© Copyright 2000 Wealth International, Ltd.

NOTE: This report is presented with the understanding that the publisher is not engaged in rendering legal or accounting services. Questions relevant to the specific tax, legal, and accounting needs of the reader should be addressed to practicing members of those professions. This information was gathered from sources believed to be reliable but it can not be guaranteed insofar as it applies to any particular taxpayer. Wealth International, Limited specifically disclaims any liability, loss, or risk, personal or otherwise, incurred as a consequence directly or indirectly of the use and application of any of the techniques or contents of this report. No copies of this material may be made or redistributed without the express written consent of Wealth International, Ltd.

Tool Use Examples

Below are examples where tools introduced previously are put into action. They are illustrations of simple but effective tactics that are available once a decision to act is made, whether that action is to set up one’s business in a legal manner more conducive to asset protection, or to move some of one’s affairs offshore. Legal and other details that would accompany an actual transaction are largely glossed over. When and if the time comes for action you should consult with an experienced practitioner. But come prepared with an expanded mind.

Protecting Your Home or Real Estate

To minimally protect your home you can transfer ownership of the property to a domestic contractual trust. The trust is considered separate for ownership purposes, and thus provides partial asset protection. Note that if the transfer is made, then at the very least a search of assets held in your name would no longer immediately reveal your home. If under IRS guidelines the trust is deemed a “Grantor Trust” then it is not considered distinct from you for tax purposes and does not file a separate tax return.

If better protection is desired for the equity in the home and the mortgage holder (if any) is flexible, then the house ownership can be placed in a limited liability company (LLC) and then 99% of the membership interests of the LLC conveyed to an offshore trust. As the manager and one of the LLC members (1% owner) the client can maintain some control of the home while protecting it. Once the home is placed into an LLC/offshore trust combination, the equity could then be stripped from the home by taking out a second mortgage on the home, and the cash from the second mortgage could subsequently be conveyed to an offshore trust.

Rental property can be protected with the same strategies utilized for the owner-occupied home discussed above. It would be wise to place each property into a different LLC and then take the LLC membership interests from each LLC and place them into one or more offshore trusts.

Protecting Your Investments

Portable investments such as stocks, bonds, brokerage account holdings, precious metals certificates and their like, can be readily moved between jurisdictions, unlike real estate. As with real estate they can be protected with an LLC/offshore trust combination. However, protection can be achieved more simply by transferring the ownership of these mobile assets directly to the independently managed foreign trust in a jurisdiction where asset protection is strong legally ... and in practice. (Stay apprised of ongoing developments in order to accurately assess this.)

Protecting Business Assets

An owner of a business containing valuable assets could fruitfully consider the idea of becoming a de facto employee with no ownership interest in his or her primary source of income. A physician, dentist, chiropractor or other medical professional, for example, could place all professional equipment, e.g., x-ray and ultrasound machines, microscopes, lab equipment, examination tables, etc. into a trust or LLC/trust combination (the entity receiving payments and engaging in banking should probably be an LLC). All other office equipment, e.g., desks, computers, fax and copy machines, filing cabinets, etc. could then be placed into a separate entity. Automobiles could be placed into additional separate LLC/trust combinations for greater liability protection. The main business would continue to function, receiving payments, hiring employees (including the former legal owner), paying bills, etc., but would own few assets, the usual targets of liability proceedings, while leasing its necessary property and equipment from the various independent trusts or LLC/trust combinations at going market rental rates. Liability insurance savings could partially offset any setup costs.

Avoiding Probate

The basic concept here is that when you die the trust does not. This applies even in the case of the Revocable Living Trust. The more thorough a job that you do of conveying your assets to a trust, the less is left to be run through the probate mill. The probate process takes time and money for even the simplest of estates, and the details go into the public record. This use of trusts is not in the least esoteric. Further using a trust to actually reduce estate taxes deviates from the strictly routine, but is not difficult. Many sources on the subject of using trusts to achieve this exist. Anyone with an estate whose value exceeds the estate tax exemption should consult a professional knowledgeable in this legal domain.

The remaining example strategies emphasize saving taxes, which certainly does not conflict with protecting assets (if done with prudent discretion). They are included to give a taste of what is available once one has addressed the basics.

Using a Business to Shelter Tax-deductible Benefits

If you are one of the small businesspersons organized as a sole proprietorship or general partnership, there are many tax reduction strategies that would become available upon conversion to a corporation, LLC, or business trust. Specific tax breaks may vary with structure type. Many of the expenditures that you are paying with after tax income could be paid for with pretax income after the reorganization. Also, certain benefits that are tax-free to employees are still deductible from the business’s gross income.

As one of the employees of your business, the business can legitimately pay many of your expenses – nontaxable to you but deductible as business expenses. Every dollar deducted in this way legally escapes self-employment, federal, and state taxes. You can create your own “cafeteria” of benefit choices – similar to the offerings of many large companies, but with you creating the package. Examples of possible qualifying benefit/expenses include:

Depreciation allocatable to the portion of your home used as an office

Depreciation on furniture and appliances used as business assets

Mortgage interest, repairs and maintenance, utility and insurance costs allocatable to the portion of your home used as a business office

Health/accident insurance and life insurance (up to defined limits) premiums; medical/dental expenses of employee spouse and dependents

Expenses associated with child daycare

Business-related travel and vacation expenditures

Business-related education costs

Business and professional club dues

Cost of company gym and exercise equipment

Legal expenses

Business-related company car, airplane, or boat expenses

In the end the claimed expense should have a credible business purpose. It is a good idea to consult with someone experienced in the area when claiming such deductions. Before deciding to legally transform your hobby or avocation into a “business” become aware of the guidelines the IRS or other tax authorities use to determine whether you are running a valid business, and thus allow the accompanying deductions.

Income splitting

If one’s business is structured as a corporation, LLC or business trust then the flexibility available in allocating shares, units, or beneficiary interests can be used to produce tax savings. Gross business income can be spread among the entrepreneur, family members and the business entity. When correctly engineered the resulting reduction in the collective tax liability can be nontrivial.

Profit upstreaming

Tax savings can be increased when utilizing a strategy known as “profit upstreaming”. Profit upstreaming means to shift profits, using means such as described below, from a company in a high tax venue to a different company in a low or no tax venue. Multinational corporations utilize this strategy routinely. Profit upstreaming can be used as part of an asset protection and privacy enhancement program.

A technique used by U.S. companies to reduce state income taxes has Company “A” in a state with high state income taxes (e.g., California) reduce its taxable income by allowing most or all of its reported profits to be realized by, or to “flow upstream” to, company “B” in a state with no state income taxes (e.g., Nevada). Total after-tax profit is increased, since state income tax is avoided with little additional effort or expense. The generalization of this involves realizing profits in an entity legally domiciled in any low or no tax jurisdiction rather than one domiciled in a high tax jurisdiction. Upstreaming strategies utilizing offshore structures can materially reduce or defer state and federal taxes.

A profit upstreaming system can shift thousands, millions ... or even billions of dollars in profits to a low or no tax jurisdiction, and defer state and/or federal taxes until the accumulated funds are remitted to a U.S. taxpayer. A non-Grantor foreign trust, such as is discussed in Appendix 1, could serve as such a vehicle. Profit upstreaming systems provide you and your beneficiaries and causes with the same advantages enjoyed by large multinational corporations. Take advantage of them!

Upstreaming methods

There are many ways to legally move profits from one company to another.

The logical choice of direction is of course to upstream profits from the company in the higher tax legal venue to the company in the lower tax venue. Shifting income from country to country is no different in principle and no more difficult in practice than shifting income from state to state. Once the suitably structured business entities are in place in the appropriate states or countries, income shifting can commence, as from Company A to Company B in the examples below that illustrate the idea.

Loans: Company A in a high tax jurisdiction can take out a loan from company B in a low or no tax jurisdiction. Company A deducts the interest paid to company B. Company B realizes the interest income with minimal or no taxes due. (Various noises have been made over time about eradicating this “loophole”, such as by disallowing the deduction of interest payments when made to a foreign subsidiary of the same corporate parent. It is hard to see how it can be effective in practice. There are just too many ways around any such rules, should they be promulgated.)

Leasing: Company B in a low tax jurisdiction leases equipment to Company A in a high tax jurisdiction such as the U.S. or Canada. Lease payments are deductible under U.S. and Canadian tax laws while Company B realizes the lease income with low or no taxes due.

Accounts Receivable Factoring: Company A in a high tax jurisdiction can sell its receivables for cash at a discount to company B in the low tax jurisdiction. (Effectively B makes a loan to A collateralized by the receivable, and the loan liquidates with the proceeds from the receivable when it is paid off.) This reduces the taxable profit of company A in the high tax jurisdiction, and increases the profits of company B in the low tax jurisdiction.

Importing/Exporting Intermediary: If highly taxed Company A is an importer, un/low-taxed Company B can make the initial purpose, at a higher price than original cost, and then resell the goods to Company A, reducing Company A’s profits. Similarly, if Company A exports then Company B would make the initial purchase at a lower price than the ultimate customer for A’s goods or services. (The hypothetical tax losses due to this type of “transfer pricing” manoeuvre are impossible to calculate, but are undoubtedly large. The IRS and its foreign tax authority equivalents sometimes tries to staunch those losses, with indifferent success. As one might imagine, enforcement is difficult as the argument comes down to the nebulous subject of what exactly is an appropriate “arm’s-length” transfer price, particularly when the products are components or other intermediate goods of hard-to-determine value. Exporting a 5 carat diamond and declaring it to be worth $50 would raise questions, if discovered, as would arranging to import a product at 10% below the retail price charged where the comparable industry gross margin for the product group is, say, 35-50%.)

Advertising: Company B in a low tax jurisdiction can act as an advertising agency for company A in the high tax jurisdiction. The ad agency commission is deductible.

Licensing: Company A in a high tax jurisdiction pays a licensing fee for the sale of software, clothing designs, etc. created by company B in a low tax regime.

Professional and Other Services: Company A in a high tax jurisdiction can take a deduction for services, e.g., consulting, business management, secretarial, publishing, writing, or accounting, performed by and paid to company B in a low tax jurisdiction.

Patents, Copyrights, Royalties: Company A in a high tax jurisdiction can make royalty payments for inventions, songs, movies, books, software, etc. to company B in a low tax country that has a tax treaty with the U.S.

The number of plausible methods to upstream profits from one company to another is vast. As long as there is true economic substance behind the reported numbers they are entirely legitimate. As we have said before in other contexts, should such a controversy occur then the government agent has a decided advantage in enforcing his or her view. Undoubtedly the money-laundering police also have their eyes on the area, as it is a way to evade money transfer reporting requirements. Thus the condition that there be economic substance behind reported transactions, and that transfer pricing approximate market values, is not just lip service.

Access to Higher Yield Investments Available only to Offshore Entities

A U.S. person is restricted by regulations from participating in many offshore investment opportunities unless he/she is a “qualified” investor – for his/her own good, of course. The U.S. Securities and Exchange Commission (SEC) imposes a substantial financial and regulatory burden on any offshore party who wishes to sell investment vehicles to U.S. persons. (The domestic investment vehicle industry enthusiastically supports these competitive barriers). Not surprisingly, most foreign investment opportunities never get offered inside the U.S. But a foreign legal entity has unrestricted access to offshore investment opportunities including high interest rate bank CD’s, and high return offshore mutual funds and managed accounts. Foreign trusts and corporations sited in friendly venues and appropriately structured can invest in U.S. and foreign stocks without incurring capital gains taxes upon sale.

[Disclaimer: We are not investment advisors and do not give investment advice. We do recommend that everyone diversify their investments. There are plenty of “opportunities”, of which we seen many, to experience 100% losses at the hands of fraudulent operators. This is not a solicitation or offer for an investment. Although there is potential for high earnings offshore, all investment involves risk. That’s R-I-S-K: “A source of danger; a possibility of incurring loss or misfortune,” for those who need it to be spelled out.]