American foreign trust tax savings and asset protection, The

Attorney-CPA, The, 1998 by Eber, Alan, Double, Peter

Alan Eber & Peter Double*

Introduction

This Article is designed to introduce you to the use of offshore trusts by United States citizens and residents who: (i) want to avoid paying income tax on investments, (ii) want to pass their assets to their heirs without estate or generation skipping tax, (iii) want to sell their corporation and other appreciated assets without having to pay capital gains tax,1 and (iv) want to protect their Assets.2

There are three types of foreign trusts:

The Foreign Grantor Trust ("FGT").

The FGT is established ("settled") by a non-U.S. citizen or resident for the benefit of a U.S. citizen or resident who is closely related to the non-U.S. citizen or resident-Settlor.3 Income and principal can be received by the U.S. beneficiary tax free during the foreign Settlor's lifetime. As with all irrevocable discretionary trusts, the FGT provides asset protection.

The Foreign Asset Protection Trust ("APT").

The APT is established by a U.S. citizen or resident for his or her benefit, and upon his or her death, other U.S. beneficiaries. The APT is designed solely for asset protection - it is tax neutral. The APT is treated for tax purposes as if it is a domestic U.S. grantor trust. It is usually irrevocable for a period of time on the expiry of which the trust assets are either returned to the Settlor, or the APT is extended for an additional period.

The Foreign Non-Grantor Trust.

The NGT is settled by a U.S. citizen or resident for the benefit of persons other than him or herself.' The NGT may not have U.S. beneficiaries until, at a minimum, one tax year after both Settlors' death. The NGT like the APT provides asset protection, however in addition it has U.S. income and estate tax benefits. The Internal Revenue Code ("IRC") confers severe penalties upon the Settlor if he or she should ever receive any benefit (as a "beneficiary") from the trust. The NGT is designed to avoid IRC(sec)(sec) 672 - 679 (and therefore, it is taxed in the same fashion as a nonresident alien - not at all).5 The NGT is used for long term planning to enable offshore assets to be accumulated and passed on to a younger generation with a considerable reduction in taxes paid.

This article discusses the Foreign Non-Grantor Trust NOT the Foreign Grantor Trust or the Foreign Asset Protection Trust. Hereinbelow we give an Overview of the Non-Grantor Trust.

Non-Grantor Trust - Basics

The NGT is designed so that its assets, upon the Settlor's death (or, if married, the Settlor and spouse's death), go to the Settlor's heirs in much the same way as they would if a living trust was used. The primary differences are that:

a. The NGT must be irrevocable. The Settlor must part with the assets which are transferred to the NGT forever. There is no ability to revoke the NGT and repossess its assets;

b. The trustees of the NGT should not be U.S. citizens or residents;6

c. The beneficiaries, (heirs of the Settlor) cannot receive any distributions (income or principal) from the NGT until, at a minimum, one complete U.S. tax year after the death of the survivor of the Settlor and spouse. The Settlor, spouse and heirs, however, may use the NGT assets (see below).

The NGT is Irrevocable and Discretionary.

This provides the Settlor asset protection. If a creditor attempts to recover assets from the Settlor after they were transferred to the NGT (at a time when the Settlor was neither subject to creditor claims, nor rendered insolvent by reason of the transfer), the creditor will fail. The discretionary nature of the trust allows this irrevocable trust to be "modified" by the Settlor at any time.

Trust Protector.

The Settlor can appoint a Trust Protector whose duty is to see that the Trustees carry out their obligations in the proper manner. If the Trustees fail to do so, the Protector can remove and replace them.' We have not experienced a single case where the Protectors have had to replace a Trustee.

Overview of the Offshore Structure

The NGT capitalizes and owns one or more offshore corporations. Corporate shares are usually registered to clearly establish ownership of the offshore corporation.8 There are many technical reasons for utilizing a foreign corporation. Suffice it to say that: (i) an NGT, as a trust should not actively carry on a business, and (ii) corporations held by NGTs are the most efficient vehicles for obtaining both U.S. tax benefits and asset protection.

The NGT has no U.S. beneficiaries during the lifetime of the Settlor and of any spouse of the Settlor.9 Therefore the corporation has no U.S. shareholders and is not a Controlled Foreign Corporation, Passive Foreign Investment Company, Foreign Personal Holding Company, etc.

Initial Corporation and Trust Considerations Who Will Be The Trustee of the Trust and Nominee of the Corporation?

The trustee of the NGT and/or the nominee officers and directors of the corporation can be a small, or multinational firm or bank. The decision rests on the Settlor's needs, comfort zone, types of activities anticipated to be undertaken by the NGT and the corporation, the time zones applicable, the personnel that will be handling the trust and corporate assets, and the personalities involved. The structure will be in existence for a long period of time. Long term relationships are important, and the Settlor must be happy with the relationship.