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International Asset Protection Planning | Foreign Security Trust | International Variable Life Insurance Program

International Asset Protection, Estate and Tax Planning:

When it comes to international tax planning you have to think about the great line from Will Rogers. He said, "The one major difference between death and taxes is that death does not get any worse each time Congress meets". To help you understand how we arrived at this sad state of affairs we are going to provide you a very short lesson in tax planning.

The US government's privilege to levy taxes was incorporated into the Constitution in 1787. The responsibility for creating the machinery for collecting taxes was given to the Treasury Department (where it has remained ever since), under the supervision of the assistant to the secretary of the Treasury. In 1792 that position was replaced with the Office of the Commissioner of Revenue.

By 1817 the issue of taxes was abandoned because the government's revenue needs were met by customs duties (taxes on imports). The outbreak of the Civil War 45 years later and the government's need for massive financing led to President Lincoln's signing the Revenue Act of July 1, 1862. This Act established the nation's first real income tax and re-establishing the Office of the Commissioner of Internal Revenue via a legislative act in which the Commissioner was to be nominated by the President and approved by the Senate. The IRS was officially born.

Shortly after the war ended, Lincoln's wartime revenue system began to be dismantled and, as before, the government's fiscal needs were met by customs receipts collected on imported goods and taxes on alcohol and tobacco. Nearly 90 percent of internal revenue was coming from these sources, so in 1872 the income tax was again repealed. In 1913 with the enactment of the Sixteenth Amendment to the US Constitution the income tax was back and has not left since then.

The Sixteenth Amendment, which was passed on February 3, 1913, states:

"The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

The Sixteenth Amendment made it legal for Congress to impose a direct tax on the net incomes of both individuals and corporations, overruling an 1895 Supreme Court ruling that asserted that the income tax was unconstitutional because it was a direct tax rather than one apportioned among the states on the basis of population.

The right of Congress to levy an income tax, and the right of the IRS, as part of the US Treasury Department, to collect taxes, periodically comes under fire from people who believe, mistakenly, that these functions are illegal or who fall prey to tax evasion schemes.

Once the Sixteenth Amendment to the Constitution was ratified tax planning began. It began because the US is one of the small handful of countries that taxes the worldwide income of its citizens and residents. The US tax code is specific about the payment of US taxes. The code states that "the worldwide income of a US citizen or resident is taxable worldwide." In plain English this translates to if you are a US citizen or qualify as a US resident your worldwide income is subject to US taxes. That is why multinational companies like Toyota, Sony and others set up US subsidiaries. The tax that is paid by the subsidiary is based on US income and expenses rather than on that company's worldwide income. Hence, the question that must always be asked is, "Who owns it?"

The first international tax planning was crude but effective. This planning consisted of having your assets owned by an international entity - hence, no US tax due on that international entity's income. This planning included entities owned by Bearer Shares, Nominee Share Holders and Trusts, both singular and plural.

In 1976 Congress passed its first full blown attack against international tax planning. So from the passing of the Sixteenth Amendment in 1913 until April 15, 1974 (the effective date of the 1976 Act) you could gain tax avoidance by using one of the many systems that were available. All of that changed in 1976. Now the planning had to be done in a way that the international system put the assets outside the various rules.

In 1986 Congress again attacked international tax planning with a whole new and tighter definition. It defined what a Controlled Foreign Corporation looked like and what happened if one was present. International tax planning became tougher but was still reasonably easy to accomplish. Congress even went so far as to allow tax deferral so long as you:

  1. played by the IRS to be published rules,
  2. were willing to pay a penalty when the funds were repatriated.

Through all of these rules and definitions it was always a safe harbor if somehow you wound up with a Non US Grantor Trust owning the international entity. Then in the summer of 2000 the IRS proposed regulations concerning Sections 679 and 684 of the Tax Code. These are the sections that define US beneficiaries and how they must recognize US taxes in an international trust. The Treasury scheduled a hearing for November 08, 2000 and held their hearing. They then adjourned the hearing and notified everyone that a new hearing would be scheduled. No new hearings were ever held. However, on July 27, 2001 the new regulations were made effective with November 07, 2000.

To the extent that an international trust was created for tax planning purposes these regulations terminated their use.

Before we go any further we would like to acknowledge that there are promoters that say that the Sixteenth Amendment was never properly ratified or that the Amendment only applies to certain citizens of certain jurisdictions. We believe, as does the juries in the trials of these promoters and their followers, that their position is simply not defendable. There are fewer and fewer of these people because they are going to jail and being heavily fined. There are promoters that say just purchase an IBC (International Business Company), transfer your assets to the IBC and never pay taxes on these assets again. Again, this position is not defendable under the 1986 legislation but some still try. There are some promoters who are still trying to squeeze around and through the 2000 IRS regulations. There are, in our opinion, for those who do not have true international business relations, only a few systems that still allow for international tax deferral and compounding:

  1. A true international partner,
  2. The International Variable Life Insurance Program.
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