Posts Tagged ‘united states taxation’

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 & Associates Attorneys at Law

The general principles discussed herein are not intended to be legal or tax advice and taxpayers should consult with their individual legal, accounting and tax advisors.

PRE-IMMIGRATION TAX PLANNING

What Can Be Accomplished Prior to Residency Status

South Florida continues to be a destination for legal aliens hoping to invest; do business and live in the United States. Very often immigrating residents are unfamiliar with the tax laws of the United States that they will face upon obtaining their resident status. Often this lack of knowledge can be costly with immigrants paying unnecessary taxes and burdening themselves with liabilities.

The following is a checklist of issues that may be helpful to avoid these tax problems. The checklist does not consider the effect of a tax treaty that may apply to an immigrant.

I. Status for Tax Purposes

- Resident for Income Tax Purposes

a. Green Card

b. Substantial Presence Test

c. Voluntary Election

- Resident for Estate and Gift Tax Purposes

a. Country of Domicile

II. Taxation Pattern

- Resident - Subject to Taxation

a. Income Taxation - Worldwide Income

b. Estate Taxation - Worldwide Assets

c. Gift Taxation - Worldwide Assets

- Non Resident Alien - Subject to Taxation

a. Income Taxation - United States Source Income, Limited type of Foreign Source Income

b. Estate Tax - United States Situs Assets Only

c. Gift Tax - Real and Tangible Personal Property with a United States Situs

- Situs of Assets

a. Real Property in the U.S. - U.S. Situs

b. Tangible Personal Property - Located in the U.S . - U.S. Situs

1. - Cash - Needs Special Consideration

2. - Exceptions for visiting art work

c. Intangible Personal Property - Dependent upon the type of intangible property

III. Pre-Immigration Planning - Income Tax and Gain

- Objective - Minimize United States Gains and Income Tax

a. Key Strategy is to accelerate gains prior to residency so that gains earned while one was a non resident alien are not subject to U.S. tax after residency is obtained. Some examples of acceleration of gain are:

b. Traded securities with unrealized gain may be sold before residency and repurchased with a new cost basis

c. Illiquid assets with unrealized gain may be sold to related parties or third parties and gain realized. Careful planning must be undertaken if one sells and repurchases illiquid assets; especially with related parties.

d. Income expected to be paid after residency should be accelerated where possible and paid prior to residency.

Some examples of acceleration of income are:

1. - Exercise stock options
2. - Accelerate taxable distributionsfrom deferred compensation plans
3. - Accelerate gains on Notes held from installment sales

IV. Pre Immigration Planning - Estate and Gift Tax

- Objective-Minimize United States Estate Tax

a. Key strategy is to minimize assets in one’s estate before obtaining residency status; and where possible to retain some degree of control over assets;

b. Planned gifts to third parties should be made prior to residency;

c. Planned gifts of United States Situs Property

1. - Tangible Property - Physical Change of Situs to a Foreign Situs Before Gift is made;

2. - Real Estate - Contribution to foreign corporation and gift of stock in foreign corporation.

d. Transfers in Trust for Beneficiaries

V. EXCEPTIONAL CIRCUMSTANCES AND SPECIAL TAX BENEFITS

- Students

a. A foreign student who has obtained the proper immigration status will be exempt from being treated as a U.S. resident for U.S. tax purposes even if he or she is here for a substantial time period that would ordinarily result in the student being taxed as a U.S. resident.

b. This student visa not only permits the student to study in the United States and pay taxes only on income from U.S. sources not worldwide income. The visa also permits the student’s direct relatives to accompany the student to the United States and receive the same tax benefits.

c. Assume the student, a Columbian woman aged 40, is married to an extremely successful Columbian businessman who accompanies her with their two children to the U.S. His annual income is $1.0 Million and is earned from the banking business in Columbia. He earns no U.S. income. Under those circumstances, for U.S. income tax purposes, this businessman is exempt from U.S. tax on his worldwide income while living full-time in the U.S. for less than five calendar years.

- Treaty Benefits

Aliens that are governed by a tax treaty can generally spend more time in the U.S. than an alien not covered by a treaty before being considered a resident alien for tax purposes.

On March 23, 2009 the I.R.S. initiated an Amnesty Program for the purpose of permitting taxpayers with foreign bank deposits to fully disclose these foreign deposits and avoid criminal sanctions as long as the taxpayer was not under investigation by I.R.S. at the time of the disclosure and the income involved was earned form legal sources. (The “Amnesty Program”).

The Amnesty Program also assured taxpayers in the program of a fixed calculable amount of all the costs involved that included, taxes, penalties and interest, necessary to pay off in full any civil liabilities owed by the taxpayers.

The Amnesty Program caused at least 7,500 taxpayers to come forward for the benefits of the program. The program was terminated on October 15, 2009.

Other than assuring taxpayers of a fixed amount of money that would be due to the I.R.S. and adding certain procedural protections of a taxpayer, the Amnesty Program did not differ from and was based upon the long standing Voluntary Disclosure Program. Under this Program, the I.R.S. has accepted late filed and amended returns without applying any criminal penalties for decades so long as the requirements of the Voluntary Disclosure Program were met.

Many taxpayers now regret the fact that they did not accept the I.R.S. Amnesty Program. This is because the Voluntary Disclosure Program, like the Amnesty Program, will still permit taxpayers to avoid criminal prosecution with a Voluntary Disclosure of all previous taxes due. However, the Voluntary Compliance Program does not provide the taxpayer with any guarantees of the amount that may be assessed against a taxpayer for the complete payment of all taxes, interest and in particular, penalties that are due. Under the worst of circumstances, these potential penalties can easily exhaust the long term build-up of a foreign bank deposit upon which taxes were not paid.

This article is not about the Voluntary Disclosure Program, though future articles will be published on this Website that will describe the Voluntary Disclosure Program. This article is about the actions that are being taken now by the U.S. to force the full disclosure of all foreign assets and income of U.S. taxpayers. This article is intended to encourage high net worth individuals with unreported foreign income and assets to take advantage of the I.R.S. Voluntary Disclosure Program as soon as possible so that they avoid criminal actions and to limit their civil penalties before it is too late. The U.S. is moving fast on high net wealth tax payers, especially with overseas assets.

High net worth taxpayers with foreign income and foreign assets must be aware that two actions were recently taken on the exact same date aimed at U.S. taxpayers with foreign assets. One step was taken by the Internal Revenue Service and the other by the House of Representatives in a proposed new bill presently known as HR.3933.

The Internal Revenue Service announced that a new division was recently established to specifically audit and deal with wealthy Americans who are hiding assets. This was announced by I.R.S. Dave Schulman and reported on October 27th. According to Commissioner Schulman, the I.R.S. is going to take a “unified look” at the entire web of business entities controlled by a high wealth individual”.

Almost simultaneous with this announcement by the I.R.S. of this specialized audit group, on October 27th the House of Representatives announced the introduction of the “Foreign Account Tax Compliance Act”. This new law would force foreign financial institutions, foreign trusts, foreign corporations and tax advisers involved with such entities to provide information about US. account holders, owners, guarantors and clients with those entities.

The bill in essence will require foreign financial institutions, trusts, foreign corporations and other entities that earn income from U.S. financial assets to withhold a 30% tax on that income and pay it to the U.S. unless that foreign institution agrees to disclose the identity of any U.S. persons, both directly and indirectly, with accounts in those institutions.

High net worth individuals with foreign assets will soon find that they are squeezed between these two new actions and forced to fully disclose all of their income from whatever sources or suffer serious penalties with serious jail time and financial burdens.

The following is a short summary of this new proposed bill.

• The bill would impose a thirty percent (30%) withholding tax on income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution’s affiliates) and to annual report on the account balance, gross receipts and gross withdrawals/payment from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners.
• The bill would require foreign corporations to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign corporation (i.e., owns more than ten percent (10%) of the foreign corporation’s stock (by vote or value)).
• The bill would require any individual that holds more than $50,000 (in the aggregate) in (1) a depository or custodial account maintained by a foreign financial institution or (2) any foreign stock, interest in a foreign entity, or financial instrument with a foreign counterparty not held in a custodial account of a financial institution (collectively, “reportable foreign assets”) to report information about these accounts and/or assets to the U.S. Treasury Department with the individual’s annual tax return. Failures to comply with this requirement would be subject to a penalty of $10,000, and higher penalties (up to $50,000) could apply if the failure is not remedies within 90 days following notification from the Treasury Department.
• Penalties for underpayments attributable to undisclosed foreign financial assets. The bill would impose a penalty equal to forty percent (40%) of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).
• Advisors who help set up offshore accounts would be required to disclose their activities or pay a penalty.
• The bill strengthens rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to U.S. beneficiaries and reporting requirements on U.S. transfers to foreign trusts.

Contact Richard S. Lehman, P.A. today to help guide you through the process of determining the best choice available for you, without waiving valuable rights. Mr. Lehman has spent years as an attorney with the Internal Revenue Service.

In addition Mr. Lehman has over 35 years of private practice experience representing clients, struggling to find their way through the complexities of the tax law, and dealing with the I.R.S.

Richard S. Lehman, P.A.
561-368-1113