On April 12th, Taxlinked hosted its webinar focusing on everything that is trending in international estate planning, both in the United States and Europe.
Our panel of experts, led by moderator Beth Tractenberg, a Partner at Steptoe & Johnson LLP in New York, answered a series of questions submitted by our community members.
In case you couldn’t tune in to the live event, please feel free to download the full transcript to read at your own convenience.
For the webinar’s audio recording, information on our panelists and the event’s main questions, please have a look at the event page found HERE.
International Estate Planning Webinar: The Highlights
Here are some of the key international estate planning questions covered and a few of the event’s main highlights.
What are the top five trends that you are seeing in estate planning these days, both domestically and internationally?
Gideon Rothschild: “US clients who have significant potential appreciation in the future would still be well advised to proceed with planning as long as it is not going to be subject to gift tax… Zeroed-out GRATs, which is something we've done all along for many years, are still going to be popular or estate freezes, it's still going to be popular… One of the big reasons that folks are coming into the US is because the US is seen as a safety country, economically stable for investments. So people are beginning to look more to the US as a flight place, both for them personally as well as for their assets… Since the election, I've also been contacted by a number of people who are genuinely concerned about the US economy, generally concerned about government expropriation exposure if foreign exchange controls all of a sudden are imposed in the US. They want to have an opportunity to flee. They're looking at second citizenships to be able to establish themselves in other jurisdictions in case they have to flee the United States.”
Goran Studen: “There's a lot of interest in dual citizenship, especially from Eastern Europe, and that could be a trend where we see many clients asking for possibilities to obtain a second citizenship due to maybe long-term problems they might expect, to put it very mildly, in terms of legal certainty or uncertainty… Another issue is also offshoring versus onshoring. We've seen it in both directions. We've seen people who are getting their offshore assets back onshore, into Switzerland, into Germany, but also vice versa… Another big trend is KYC discretion and compliance. The whole issue of regulation is also very important in the estate planning arena. We cannot actually do anything in terms of structuring or estate planning without coming across all the KYC requirements, which are changing basically as we speak.”
Michael Malloy: “One thing is protecting client privacy in the midst of trying to implement CRS. I think as a community we've been a little slow to address this fundamental issue… It's also interesting to review the different tax amnesty programs for different countries and see that the ones that are successful have a very good mix of the carrot and the stick. And the ones that aren't so successful don’t offer clients much incentive to bring their assets back onshore.”
How important is it to add life insurance to a client's planning? And why would you say that it is important? Who on the planning team do you think should initiate the discussion? And can you give us some examples of particularly successful solutions that you've used with clients?
Michael Malloy: “The traditional reason for adding life insurance is to create liquidity in the estate. So counsel says that if a client is heavily invested in real estate or hard assets then there's a compelling need. And clients in low tax or no tax jurisdictions maybe have a less compelling need. But there may be other reasons to have life insurance as it provides some asset protection. In certain parts of the world, clients want to mitigate forced heirship rules, where the way the tax regime changes back and forth between estate tax and income tax, there may be other taxes that that increased liquidity can pay besides just the estate tax.”
“In terms of clients who have a nexus to the US, i.e., US beneficiaries of foreign trust, the private placement life insurance (PPLI) works very well in that regard, because, as you all know, for the US beneficiaries the foreign trust works very well until the grantor dies. And then the US beneficiaries are subject to draconian taxes that may even eliminate the entire trust corpus within a very few years.”
“And it works particularly well when the beneficiaries are both US and non-US and the assets are spread out. Because one trend is rather than use the PPLI, practitioners just domesticate the trust, moving it to South Dakota or Delaware or Nevada. But if there are other beneficiaries or there are offshore assets, it doesn’t work so well.”
How would you rate foundations and privately held investment funds in terms of robustness and popularity for international estate planning?
Goran Studen: “From a European and offshore perspective, a foundation is a legal entity that can be used for many purposes involving private estate planning. Especially from a European perspective—from a civil law perspective—foundations are something non-common law countries tend to put more legal certainty on. Foundations have legal personality. The foundation in itself can obtain rights and duties. It can act. It can own assets, which is a major part of the structuring if I wanted to bring all assets I have worldwide into one foundation… The foundation is very much located offshore. For example, Austria, Jersey or Guernsey, or Liechtenstein, which has a very fascinating foundation law since 1993.”
Gideon Rothschild: “There's always been a concern from a US tax perspective as to whether a foundation is taxed as a trust or as a corporation, which leads to some uncertainty there if you have US connections. But, generally speaking, for asset protection for US persons and outbound planning, US persons are more inclined to use trusts, whereas if I'm engaging in asset protection for someone who lives in a similar jurisdiction, we might consider a Liechtenstein foundation perhaps, which has probably one of the best asset protection features available these days.”
Let's say a client has a BVI company, which owns an apartment in London or owns an apartment in the US or owns both. When that person dies, if he does not extend his good planning to having a will or other specific estate planning documents, we are faced with the question of: what law is going to govern the disposition of this property? So what kinds of issues do you see in terms of transfer of the asset to the heirs?
Gideon Rothschild: “You have to be very careful in even disposing of assets under a will, of properly describing what those assets are, understanding the difference between what are US assets, because what US situs assets are for estate tax purposes may be very different to what US assets are for disposition purposes, as defined under the laws of the local jurisdiction. And it really depends on where you’re domiciled to determine where the assets are located and who has got jurisdiction over those assets.”
Goran Studen: “What forced heirship comes down to is, from a legal perspective, you have a share of the estate, which is reserved for a certain group of beneficiaries or people, the spouse and other descendants who have a mandatory share of the estate. To give you an example under the current forced heirship regime in Switzerland, if you have one child and you want to draft the will giving everything to charity, for example. Under the forced heirship rule, three quarters of your estate are reserved for that child. So you can basically just give one-quarter away… So if I have clients who don’t want the forced heirship rules, I cannot draft them out of the will because Swiss law will apply upon demise and we will have those three quarters of forced heirship rules. But a simple but very effective tool in terms of planning can be to move to a jurisdiction that does not have forced heirship rules, for example, the UK.”
How can practitioners feel confident that the advice they've given this year will still be good advice in three or five years? Even if you review your client's positions on a periodic basis, what do you see in terms of switching from one sort of planning to another to address changes, particularly on tightened money laundering laws?
Goran Studen: “It is very important from the outset to make sure that estate planning is only as good as the current environment we're dealing with. So as advisers, we can only work on the basis of existing laws and what may be predictable in terms of whether we know a current legislation is in the process on being enacted… But as soon as something changes, if you move abroad, if you acquire any further assets located abroad or in your current domicile, if you change anything about your current environment, or if anything happens on the side of the legislator, we will have to look at it again and maybe substantially restructure it. Talking from experience, if you are open about it from the very beginning, I have not met one client who had categorical problems with such an approach.”
Gideon Rothschild: “The key is, whatever plan we do, to do it in a flexible manner so it could be unwound easily without a lot of estate tax or legal complications…”
Michael Malloy: “You have to be very careful and you have to know what the client's aims are…A client from Venezuela is different than a client from Mexico in terms of how it’s going to work in a structure… But it’s so amazingly unpredictable.”
What are your thoughts on the use of protectors and how that interacts with the Common Reporting Standard (CRS) requirements?
Goran Studen: “It does not really make a difference from our legal perspective and also from CRS, as far as I'm concerned, how you call it. I think if you call it protector and give him too many rights, especially appointment rights, you will have problems. If you just call it guardian or family friend or committee and give him the exact same amount of powers, I am pretty sure they would still be qualified as beneficial owner or as someone who falls under the reporting obligation.”
“So what we're seeing as a trend actually to call it by a different name, I don’t think that's a very long-lasting strategy. The other trend is to give beneficiaries actually as many powers as they can handle. This is very difficult and tricky. How many powers can you actually give beneficiaries without triggering not only the CRS requirements and problems but also the triggering of additional tax negative implications? So it’s a very difficult and delicate task.”
What kind of advice are you giving clients as a sophisticated adviser on how to move assets here and avoid some pitfalls or tax traps?
Michael Malloy: “FATCA, in a certain sense, is mostly a one-way street with information flowing back to the IRS. But, at the same time in FATCA, there are these IGAs—Intergovernmental agreements—and they can be turned on at will. Like a few months ago, the US reported to the Israeli government the existence of undisclosed bank accounts.”
“So I think some plans are they move some assets, say, to Nevada or South Dakota, and form an LLC. But then they have other assets offshore and they think the LLC is going to block everything. There are a lot of traps, say, moving things to the US.”
Gideon Rothschild: “I think, first of all, that a lawyer has some ethical obligation to ensure that the client is not engaged in money laundering or terrorist financing… So the first thing I tell clients is, why don’t you go to a bank? Give them all the KYC information that they would need to open up an account that would benefit any of the beneficial owners… The interesting part of that equation is: What do you define as money laundering offense? Under US laws, tax evasion, you may be surprised, is not a money laundering offense. Yet under foreign countries' laws, tax evasion in most of the developed countries is an enumerated money laundering offense…I don’t want to be a target of a US prosecutor or a target of an ethical violation in assisting someone with what is knowingly a money laundering offense in their home country.”
The United Kingdom was the first country in the world to introduce a year ago a public register of beneficial owners for companies registered at Companies House. What is your position on these requirements for public registers for companies and trusts worldwide?
Goran Studen: “Talking about Germany, if you want to see far-reaching legislation, please feel free to look at the German legislative act in terms of introducing this transparency register. It is complicated. It is even for legal experts almost impossible to understand what reporting obligations exist… Client-attorney privilege is something we as attorneys had to bring up in Parliament in Germany to say there is actually a red line you should not cross… If this legislation passes in Germany and if it becomes a role model for other EU jurisdictions, this would certainly be a big disadvantage for setting up any company, I must say, in Germany. Those reporting obligations are very far-reaching; we're now talking about if you own 25 percent or more shares in a company, you have to give that information, not only to the bank obviously, but report it to the state.”
To download the entire transcript, please click HERE.