Published by: Private Wealth Advisor; Campden Publishing / Campden Media
Date of Publication: 1999
There is now available a superior trust structure in which a single-member Nevis limited liability company (LLC) is used in combination with a Cook Islands trust. There was a previous plan – an LP/Trust Plan (LPTP) – that worked by having a client establish a US limited partnership. In that structure all the trustee actions were subject to the written approval of the trust protector, usually a friend or relative selected by the client upon establishment of the trust. The client was designated as the 1% general partner; the offshore trust established by the client was designated as the 99% limited partner.
The client transferred assets into the partnership and, as the general partner, directly controlled and managed those assets. A partnership was required to annually file Form 1065 US Partnership Return of Income.
To take money out of the partnership without tax consequences, the general partner had to declare a distribution to the partners (the trust, as the 99% limited partner, receiving 99% of the distribution). The trustee, in its discretion, might then distribute the amount it received from the partnership to the client (as a beneficiary of the trust). Any effective asset protection plan must ultimately be based on eliminating US court jurisdiction over assets. Applying that rule, if a serious litigation threat or claim arose the offshore trust, as the majority partner, would vote its partnership interest to dissolve the partnership.
When a partnership dissolved, the partners received their respective capital accounts (99% to the offshore trust). The offshore trust would place the assets it received in the dissolution in a secure offshore financial institution with no US branch office (so that a US court would not be able to exert pres-sure in any way on the institution).
Under the new LLC/Trust Plan (LLTP), a single-member LLC is established in Nevis. The client’s Cook Islands trust is designated as the member (owner), and the client may be retained by the LLC as its manager (with signature control) or as its investment advisor (securities trading authority, but no signature control). Under US tax law, an election may be filed with the Internal Revenue Service within 75 days of the formation of the LLC to disregard the entity for all US tax purposes.
What benefits are derived from dis-regarding the LLC for tax purposes?
First, unlike the limited partnership, the LLC will not have to file any US income tax return (though tax will still be paid on its earnings). Second, even though the LLC is a foreign entity, the US tax withholding rules provide that if the member is a US `person’ for US income tax purposes, the LLC is treated as a US person, and no withholding is required.
A properly structured Cook Islands trust may be established in a manner which permits it to be treated as a US trust (US person) for US income tax purposes, while at the same time realizing the protective benefits of Cook Islands trust law.
A third benefit of the LLTP is uncomplicated distributions. A complicated procedure must be endured to remove funds from the limited partnership to avoid adverse US income tax consequences. Because the LLC is disregarded for tax purposes, `management fees’ paid by the LLC to the manager/advisor (client) are treated as paid by the trust. The trust is treated as ‘owned’ by the client for tax purposes, so the ‘payment’ by the trust to the client of such amounts is, in essence, treated as a payment by the client to himself – no tax effect. The most important benefit of the LLTP is realised if a significant threat or claim arises.
In the previous LP/Trust Plan the partnership would have to be liquidated. Such a transaction would involve legal fees and other costs. With the LLTP the LLC can remain intact, although if the client served as the manager with signature authority, they would have to be fired (a simple fax transmittal from the trust would suffice). The client may then, however, be retained as the investment advisor with securities trading authority.
Of course, if the LLC has accounts in the US or with US-based financial institutions, those accounts would be moved to an offshore financial institution. But the movement of accounts within the same entity is much more easily accomplished than the movement of accounts out of the partnership and into the trust.
Finally, the LLC entity form is easily understood in civil law jurisdictions, where the trust legal concept does not exist (such as Switzerland, where accounts might be set up). Clients who have the LP/Trust Plan may wish to consider the tax-free conversion to the LLC/Trust Plan.
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Donlevy-Rosen & Rosen, P.A. is law firm with a national practice focused on asset protection planning and offshore trusts. Attorneys Howard Rosen and Patricia Donlevy-Rosen co-founded the firm in 1991, and have since become internationally recognized authorities in the field of asset protection planning. Send a message using our contact page