Why Every Business Owner

Needs a Family Dynasty Trust

2020 Edition
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 THE MUR LAW FIRM, P.A.
“Serving The World
One Client at a Time”

WHY EVERY BUSINESS OWNER

NEEDS A FAMILY DYNASTY TRUST

P R E S E N T E D B Y: L A Z A R O J . M U R , E S Q .
AV PREEMINENT RATING - FOUNDER, THE MUR LAW FIRM, P.A.
WWW.MURLAW.COM
 ABOUT PRESENTER
LAZARO J. MUR, ESQ.
AV Preeminent Rating
Founder, The Mur Law Firm, P.A.
www.murlaw.com

Lazaro J. Mur, Esq. Founder of The Mur Law Firm, P.A. Mr. Mur has
been serving the international business community since 1985, has an
AV Preeminent Rating from Martindale-Hubble, has been quoted by
the Wall Street Journal, is Former Chair of the Florida State Hispanic
Chamber of Commerce, lectures on the topics of Global Asset
Protection and International Tax Planning on behalf of the National
Business Institute, LawPractice CLE; LawPro CLE and myLawCLE;
and is a contributing Author for Mundo Offshore, EB-5 Investor
Magazine and other World Class Journals.
2
 OVERVIEW

This course will cover the various types of business succession

strategies and why every Business Owner needs a Family Dynasty
Trust. Clarification of Misconception - Why Revocable Living Trusts
are NOT Family Dynasty Trust. In addition, there will be a detailed
discussion on the benefits of holding the family business in an
Internal Revenue Code Section 678 Trust for Asset Protection
purposes.

3
 COURSE SUMMARY
The most critical decision to make from an Asset Protection
point of view is choosing the business entity.
While some entity types may make business and economic
sense, they provide no asset protection for business owners.
Business owners often utilize various different types of asset
protection trusts, whether DAPT or FAPT.
Holding the family business in a Section 678 Trust not only
plans for business succession, and minimizing estate taxes, but
also provides asset protection for business owners.

4
 TABLE OF CONTENTS

I. Overview of Domestic Asset Protection Trusts, including

a Family Dynasty Trust
II. Overview of Offshore Asset Protection Trusts
III. Hold The Family Business Entity Interest in Trust
I. Asset Protection
II. Estate Planning
III. Avoid Probate
IV. Business Succession
IV. The Section 678 Trust and The Family Business

5
A. Introduction
What is a Dynasty Trust?
• A dynasty trust is a way to pass wealth to future generations. Perpetual trusts differ from most
other trusts in the length of time they last and the control they offer. The most important function
is that dynasty trusts are designed to last for longer periods of time compared to most trusts.
Depending on the state where the generation-skipping trust is established, they can last for
several generations or over hundreds of years.
• Not all states allow these longer periods, which make dynasty trusts useful. Because a dynasty is a
generation-skipping trust, it avoids some repetitive taxation. It also limits how future generations
can access the family trust. Due to the common law rule against perpetuities, most trusts would
end no later than 21 years after the death of an involved individual, such as a beneficiary who was
alive at the time it was created. Irrevocable dynasty trust states have adopted some form of
perpetuity reform which allows for longer trusts.
• Dynasty or family trust funds are also irrevocable. Once they are formed, the grantor has no
control over the assets. However, when creating the trust, the grantor can specify how the trust is
to be managed, what control the trustee has, and how distributions will be made to beneficiaries.
In contrast, a grantor trust or revocable living trust allows the grantor to withdraw or change
aspects of the trust. A family trust can be set up to allow beneficiaries some levels of flexibility in
managing assets. These trusts can also stipulate how funds are to be distributed to future
generations.

6
 Why You Need a Dynasty Trust

Dynasty trusts can help you save a great deal of money on taxes. Since this is a type of
irrevocable trust, once the assets are inside, they can avoid some taxable events which
allow for massive compounding power. This is especially valuable if using tax-free
investments. The typical flow of the grantor’s estate from parents to children would be
subject to gift and estate taxes as well as generation-skipping tax in some cases. Under
the current tax law, using dynasty or legacy trusts means the estate would only face
those taxes once and can thus grow much faster over time. Funding the dynasty trust in
the next few years also takes advantage of the much higher tax exemptions allowed by
the Tax Cuts and Jobs Act. An irrevocable dynasty trust can lock in the exemptions used
to fund it and bypass the need for future generations to claim the exemptions as well.
Trust planning is important because these exemption levels are currently set to expire by
2025 unless renewed by Congress.

7
Why You Need a Dynasty Trust
Dynasty trusts also allow the grantor to direct how funds will be released to
future generations. This allows the creator to determine how much and in
what situations that funds will be released. For example, you could allow
distributions to a beneficiary of a certain age as long as they are completing
desired milestones such as college and not using drugs. The trust can be
arranged to payout completely or parcel out assets over many different
generations. Finally, dynasty trusts offer asset protection to future
generations as well. Because the trust is irrevocable it can be designed to
deter creditors from using those assets to settle a beneficiaries’ debt. This
ensures that those funds will go to the future generation you wanted to
receive these assets. Dynasty trusts can also be set up to prevent a future
beneficiaries’ spouse from attempting to claim those assets in case of
divorce.
8
Protection Trust Features

An asset-protection trust is a term which covers a wide spectrum of

legal structures. Any form of trust which provides for funds to be held on
a discretionary basis falls within the category.

How do Nevada Trusts, Delaware Trusts and Alaska Trusts Compare to

Offshore Trusts in the Cook Islands, Nevis and Belize?

9
Intro cont..

A Domestic asset protection trust (DAPT) is a trust formed in the US,

under US laws that has one or more US trustees. It is drafted to shield
items of value from being seized in lawsuits. Fairly recently, some
states such as Nevada, Delaware and Alaska have adopted statutes
allowing one or more people to form a trust (called a settlor) with
spendthrift provisions (that are intended to keep assets from
creditors). Unlike traditional statutes, the settlor can also be a
beneficiary of the trust and enjoy its proceeds while, at the same time,
keeping trust assets from his legal enemies.

10
Cont…

First came Alaska in 1997, which adopted asset

protection trusts that help make assets creditor-remote. Other
states have followed suit, including Nevada, Delaware, Missouri,
Rhode Island, Utah, South Dakota, Wyoming, Tennessee, New
Hampshire, Hawaii and Oklahoma. As of this writing, Virginia is
the most recent, which enacted legislation addressing this type of
trust, going into effect on July 1, 2012. The Alaska Trust, Nevada
Trust and Delaware trust remain the most popular.

11
 B. Asset Protection Trust Features

Here is the bottom line. The following features are seen in the
trust laws of the above states:
1. Asset Protection. You can settle the trust (have it created and
put money and property into it), can be the beneficiary of the
trust and, at the same time, can keep trust assets away from
future creditors. Thus, it is called a “self-settled trust” because
you create it and can benefit from it. It has spendthrift
provisions. This means that there are provisions to keep trust
assets out of the hands of your creditors. The states without
these special laws do not allow this type of trust to shield your
assets from creditors.

12
Asset Protection Trust Features cont…

2. Shorter Time for Creditor Challenge. The creditors don’t have

much time to challenge the transfer of assets into the trust compared
to other states. So, there is a relatively short statute of limitations on
fraudulent transfer. In Nevada, for example, you can form a trust, put
assets into it, and two years later those assets are theoretically safe
from lawsuits. If you transfer assets into such a Nevada asset
protection trust and properly publish the event, the timeframe can be
reduced to six months. In many other states you have six to fifteen
years to file a claim.
3. Higher Barriers to Creditors. Laws make it more difficult for a
creditor to try to convince a courtroom that you put the money into
the trust to keep it from creditors.
NOTE: You should always retain the services of a CPA to ascertain
whether the transfers to an Asset Protection Trust would render you
technically insolvent.
13
C. Compare Domestic to Offshore Trust
For Asset Protection Purposes, How Do
Domestic And Offshore Trusts Compare?

14
 The Top 10 Reasons Why Offshore
Trusts May Be More Beneficial than
Domestic Trusts
1. Offshore trusts are not subject to domestic court orders. In a civil
lawsuit, if a judge orders a US trustee to release the funds or be
thrown in jail for contempt of court, you can guess what the trustee is
going to do. The offshore trustee, however, can simply ignore US
court orders because he is not bound by them.

2. The domestic trustee’s assets may be at risk. We have seen US

plaintiffs sue domestic trustees in civil lawsuits. When the trustee
has the choice of turning-over up your assets or his own, you
already know which one he will choose.
15
3. The domestic trustee is subject to duress tactics. If the plaintiff’s attorney
implies threats of, or actually succeeds in, getting the government
involved and intimidates the trustee with racketeering or money
laundering charges for failure to release funds, the trust is moot. This
drawback, in itself, is enough to adversely affect the asset protection of a
domestic trust. There may be a statute of limitations on fraudulent
transfer. But there is no statute of limitations on trustee intimidation.

16
4. Offshore trust jurisdictions may ignore US judgments. In the Cook Islands,
Belize and Nevis, to name a few, the courts do not acknowledge US
judgments. So, the creditor would have to start afresh and file whole new
lawsuit from the very beginning. This tremendously high expense and time-
consuming undertaking is about enough to deter even the most resolute of
plaintiffs from pursuing an offshore trust. In addition, even after a die-hard
attacker has been exhausted from the foreign battle, you can re-domicile the
trust and change it from a Cook Islands Trust to a Belize Trust, and then to
a Nevis Trust. In each case, your opponent would have to start from the very
beginning and may have to post an expensive bond.

17
5. US states fully recognize out-of-state judgments. In contrast to the
above, if your enemy gets a judgment against you in any US state,
every other US state is required to recognize it. That means that a
creditor can move his judgment to any state and start seizing assets
without having to file another lawsuit. This is very easy and
inexpensive for the creditor and is often done for free by collection
agents who get a percentage when they collect from you.

18
6. US judges consistently rule according to their own state’s
laws. The creditor obtains a judgment against you in California,
but you have assets in a Nevada trust. The California judge is
probably not going to apply Nevada law to property located in
California. The creditor gets your assets and liquidates them.
Then it’s up to you to file an appeal to get them back.

19
7. Federal courts can ignore state law. Federal courts are not
essentially bound by state law. This is even more
concerning when you take into account that the big cases
are usually federal lawsuits.

8. Asset seizure without due process. It is even more

daunting when a federal agency gets involved, where the
policy is “Seize now, ask questions later.”

20
9. Privacy is thrown out. The local trustee of a DAPT is subject to
subpoena and must provide documents that may be used against
you. Each state applies its own laws, the federal courts apply their
own laws, and your trustee must comply regardless of the state in
which he resides. The state in which the trust was formed doesn’t
matter. The trustee of an offshore asset protection trust, on the other
hand, can simply discard and ignore deposition and subpoena
requests.

21
10. Offshore bank accounts. Offshore trust assets are usually
sheltered in offshore bank accounts, outside the reach of US
courts. Even if a DAPT had assets in a foreign bank, the
domestic trustee could be compelled to bring them back. Not
so with a foreign trustee.

22
D. When to Use a DAPT
So, when would you use a DAPT? You stand a fair chance when all
of the following criterion can be met at once:

1. You live in Alaska, Nevada, Delaware, Missouri, Rhode

Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire,
Hawaii, Oklahoma or, Virginia, as of this writing. These states all
recognize self-settled DAPTs. (Incidentally, if you live in one of these
states, we would choose a Nevada trust since it has one of the
smallest windows of time for creditors to challenge transfers into the
trust.

2. You have all of your assets in one or more of the above

states.
23
cont…When to Use a DAPT

3. You think you can avoid federal lawsuits.

4. The potentially at-risk assets have been placed into the trust
before problems arise. In Nevada, for example, the creditor must file a
claim within two years after the assets were transferred into the trust or
six months before your creditor knew or should have known that you
transferred assets into the trust.

If you don’t meet all of the above at the same time, use an offshore
trust, because the DAPT probably isn’t going to be the best option.

24
E. Offshore Jurisdictions

The trust laws of the offshore world are typically founded on the
trust laws of the onshore world. For those jurisdictions which are
currently possessions of the UK, or were former possessions of
the UK, typically the UK Trustee Act of 1925 is the common
starting point. From there, each jurisdiction has sought to develop
and evolve the law in a race to develop the most attractive trust
environment which maintains acceptable standards, preserves the
concepts of a trust, yet is attractive to potential users. Many of
these jurisdictions share similar characteristics.

25
Bahamas
The Commonwealth of the Bahamas have traditionally been
associated with offshore planning. However, the Bahamas are
probably more noteworthy for offshore banking. The Bahamas do
not recognize self-settled spendthrift trusts, unlike the Cook
Islands, Nevis, or Belize.
The burden of proof for a claimant to challenge a transfer into a
Bahamian Trust has a limitation period of two years, the same as
Cook Islands.

26
Belize

Belize, offers immediate protection from court action initiated by

creditors which challenges the settlor’s transfer of property into the
trust. However, due to the paucity of credible offshore banks in
Belize, many trusts established in Belize hold assets with a second
trustee or third-party financial institution in another country.

27
Cayman Islands
Cayman Islands trusts are governed principally by the Cayman Islands
Trusts Law (2009 Revision), however elements of the Fraudulent
Dispositions Law 1989 are relevant when considering the asset protection
benefits of Cayman Trusts.
A number of offshore jurisdictions have enacted modern asset protection
legislation based on the Cayman Island's Fraudulent Dispositions Law 1989
(the "FDL"). The Cayman Islands FDL states "Every disposition of property
made with an intention to defraud, and at undervalue, shall be voidable at
the insistence of an eligible creditor thereby prejudiced". The burden of
proof is borne by the creditor applying to set aside the trust, and in the case
of the Cayman Islands, the creditor/claimant must bring an action in the
Cayman Islands courts (not in their home jurisdiction). The bar is set high for
a potential claimant to successfully challenge a transfer.
Cont…
28
Cont…

They must demonstrate an intention to defraud on behalf of the

Settlor, and they must demonstrate they are an "eligible creditor" -
meaning that at the date of the transfer, the transferor owes an
obligation to the claimant. They must also be willing to bring an action
in the Cayman Islands, which by itself is an expensive proposition.
The burden of proof for a claimant to challenge a transfer into a
Cayman Trust has a limitation period of six years.

Cont…
29
Cont…

In Cayman it is possible to register a trust as an Exempt Trust; however,

it is voluntary registration regime only, so most trusts remain
unregistered. As most Cayman trusts are therefore private arrangements,
it is hard to give exact figures for the popularity of AP Trusts governed by
Cayman law. However, the number of licensed trust companies give us
some indication of how the jurisdiction is viewed. As of 30 September
2012 the Fiduciary Services Division of CIMA, the body responsible for
licensing and regulating trust companies in the Cayman Islands has
supervisory responsibility for 146 active trust licenses.

As the Cayman Islands are a British Overseas Dependent Territory, the

quality of the judiciary is considered excellent, with the islands able to
draw on the services of UK lawyers and solicitors when contentious
cases arise and expert lawyers with appropriate experience are required.
The quality of banking and investment services are reasonably good.

30
 Cook Islands
The Cook Islands claims to be the first country to have enacted an explicit
asset protection law, implementing particular provisions in 1989 to its
International Trusts Act. Several of these changes have been adopted in
one form or another in several other countries and a handful of a U.S.
states. The most important of these changes permits the settlor of a trust
to be named as a spendthrift beneficiary.
The trust laws of the Cook Islands provide a shortened statute of limitations on
fraudulent transfer claims. While most U.S. states have a four-year statute of
limitations (and the Statute of Elizabeth in some common law jurisdictions has
no statute of limitations), the general statute of limitations in the Cook Islands is
reduced to two years for fraudulent transfers; in certain circumstances, it may be
as short as one year. If the trust is funded while the settlor is solvent, then the
transfer cannot be challenged.(i.e., there is no time period for the creditor to
challenge the transfer.)
Cont…
31
Cont…

Several provisions of the Cook Islands law specify the form of

pleading that a creditor must establish in order for its claim to be
heard in a Cook Islands court. The effect of these provisions is to
raise the burden of proof to "beyond a reasonable doubt,"
something akin to a criminal law standard, in order for a creditor to
establish a fraudulent transfer. The "constructive" fraudulent
transfer theories are eliminated under Cook Islands law, requiring
the creditor to prove that the transfer was made with specific
intent to avoid the creditor's claim.

Cont…
32
Cont…

It is believed that the Cook Islands now has more registered asset
protection trusts than any other country, although it should be
noted that in most jurisdictions a Trust is considered a private
arrangement and it is not a requirement to register a Trust. Case
law is somewhat lacking in the Cook Islands. However, some
landmark decisions show that the Cook Islands Court intends to
uphold the asset protection trust law. In 1999, the Federal Trade
Commission attempted to recover assets from a Cook Islands
Trust. The suit filed by the FTC against a trust company was
unsuccessful. The quality of the judiciary and the associated
banking and investment services offered from the Cook Islands
are considered poor.

33
Nevis

Nevis was one of the first countries to follow the Cook Islands,
duplicating an older version of the Cook Islands law and naming it
the Nevis International Exempt Trust Ordinance, 1994. One
distinguishing feature of the Nevis legislation is that a creditor must
post a bond of ECB 25,000 (roughly USD 13,000) to lodge a
complaint against a trust registered in Nevis.
Very little case law exists in Nevis, which many attorneys interpret to
mean that creditors are effectively deterred from bringing suit in
Nevis. It has a small offshore banking industry, with St. Kitts-Nevis-
Anguilla Bank and Bank of Nevis International as the only licensed
offshore banks.
Cont…
34
Cont…

LLC legislation modeled after the Delaware LLC Act was passed in 1996.
This has enabled Nevis to distinguish itself as a primary offshore
jurisdiction for LLC formations, as opposed to other countries that are well
known for IBC formations (British Virgin Islands) or trust formations
(Cayman Islands). A Nevis LLC is often used in conjunction with an asset
protection trust because it gives the creator of the trust direct control over
the assets if the creator is listed as the manager of the Nevis LLC.
This gives the creator added security in that it keeps the assets one step
removed from the trustee of the asset protection trust. Because the
managers and members of a Nevis LLC are not public information, the
creator of the trust is able to assume control over the assets without
disclosing his control on any public records. But be mindful of US bank
account reporting obligations which require US reporting and may be
subject to discovery.

35
Channel Islands (Guernsey and Jersey)
The Channel Islands have been long regarded as being the first
jurisdictions to develop an offshore finance industry, each is often
regarded as being one of the best quality jurisdictions to use. Fully
compliant with anti-money laundering laws, sharing taxation
information with an increasing number of countries, modern case
law indicates that creditors, who have a rightful claim, are able to
freeze trust assets in the Channel Islands.
Tax law initiatives in the UK have largely eliminated the tax
advantages of UK citizens placing assets in trust in the Channel
Islands, which in the early years had been a source of business.
While the Channel Islands enjoys a modern banking sector, most
attorneys do not regard the Channel Islands as appropriate for
asset protection planning.
36
Cont…

The judicial systems of the Channel Islands are split into two
distinct Bailiwicks. The Bailiwick of Jersey, and the Bailiwick of
Guernsey (which includes the islands of Guernsey, Alderney Sark,
and Herm). The legal systems in each island follows a dual
system based on Norman-French codified law overlaid with
elements of English common law. Whilst specialized training is
required in order to practice law in each of the Bailiwicks, the Bar
is not open to everyone, the quality of the judiciary is generally
considered very good, if not very expensive. Regulation of
Fiduciary companies and the related banking and investment
services offered in the Channel Islands is also considered good to
excellent.

37
Switzerland and Liechtenstein

Switzerland and Liechtenstein are noteworthy for large banking

sectors and sophisticated wealth management services. While
both countries now recognize trusts (particularly trusts established
under the laws of another jurisdiction, such as Nevis), there is no
available case law yet which indicates how the courts of those two
countries will enforce offshore asset protection trust laws.

Cont…

38
Cont…

Many attorneys establish asset protection trusts under the laws of

another country and deposit the trust assets in Switzerland or
Liechtenstein. One question raised by this approach is whether a
creditor can seize assets in Switzerland or Liechtenstein without
having to bring a claim in the trust-protective jurisdiction. Again, a
lack of precedent suggests that this is an open issue in
Switzerland and Liechtenstein.

Cont…

39
Cont…

Both countries are also known for offering asset protection

annuities, with a six-month statute of limitations on fraudulent
transfers into an annuity. Unfortunately for most Americans, these
annuities cannot invest in US securities without punitive taxation
due to the offshore status of the insurance carriers that offer these
annuity products. Furthermore, many lawyers promoting these
annuity products to their clients collect commissions from the
insurance carriers. These reasons, among others, may help
explain why annuities offered in these two countries are not
particularly popular with U.S. persons.

40
 10 Mistakes To Avoid
When Using Offshore Trusts
From A U.S. Tax Planning Point Of View
1.Not Knowing All the Facts
2.Not Understanding What “Irrevocable” Means
3.Not Understanding the Specific Provisions of the Trust
4.Not Properly Funding the Trust
5.Not Doing Corporate Due Diligence
6.Not Knowing Your Offshore Trustee
7.Not Choosing the Proper Jurisdiction
8.Not Understanding the U.S. Reporting Requirements
9.Not Taking into Account Family Needs
10.Not Considering a Change of Mind
41
INTRODUCTION

If you are thinking about moving to the United States, you should be
thinking about pre-immigration tax planning. Otherwise, you may
face significant U.S. income and estate tax consequences as a
result.
Proper and timely pre-immigration tax planning may involve
establishing an offshore trust. In this presentation we present the
top 10 most common mistakes to avoid when using offshore trusts
from a U.S. point of view.

42
1. Not Knowing All the Facts
Many readers thinking about moving to the United
States do not understand the nature of the U.S. tax
regime because they may be coming from a
jurisdiction that has a totally different tax system.

Cont…

43
Once you move to the United States with your green
card, you become a U.S. resident for income tax
purposes, you will be taxed on your world-wide
income and if you are deemed domiciled in the
United States as a result of moving to the United
States, then your entire world-wide holdings will be
subject to estate taxes.

Needless to say, this is a harsh reality for some to

understand, much less accept. This is why pre-
immigration tax planning is of critical importance if
you are thinking of moving to the United States.

44
2. Not Understanding What
Irrevocable Means
For the offshore trust to protect you from the exposure of U.S. estate
taxes, it must be irrevocable.
Irrevocability is an issue that many have a difficult time with. After all, it
implies a complete loss of control over the assets being transferred to
the trust. However, if the offshore trust is revocable, then all of the trust
estate will be included in your estate for U.S. tax purposes.
This is why the offshore trust must be irrevocable. Even then, if the
irrevocable trust contains provisions that are indicative of retained
interests and control, you will have an estate tax issue.

45
3. Not Understanding the Specific
Provisions of the Trust

The offshore trust will probably have language you are not familiar
with and simply may not understand. This type of trust will usually
contain language specifically used for U.S. statutory planning and
compliance purposes and may not appear to make any sense at
first glance. So if you come across language in a provision
contained in the trust that you are simply not sure about, stop and
ask:

46
Cont…

• What does this mean?

• Why is it relevant?

• What are the real life implications to me?

• How will this impact my family’s needs in the future if

I am not around?

Cont…

47
Cont…

It is important that you read and understand each and

every provision contained in the offshore pre-
immigration trust because the trust will be irrevocable.

Remember, you will have to respect and abide by each

and every provision in the offshore irrevocable trust, as
failure to do so may bring about significant adverse tax
consequences.

48
 4. Not Properly Funding the Trust

You may have a perfectly drafted offshore pre-immigration trust, one that
you can live with because you understand each and every single provision
contained in it. Yet, unless you actually and properly fund the offshore
trust, it will be of no benefit to you.
Assets not properly transferred to the offshore pre-immigration trust will be
included as part of your taxable estate for U.S. estate tax purposes and
subject to U.S. estate taxation at a rate of 40 percent. As such, the failure
to fund the offshore trust means that your objective of minimizing
exposure to U.S. estate taxation will not be achieved.

49
5. Not Doing Corporate Due Diligence

You need to know exactly what you own and where. Too often clients
forget about an offshore company or foundation they established
years ago.
Failure to take this into account will have an adverse effect in
achieving your planning objectives. You may forget that you have a
company with other shareholders and that your ownership interest in
said company is not freely transferrable under an existing
shareholders’ agreement. This may require you to contact the other
shareholders and many times this may present a privacy issue, as
you may not want everyone to know that you are planning on moving
to the United States.
50
Cont…

In addition, you may have limitations on the

transferability of your ownership interests under
the laws of your particular home jurisdiction,
especially transfers to an offshore trust.

In some cases, your home jurisdiction may even try

to impose an exit tax on transfers to an offshore
trust. That is why your corporate due diligence is
of critical importance.

51
 6. Not Knowing Your Offshore
Trustee
Many times little consideration is given to the important question of
“who will be the trustee of the offshore trust?" In many cases, a
professional corporate trustee will have to be appointed, and this often
raises concerns.
You will probably be thinking, who are these people and can I truly
trust them with all of my assets? What if they take all that I have
worked for all my life and disappear into the sunset? Do your own due
diligence on the trust company, their reputation and operations. Do not
take anyone’s recommendation at face value.

52
Cont…

The decision of who to appoint as your offshore trustee is as

important as choosing which bank to use. The critical
difference is that if you don’t like your bank or banker, for
any reason, you can simply close the account and take your
hard earned money elsewhere.

Not so easy with the trustee of your irrevocable offshore

trust. For this reason, you need to be very clear on what
power(s) you have under the terms of offshore trust to
terminate the existing trustee and appoint another trustee.

Cont…

53
Cont…

Equally important, you need to understand what fees will be

charged, not only for accepting the trust, (acceptance fee)
and the annual ongoing fees, (annual fees), but also the
fees involved in case you decide to terminate the trustee
relationship, (termination fee).

Look, there are many qualified trust companies out there. Make
sure you find the one that best fits your needs and that they are
in-fact experienced and familiar with this type of pre-immigration
offshore trust structures and the related U.S. compliance
requirements.

54
7. Not Choosing the Proper Jurisdiction

Not all offshore jurisdictions are the same. Some offshore

jurisdictions are not suitable for this special type of pre-
immigration offshore trusts. Some may not have the infrastructure
you have come to expect in these days of complete comfort and
connectivity.
If you plan on visiting the trustee, make sure the jurisdiction has a
suitable airport and adequate hotel accommodations. Determine
ahead of time the logistics of how you can get to their location if
you choose to visit your trustee in person.

55
Cont…

You will of course want to know that the laws of the selected
jurisdiction favor the use of this type of offshore trust and that the
offshore trust is in full compliance with all applicable laws. Therefore,
you are going to want to speak with independent counsel in that
jurisdiction and even request a legal opinion on the matter at hand.
Remember, this pre-immigration trust is not an aggressive offshore
asset protection trust which requires a very special type of jurisdiction
with favorable fraudulent transfer statutes. However, if properly
drafted and funded, the offshore pre-immigration trust may also
protect your assets from future creditors.

56
8. Not Understanding the U.S. Reporting
Requirements

Once you become a U.S. resident, you now have a number of somewhat complex
reporting obligations. Anonymity is a myth. There is no such thing as secret bank
accounts or invisible bearer shares these days.

For this reason, you be must thorough with your comprehensive corporate due
diligence and make a complete list of all your world-wide bank accounts and
global holdings. Otherwise, if you don’t make full and complete disclosure to your
trusted certified public accountant, they will not be able to properly inform you of
all your new U.S. reporting obligations.

Mind you, failure to properly comply with applicable reporting obligations can
result in substantial tax penalties, regardless of how well the offshore trust is
drafted.
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9. Not Taking into Account Family Needs

Often times, your desire to avoid U.S. estate taxation by fully funding
an offshore pre-immigration trust may run afoul of your family’s current
financial needs.
How are you going to pay for your lifestyle? How are you going to get
your hands on money if you have already transferred all of your
assets to the offshore trust?

58
Cont…

More importantly, will dipping into the offshore trust result in

unanticipated income taxation or even U.S. estate taxation
because you are deemed to have a retained interest (control) over
the assets transferred to the offshore trust?
That is why it is so important to have your certified public
accountant and financial advisors as part of your pre-immigration
tax planning team.

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10. Not Considering a Change of Mind

It may well be that after you move to the United States, you may have a
change of heart. You may want to pack up and leave. What then?
What will you do now that all of the assets are held inside the offshore
pre-immigration trust?

First, depending on how long you have resided in the United States, you
may find yourself facing an exit tax. Moreover, since the offshore trust
is irrevocable, how can you decant the offshore trust once you leave?

These are critical questions that should be considered because nothing

is certain, except death and taxes.

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 THE SECTION 678 TRUST
&
THE FAMILY BUSINESS
OVERVIEW

• Section 678(a)(1)
• Section 678(a)(2)
• Section 677
• Partial Release vs. Lapse
• Withdrawal Right
• Client Not Treated as Owner
• Sale of Assets to the Section 678 Trust

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 Considering a Section 678 Trust
Typically, when a client is considering options to help protect assets from the
reach of creditors and reduce future potential estate taxes, the client must
consider techniques that require the client to part with at least a portion of the
assets he or she has accumulated over the years, as well as part with future
appreciation. For example, many estate planning techniques involve gifting
and/or selling the client’s assets to trusts that benefit the client’s children or
family members. As a result, the client permanently parts with all of the future
appreciation, as well as the income stream from the assets.
In these situations, it can be difficult to balance the client’s desire to protect
assets from the reach of creditors and reduce estate taxes with the client’s need
to retain sufficient assets to maintain his standard of living.
One vehicle that allows the client to combine asset protection, estate tax savings,
and the continued ability to benefit from assets he or she has accumulated over
the years is the “Section 678 Trust.”

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 Name & Purpose

The Section 678 Trust is named after the Internal Revenue Code Section upon
which it is based, which states that a beneficiary who has a withdrawal right
under a Crummey Power will be treated as the owner, for income tax purposes, of
the portion of the trust over which the withdrawal power lapsed.
The Section 678 Trust can be structured and customized to fit many different
situations. For example, a 678 Trust can be a useful tool under two particular fact
patterns:
1. The first is when the client is contemplating purchasing an asset,
starting a new business venture, or revitalizing and expanding an existing
business that has high appreciation or income-generating potential.
2. The second is when the client has significant assets that are already
material in value, which the client wants to transfer to the Section 678
Trust.
Structuring the transfer of the assets to the Section 678 Trust in both fact patterns
are discussed in more detail below.

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 Structure of a Section 678 Trust
The Section 678 Trust is established by the client’s parents, sibling, or close friend with
a gift of $5,000.
This is the only gift that should ever be made to the Trust. It is important that the
$5,000 contribution to the Trust be a true gift and that the creator of the Trust receive
no quid pro quo payments or benefits as a result of making the gift.
The Trust is structured as a “Crummey” Trust, so the beneficiary has a period of time
to withdraw the $5,000 gift. If the beneficiary does not demand the gift, his
withdrawal right lapses after a certain period of time (e.g., thirty days).
In order for the Section 678 Trust technique to work as intended, it is crucial that the
beneficiary not be given a withdrawal right exercisable with regard to any other trust
at any earlier point in the year of the gift. NOTE: This may require careful review in the
event the client's parents or relatives are also establishing a Section 678 Trust and/or may
have an existing Irrevocable Life Insurance Trust which have such standard withdrawal
rights.
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 The Primary Beneficiary
The client is the primary beneficiary of the Section 678 Trust and can receive distributions for
health, education, maintenance, and support purposes. The client can also be named as the
trustee, and is in fact named as Trustee of the Section 678 Trust. The Grantor of said Trust, if
yet to be determined, but could very well be relatives or some other person.

The Trust is structured initially as a “non-grantor” or “complex” trust for income tax
purposes. Therefore, at inception, the Section 678 Trust is a separate taxpayer for income tax
purposes. However, said Trust also includes a “Crummey” withdrawal right for the client.

When the client allows the withdrawal right over the initial $5,000 contribution to lapse, the
Section 678 Trust becomes a grantor trust as to the client (under the authority of Section 678
of the Code). Thus, all income tax effects of the Section 678 Trust from that point forward
should become the responsibility of the client.

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 Ownership of the Section 678 Trust

While the client is treated as the owner of the Trust for income tax purposes, the client will be responsible for
paying the income tax on the income generated by the Trust’s assets. Assets outside of the Trust can be used to
pay the income taxes, allowing the Trust assets to grow without being depleted by income taxes. This also
allows the client to “spend down” assets that would otherwise be includable in his estate and subject to estate
taxes at death or perhaps be subject to the reach of creditors during his lifetime.

If the time came that the client were unable to pay the income taxes out of his own assets, the Section 678
Trust could make a distribution to the client in the amount of the income taxes under the health, education,
maintenance, and support standard.

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 Benefits of the Section 678 Trust
As discussed above, the assets owned by The Section 678 Trust will not be subject to estate taxes at the
client's death.

While the client is living, he will continue to have access to the funds for health, education, maintenance,
and support purposes and can serve as trustee of the Section 678 Trust.

In addition, the assets owned by the Section 678 Trust will not be subject to the claims of the
client's creditors.

NOTE: Specifically, Florida Statute Section 736.0504, states that a beneficiary's creditors cannot compel a
trustee to make a discretionary distribution of income or principal to a trust beneficiary, even if the trustee is
also the beneficiary, when the distribution would become vulnerable to the claims of the beneficiary's
creditors.

Thus, the client's creditors will not be able to reach the Trust’s assets if he or she is also named as the
trustee, so long as the trustee-beneficiary’s distribution standard is limited to health, education,
maintenance, and support.

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 Advantages of the Section 678 Trust
As noted above, the Section 678 Trust technique helps reduce estate taxes, provides creditor
protection, and gives the client the ability to continue to benefit from the assets during his or
her life. When compared to other estate planning techniques, such as GRATs, the Section 678
Trust is superior because, among other things:

(i) the client does not have to survive the transaction with the Section 678 Trust by any period
of time in order for the assets to be outside of the client’s estate; and

(ii) the estate tax inclusion period rules do not apply, so that GST exemption can be allocated
to the Trust on its creation.

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 Building Value in The Section 678 Trust
The Section 678 Trust can be utilized by almost any type of client. The most obvious use of a Section 678
Trust is for clients who are expecting to purchase an asset that has high appreciation potential, are starting a
business, or are expanding an existing business (but as discussed below, it can also be used for existing assets
with appreciation potential or that may be subject to valuation discounts). Some examples include buying a
new business opportunity, or investing in the stock market, etc.

In those cases, the client can make a loan to the Section 678 Trust to enable it to buy the asset, start the new
business, or expand the existing business. In order for the loan to be respected by the IRS, it must carry an
interest rate equal to, at a minimum, the applicable federal rate for the type and length of the loan.

As the asset or business grows in value, the loan can be repaid. The asset will continue to be owned by the
Section 678 Trust, where it will not be subject to estate tax at the client’s death and will continue to be beyond
the reach of creditors. Once the Section 678 Trust has built up significant assets, it can simply purchase new
assets using its own credit.

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 Results of Section 678 Trust Planning
The Section 678 Trust should be structured as a GST exempt dynasty trust. When the initial gift is made to the Section
678 Trust, the client’s parents (or other third party who makes the gift) should allocate GST exemption to the Trust,
which will allow it to pass to future generations free of transfer taxes. As a result, the assets owned by the Trust should
not be subject to estate tax at the death of the client or the client’s children.

In addition, the Section 678 Trust should contain a spendthrift provision, in which case the Trust assets should be
protected from the client’s creditors.

Furthermore, assets in the Section 678 Trust do not constitute marital property, protecting the assets if a beneficiary of
the Trust gets a divorce.

With regard to assets sold to the Section 678 Trust, the value of the assets owned by the client is frozen at the value of
the note the client received in the sale and if the sale was in exchange for a Private Annuity, then unlike a promissory
note, the Private Annuity would automatically terminate at the time of death resulting in nothing being included in the
client's estate.

The client can spend down the other assets by paying the income tax liability generated by the Trust’s assets and allow
the assets owned by the Section 678 Trust to grow without being depleted by income taxes, as noted above.
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 Assets of Section 678 Trust

The Trustee of the Section 678 Trust has the ability to distribute Trust
assets to the client and his issue for health, education, maintenance, and
support needs, and the client may be given a limited inter vivos or
testamentary power of appointment over the assets of the Section 678
Trust to account for changes in family circumstances or the law.

Upon the client’s death, the Section 678 Trust can be drafted to divide
into separate trusts for his or her children, and those trusts will be
considered “complex” trusts (rather than “grantor” trusts) for income tax
purposes.

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 Reporting Requirements

The creator of the Section 678 Trust should file a gift tax return reporting
the $5,000 gift to the Trust and allocating GST exemption to the gift. The
gift tax return will be due on April 15 of the year following the year in
which the $5,000 gift is made. When the client transacts with the Section
678 Trust, he or she should file a gift tax return disclosing the sale or loan
in order to start the running of the 3-year statute of limitations. Assuming
that the disclosure is adequate, if the IRS does not audit the gift tax return
within the 3-year period, it will be prohibited from challenging the
transaction later. The gift tax return will be due on April 15 of the year
following the year in which the transaction takes place.

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 Discussion of Statutory Authority

Although the beneficiary may be deemed to be the grantor of the trust for income tax
purposes, he or she is not considered the grantor for estate and gift tax purposes. Under
Section 2041 and Section 2514 of the Code, a lapse of a withdrawal right is not deemed to be
a gift to the Trust from the beneficiary so long as the lapse does not exceed the greater of
$5,000 or 5% of the Trust assets (the “5 and 5 power”). As a result, allowing the withdrawal
right to lapse will not cause the assets of the Section 678 Trust to be subject to estate taxes at
the client’s death. (Note that an affirmative release of a withdrawal right may have the
opposite effect. If a holder of a withdrawal right releases the right, he or she could be treated
as having made a gift to the Trust, causing the Trust assets to be subject to estate taxes at the
holder’s death. Therefore, in order to clearly qualify for the statutory “5 and 5” exception, the
plan is for the beneficiary to allow the withdrawal right to lapse, rather than release it.)

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 Section 678(a)(1)

Under Section 678(a)(1), a person who “has a power exercisable solely by

himself to vest the corpus or the income” of the Trust in himself will be
treated as the owner of the portion of the Trust over which the power is held.
A withdrawal right gives the beneficiary the right to vest the corpus or the
income of the Trust in himself and, as a result, is a power that will cause the
Trust to be owned by the beneficiary for income tax purposes under Section
678(a)(1) so long as the power remains outstanding. If the withdrawal right
applies to all of the assets owned by the Section 678 Trust (as in the case of
the initial $5,000 gift), then the entire Trust will be treated as owned by the
beneficiary for income tax purposes. Once the withdrawal right lapses,
however, the income tax treatment of the Trust is not as clear.

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 Section 678(a)(2)

Under Section 678(a)(2), a person who “has previously partially released or

otherwise modified such a power and after the release or modification retains
such control as would, within the principles of sections 671 to 677, inclusive,
subject a grantor of a trust to treatment as the owner thereof” will be treated as
the owner of the portion of the Trust over which the power was partially released
or modified. The question, therefore, is whether the client would be treated as
the owner of the Trust under Sections 671 to 677 of the Code if he or she had
been the initial grantor of the Trust.

75
 Section 677
Under Section 677, the grantor of a trust will be treated as the owner of
the trust for income tax purposes if the income of the trust may be
distributed to the grantor or held and accumulated for future distribution to
the grantor. the client is the beneficiary of the Section 678 Trust, and as
such, income and principal may be distributed to him. Accordingly, if the
client releases or otherwise modifies his withdrawal right, then he will be
treated as the owner of the Trust for income tax purposes. Based on the
plain language of the statute, it appears that this would apply to the entire
Trust (both the income and the principal) since the withdrawal right exists
over the $5,000 gift, which would comprise the entire Trust at the time the
right was granted.

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 Partial Release vs. Lapse
Note that Section 678(a)(2) refers to a “partial release” (as opposed to a “lapse”) of a
withdrawal right as the triggering event. Although this terminology does not mirror that
contained in Sections 2041 and 2514, the IRS has issued a recent private letter ruling
interpreting a lapse under Sections 2041 and 2514 to be a partial release under Section
678. PLR 200949012. In addition, the IRS has implied in prior private letter rulings that a
lapse under Sections 2041 and 2514 would have the same effect of a partial release under
Section 678. See, e.g., PLRs 200747002, 200104005, 200147044, 200022035, 9809005,
8342088.

If the IRS changes its policy expressed in the private letter rulings and argues that a lapse
is not treated as a release under Section 678, it is possible that the client will not be
treated as the owner of the Trust for income tax purposes after the withdrawal right
lapses. To help mitigate that result, we propose including additional provisions in the
Section 678 Trust.

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 Withdrawal Right

First, the withdrawal right granted over the initial $5,000 gift to the Trust could extend until
at least December 31 of the year in which the gift is made (i.e., the withdrawal right does
not lapse until after December 31). Any sales to the Section 678 Trust should occur before
the withdrawal right lapses. During the time that the withdrawal right remains outstanding,
the client should clearly be treated as the owner of the Trust for income tax purposes and
should be able to transact tax-free with the Trust.

Second, in December of each year, the client could be given a withdrawal right over all of
the Trust income earned during that year, to the extent that the income does not exceed the
greater of $5,000 or 5% of the Trust assets. (Note that, if the client dies while the
withdrawal right is outstanding, the amount of assets over which the withdrawal right exists
will be included in the client’s taxable estate.) To the extent that the income is less than or
equal to this amount, the client should be treated as the owner of the Trust income for
income tax purposes. It is not clear whether this withdrawal right would cause the client to
be treated as the owner of the Trust’s principal for income tax purposes.

78
 Client Not Treated as Owner

If the client is not treated as the owner of the Trust’s principal, then the Trust may be
required to pay any capital gains taxes out of its own assets. As a result, the tax amount
would deplete the assets that will be protected from estate taxes, as opposed to the client’s
assets, which will be subject to estate taxes. In addition, if the client is not treated as the
owner of the Trust’s principal, capital gains taxes could be triggered when the Trust makes
principal payments on the note owing to the client.

The client and the Trust should also consider entering into an agreement that, if the client
pays income taxes and it is later determined that the taxes should have been paid by the
Trust, the client will be treated as having loaned the amount paid to the Trust with interest
at the applicable federal rate. This should help prevent the client being treated as having
made a gift to the Trust by virtue of paying income taxes on the Trust’s behalf.

79
 Sale of Assets to the Section 678 Trust
Nevertheless, the client should, at a minimum, be able to sell assets to the Section 678
Trust while the withdrawal right is outstanding without being required to recognize gain on
the sale.

In addition, if the client sells assets to the Section 678 Trust in exchange for a promissory
note or loans money to the Section 678 Trust, the client should not be required to recognize
the interest payments as income. This characteristic may also cause the Section 678 Trust
to be a permissible owner of S corporation stock, without requiring the Trust to elect to
become a qualified subchapter S trust (“QSST”) or an electing small business trust
(“ESBT”). The IRS has issued a recent private letter ruling stating that a 678 Trust is a
permitted S corporation shareholder under Code Section 1361(c)(2)(A)(i). PLR
201739010. However, it may be advisable to make a protective QSST or ESBT election in
the event that the IRS argues that 678(a)(2) does not apply to the Trust assets.

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 FINAL ANALYSIS

So as you can see, a Section 678 Trust is an

excellent tool for holding ownership of the
family business.

81
 Q&A

Presented by: Lazaro J. Mur, Esq.

THE MUR LAW FIRM, P.A.
(561) 531-1005
Email: lmur@murlaw.com

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 DISCLAIMER

Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subject
matters covered. It is published with the understanding that in this publication the author is not engaged in
rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required,
the services of a competent professional person should be sought. (From a Declaration of Principles jointly
adopted by a committee of the American Bar Association and a committee of Publishers and Associations.) In
addition to the Presenters views as expressed herein, these materials represent a compilation of numerous on-
line articles and research materials, see general references included herein intended to give due credit and
recognition to the cites and authors thereof.

83