An offshore trust is a primary legal tool involved in offshore planning. The offshore trust is generally a “self-settled trust.” This is a trust where the settlor and the beneficiary are both one and the same. The trustee is a person who is nominated by the settlor and is either an individual who is not a U.S. citizen or a business having no U.S. offices or affiliation. An offshore trust has additional people who serve as trust advisors or trust protectors. These individuals are not under the settlor’s control, but they have certain powers in the administration and protection of the trust and its assets. Offshore trusts provide a method of transferring assets between generations, probate free. The trust will usually provide that assets will automatically pass to named successor beneficiaries upon the settlor’s death.
The problem with most tax planning is that you have to give up something to get something. To get an income tax deduction you must spend a dollar to save taxation on a dollar. To get a deduction for a business expense, you must incur a business expense. To get a personal deduction you must pay a deductible expense.
Income taxes are not at a 100% rate thankfully, so one normally thinks wisely before spending a dollar to save tax on a dollar, usually about 40% (35% federal plus state tax). Then if you save the dollar long enough your estate may become so large that it has to pay an estate tax of almost 50% (currently 47%). Let’s not forget FICA and Medicare, both sides being around 15%. Phew, it’s no wonder why most people loathe the IRS and tax time.
Changing The Status Of Entities
Organizations that are eligible and wish to change their classification may do so by filing an election. Once the classification has changed, the organization must keep that classification for at least five years.
Potential Tax Impact on Changing Classification
A change in tax classification will have tax consequences.
Corporation Status Elected
When a partnership elects to be classified as a corporation, it will be considered to have contributed all of its assets and liabilities to the corporation in exchange for stock in the corporation. 23 The partnership is deemed to liquidate by distributing stock in the corporation to its partners.
Examination of the Check-the-Box Regulation
Effective January 1, 1997, the IRS issued final regulations that implemented the entity classification system. These “Check-the-Box” rules allow unincorporated organizations to elect to be treated as either corporations or partnerships for federal income tax purposes. Certain business entities that are excluded from these rules are corporations organized under state statutes, foreign entities that resemble U.S. corporations, entities taxable as corporations under special Code provisions, and trusts. 1
CAN MORE THAN ONE BUSINESS MAKE YOUR HOBBY PROFITABLE?
Internal Revenue Code §183 disallows losses taken regarding any alleged business where there is not a profit motive. If a transaction is not being engaged in for profit, the Internal Revenue Service will disallow all losses related to such activity. The service provides various safe harbors, such as showing a profit three out of five years or five out of seven years. This will establish a presumption that a hobby is not present, but an actual business is. What happens when you run more than one trade or business that are related and one activity creates a loss while others create a profit.
Your business has matured, or your real estate has appreciated, time to cash out and sell. It has taken a long time, and since you have held your shares or real estate for greater than one year, the gain qualifies for long-term capital gain taxation. A 15% federal tax rate; not bad!
Yet, 15% of a $10,000,000 gain is $1,500,000. With a $20,000,000 gain it is $3,000,000. That is an awful lot of money.
Tax shelters have been a bad word since legislation was designed to eliminate what was considered abusive. From the sweeping language of the Tax Reform Act of 1986, Pub L. 99-514, tax shelters were, in essence, wiped out and became the equivalent of a 4-letter word in tax planning.
But are tax shelters really gone?
Haven’t there been cases where the IRS has alleged that certain devises are still abusive tax shelters?
Welcome to Puerto Rico—a 3,000-plus square-mile tax haven where US residents can enjoy zero capital gains tax and tax-free dividends on their investments and business distributions (Act 22)…
Early adopter Justin M. Sullivan traded Stamford, Conn., for Old San Juan in December 2012. Initially, he came to Puerto Rico in search of tax breaks, but then fell in love with the laid back ways and culture of San Juan’s Old City…
Reaching the opportunities that lie beyond the borders of your home country is seldom simple, but it can be worth the effort. In fact, moving at least part of your financial life away from your home government and its eagerness to share in what you’re accumulating is one of the most liberating steps you’ll ever take…