A full range of proven structures for safeguarding assets, zeroing out estate taxes, and reducing or eliminating income taxes. Complete trusts and individual provisions … from simple living trusts to sophisticated international asset protection structures … will broaden and strengthen the options you present to clients. Each structure is diagrammed and explained, with tax considerations, case studies, and pattern clauses.
The living trust has become almost mandatory in estate planning, but it is frequently offered without any thought to safeguarding inheritance. However, children’s inheritances in a living trust can be readily protected from creditors if the trust is made discretionary or includes shifting language.
Mr. Eber, a pioneer in the asset and tax protection field, provides everything needed for implementation. He:
- Presents each of his protective approaches with easy-to-follow text.
- Illustrates the structure with diagrams that can be shown to clients.
- Describes the structure’s advantages in language clients can understand.
- Cites the supporting law for both domestic and international structures.
- Recommends specific jurisdictions.
- Discloses any risks.
- Details the tax considerations.
- Shows different usages with case studies.
- Speeds your drafting with pattern clauses.
Private Placement Life Insurance (PPLI). PPLI’s tax and asset protection attributes are leveraged through trust structures. Selecting the proper ownership entity for the PPLI depends upon estate planning considerations unique to each client. PPLI structures can remove tax consequences that substantially reduce your client’s portfolio’s overall returns.
Private Placement Variable Annuities (PPVAs). PPVAs are valuable for the elderly, the retired, the uninsurable and families with charitable intentions. They offer high net worth clients a way to participate in hedge funds and other alternative investments without incurring tax. PPVAs can provide an income stream for life. CRTs and CLTs require assets to be gifted irrevocably in exchange for a tax deduction. The PPVA allows charitably inclined individuals to maintain ownership and control of PPVA assets throughout their lifetime while deferring the investment gains on those assets from taxation.
Captive Insurance Companies (CIC). Premium payments from a business to its CIC are tax deductible. A CIC can receive up to $2.2M of premium payments annually income-tax-free. The premiums received by the Captive are invested (not “lost”) if not needed to pay claims. A Captive owned by a Bespoke Trust avoids inclusion in the estate of the senior generation. This strategy provides significant wealth transfer opportunities.
Trusts are creatures of “equity”. Trusts are subject to the concept of “clean hands, and are drafted subject to the drafter’s ultimate sophistication and drafting skills.
- Irrevocable Life Insurance Trusts (ILITs). For many an ILIT is simply an insurance trust. In reality it refers to one of the many trusts that can hold insurance as discussed herein. An ILIT simply refers to an irrevocable skeleton on which we can hang numerous specialized clauses to shelter an estate from estate taxes, providing asset protection. When mated to PPLI, the structure is cleansed of income tax.
- Intentionally Defective Grantor Trusts (IDGT). Clients can achieve a tax-free transfer of their wealth to their beneficiaries if the IDGT’s return on the assets it purchases from your clients exceeds the IRS rate for the promissory note it paid. The arbitrage between the interest on the note and the appreciation of the assets provides the IDGT cash flow for purchasing PPLI policies and paying their premiums.
- Grantor Retained Annuity Trust (GRAT). A GRAT allows a person to share the future appreciation of an asset with the next generation with minimal gift tax. The GRAT remainder could purchase PPLI which could assist with any estate taxes due and would result in additional tax savings.
- Cash Value Beneficiary Controlled Trust (BCT or BDIT). A Dynastic BCT combined with PPLI provides clients with a flexible wealth accumulation and retirement plan. Clients can access retirement funds on a tax-free or deferred basis. The BCT provides the “Prime Beneficiary” with all the rights, benefits and control that the PB would have had if the PB owned the assets outright. CVBDIT with PPLI can dramatically enhance your client’s retirement, wealth accumulation and asset protection.
- Hybrid Domestic Asset Protection Trust (DAPT). The “Hybrid DAPT” is created by your clients and a “Protector” can make your client a beneficiary. For asset protection purposes, a Hybrid DAPT is more protective than a regular DAPT because local law could be applied to a regular DAPT if the Settlor isn’t a resident of the DAPT’s jurisdiction. It would be difficult for a judge to rule that the assets of a Hybrid DAPT are subject to the creditors of the Settlor who is not a beneficiary.
- Low Profiler Trust. The Low Profiler Trust is for those who want the protection afforded by a foreign trust but are reluctant to give up control to a foreign trustee. The Low Pro’s primary purpose is to protect your client’s financial resources for their use, benefit, and enjoyment. The Low Pro is registered offshore, but from the perspective of the IRS, it is a domestic grantor Trust. There is no need for onerous IRS filing and reporting that accompany a typical foreign trust.
- Charitable Lead Trust (CLT). A CLT is a gift of appreciating assets to an irrevocable trust. A designated charity receives an income stream for a term of years or life. The client enjoys a current income, gift, or estate tax deduction. If the CLAT assets grow at a rate in excess of the IRS rate, assets remaining at the expiration of the trust term pass tax free to the client’s children or a trust for their benefit.
- Charitable Remainder Trust (CRT). CRTs appeal to older beneficiaries who appreciate knowing how much they will receive each year. A CRT allows clients to convert highly appreciated non-income producing asset(s) into lifetime income, without having to pay capital gains or estate taxes and in benefiting a charity. In addition, your client gains asset protection and the immediate tax deductions and lifetime income generated by a CRT provides a source for funding various PPLI planning techniques.
- Private Family Foundation (PFF). The PFF enables the intergenerational transfer of wealth. The advantage of a PFF over a trust is greater confidentiality. PFFs do not need to be registered. PFFs allows for the maintenance of a completely confidential record.
- SPA Trust. A unique asset protection tool which offers benefits that you cannot achieve otherwise.
- Dynasty Trust. The essence of a trust set up in a dynastic state is its GST tax-free compounding in perpetuity. Wealth is not consumed by transfer taxes.
- Intrafamily Loans are a wealth transfer strategy and an estate freeze technique.
- Opportunity Shifting. The client is not transferring anything which could expose the transaction to being treated as a fraudulent transfer.
- Along with due diligence on the PPLI insurance company, have you completed your due diligence concerning the jurisdiction from which the PPLI is issued?
- Secret Source. Double taxation treaties. By adding the “Secret Sauce” to your PPLI based estate plan you will always land the potential client.
- When you sell a Bitcoin, there are tax consequences. PPLI gains from trades are non-taxable and your clients can access their Bitcoins tax-free.
- Purpose Trusts are created to hold the shares of a Private Trust Company where confidentiality and control issues are important.
- Private Trust Companies. These are popular with families who want to retain significant control over trustee decision-making.
- Pre-Inheritance Trusts.
- Selling Appreciated Or Appreciating Assets With PPLI.
- Protecting Assets And Producing A Profit With PPLI.
- Post Death Inheritance Trust.
- Protecting Real Estate with PPLI.
KEY CLAUSES TO CONSIDER
- Irrevocable trusts with rights of revocation with protector and independent trustee, with forms.
- The UTC standard for judging a trustee’s discretion, with recommended clauses.
- Clause prohibiting distributions in discharge of settlor’s support obligations.
- The importance of proper language in shifting trust provisions, with pattern clauses.
- Support trust provisions for settlors concerned that the discretionary trustee may not provide a beneficiary sufficient support.
- Spendthrifting a trust by defining education and support, with language.
- Restraint on alienation pattern clauses.
- Leveraging assets exempt from the generation skipping transfer tax.
- Making trusts more flexible by delegating certain powers to trust protectors, with provisions.
- Pattern letters of wishes.
- Providing more control to beneficiaries, with forms.
- How an intentionally defective grantor trust transaction is structured, with trust language and tax considerations.
- Pattern situs change clause.
- Teaching clients to look upstream with pre-inheritance trusts.
- The wonderfully effective concept of opportunity shifting.
- Foreign Asset Protection Trust (FAPT). Investments are kept out of the reach of creditors because U.S. judges cannot compel the foreign trustee to release funds to someone who claims to be your creditor.
- Drop-Off Trust. Prior to immigrating to the U.S., Non-Resident Aliens (NRA) are subject to U.S. income tax only on income sourced in the U.S. A goal of pre-immigration planning is to minimize post-immigration exposure to U.S. transfer taxes.
- Jurisdictions that do not enforce U.S. judgments.
- Common objections to international trusts, with responses.
- What I have learned to ask in the initial phone call to avoid later problems, with checklist.
- How to obtain buy-in from the client’s financial advisor and accountant.
- Selecting a trusteeand
- Negotiating liability language with trust companies, with recommended phrasing.
- Distinctive feature chart of commercial and private foreign banks.
- How to create a trust that is domestic for IRS reporting purposes but foreign when threatened by creditors and lawsuits.
- What the letter of wishes should at minimum direct, with examples.
- The collapsingand withdrawing bridge techniques.
- Countries that permit the use of bearer stock.
- Recommended jurisdictions for private trust companies, with characteristics of each.
- Powers typically granted to a trust protector, with pattern provision language.
- Tax considerations.
- Pattern flight, duress and limited power of appointment
FAMILY LIMITED PARTNERSHIP AND LIMITED LIABILITY COMPANIES
- Asset protect and discount assets going to trusts by first putting them into FLPs/LLCs and transferring the non-controlling interest to the trust.
- The major difference between FLPs and LLCs is that the LLC’s managing member is shielded from liability whereas the FLP’s general partner is responsible for the FLP’s liabilities.
- Ensuring negative income tax consequences for a creditor who obtains a charging order.
- Limiting recourse to partnership assets.
- Appropriate and inappropriate assets.
- Obtaining valuation discounts.
- Gifting to an FLP.
- Funding a trust with an FLP or LLC.
- The double discount.
- Drafting suggestions to improve asset protection aspects, with sample clauses.
- Advantages and risks of international LLCs.
- Maximizing asset protection aspects, with recommended clauses.
- Effect of a charging order.
- Tax issues.
- The advantages of owning insurance through an LLC or FLP.
Estate Planning Worksheet, Spousal Conflicts Disclosure Letter, Anti-Abuse Clause, Financial Affidavit
Trustee Indemnity Clause, Provision for Existing Obligation of Settlor, Revocable Trust, Irrevocable Trust, Irrevocable Trust With Right of Revocation for Protector, Irrevocable Trust With Right of Revocation for Independent Trustee
Clause Providing Trustee Discretion to Acquire Assets for Beneficiary, Clause Establishing a Discretionary Trust, Clause Establishing the Discretionary Standard
Shifting Trust: Terminates Interest and Creates a Discretionary Interest, Shifting Trust: Converts from Mandatory to Discretionary Trust
Disclaimer Clause, Beneficiary’s Support Is Primary, Definition of Education for a Support Trust
GSTT Provision, Protector Provision, Authority of Distribution Trustee, Beneficiary Controlled Trust: Removal of Distribution Trustee, Presently Exercisable Power of Appointment
Authority to Change Jurisdiction, Authority to Merge or Sever Trusts, Trustee Power to Invest in Non-Income Producing Property and to Invest Without Diversification
Client Worksheet, Conflict Disclosure Letter and Consent, Attorney Retainer Agreement, Statement Regarding the Money Laundering Control Act, Letter Declining Engagement, Letter After Client Declines Engagement
Client Letter Affirming Trust is Tax Neutral, Agreement Appointing Investment Advisor, Letter Recommending a Trustee (with Choices), Agreement Retaining the Trustee, Affidavit of Solvency, Declaration of Source of Funds, Attorney Letter of Recommendation to Trust Company, Attorney Letter of Recommendation to Be Given to Bank
Low Profiler Trust, Letter of Wishes, Aide Memoir to My Attorney (to Keep Letter Under Attorney-Client Privilege), Clauses for a Low Profiler Trust, Merger of Trusts, Excluded Persons Clause
Postnuptial Agreement, Employment Agreement, Buy-Sell Agreement
PRACTICE TIPS FROM THE BOOK
Incorporating Asset Protection Into Estate Planning. “Estate planners typically leave assets exposed to creditors. To protect the estate the asset protection planner can either:
- Make the trust discretionary. A “discretionary” trust leaves it to the trustee’s discretion to select which beneficiaries will receive distributions and when.
- Place “shifting” language in the trust. A shifting trust shifts its purpose, its terms and/or its beneficiaries if a creditor tries to penetrate it. Upon the “shift,” the trust becomes discretionary and creditors are prevented from penetrating the trust.
Benefits of Trusts. “A non-self-settled discretionary trust, utilized with a Letter of Wishes, a Protector, a Distribution Trustee and Powers of Appointment and utilizing the GSTT exemption is a flexible trust able to adjust to changed family situations and tax laws. Trust assets are protected from estate tax, divorce, and creditors for generations as the beneficiary has no property right that a judge could pass to a predator.”
Common Mistake And Solution. “Many lawyers set up non-self-settled trusts as part of their regular practice and then destroy their asset protective capabilities by making the trust distribution pattern mandatory. If asset protection is a goal, the trust must be discretionary.
“A shifting trust provision is particularly helpful after you have suggested to your client an excellent asset protected and extremely flexible trust (a non-self-settled, discretionary, spendthrifted trust, with a letter of wishes and a protector), but the client is not able to understand the benefits and states: ‘All I want is to give each of my two children half of my estate in equal parts when they turn 25, 30 and 35 and do so in a way they will be asset protected.’ The shifting trust allows you to give the client ease of understanding while preserving considerable (but not total) asset protection and flexibility. The trust states…”
Specific Conditions. “The trustee’s discretion must be broad enough to be exercised in connection with factors that take into account more than the beneficiary’s financial condition. For example, a trust may provide that the trustee should withhold distributions if the beneficiary is taking drugs, or is in litigation, or is experiencing other difficulties that would make it unlikely that he would benefit from the trust assets as the settlor intended. This broad discretion will tend to counter a public policy argument that the trust arrangement is being misused to allow a beneficiary to avoid creditors.”
More Control. “From an asset protection and estate planning viewpoint, assets inherited in trust are far more advantageous then assets received outright. However, many beneficiaries want to receive assets outright because they believe that an inheritance in trust while advantageous will not give them the control over the assets and that the trustee will not be responsive. To give the beneficiary the control he wants, the trust can be drafted as a Beneficiary Controlled Trust….”
Conveyed Special Power. “If a powerholder has a special power of appointment, he is not deemed to be the owner of the property subject to the power. The power doesn’t cause trust assets to be included in the powerholder’s estate for estate tax purposes and can be given without adverse tax consequences. An exercise or release of the power will not constitute a taxable gift. This arrangement is beneficial where the settlor desires flexibility in his plan to allow for changing needs and circumstances of beneficiaries in the future.”
Intentionally Defective Grantor Trust (IDGT). “The IDGT is one of the most powerful estate planning strategies available, particularly when it is dynastic and used with other wealth shifting techniques [and PPLI]. An asset can be ‘sold’ to an IDGT income and capital gains tax-free. Provided it was sold for an installment note or a SCIN of equal value there will be no gift tax. All future income (not including the interest paid on the Note [unless PPLI is utilized]) …will generally be taxed to the seller. …The tax the seller pays on future income in the IDGT further reduces the seller’s estate. The asset in the IDGT appreciates outside the seller’s estate. IDGTs provide asset protection …. The IDGT transaction usually takes the following form….”
Transferring Family Businesses. “Opportunity shifting allows dad the opportunity to shift business opportunities into an entity he sets up for his children and … afford these opportunities to his children asset and divorce protected and transfer tax free.”
Low Profiler Foreign Trust. Is My Money Safe? “The concern over foreign institutions is misplaced. Perhaps the fear comes from stories of those who have not used licensed companies but have used storefront practitioners. None of my clients has ever lost money to financial misdoings of foreign banks or trust companies (although some have been upset at fees for certain services performed by the bank or trust company).”
Low Profiler Trust. Grantor Is In Control. “will protect the settlor’s assets even though the settlor set the trust up for his own benefit. This permits the settlor to retain a control over trust assets that would not be permitted in most states. Domestically, generally, self-settled trusts afford no protection.”
Low Profilers Are Exempt From IRS Reporting. “The Low Profiler is most useful for those clients who:
- Do not want to spend the time and money involved in filing IRS reports.
- Are concerned that filing will raise their IRS profile.
- Want no trace of their Low Pro to be publicly available until after they are in litigation and only then, if and when the U.S. trustees are removed, does the trust turn foreign for IRS reporting purposes and only then does it need to begin to file the 3520s and 3520As.”
High-Comfort Technique. “The Low Profiler structure is appropriate for the American who has little foreign experience and/or who wants to maintain maximum control over his assets until a creditor or lawsuit looms.”
Common Error. “Unfortunately, letters of wishes are rarely written and discretionary trusts themselves provide little guidance. They either:
- Say nothing about what the trustee should consider in exercising discretion.
- Contain the typical “ascertainable standard” (“the trustee may make distributions for a beneficiary’s health, education, maintenance, and support”).
- We encourage settlors to….”
Protectors Becoming Widespread. “Irrevocably transferring property to a trustee has caused clients and advisors concern due to the lack of control over the transferred assets. Just the word “irrevocable” raises anxiety due to the fear that future change may negate the purpose, taxability, distributions or other benefits originally contemplated by a trust agreement. Appointment of a Protector can offset those reservations and provide a safety net for administering long term trusts.”
Common Error. “The greatest planning gift a client can give children is to set them up in a non self-settled trust that will protect their assets from creditors, predators, divorcing spouses, estate taxation, and provide them with a vehicle through which to run their business or professional lives. Unfortunately, many attorneys counsel clients to distribute trust assets to their children at certain ages. By doing so, the children lose the protection of their non self-settled trust.”
Minority Discount. “A client places a $3 million parcel of real estate into an FLP/LLC, and transfers a 99% non-controlling interest to children. With a 33 1/3 % discount applied to the 99% interest, the client and the client’s spouse’s gift tax exclusion will negate any gift taxation. With a one percent interest, the client totally controls the FLP/LLC and the real estate. If 30 years later the asset is worth $15 million, it is not in the client’s estate because it has been given to the children.”
REVISION 7 HIGHLIGHTS
Private Placement Life Insurance & Other Advanced Asset Protection Strategies offers a full range of proven structures for safeguarding assets, zeroing out estate taxes, and reducing income taxes. Written for both sophisticated planners and planners new to the field, this book offers techniques ranging from trust modifications to
sophisticated international asset protection structures.
This edition updates all existing chapters and adds extensive new material on Private Placement Life Insurance (PPLI), Private Placement Variable Annuities (PPVA), and Captive Insurance Companies. Two new Chapters provide solutions that implement the best possible asset protection and tax optimization for your wealthy clients.
More than 30 structures are diagramed and explained.
New Chapter A explains how PPLI and PPVA can be combined with many trusts including:
- Irrevocable Life Insurance Trusts.
- Intentionally Defective Grantor Trusts.
- Grantor Retained Annuity Trusts.
- Cash Value Beneficiary Defective Trust.
- Domestic Asset Protection Trusts.
- Foreign Asset Protection Trusts.
- Low Profiler Trusts.
- Charitable Trusts.
New Chapter B discusses additional PPLI strategies and techniques including:
- Special Power of Appointment Clauses.
- Valuation Discount Strategies with FLPs and FLLCs.
- Dynasty Trusts.
- Intra-Family Loans.
- Split Dollar Financing.
- Double Taxation Treaties.
- Bitcoin Tax Planning.
- Purpose Trusts.
- Pre and Post-Inheritance Trusts.