• Asset Protection and Titling of Property
• Property Titling and Taxes
• Chartered Wealth Management Training Course in Key Largo
• IRS Waives Underpayment Penalty on Foreign Earned Income
• New Mailing Address for Form 1042 Series
• March 15 Filing Deadline for Foreign Trust Returns
• April 17^th is Tax Due Date for 2007 Instead of April 16^th
• Will Your Critical Software Work with VISTA?
• Jacobs Report Articles
• Worth Reading

Asset Protection and Titling of Property

If you are sued and lose, any property that is in your name as the sole owner is going to be included in the assets that are available to satisfy a judgment by a creditor. Property held as joint tenants with the right of survivorship are subject to the claims of creditors of either joint tenant. Joint-tenants-in-common is a form of ownership between spouses that sometimes protects property from the claims of the creditor of only one spouse but it depends on state law.

Property owned by a non-debtor spouse, child or parent that is not jointly held will usually be protected from the claims of creditors of the debtor spouse, parent or child, respectively. If fraudulent transfer laws are avoided or if the donor can show that he or she was solvent after the transfer, then gifts to a spouse, child or parent may succeed in being protected from the claims of creditors of the donor.

Property owned by a closely held corporation is subject to any creditors of the corporation and could be lost to the creditors of a stockholder who owns more than 50% of the voting stock of the corporation. Property held by a general partnership is subject to the claims of any creditors of the partnership. Property held in a limited partnership or limited liability company (LLC) is generally protected in those states that limit access by creditors to what is called a charging order. However, transfers to limited partnerships or LLCs when the transferor retains use of and/or income from the property will often be disregarded by the courts.

Property held in a revocable living trust may avoid state probate delays and costs but such property is subject to the claims of the creditors of the trust settlor (aka grantor). Property held in an irrevocable trust may be subject to the claims of the creditors of a beneficiary if it does not include a spendthrift provision. Property held in a foreign trust is generally protected from the claims of creditors of the trust settlor (grantor) but there have been a number of cases where the courts have held that the trust was not valid because the trust settlor (grantor) retained effective control over the assets or over the trustee.

Nearly every form of asset protection involves the transfer of property to another person or to an entity such as a corporation, trust or limited liability company. Forming an entity is a waste of time and money if the assets you own are not re-titled in the name of that entity (or person).

These comments are an extremely brief summary of the numerous rules that relate to the effective change in ownership of property for the purpose of asset protection from future creditors.

Here are links to some of the articles in our web site and other sites that deal with various aspects of how to title property to achieve asset protection.

A Beginner’s Guide to Joint Tenancy

Tenancies: Joint and Tenants in Common

Pitfalls of Do-It-Yourself Asset Protection

What Local Advisors Need to Know About Offshore Asset Protection Trusts

Asset Protection: Understanding the Fundamentals

A Checklist of Asset Protection Strategies

Property Titling and Taxes

For tax purposes, the general rule is that the owner of an asset that produces income is subject to tax on that income. Thus, when assets are transferred to another person or entity for asset protection purposes, the recipient is usually liable for income taxes on any future income from those assets – including capital gains.  It is therefore critical for income, gift and estate tax purposes to ensure that the title to the asset is in the name of the person who is intended to be the owner for tax purposes.

Income from assets that are jointly held are subject to tax in proportion to the contribution of each joint owner to the purchase of the property. As often occurs, Mom or Dad include an adult child as a joint owner of an asset like a home or a car, but the child is not an owner unless the child (or a creditor of the child) takes possession of the joint property.

The tax cost (basis) of assets transferred as a gift is transferred to the recipient. For example, if Dad has some stock that cost $10 a share and is now worth $100 a share, and he gives that stock to an adult child, the child takes the $10 cost and will be subject to a tax on the $90 gain if or when the stock is sold.

When assets are transferred to an entity such as a partnership, LLC or corporation, that entity generally assumes the cost from the contributor and there is usually no tax generated by the transfer to the entity. If or when a LLC, partnership or sub-chapter S corporation sells that asset, any gain or loss will be apportioned among the owners of the entity. If the entity is a taxable corporation, the corporation will pay a tax on any gain and the shareholders may also pay a tax on the after tax gain if it is distributed as a dividend or if the corporation is liquidated.  However, if the corporation is a controlled foreign corporation, any investment income will be subject to current tax by any U.S. shareholder who owns 10% or more of the stock.

In the case of a trust, the income tax treatment depends on whether the trust is a grantor trust or an irrevocable trust, a domestic trust or a foreign trust. In the case of a foreign trust or a domestic grantor trust, the trust settlor (grantor) will be treated as the owner of the assets for income tax purposes and will be liable for income taxes on any income earned by the trust. In the case of a domestic irrevocable trust that is not a grantor trust (as defined in tax code sections 671 through 678), the trust will pay income taxes on any retained income and the beneficiaries will pay taxes on income that is distributed to them.

Transfers to others, without receiving payment of a fair amount, are treated as a gift. The recipient of a gift is not generally subject to any tax on the gift but the donor might be subject to a gift tax for gifts in excess of an annual exclusion and in excess of a lifetime exemption. The lifetime exemption is currently $1 million. The annual gift tax exclusion is $12,000 per donor and per recipient (donee) in 2007.  A husband and wife can thereby gift $24,000 each to an unlimited number of children, grandchildren or others without any gift tax. And excess gifts are protected until the cumulative lifetime total exceeds $1 million.  For those with substantial estates, lifetime gifts will help to reduce the amount of any future estate tax that may be imposed.  For Medicaid planning purposes, all gifts made within five years of applying for Medicaid benefits will result in a delay in when benefits can begin.  (For details see http://www.seniorlaw.com/medicaid.htm )

For information on the 2001 Tax Law see http://offshorepress.com/subscribers/2001taxlaw.htm

Chartered Wealth Management Training Course in Key Largo

Richard Duke and I (and four other speakers) will be teaching a training program for the Chartered Wealth Management and Chartered Trust and Estate Planner programs that will be held in Key Largo, Florida from April 24^th through April 27^th. A $300 discount is available to Offshore Press subscribers. For registration information and further details see http://mfsfinancial.com/bsiiexecutiveeducation/id31.html  Future programs in 2007 will be held in Toronto and London.

IRS Waives Underpayment Penalty on Foreign Earned Income

The Tax Increase Prevention and Reconciliation Act of 2005 wasn’t enacted until May of 2006 but it included provisions that were effective as of January 1, 2006. One of these provisions was a change that reduced the excludable housing cost allowance for U.S. persons living and working outside the U.S.  The IRS has announced they will waive additions to tax under section 6654(a) to the extent that the underpayment is attributable to the changes enacted under TIPRA and for individuals who file Form 2555. (Source: IR-2007-032)

New Mailing Address for Form 1042 Series

Form 1042 is used to report taxes withheld from taxable payments to foreign persons. All 1042 forms (including Forms 1042, 1042-S, and 1042-T) should be mailed to the Ogden Service Center (rather than to Philadelphia as in past years). The mailing address is: Ogden Service Center, P.O. Box 409101, Ogden, UT 84409. The Ogden address is shown in the Form 1042 and 1042-T instructions but not in the Form 1042-S instructions, which could not be updated in time to provide the new address.

March 15 Filing Deadline for Foreign Trust Returns

Foreign trust returns (Form 3520-A) are required to be filed by the trustee on or before March 15^th. If the foreign trustee does not comply, the U.S. grantor is required to do so. Quite often, taxpayers who establish a foreign trust assume that the return is due at the same time as their personal income tax return. However, that could be a costly error. A six month extension can be requested with Form 7004 according to the instructions to the form 3520-A.

April 17^th is Tax Due Date for 2007 Instead of April 16th

April 1 5^th is a Sunday this year, so that would usually mean the due date for filing Form 1040 and various other returns is on Monday, the 16^th. But Emancipation Day falls on the 16^th this year so the filing date is extended for everyone to Tuesday, the 17^th. Some states will follow the federal dates, but some won’t. Details are on the subscribers’ web site at 20070417duedate.htm.  

Will Your Critical Software Work with VISTA?

The new Microsoft Vista operating system will be pre-installed on many new computers, but we hear that a lot of application software won’t be compatible with the new operating system. It seems that a comprehensive list of compatible software is not available so it will be necessary to check with each software provider to find out if it will work with VISTA. For more see the eWeek article on VISTA compatibility.

Jacobs Report Articles

The only duplication of information between the Jacobs Report and the International Wealth Protection Monitor are the links in each issue of IWPM to recent issues of the Jacobs Report. Paid subscribers to the IWPM & Library have priority in receiving answers to their questions as long as you let me know you are a subscriber when you submit a question to jacobs1@kc.rr.com  Questions are answered on a time available basis but I try to respond to about two questions each week, except when I’m under the gun with tax return deadlines.

#435 – Feb. 28^th Due Date for Information Returns

#434 – Query re: Eligible Entities to Elect out of Corporate Tax Status

#432 – Query re: Panama S.A. Owning Real Estate

#431 – Query re: Form 5471 and/or 1120F

#430 – Follow Up on New Zealand Seminar

#429 – Follow Up on FBAR Form and Foreign Insurance

#428 – Query re: Finding a Competent Tax Advisor

#427 – Query re: Status of New CFC Tax Guide

#426 – Query re: Offshore Variable Annuity and FBAR

#425 – Query re: Authority for Tax Deferred Variable Annuity

Worth Reading

 The following links were valid at the time of publication but could be changed at any time.

Richard Duke Law Firm Newsletter, Jan., 2007

Democrats Take Aim at Multi-National Tax Rules

Germany May Repeal Charity Status for Greenpeace

Large Company Execs Expect Adverse Tax Changes

IMF Pushes Dominican Republic to Criminalize Tax Evasion

Fiscal Year 2008 Budget Information Sources

Contrary Views on Latest Global Warming News and Carbon Tax

Top Court to Hear Discrimination Case Involving Senate Employee

IRS Issues Revenue Procedure to Rescind Reportable Transaction Penalty

OECD Welcomes Tax Information Exchange Agreement Between Antigua and Barbuda and Australia