survivors will be reportable and
partly taxable, but no one will be subject to U.S. tax on earnings the trust
accumulates. The trust needn't be in anyone's taxable estate ever again. And
no one will have a U.S. reporting obligation for the trust itself. That's as
out of town as money can lawfully get.
They'll Waste It. 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.
I Might Need It. Here is where an offshore trust shines for anyone who
wants to exploit the $5 million opportunity.
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 U.S., the money
in the trust probably will remain in your taxable estate, because courts in
the U.S. generally will tap into such a trust to satisfy your creditors.
By
the standards of U.S. 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 U.S. from lawsuits against the
grantor in federal courts. The money is still available to at least some of
the grantor's creditors, so it is still in the grantor's 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.
[The
editors of The
Casey Report – among them investing legend Doug Casey –
leave no stone unturned to inform investors of the profit opportunities
hidden in today’s volatile markets. While the U.S. dollar is losing
more of its value every year and the economic crisis continues unabated,
there are strategies to stave off the slow drip-drain on your bank account. Read
the details here.]
Terry Coxon
The Casey Report
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