This week, the Obama Administration released its report detailing the myriad of changes coming to the tax laws, many of which are slated to take effect by the end of this year. This announcement should come as no surprise, as we have been warning of this coming tidal wave of change for the past two years.

Under the guise of the fair and equal treatment of millionaires and billionaires, the Obama Administration is proposing to substantially alter many key areas of the tax code, with many changes poised to prevent affluent taxpayers from utilizing several of the traditional wealth transfer planning structures.

This is not intended to be a complete review of the changes, but it will highlight the important changes that will certainly diminish the wealth transfer opportunities presently available.

One of the Obama Administration’s 2013 Revenue Proposals would limit the duration of the generation-skipping transfer (“GST”) tax exemption. The GST tax is imposed on transfers that skip a generation, for example, transfers from a grandparent to a grandchild. Upon the transferor’s death, to the extent distributions are made from the trust to the transferor’s grandchildren or other skipped persons, the GST tax will be payable on the value of the transfer at the highest estate tax bracket applicable in that year. Under current law, a person has a lifetime GST tax exemption ($5,120,000 in 2012) that can be allocated to all gifts in trust.

This is important because many states have repealed or limited the application of the Rule Against Perpetuities, so that trusts may continue forever (Florida allows trusts to last for up to 360 years). These trusts, commonly referred to as Dynasty Trusts, are a popular estate planning technique. By placing assets in a Dynasty Trust and allocating the GST exemption to those gifts, the assets can be held in trust without being subject to any further gift, estate, or GST taxes from generation to generation. However, the new Revenue Proposals would tax a trust on the value of all of its assets at the proposed new 45% estate tax rate every 90 years.

Fortunately, a trust created before the enactment of the new law will be forever exempt from the new GST tax. The proposed change to limit the GST tax exemption, coupled with the Obama Administration’s additional proposal to reduce the GST tax and gift tax exemptions back to their 2009 level of $1,000,000 (as compared to the $5,120,000 available this year) creates a sense of urgency for anyone thinking of making a gift in trust during the remainder of 2012. Such gifts must be made prior to the enactment of the proposed legislation, which may occur by the end of this year.

In summary, such trusts formed and funded after the implementation of the tax change would be taxed every 90 years. On the other hand, a trust created and funded before the enactment of the new law will be forever exempt from the new GST tax. Therefore, we recommend that you consider making a gift in trust, even if it is of a small amount, as soon as possible to take advantage of having a trust that is exempt from the proposed 90 year tax on Dynasty Trusts. Most importantly, once a GST tax exempt Dynasty Trust is in place, it can be used as a platform for future estate planning without having to worry about exposing the trust to an estate tax every 90 years.

Furthermore, with the Obama Administration’s proposal to limit the gift tax and GST tax exemptions to $1,000,000, anyone considering gifts in trust in excess of $1,000,000 should also take advantage of this limited opportunity available for the remainder of 2012.

If you have any questions regarding this and need assistance in implementing your gift, please contact Susan Jerome, Director of Client Services, to schedule a no charge consultation.  (susan@jmvlaw.com)

I will put out another post summarizing additional important and impactful suggested tax law changes under the Obama Administration’s Revenue Proposals.

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(1) establishment of a foreign asset protection trust by the company itself and

(2) settlement of a group foreign asset protection trust for a business with multiple business owners or associates.

Entity Asset Protection Trust

In earlier posts, I have described the design and benefits of forming a foreign asset protection trust (APT), usually in the context of protecting one’s individual assets. The Cook Islands is a jurisdiction with very favorable trust laws, providing significant protection from a Settlor’s creditors even where the Settlor is also the beneficiary of the trust. A business can also form an offshore APT, which we call an “entity asset protection trust” (EAPT), and name the business entity as the sole beneficiary of the EAPT. However, the EAPT can be designed to allow direct distributions to the business owners so long as the distributions are in the best interest of the business and are made “on behalf of the business.”

If properly formed, the EAPT is considered a grantor trust for income tax purposes, meaning that the income from the trust assets is attributed to the company and not to the EAPT.

Furthermore, contributions by the company to the trust will not constitute a “completed gift,” thus avoiding any gift tax issues. The EAPT should be established for a business purpose, such as forming a separate investment vehicle for trust assets and to preserve those assets against unforeseen liability, so that the trustee may distribute assets back to the business and to the business owners without incurring individual tax liability for the owners or for the trust. Ideal assets to be held in the EAPT are the company’s liquid assets including its retained earnings and intellectual property, i.e., patents, trademarks, licenses and other similar assets.

If the trust is established for the personal planning needs of its owners, any distributions from the business to its owners will likely trigger negative income, gift, and estate tax consequences. Business owners should carefully document the “business purpose” by describing it in the company’s minutes, including the company’s beneficial interest in the trust as an asset on the company’s financial statements, and notating each distribution to a business owner as one made for the direct benefit of the company.

In addition to being the Settlor and sole beneficiary of the trust, the business can also be the trust protector. As protector, the business would have the authority to veto trustee investment and distribution decisions, allowing the business to still retain some control over the trust assets. Moreover, naming the company as the trust protector offers further evidence that the trust was created for the benefit of the business rather than for the owner’s personal benefit. Finally, the EAPT can also be designed so that these protective provisions only apply so long as the business is controlled by persons that acquired his/her ownership interest through a bona fide voluntary sale or gift from a previous owner.

Group Asset Protection Trust

Another option to consider is the group asset protection trust (GAPT). This structure is particularly useful for business owners who share ownership with multiple individuals, such as is often the case with CPAs, lawyers, physicians and consultants, all of whom may be subject to future unforeseen liability claims. The GAPT is a very cost effective way to reduce the expense to each owner to create effective “firewalls” that insulate certain assets owned by the business owner and his or her family. With a GAPT, instead of the APT having a single settlor, each participating owner is a settlor with the other owners in a common or group APT. The GAPT will have a sub-APT created under the master GAPT document for the benefit of each participating group member. That way, each owner of the company can place his or her selected assets in the GAPT and enjoy the protections afforded by the APT just as though the APT was established for the individual without other members.

The downside to using a GAPT is that each Settlor of the GAPT is limited to using the same method for distributions of the trust’s assets to their intended heirs, rather than having the ability to use the customized dispositive provisions associated with individual APTs. However, at any time, the Settlor of a GAPT may split off from the GAPT and convert his or her sub-trust into a personal APT (such as when the level of assets held in the sub-trust becomes large enough to warrant formation of an individual APT). In this litigious world, the GAPT may be a very cost effective structure to provide effective asset protection planning at a very reasonable price tag.

Contact Susan Jerome, Director of Client Services, for further information (susan@jmvlaw.com or 800-521-0464).

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What is the employer’s obligation with respect to employee meal and rest periods?  Must an employer force its employees to take these breaks, or is it enough to make them available for employees who are interested in taking them?  An incorrect answer can be expensive.  California courts have seen a marked increase in employee class actions alleging meal and rest period violations.  Employees seek an extra hour of pay for each day that they miss a meal period or a rest break, along with miscellaneous penalties, attorney fees, and interest, going back three to four years.

Recent oral arguments before the California Supreme Court raise the question, is it the employer’s duty to “provide” or “ensure” a meal break.  The decision if mandated retroactively rather than prospectively could expose California employers to a new onslaught of lawsuits on this issue as well as potentially huge liability.   Whatever the outcome, the Brinker case will be one of the most important wage and hour cases in California’s history.

By way of background, in the San Diego case of Brinker v. Superior Court (Hornbaum), the plaintiffs have argued that an employer must affirmatively ensure that their employees take the required meal periods, while defendants claim that the employer’s duty is only to provide the employee the opportunity to take the meal period free of any control by the employer.  After much legal wrangling, most of the case rests on the Court’s interpretation of the Labor Code, which indicates that the employer is to “provide” a meal period.

During oral arguments, the plaintiff argued that under the “ensure” standard, employers would be justified in disciplining or even firing employees who did not follow instructions on taking their meal breaks.  The Court seemed hesitant to adopt a standard that could lead to this outcome and appeared to favor a standard that provided flexibility, leaving the choice up to the employee as to whether or when they would take their meal break.

The most insightful comment from the bench on this issue pointed out that, if the hallmark of a meal period is the employer suspending control over the employee, then the employee should be able to choose for themself whether to take the meal period at the designated time.  Overall, the tenor of the questions suggested that the Court is in favor of a standard that leaves the employee some flexibility in deciding whether to take their meal breaks.

In a relatively rare circumstance, the California Supreme Court accepted a post-argument brief concerning the “rolling 5″ issue – whether meal periods must be provided for every 5 consecutive hours of work, e.g., in an 8-hour shift, if an employee takes a meal period after 3 hours, then works a further 5 hours after the meal period, must a second meal period be provided.  Also, the brief addresses whether the Court’s decision will apply prospectively or retroactively.  If applied retroactively, the statute of limitations for meal period violations is 3 years, but challenges could also be filed under California’s unfair competition law, which has a 4-year statute of limitations.

The California Supreme Court is required by court rule to issue decisions 90 days after they are submitted.  The Court previously submitted the Brinker case for decision after the November 8 oral argument, which is why most expected the final ruling by early February 2012.  On December 14, the California Supreme Court vacated the November 8 submission of the matter based on its earlier decision to allow further briefing on the issue of whether the eventual decision will operate prospectively or retroactively.  The Court has now ruled that additional briefing will be completed by January 13, 2012, and the matter submitted at that time.  As a result, the Court should issue its decision by April 12, assuming no additional delays.

Recognizing the potential for significant liability exposure at the employer level, check with your insurance broker to determine if you have coverage.  And, by all means, institute a rationale and effective asset protection structure at the company level in case a catastrophic lawsuit besets your company.

Many taxpayers or their CPAs, who are already filing the FBAR return, may not realize they may also be required to file this Form 8938.

This blog post is intended to briefly describe the eligibility requirements and to recommend that you contact your CPA or tax compliance professional for further information, as failure to file the report carries significant penalties.  Quoting from the IRS’ website

“Do I need to file Form 8938, Statement of Specified Foreign Financial Assets?

Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.  Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010.  For most individual taxpayers, this means they will start filing Form 8938 with their 2011 income tax return to be filed this coming tax filing season.

Upon issuance of regulations, FATCA may require reporting by specified domestic entities.  For now, only specified individuals are required to file Form 8938.

If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold.  If you are required to file Form 8938, you do not have to report financial accounts maintained by:

• a U.S. payer (such as a U.S. domestic financial institution),
• the foreign branch of a U.S. financial institution, or
• the U.S. branch of a foreign financial institution.

Refer to Form 8938 instructions for more information on assets that do not have to be reported.

You must file Form 8938 if:

1. You are a specified individual.

A specified individual is:

• A U.S. citizen
• A resident alien of the United States for any part of the tax year (see Pub. 519 for more information)
• A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
• A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident)

AND

2. You have an interest in specified foreign financial assets required to be reported.

A specified foreign financial asset is:

• Any financial account maintained by a foreign financial institution, except as indicated above
• Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely:
• Stock or securities issued by someone other than a U.S. person
• Any interest in a foreign entity, and
• Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

Refer to the Form 8938 instructions for more information on the definition of a specified foreign financial asset and when you have an interest in such an asset.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

• Unmarried taxpayers living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
• Married taxpayers filing a joint income tax return and living in the U.S.: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
• Married taxpayers filing separate income tax returns and living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
• Taxpayers living abroad.  You are a taxpayer living abroad if:

You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or

You are a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you are a taxpayer living abroad you must file if:

You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Refer to the Form 8938 instructions for information on how to determine the total value of your specified foreign financial assets.

Reporting specified foreign financial assets on other forms filed with the IRS.

If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938.  However, you must identify on Part IV of your Form 8938 which and how many of these forms report the specified foreign financial assets.

Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.”

Conclusion:  All taxpayers are presumed to know the law, no matter how confusing or obtuse.  If you have any questions or concerns as to whether this new reporting requirement applies to your transactions, call your tax accountant or us and we will try to help you sort this all out.

In a June 2003 ruling (Abacus v. Esteem Settlement), the Royal Court in Jersey upheld a trust against an attack by creditors of the settlor-beneficiary. The trust in this case is a discretionary trust, with an independent trustee, whose beneficiaries are Sheikh Fahad Mohammed Al-Sabah (the trust settlor) (“Sheikh Fahad”), his wife and their son. Attempting to collect on an $800 million judgment against Sheikh Fahad (for fraud, no less), Plaintiff Grupo Torras SA (“GT”) sought to reach the assets of the trust on five separate theories, yet proved to be unsuccessful on each theory. In what proved to be a key factual determination for Settlor, the court determined that the trust funds in question were “clean assets,” i.e., assets that were validly contributed to the trust well before GT became a creditor of Sheikh Fahad. Since this ruling deals only with “clean assets,” fraudulent transfer was not at issue. Under accepted principles of Jersey common law, a self-settled spendthrift trust cannot be set aside by creditors—unless it was initially set up as a fraud against creditors.

First, GT argued that the trust was a sham. The Court, applying the “classic definition” of sham, ruled that the trust was not a sham, because there was no “common intention” between the trust parties (i.e., settlor and trustee) to create the appearance of legal rights and obligations that are different from the intended rights and obligations. Importantly, the Court held that Sheikh Fahad’s intent alone, as trust settlor, was insufficient to make a sham determination. That is, if a trustee enters in good faith into a trust with the intent to exercise its fiduciary powers and abide by the trust terms, then the trust is valid.

Second, GT contended that the trust was void because Sheikh Fahad retained “dominion and control” over the assets. Citing previous Jersey case law, the Court held that dominion and control by a settlor requires a retention by the settlor of the ability to dispose of the property “without consulting anyone else or without the consent of any other person.” Further, the Court surmised that a settlor may retain control through the language of the trust deed or through a secret arrangement with the trustee in spite of the trust language (i.e., a sham). Finding neither situation to in this case, the Court rejected GT’s second argument.

It is important to note that the Court found that Sheikh Fahad did not retain dominion and control, even though numerous transactions were made at Sheikh Fahad’s request and no such request was ever refused. In this regard, the Court stated, “In our judgment trustees who consider a discretion in good faith…cannot be said to be under the substantial or effective control of the requesting settlor. … It cannot be sufficient simply to show that, in practice, trustees have gone along with a settlor’s wishes [because this result could be] consistent with the trustees having exercised their fiduciary responsibilities properly [by] having decided that each request of the settlor was reasonable and in the interests of one or more beneficiaries.”

Third, GT argued that the trust’s veil should be pierced, because the trust was administered as though the assets were held in “bare trust” for Sheikh Fahad. The Court rejected this argument, holding that a valid trust should not be pierced provided the trustee has not abdicated its fiduciary duties. Again, because the trustee acted as a fiduciary, the fact that Sheikh Fahad’s requests were always honored was insufficient to prove GT’s contention of a “bare trust”.

Fourth, GT argued that Sheikh Fahad should not continue to benefit from the trust following his fraudulent conduct—i.e., that the trust should be invalidated as a matter of public policy. Because the trust was validly created with “clean assets,” the court declined to invalidate the trust on public policy grounds.

Finally, GT sought to impose upon the trust a remedial constructive trust because of Sheikh Fahad’s misuse of the trust coupled with his substantial control. Again, because the trust was funded with “clean assets,” the court refused to apply a constructive trust (a notion foreign to Jersey law), because there had been no unjust enrichment of the trust at GT’s expense.

I believe that this case illustrates that, if formed and maintained properly, international APTs can, indeed, be quite effective. First, assuming no fraud against creditors at the trust’s inception, it can prove quite difficult to reach the assets of international APTs. Funding an international APT with “clean asset” and prior to any claims of creditors will go a long way (if not prove definitive) on the issue of fraud. Second, having an independent fiduciary who respects the trust agreement is vital towards upholding the integrity of a trust. In the illustrated case, even though the trustee always honored Sheikh Fahad’s requests, the mere fact that trustee did so in good faith was sufficient to deem the trust valid. Finally, even though Sheikh Fahad had defrauded GT out of $800 million, the Court refused to let these “bad facts” color its judgment, especially regarding GT’s public policy and unjust enrichment arguments—which I believe speaks volumes about judicial attitudes, in general, towards trust settlers in these trust-friendly jurisdictions.

With the advent of the Internet and websites offering low cost incorporation services, many business owners will seek these lower cost alternatives to hiring a business lawyer and can run into trouble. Generally, these online “do-it-yourself” services provide only the most basic incorporation services, often without a lawyer involved, which initially may appear to be saving money for small start-up businesses. However, as the business becomes successful, these business owners fail to “upgrade” to a business lawyer skilled in maintaining their corporations and adopt the necessary corporate governance and procedures to ensure the corporation remains in compliance.

Since the 1800s, the corporation has been used as a means to shield its owners, or shareholders, from personal liability if the corporation loses a suit brought against it and there are insufficient corporate assets to satisfy the judgment. This “veil,” as it is often referred, may only be available if the corporation is (1) properly formed and (2) properly maintained according to the corporate statutory requirements imposed by state law. This issue of Client Alert will explore the “maintained” aspect of the corporate veil.

In all states, a corporation’s officers must adhere to a set of procedures in order for the corporation to be recognized as a bona fide entity. These requirements are not particularly onerous or difficult to meet, but they must be fulfilled every year to prevent running afoul of the law and risk the corporate veil being pierced as a result.  Such formalities include, but are not limited to:

All too often, we find that the business owner fails to properly maintain these aforementioned corporate requirements through neglect, oversight, or naivety. If the corporation is ever sued, the first thing the plaintiff’s lawyer will do is subpoena the corporation’s books and records, looking for any reason to assert that the corporation is not properly maintained. If improper maintenance can be established, the corporate veil may be “pierced,” exposing the shareholders to liability and providing the plaintiff’s lawyer with another party with deep pockets to include in the lawsuit.

In addition to the risk that the corporate veil may be pierced, the failure to follow certain corporate formalities could give rise to the IRS to disregard your form of business entity resulting in unintended income tax consequences for the company and its shareholders. For instance, the IRS requires that a corporation adhere to specific operational formalities in order to be recognized as a corporation for income tax purposes. A business owner’s failure to properly maintain the corporation could result in the IRS disallowing the corporation’s deductions and imputing its earnings and profits to the shareholders, resulting in the under reporting of income. If the deductions are eliminated, the distributions to the shareholders will be subject to double taxation — once at the company level and again at the shareholder level.  In short, the consequences of falling short on these corporate requirements can be catastrophic for the shareholders.

Investors – Be Cautious: Many of our readers are investors in private equity and small businesses. More often than not, the investor will have no idea if the corporation is properly maintaining the books and records and complying with other corporate statutory requirements. If a lawsuit arises against the corporation, the passive investor could find himself or herself being named as a defendant in such a lawsuit under the Piercing the Corporate Veil theory of third-party liability.

Stress Test Your Corporation: As we wind down the year, think about stress testing your corporation’s books and records to determine if it will survive an aggressive plaintiff’s lawyer’s attempt to Pierce the Corporate Veil. Add this to your list of New Year’s resolutions and make an appointment to visit your attorney in January after the holidays.

Free Stress Test: If you don’t have a business lawyer to do this for you, my law firm will gladly perform a “stress test” at no charge to ensure your corporation is in satisfactory condition and not vulnerable to the corporate veil being pierced. The old adage, “An ounce of prevention is worth a pound of cure” really applies in this area, as the risk of loss is profound if this aspect of your business is not properly maintained.

Alternatively, if you would rather operate your business with little or no requirement for adherence to these formalities, consider operating as a limited liability company instead of a corporation, as the formalities are not nearly as stringent as that of a corporation.

As the year end approaches, many people are meeting with their CPAs or tax advisors to try and make sense of the year end tax planning opportunities, and to try and figure out what the tax laws will be for the future.  At the end of 2012, the Bush era tax cuts expire and everyone’s taxes will be rising, even those making under $250,000.

DAVIES:  Jeff, we are in very turbulent times these days.  Investors have no clue as to what to do with the money, the game seems rigged in favor of crony capitalism and the tax laws are in a constant state of flux.  What are you advising your clients to do?

VERDON:  Bob, you hit the nail on the head.  Our affluent clients, who have invested in many of the popular alternative investments of the last decade, such as real estate, hedge funds, private equity, commodities and the like, seem to be a couple of steps behind the market and frustrated watching their capital being lost. As I meet with our clients and their professional investment advisors, the advice that continues to be given to our clients by their investment advisors is to focus on the return “of” capital, not return “on” capital. In other words, stop chasing yields, keep you money in safe investments and wait to see what Congress does about the tax code.  In my opinion, the ability for businesses and investors to plan longer term for where the tax laws are going to settle, will bring certainty to the financial markets and investor confidence.  Also, many of our substantial clients have found safety and refuge in the boring asset called cash value life insurance. Life insurance companies have solid balance sheets, received no TARP money or government bailouts and are paying above market rates (5.35% by one carrier) on the cash value in the policy, along with the death benefit paid to the named beneficiary if the insured dies.  All of the earnings inside the policy are 100% income tax free and can be withdrawn from the policy without any income taxes.

DAVIES:  Jeff, you know that I am an expert on behavior and clients’ behavior and actions are driven by fears, particular in this market. What are the 3 biggest fears your clients are expressing these days?

VERDON:  That is a very important question.  Estate planning is mostly about providing peace of mind to the client. Once a client has reached some level of financial comfort, the skill set for managing their wealth is quite a different skill set than the skills it took to create it, so most people are in unfamiliar territory.  Besides the volatility of the markets, our clients worry about lawsuits, and they worry their children will be ok and be able to find stable employment and be able to afford to own a home.

DAVIES:  What are you advising your clients to do?

VERDON:  Last year, Congress and the president passed the largest gift and estate tax benefits in the country’s history. The bad news is they only gave us 2 years to use them.  Two years is not very long, in the tax planning world, to implement strategies to tax advantage of the new rules.  Previously, one could make lifetime gifts up to $1M without incurring any gift tax. Beginning January 2011 and ending at mid-night December 31, 2012, taxpayers may gift up to $5M without incurring any gift tax. On January 1, 2013, the maximum gift that can be made tax free is $1M.  Why is this significant?  Removing $5M of an appreciating asset from the estate, not only saves the death taxes on the gifted assets, as it is removed from the estate, but the future growth on the gifted asset is also removed from the taxable estate. $5M growing at 6% per year, will be worth $29M in 30 years.

DAVIES:  Are you clients making $5M gifts taking advantage of the new law?

VERDON: Well, yes and no.  Ordinarily, an affluent client will not make a substantial gift to their children, in trust or otherwise, because they might need it in the future. This is the hang over from the 2008 Great Recession.  Generally, in order to make a completed gift for gift tax purposes, the donor must relinquish all use, benefit and control over the gifted asset.  If the donor needs or wants it back, he or she has no way to recapture the gifted asset.

DAVIES:  So, what are you advising your clients to do?

VERDON:  Recent tax rulings inspired us to design a type of Gift Trust we call the HYCET Trust – Have Your Cake and Eat It Too:  The HYCET Trust gives the client the ability to form an irrevocable trust, in a qualifying jurisdiction, appoint an independent but friendly trustee, and make a completed gift of assets to the Trust, and retain what we call a “discretionary beneficial interest “ in the Trust. This beneficial interest allows the Trustee to make future distributions from the trust to the taxpayer should he or she need or want a distribution and the gift from the taxpayer remains outside of the taxable estate.

There are specific rules that must be followed, but they are not particularly onerous and for those who want to take advantage of the generous but very temporary gift tax exclusion rules, the HYCET Trust could be a very practical solution.

DAVIES:  If someone wants to receive more information about your  HYCET Trust or the other services your law firm provides, how can they get in touch with you?

VERDON:  Our toll free phone # is 800 521-0464 and my personal email address is:jeff@jmvlaw.com  I will be happy to send or email a recent article I wrote about the HYCET Trust or any other subject matter the caller wishes to discuss. I have also just updated our very popular book: Estate Planning for Women Only.  If any of your female readers would like to obtain a copy, we ask for a $5.00 donation all of which goes to support the Wounded Warriors Foundation.

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Just because the Super Committee failed to reach an agreement hasn’t stopped the tax raising members of Congress from introducing legislation to reduce the $5M estate and gift tax exemptions presently called for under the changes to the 2010 Tax Reform Laws legislation before they are set to expire next year.

Congressman Jim McDermott (D. Wash), a veteran member of the House Ways and Means Committee and Co-Sponsor Charles Rangel (D-NY), introduced H.R. 3467 “The Sensible Estate Tax Act of 2011″, which proposes to extend the current reach of the estate and gift tax by reducing the amount of the estate and gift tax exempted to $1 million from $5 million and raises the tax rate to 55% from 35%, bringing it back to pre-Bush era levels. The effective date of the proposed Bill would be December 31, 2011. “I’m not against people making money in this country, but I do think they have a responsibility to give some of it back, especially at a time of a deep federal budget deficit,” McDermott said in an interview this week.

Highlights of H.R. 3467 include:

• Estate and Gift Tax Exemption would be reduced to $1M from $5M
• Top tax rate increases to 55% from 35%
• Portability of estate tax exemption made permanent
• Credit for State death taxes would be restored
• Valuation discounts for intra family transactions would be restricted
• Benefits of GRATs would be significantly lessened
• Duration of GST exemption would be limited to 90 years

The Bill was just introduced (November 17, 2011) and has only one sponsor, but this Bill should be a wake-up call for those who could take advantage of the recent tax law changes but have been procrastinating taking advantage of the generous but temporary increased gift tax exclusions, discounted wealth transfer opportunities, and generation skipping transfer planning.

Recently, I was quoted in an article by Forbes about the possibility of the gift tax exemption law being reduced from $5M to $1M.  There have been some developments since then that I have outlined in my latest client alert.  Read these and talk to me to determine your next course of action.  The changes have huge implications.

The Forbes article includes a nice mention of my HYCET Trust:

“Mr. Verdon promotes a trust that he calls HYCET (which stands for Having Your Cake and Eating it To).  It allows for making a gift to an irrevocable trust which can possibly make distributions back to the grantor.  I ran the concept by another attorney who indicated that it is probably based on PLR 200944002.  It addresses the problem of people who have net worth in the 5 to 10 million range, who like the idea of getting the assets out of their estate but prefer tuna fish to cat food. “

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You can renounce your citizenship, but count the cost first … Legislation has recently been proposed in the House to tax expatriates at the same rate as estate tax – an asset tax starting at estates valued at $600,000 – but it has been shot down. John Templeton’s move to the Bahamas was not tax-motivated. The cost of living is higher there, and there are many local taxes and tariffs there. The United States is still one of the lowest-taxing major nations on earth.

You may be aware that the Money Laundering Act requires you to report any cash transaction over $10,000. If you don’t file a Cash Transaction form, there are hefty fines and even prison sentences. What you may not know is that if you structure three separate $3,500 transactions instead, you could still be in trouble. If the “purpose” for doing that is to evade taxes, that, too, has been deemed a crime.My talk is not about tax avoidance, but about asset protection. I have noticed, over the last 15 years, that more and more clients are more concerned about protection from flagrant and ungrounded lawsuits and asset judgments than they are about taxes.

Why protect your assets? Who knows what outrageous decision some judge or jury in the United States will decide about your wealth in the future? If you have deep pockets, once a lawyer discovers your net worth (which is easy to do these days), you can rest assured that you’re probably going to be named as a target sooner or later. That applied to anyone with a net worth of half a million dollars or more, or anyone who scores high on my Lawsuit Exposure Test.

Why have asset protection? Because you are vulnerable to lawsuits based on your net asset value, not just on what you do. You don’t have to be wrong, or break a law, to be sued. All you need is money. People are routinely winning suits against big corporations on the flimsiest of reasons, and disclaimers don’t often help.

Consider the extreme nature of actual suits awarded, such as the woman who won millions when she spilled McDonald’s coffee on her lap, or the $1,000,000 award to a woman who underwent a CAT-scan and then sued her doctor for loss of her psychic powers? (She won, although she later lost on appeal.) Frivolous suits very often go to the plaintiff, due to the ignorance or envy of the jury, or the judge’s bias. Judges and juries tend to side with the “little guy,” because they have more votes than the single target, or the rich in general. Lawyers who work on a contingency basis have a vested interest in attacking those with deep pockets, not the middle class or poor.
One example I’ve been close to lately is a San Diego – area mobile home park, where a law firm has made a practice of joining the tenants together for a class-action suit against the landlord for “failure to maintain.” If the Jacuzzi doesn’t work, or the pool cues get bent, the law firm will sue, and win, with all the tenants getting thousands of dollars in settlements.

If you read the legal trade magazines, as I do, you’ll see ads for specialties, like “breast implant litigation specialist” or “stockbroker lawsuit specialist.” Obviously, such cases depend on how much money your own, not just on case facts, or else these asset-search firms couldn’t thrive. Thousands of lawyers are pouring out of law school every year, and they’ve got to feed their families like everyone else; so people with wealth become their meal ticket.

To research this subject, I spent a month on jury duty. I got to know the kinds of people who sit in a jury pool! I found that if it’s a complex or time-consuming case, most hard-working, privately employed people get excused from serving. This leaves you life savings in the hands of the unemployed, the retired, civil service workers, or low-level employees in large companies. I’m not saying a modern jury is biased or incapable of sound judgment, but I did discover that they often automatically side with the little guy against “the rich”. Yet, “the rich” seldom protect themselves adequately in advance. Most well-off people are too busy doing that which makes them rich – i.e., running a business, or investing – to take care of all the details of asset protection or wealth transfer.

For instance, you may think you are protected if you hold rental properties in your living trust, which also contains your stocks and bonds. That is a recipe for disaster. Your personal investments then become attachable as part of any suit against you as landlord.

By itself, a domestic trust is no great protection against lawsuits. So what should you do? I suggest a two-stage protective strategy…

Two-Step Asset Protection Strategy

1. First, I recommend the Family Limited Partnership (FLP) for a family where the parents own a business or a large portfolio of securities, or both. In an FLP, Mom and Dad can act as General Partners, with children as Limited Partners. The FLP is a device to protect your assets against exposure to lawsuits, or to make gifts to family members without losing control of the assets.

The General Partner (you) makes all business decisions for the FLP while “owning” as little as 1% of the assets of the partnership. The Limited Partner(s), other family members, have no right to participate in the management of the business. Bottom line, a plaintiff may be able to collect part of your 1% ownership but cannot collect a judgment from assets of a partnership, even after obtaining a court order.

The judgment remains in force, but the plaintiff can’t collect until the defendant receives a distribution from the partnership. The result is a standoff. The protected client will not cash in on any of the partnership’s assets because of the judgment; the plaintiff, knowing he or she has no other choice, settles for a greatly reduced payoff.

It’s expensive to sue. If lawyers know your assets are protected, they’ll move on to another target. If they can’t get at assets, they won’t get paid.

2. Second, I recommend an Overseas Trust. There are basically two types of trust- domestic (which most of you may have already) and an Overseas Trust. Not all nations offer trusts. Switzerland, for instance, one of the world’s greatest banking centers, does not recognize most trusts. As you will find out, if you wanted to set up an account in the name of your trust here, it will be difficult. Werner Merk of Zurich Cantonal Bank (the next speaker) will recognize it, but most Swiss bankers won’t.

The other type of trust, which prefer, is an international trust, in one of the many jurisdictions that recognizes trusts. A foreign grantor trust is different from a U.S. grantor trust. (We’ll only be talking today about international trusts formed outside the U.S., which can also be set up to be a grantor trust at home. Overseas, the grantor is generally called the settlor.)

You can put your residence in the trust, or a limited partnership interest , or S-corporation stock. The international trust has all the advantages of a domestic trust. By use of the proper country, a judgment in your home country will not be recognized in your trust’s country. As a result, you can have a lot more control over your trust assets than you can by operating a trust in the U.S. alone.

What’s the best jurisdiction? Some of the more popular sites are the Isle of Man, the Bahamas, or the Cook Islands. The Isle of Man is the oldest democracy in the world. You want that kind of stability. The average trial case takes about seven years, which represents a roadblock to creditors. The problem is, their law is based on case law, dating back to 1571. I use the Isle of Man, but the best overall place I’ve found is the Cook Islands. (To find the islands, go to Hawaii, then turn south.)

The Cook Islands are a protectorate of New Zealand, carrying their flag. They are a very docile country, an excellent financial center, near the Asian markets. In 1988, the Cook Islanders contacted some U.S. lawyers in order to set up a favorable trust environment for Americans. They asked American lawyers how they would design a trust law. Their resulting 1989 Cook Islands Trust Act gives us the certainty of law, not just case law, as in the Isle of Man.

If you happen to have a living trust that was formed more than two years ago, say in 1990, you can amend your trust, re-domicile it and ten your fund is deemed to have been formed in 1990. As long as you do this before the fact – i.e., before a pending judgment case arises – your assets are safe from seizure. But beware – any attempt to foil a ruling in process can be deemed a “fraudulent conveyance” device.

To file a lawsuit, a creditor or sue-happy lawyer will now have to bring his case before a Cook Island court, flying down his witnesses, etc. In such cases, I show the plaintiff’s lawyer a copy of the trust laws of the Cook Islands, showing how difficult it is to get a judgment there. In most cases, they will drop the suit. It may take five or six years to get a judgment, and even if the case comes out in their favor, how do they enforce it? In most cases, lawyers look for deep pockets who are easy targets, not hard targets. A Cook Island Trust is a very hard target.

If you’re more comfortable having hands-on control in the U.S., then set up your Limited Partnership in the U.S., put your assets in it, set up an international trust in the Cook Islands, put 99% of your LP in that trust, and you will remain the General Partner, in control, with only 1% held in the U.S.

What happens if you get sued? Today, you have the option to move the assets to your overseas trust – before such a suit gets under way. Put some assets in Europe, Switzerland, or elsewhere, and then the U.S. will not have jurisdiction over those assets.

I repeat: We are not doing this to reduce income taxes, but to insulate your assets. All the income of the Overseas trust is taxable in the U.S.