Archive for the ‘Domestic Taxation’ Category

NEW U.S. TAX LAW Seminar Series: 5.5 hours FREE Continuing Education Course Credits

These seminars cover a complete range of topics dealing with legal and practical advice for foreign investors that invest in United States businesses, United States real estate and United States securities; and aliens that immigrate to the United States. This includes income, estate and gift tax planning for nonresident alien individuals and foreign entities such as foreign corporations, foreign trusts and foreign partnerships. Special sections are devoted to foreign investors in United States Real Estate, Tax Planning and Pre Immigration Tax Planning.

Also included in this group of seminars is a thorough study of the United States tax laws governing the tax deductions and tax refunds available for victims of Ponzi Schemes and other theft losses under the Internal Revenue Code Section 165. www.ustaxlawseminars.com

WATCH A SHORT OVERVIEW OF SEMINAR FORMAT:

TAXATION both DOMESTIC AND INTERNATIONAL

Mr. Lehman’s general tax practice has consisted of a wide range of representation acting as counsel in both the criminal and civil tax areas. In the domestic tax area, he has represented clients in almost every type of commercial endeavor. This has resulted in a familiarity and use of every form of entity for tax planning purposes. This includes among others limited partnership, limited liability companies and domestic and foreign corporations and trusts.

In the criminal tax area Lehman works along side of criminal defense lawyers so that creative tax theories can be blending with the strongest defense of constitutional rights. This often results in potential criminal cases being dismissed at administrative levels.

South Florida is a major center of international trade and investment. Mr. Lehman’s international practice spans the globe. This has resulted in Lehman’s representation of foreign investors giving tax and practical advice in acquiring and selling a wide range of commercial businesses and other U.S. investment assets. This includes not only the acquisition and sale of active businesses in the U.S. but also investments in all fields of real estate including raw land, shopping centers, commercial office buildings, condominiums, residential apartments, residential homes and the like.

In addition, Mr. Lehman has provided legal advice to Americans expatriating from the U.S. and have extensively restructured many non-residents’ holdings in conjunction
with their immigration to the United States. A very unique set of tax laws applies to non-resident aliens and foreign corporations in both the income tax and estate tax areas that provides for both tax traps and successful tax planning opportunities.

He has also represented numerous Americans working and investing outside the United States taking full advantage of another unique set of tax laws. Americans investing and working outside of the United States may benefit from excluding certain income earned outside of the U.S. or deferring the taxation of such income until a later point in time. At the same time there are tax traps for American investors investing internationally that must be avoided.

By Richard S. Lehman, Esq., of Richard S. Lehman P. A.; Boca Raton, FL

In last week’s column, we established that today’s business climate is extremely treacherous for all sizes and types of business. Whether a suit is won or lost, frivolous or legitimate , there are major distractions. Time is spent defending actions, while revenue-generating activities are curtailed. Similarly, large sums of money can be spent on defense.

In the first article, we analyzed a variety of asset protection entities. In this final segment, we will look at protected forms of investment. Business owners, directors of public companies, management and individuals should consider making use of these various methods of investment as another protection against liabilities.

Exemption equals protection.

Not only can there be protection from creditors by choosing the proper entity in which to hold assets, many types of investment assets are also protected from creditors by virtue of state and federal exemptions.All states have “exemptions” to designate categories of property interests that are immune from forced sale or seizure. Florida law provides an assortment of such exemption:

• Annuity and insurance contracts. Florida law protects the cash surrender values of life insurance policies and the proceeds of annuity contracts issued upon the lives of residents of the state. Creditors of the insured or the beneficiary cannot seize the assets unless the policies or contracts were for the benefit of the creditor.
• Life insurance trusts. Consideration of the life insurance trust provides an asset protection opportunity that makes use of the trust concept, the exemption concept and also provides for major estate and gift tax benefits. This type of trust, formed to handle life insurance proceeds, is similar to the domestic trust described in the previous article. Asset protection may be afforded by providing limitations on the beneficiaries’ interest. Under Florida law is also protection from creditors due to the exemption, and it also provides for the estate tax-free payment of life insurance death benefits to beneficiaries.

By placing the policy in a separate irrevocable trust, rather than owning the policy, the insured retains no “incidence of ownership.” The death benefits payable from the policy will not be included in the insured’s estate. If the insured does not use a trust or another person as the owner of the policy and retains any incidence of ownership, all of the death benefits will be subject to estate taxes.

All states have exemptions to designate categories of property interests that are immune from forced sale or seizure. Florida law provides an assortment of such exemptions. Homestead and other exemptions.

• Homestead protection. Florida provides unlimited protection for the homestead property and improvements. The limit on the size of protected property is up to one-half acre in a city or 16 acres in the country.
• Earnings of a head of household. Florida protects compensation for personal services or labor whether denominated as wages, salary, commission or bonus. The first $500 a week of such earnings are absolutely exempt from attachment or garnishment and anything above that amount will not be subject to attachment or garnishment unless such person has agreed otherwise in writing. Wages may be protected for six months after receipt.
• Disability insurance and disability insurance proceeds. Florida exempts disability payments from creditors, including lump sum proceeds resulting from settlement of a claim against a disability carrier.
• Pension plans and IRA’s. These are generally protected, but bankruptcy courts have found that pensions will not be protected from creditors in the event of inappropriate compliance with tax or labor laws. Among common defects that may cause this qualification are a failure to cover all employees requiring such coverage, inappropriate investments and loans, and prohibited transactions.
• Alimony rights. These rights are a protected asset.
• Unemployment compensation benefit rights. As defined by Florida law, these rights are exempt from all claims and creditors.

Keep in mind that these are cursory explanations of several asset protection strategies. Business owners should realize that their assets are always at risk, so it’s worth considering these plans with a professional as a way to protect what you’ve built personally and through your business.

Originally Published: May 31, 2002 in South Florida Business Journal

By Richard S. Lehman, Esq., of Richard S. Lehman P.A.; Boca Raton, FL

In times of low interest rates, special opportunities arise for estate planning. It is of the utmost importance that all people look at their portfolios and consider various strategies for maximizing their wealth for current and future family generations.

Most are aware of the more common tax-planning tools, such as various exclusions — for example, each person’s right to give $11,000 annually, free of gift tax, to each of any number of beneficiaries; and the right to transfer, during a lifetime, $1.5 million free of estate tax and $1 million free of gift taxes. Fewer people, however, are aware of the more sophisticated estate-planning tools that are used generally by the very wealthy in these economic times but have for years been available to all.

With that in mind, the following are several summarized tax-planning tactics that should be considered and discussed with your team of financial-planning experts.

Transfer with Retained Interests

The first estate-planning technique that accomplishes several tax purposes at the same time is known as a Transfer with Retained Interests, designed to transfer assets out of one’s estate that are likely to greatly appreciate in value in future years. Properly used, the technique should insure that the increase in value after the lifetime transfer of an asset is no longer included in one’s estate for estate tax purposes. The technique also can result in completing transfers of assets to one’s children, grandchildren and other beneficiaries at highly reduced gift tax costs.

Many of these transfers also generally insure some degree of continued control, permitting the transferor to retain a good deal of the economic benefits of assets he or she transfers. This technique is extremely valuable when interest rates are low, such as now.

Grantor Retained Annuity Trust

One of the most effective strategies in today’s low-interest-rate climate involves establishing a Grantor Retained Annuity Trust. The following are several features:

• The original owner of the asset and creator of the trust, the Grantor, transfers an appreciating asset to an irrevocable trust and the Grantor continues to retain all or a portion of the trust’s income for his or her life or for a period of years (the “Term”).
• At the end of the term of the annuity, the asset (the “Remainder Interest”) will pass to the Grantor’s beneficiaries. Assume that the asset will increase in value. By making a gift of the Remainder Interest, any increase in the value of the asset will pass to the beneficiary without being taxed in the Grantor’s estate. Equally as important, by making a gift only of the Remainder Interest and not of the entire ownership of the asset, the valuation of the gift, for gift tax purposes, is greatly reduced because there is a delay in the beneficiaries’ enjoyment of the gift during the Term.

To understand why the Grantor Retained Annuity Trust is beneficial at low interest rates, assume the following:

• The Grantor establishes an Irrevocable Trust for his children and transfers an asset worth $1 million that will pay an income of 6 percent per year and will double in value in 10 years.
• The Grantor retains an interest in all of the trust’s income for 10 years at $60,000 per year, consuming all the trust income annually.
• At the end of the 10-year period, the Grantor’s beneficiaries own the asset.

To determine the value of the taxable gift of the Remainder Interest the IRS uses a fixed formula tied directly to the prevailing interest rates. This formula applies to all transactions and does not take into account the actual income produced by an asset in trust. Since the interest rates are so low today, the IRS uses a valuation formula that assumes the Irrevocable Trust will provide an annual return of only 4.2 percent, or $42,000 per year. However, the Irrevocable Trust earns $60,000 per year, to be paid to the Grantor.

The IRS rule assumes that the Trust will produce only $42,000 in income. The IRS formula to determine the value of the Remainder Interest also assumes that the balance of the $60,000 to be paid to the Grantor, equal to $18,000 per year, must be taken from the Irrevocable Trust’s $1,000,000 principal each year.

Even though the Irrevocable Trust provides $60,000 a year in income, under these IRS assumptions the value of the taxable gift of the Remainder Interest that the Grantor has given the children 10 years from now is reduced (1) to reflect that the gift will not be received for a period of 10 years, and (2) because of this presumed invasion of principal, equal to $18,000 annually.

Thus, for gift tax purposes, the Remainder Interest will pass to the children when the term of the annuity ends in 10 years and it will be valued as a small percent of the Trust’s value, subject to only a small gift tax at the time of the gift. When the term ends after 10 years, the asset may continue to be held in trust for the children’s benefit.

Assuming the facts above, the IRS formula says that the gift now of the Remainder Interest to the children of this $1 million asset is a taxable gift equal to only $518,158. The asset is transferred to an Irrevocable Trust at a value, for gift tax purposes, of $518,158. At the end of the Grantor’s annuity term, the appreciated asset, with a value of $2 million, will pass free of any additional gift or estate tax, since it was all given as a gift 10 years ago. At a 48 percent estate or gift tax rate, there has been a savings of $740,921 in taxes, calculated as follows:

• Property Value at Termination of Annuity $2,000,000
• Taxable Gift — Present Value of Remainder ( 518,158)
• Tax-Free Portion of Gift to Children $1,481,842
• Potential Estate Tax Savings @ 48% $711,284

There are, however, certain disadvantages of utilizing the Grantor Retained Annuity Trust. Most important of all, if you die during the term of the annuity, the value of the asset or some portion thereof will be included in your estate for estate tax purposes, and none or only a portion of the tax benefits sought by using a Grantor Retained Annuity Trust will result.

Several techniques have been developed that will ameliorate the consequences of dying during the term of the annuity.

Charitable Lead Trust

A Charitable Lead Trust can provide a long-term economic advantage to the Grantor of the Trust. It can accomplish these tax and economic benefits while permitting the Grantor to endow charitable causes. The Charitable Lead Trust is used generally to leave appreciating assets to one’s beneficiaries at significantly reduced estate and gift tax rates, the way the Grantor Retained Annuity Trust does. The Charitable Lead Trust also has special tax advantages in the current climate of low interest rates.

A Charitable Lead Trust is formed by contributing an asset to a trust that pays income to qualified charities for a number of years, after which time the charity’s rights to the income cease and the property is owned by the Grantor’s beneficiaries.

Like the Grantor Retained Annuity Trust, the principal advantage of a Charitable Lead Trust is that it permits a donor to give a Remainder Interest in property to a family member while paying little or no gift or estate tax. Generally, the Grantor does not receive an income tax charitable deduction. However, the income of the Charitable Lead Trust is not included in the donor’s income if it is paid to the charitable beneficiary. Furthermore, the donor will receive a gift tax deduction for the value of the charity’s interest.

The Charitable Lead Trust works best with an asset that will appreciate significantly, since the appreciation in value of the trust principal, which ultimately will belong to the beneficiaries as outright owners, will pass free of estate and gift tax.

Valuation Reductions

A tax-planning concept not necessarily related to low interest rates is the technique of assuring the lowest value for tax purposes of any asset transferred by you to a beneficiary, either as a sale, as a gift (gift tax) or at death (estate tax). The gift and estate taxes are both taxes on the transfer of wealth and are measured by the value of the transferred asset. An asset that can be transferred at a legally lower value rather than higher value can result in a substantial saving.

One example of this can be found in the dual ownership of an asset. A piece of real estate (the “Real Estate”) owned equally by two people as tenants in common might have a sale value of $1 million. However, because each owner owns only 50 percent of the Real Estate, the value of each owner’s separate interest is reduced (for estate and gift tax purposes) to a value that is less than one half of the Real Estate’s full appraised fair market value.

This is because each owner’s 50 percent interest has impediments that affect its value. A buyer for one owner’s share would have to deal with the second owner’s desires for the Real Estate that may be different from those of the potential buyer. The market for a buyer at the full value of the Real Estate is going to be reduced when the seller is selling only partial and not total ownership of an asset.

The Internal Revenue Code recognizes this practicality and for gift or estate tax purposes provides for a “valuation reduction” for the impediments of partial interests. For gift tax purposes, the value of a gift of the 50 percent ownership interest might be only $300,000

A more sophisticated version of obtaining a valuation deduction is the use of an entity known as the Family Limited Partnership (the “Partnership”). A family asset such as the Real Estate can be contributed to the Partnership that is owned and controlled by the contributor and/or the contributor’s family, with family members having differing voting and economic interests in the Partnership. Once the Real Estate is owned by the Partnership, each of the family members then owns a partial interest in the Partnership and will not directly own the Real Estate.

Therefore, a gift of 50 percent interest in a Partnership that owns a $1 million piece of Real Estate may be a gift valued at $300,000 and not $500,000.

The Partnership (or a Limited Liability Company) is often the preferred method of transferring partial ownership interests. This is because not only does it achieve the estate or gift tax valuation reduction but it also accomplishes many other aims. The Partnership provides the transferor with a method of continuing to control and benefit economically from the assets without assuming any personal liability.

In addition, the Partnership provides for significant asset protection for its partners, making it more difficult for creditors of the owner to gain control of the full value of Partnership assets. A discussion of the Partnership’s asset-protection qualities, however, is beyond the scope of this article.

Private Foundation

A completely different estate-planning tool is forming a Private Charitable Foundation (the “Foundation”).

This technique does not allow one to leave more property to heirs and beneficiaries at lower tax rates. It does, however, permit a person to create a lasting charitable legacy that the person and the person’s family continue to control and finance with funds that are deductible for income and estate tax purposes. In addition to accomplishing this charitable purpose, the Foundation can provide an income stream to beneficiaries in the form of board member compensation.

A charitable foundation is generally formed as a non-profit corporation that has a board of directors or trustees and officers. The Foundation can be established during a person’s life, and at the person’s death the Foundation is subject to a set of compliance rules to insure that its funds are being distributed and used for charitable purposes.

This article is intended to make high-net-worth individuals aware of a variety of strategies to preserve assets and limit tax liability. Keep in mind that these strategies are complex and should never be implemented without the assistance and guidance of an attorney.

Richard S. Lehman is a principal in the Boca Raton-based law firm of Richard S. Lehman and Associates, P.A. The firm specializes in tax law, estate and asset protection planning, and international law.

There is one creditor that is often not put off even by bankruptcy - the IRS.

By Richard S. Lehman, Esq., of Richard S. Lehman P.A.
Published: South Florida Business Journal

Whether it is individuals who have not filed their income tax returns for years and wish to get clean or taxpayers who filed tax returns and just did not have the money to pay, there is a way out: the offer in compromise.

An offer in compromise is a contractual agreement between the IRS and a taxpayer that permits a taxpayer to pay a specific amount in full settlement of tax liabilities, including interest and penalties. This author has found that the IRS deals with these offers in a businesslike and at times humanistic way.

IRS policy acknowledges that the “acceptance of an adequate offer will result in creating for the taxpayer, an expectation of and a fresh start toward compliance with all future filing and payment requirements.” In addition to the tax liability, the penalty and interest liabilities can be established by an offer in compromise.

The IRS has three grounds in considering an offer in compromise: doubt as to liability; doubt as to collectibility; and to”promote effective tax administration.”

Offers involving doubt as to liability are relatively infrequent. Generally, the IRS does not consider an offer in compromise as a substitute for the normal procedures to determine tax liability. However, if the doubt as to liability is supported by evidence, it will be given consideration and a compromise amount can be reached.

After the taxpayer’s liability has been established by a court judgment, there can be no doubt as to liability.

It would also be misleading for the taxpayer to think that promoting effective tax administration is an easily available remedy. IRS regulations use as examples of a basis for compromise the most dire of circumstances, such as a taxpayer unable to earn a living because of a long-term illness, medical condition or disability, and expectations that the taxpayer’s financial resources will be exhausted providing for care and support. Another example is the taxpayer has assets, but will be unable to pay for basic living expenses if those assets are sold to pay outstanding tax liabilities.

Most offers in compromise are based on doubt as to collectibility and the taxpayer’s inability to pay the full tax liability. The IRS policy views an adequate offer as one that will result in a collection of the amount of tax potentially collectible at the earliest point in the collection process and at the least cost to IRS.

An offer based on doubt as to collectibility must be accompanied by an IRS full financial disclosure form. A taxpayer has three options for paying the amount of the compromise offer.

Generally, collection will require payment of cash in the amount of the offer within 90 days. When the circumstances warrant it, however, collection can also accept a short-term deferred offer that is paid within two years or, under appropriate circumstances, more than two years.

In addition to amounts paid or payable under an offer in compromise, the IRS may use a collateral agreement that asks the taxpayer to agree either to pay additional amounts from future income or to forego present or future tax benefits

There are certain parameters at various IRS review levels that may prevent a revenue agent from agreeing to what seems to be a very logical settlement with a taxpayer. It is extremely important to frame one’s offer in compromise in a manner that is not only realistic under the circumstances, but also in a manner that is sensitive to the limits imposed by the IRS parameters.

Richard S. Lehman is a principal in the Boca Raton-based law firm of Richard S. Lehman and Associates, P.A. For more information, call (561) 368-1113 or visit www.lehmantaxlaw.com.

The web sites below have been created by Lehman Tax Law to help you better understand your options. Since tax law is ever evolving — the site content will evolve and provide detailed advice. The following sites are current and up-to-date.

United States Taxation of Foreign Investors: http://www.unitedstatestaxation.com

This web site is intended to provide the foreign investor with only a basic introduction to the tax laws of the United States as they apply to that foreign investor.

The narrative outline available from this site is available in 8 languages:
English, French, Spanish, German, Italian, Arabic, Chinese, and Russian

Ponzi Scheme Tax Loss:
www.ponzischemetaxloss.com
This web site offers tax recovery advice for victims of Ponzi Schemes. Includes a Free 50-minute web seminar: For victims of Ponzi Schemes and financial professionals. Learn how recovery through the “Tax Refund” is quick and reliable.

• How to best secure a tax refund from Ponzi Scheme losses
• How the government has made recovery easier
• What you need to know about theft losses
• How to plan and implement a taxpayer Ponzi Scheme tax loss for maximum benefits now, and in the future.

IRS Voluntary Compliance for Offshore Banking: www.offshorebankingamnesty.com

On March 23, the Internal Revenue Service came up with a six month “Amnesty Program” to allow U.S. taxpayers with unreported income to disclose their foreign bank accounts without fear of any criminal tax penalties. That was then — and this is now - Mr. Lehman has found on multiple occasions that when dealing with cases such as those involved in the Amnesty Program, the taxpayer is best served by making his first few steps the right ones which include hiring the right team of counsels that include both a tax lawyer and a criminal lawyer.

Richard S. Lehman, P.A.
2600 N. Military Trail, Suite 270, Boca Raton, Florida 33431
Tel: (561) 368-1113 | Fax: (561) 998-9557