It’s that time of year again; the season that everyone loves to hate; tax time. Personally, I don’t completely despise paying taxes as much as I despise the complications of tax reporting and the use of tax dollars.
Don’t get me wrong, our current tax system in the US has reached a point where it is just downright immoral. Yes, I said it – our tax system is immoral. But I think there is a legitimate role to play for government and thus taxation is a necessity.
Taxes fund government expenditures. Clearly government has now expanded well beyond its role in society – defense of property rights and we are now paying for things we don’t really want or need. In my view, a government should exist solely to protect my rights as a human being.
At what point did we not only allow, but require our government to;
• Educate us and our children?
• Provide us with health insurance?
• Become the police force of the world?
• Take care of us when we don’t have a job?
• Determine which businesses fail and which ones are saved from failure?
• Regulate the cost of money?
• Take care of us in retirement?
• Tells us what kind of car we can drive?
• Tell us what we do with our own property?
• Take our property for the “common good”?
• And the list goes on and on…
We have reached a serious disconnect with the purpose of government. At one point in time, government existed to serve the people. It has clearly evolved where the people now serve the government.
Don’t think so? When did you vote to bailout GM, AIG, Fannie Mae, or Bank of America?
When did you vote to hire the new Czar’s in the Obama administration that control various aspects of the government?
Right now Obama has 37 Czar’s including;
• Foreign aid czar
• AIDS czar
• Bioethics czar
• Bank bailout czar
• Border czar
• Climate czar
• Ethics czar
• Great Lakes czar
• Health czar
• Weapons of mass destruction czar
• And my favorite – Czar czar (yes, this one just makes sure the other ones do their job)
Czars basically serve the purpose of executing the government’s agenda outside of the bounds of voter approval. Did you vote for any of these czars? Keep in mind; your tax dollars pay their exorbitant salaries.
One of the biggest disconnects that I see now is that our elected officials don’t actually serve the people now. We are now slaves to the state.
As you file your tax returns or extensions today or tomorrow, think about what those tax dollars really pay for.
With that said, over the next couple of years, it is imperative that you develop your own asset protection plan. Part of this needs to be tax planning. While it disgusts me that we should have to jump through so many hoops to minimize our tax burden, it is just part of the game that must be played.
Today I will share with you one very large opportunity; one that could save you millions of dollars. This involves offshore estate planning.
In the 2010 Tax Act passed by Congress late last year, there are estate tax rules that only apply to 2011 and 2012. The tax benefits arise from taking advantage during this short window of opportunity.
For 2011 and 2012, you are granted a $5m exemption from gift tax. Starting in 2013, the exemption drops to $1m and the tax rate rises from 35% to 55%.
If you have the ability to write your heirs a check for $5m over the next few months, you can avoid this estate tax and reduce your taxable estate by $5m.
Of course this is not the ideal situation because now you no longer have access to the money and have given it to your kids.
The solution is to use an offshore trust. You can gift the $5m to your trust and remain a discretionary beneficiary – meaning you have the ability to receive distributions but do not control it (the trustee provides this function). Essentially, you would be giving the assets away to your heirs while retaining beneficial use of those assets.
The offshore trust offers many benefits not available with US domestic trusts;
• Unbeatable asset protection from creditors
• Protection from asset seizures
• Access to foreign investment options
• After your lifetime, the trust is completely disconnected from the US tax system – meaning your heirs have no tax liability for undistributed gains from the investments
• Just as easy to manage as a US trust
Keep in mind too; this $5m exemption is per person. If you are married, you get a $10m exemption. If your estate is less than this amount, you can transfer all of your assets into an offshore trust and completely bypass estate taxes while giving your heirs the ability to manage the trust outside of the US tax system after your lifetime.
Granted, many of you may not have assets this large, but keep in mind the size of your assets can and hopefully will grow over time. In 2013, the estate tax threshold lowers to $1m and the tax rate rises to 55%. Even if your estate is only $1-2m now, this type of planning still makes a lot of sense.
I am certain most of you will bypass this opportunity to save potentially millions of dollars in estate tax. It’s always on your ‘to-do’ list, but is never a priority. It’s not a sexy topic that offers you immediate benefit.
Many of you will say that you already have set up a domestic trust. While that is a good start, it doesn’t provide you with this type of tax savings and asset protection. Some of you don’t want to do this because you think your heirs will gain access to your wealth and waste it. This is easily solvable within the trust.
Some of you think you don’t want to establish an estate plan now because you want to continue to use your assets. This is one of the silliest arguments because once the assets are in the trust, they are untouchable by potential creditors but you retain beneficial use.
Some of you are just procrastinators. But as the saying goes, “If you plan to fail, you fail to plan.”