Dear ,

We provide information to help people "invest offshore, on the grid, secure and private". Written into the U.S. tax code is a section called 402(b) and it refers to overseas retirement plans and pension law.

An IBC controlled by a trust, no longer works to provide offshore asset protection. Allow us to show you the solution, for any and all global citizens, to hold assets outside of their home country.

Offshore Investment Truth

Offshore investments have access to the widest possible variety of investment instruments and may often pursue more aggressive investment strategies than if they were registered in a "traditional" jurisdiction.  (These Funds out-perform U.S. Funds in Asia and South America).

A series of offshore investment funds, designed under the same pattern, and having the same recognized managers and administrators, may be created extremely quickly and with minimum cost. As a result, an offshore investment fund can be offered to potential investors at more attractive financial terms.

It is also quite common for an offshore investment vehicle to outsource some or all of its support functions to outside providers, either in the same jurisdiction or abroad at lower cost than in the home jurisdiction. Thus, such flexibility and variety of choices quite simply ensures a more efficient and profitable running of the investment instrument.

Segregate & Diversify

Most of us know about the benefits of holding uncorrelated assets in an investment portfolio to reduce overall risk. In a similar fashion, you can reduce your political risk-the risk that comes from governments. You do this by spreading across politically uncorrelated countries to obtain the most diversification of benefits. The optimal outcome is to totally eliminate your dependence on any one country.

Offshore Investment Myths

Offshore Investment Myth No. 1

There is no economic advantage to deferring income. Whether you get paid now or later, you end up with the same amount of money (That statement is a Myth).

a) when you invest pre-tax, tax deferred, your income grows at the pre-tax rate of return, rather than the after-tax rate.
b) by deferring, you have the opportunity to reduce your effective tax rate.

Offshore Investment Myth No. 2

Deferrals must be structured as a fixed annuity. (That statement is a Myth)

a) Non-Qualified Deferred Compensation (NQDC) is subject to its own tax rules, namely the constructive receipt and economic benefit doctrines.

Offshore Investment Myth No. 3

Concluding that capital gain assets should not be placed in tax deferred accounts because they will be subject to ordinary income taxation on withdrawal is erroneous. (That statement is a Myth)

a) The key role of exempt from income compensation is not always appreciated
b) a capital gains strategy is based on an illusion of the IRS current view of what is or is not a capital gain.

Offshore Investment Myth No. 4

Accounting rules follow tax law (That statement is a Myth)

2) You can't change the legal quality of capital. Capital arises in two ways:
a) capital injection; which for U.S. tax law terms is completely useless or the other way is the much more common way is
b) from income accruing and it is accruing in such a way that it is being accumulated and the trustee takes a decision to capitalize that income and adds it to the capital base.

Contact us today for the corresponding white paper - 402(b) and/or a free consultation.

Q: Is the biggest short yet to come?

A: Yes. I think so. We are in a much larger bubble than the Internet/Tech Bubble or the Real Estate/Subprime Mortgage Bubble.

Q: What is the bubble and how did it develop?

A: Before I explain, I need to cover a few economic principles. Every transaction involves a shorting element. For instance, when you buy IBM shares, you've determined that the shares have more value than the cash used to buy them. In a very real sense, you are long IBM and short USD. If the value of US dollars goes up faster than the shares' value, you will have a loss on being short the cash. If you had kept the US dollars, you would have had a profit from being long cash. This analysis is subject to further refinement if we look at the role of money.

All value is subjective. People buy and sell based on their value scales. Money is the medium of exchange used to facilitate indirect exchange. Ultimately, its value depends on its usefulness in satisfying the wants of consumers. In every instance, when a buyer decides to buy the most highly valued item on his value scale, he foregoes purchasing the second most valued item on his value scale. In value terms, the price a buyer pays is his foregoing the second most valued item on his value scale. The cash paid is simply the medium used to facilitate the exchange of values.

Every transaction always involves a decision to value A over B. Essentially this equals being long A and short B. This duality is inherent in the human condition. It results from the fact that all our objective senses function on information received as relative rates of vibration. We are only able to know hot if we know cold, wealth if we know poverty, etc. Looking only at the long side ignores half of reality.

Long-term consistent success depends on being balanced. That requires embracing all of reality, not just half. The market is perfectly balanced every day, usually with brokers selling to a public that is buying. The average investor is unbalanced because the average investor is only long. The brokers want to keep it that way. They do not want you to be balanced. They want you on the long side so they can be on the short side. That is the balance they wish to maintain.

Q: OK, I understand that every transaction involves an ordering of priorities: A over B. Where is the bubble?

A: The bubble is in government promises, which are expressed as government debt, which is expressed as legal tender money. People sponging off this bubble have profited from the increased liquidity. For them, it's been a successful intervention in the market economy. The bubble is founded on the compelled use of legal tender money to pay government imposed taxes. It was possible to transition to a fiat currency on August 15, 1971 because the paper money had previously been commodity based — backed by gold.

Only the market can determine what money is. Once money is established, the government can modify it. The USD was originally a receipt for gold or silver. In order to make the change to a fiat system the long-term government bond was set to pay 15% per annum and Arab oil producers were given a security guarantee to price their product exclusively in USD. Even so, the average person suffered — living standards dropped significantly and the inflation rate reached 15% per annum. A successful move to a cashless system would mean total victory for the interventionists. Gold and silver might then be relegated to use in criminal activity or simply adornment.

I am not a gold bug. I do not have a product — metal or stock — to sell. The foregoing summary reflects my understanding of recent history and how the bubble has grown so huge. Money is 50% of every transaction. The capital base of the USA money supply is federal government debt. The official USA legal tender — the world's reserve currency — is founded on USA military and police powers, on their ability to inflict harm. Saddam Hussein and Muammar Gaddafi are just two recent casualties of the global war to maintain USD hegemony. That is the bubble. When the perceived ability to harm diminishes, the bubble will deflate. Remember, all value is subjective. This includes the value of perceptions — what people perceive to be the ability of the USA military and police to do harm.

by Arthur Fixed

Be ready. Contact us today for the Fixed System whitepaper.

Looking Over the Edge of the Cliff – The Use of Pooled Income Funds for the Repatriation of Offshore Carried Interest

Overview

The addition of IRC Sec 457A effectively ended the ability of investment managers to defer the tax recognition of the carried interest in the investment manager’s offshore fund. Under IRC Sec 457A, hedge fund managers must repatriate the offshore deferred compensation not later than December 31, 2017. Who knows the total amount of capital that has been growing on a tax deferred basis over the last two decades. $50 billion?  IRC Sec 457A effectively eliminates the ability of investment managers to enter into deferred compensation arrangements with their offshore funds going forward.

Undoubtedly, those hedge fund managers with the deferred offshore carried interest problem have been waiting for a last minute miracle. The problem of substantial deferred compensation is an insidious one as the income is taxed as ordinary income and also subject to estate taxation. A New York hedge fund manager could ultimately be looking at the erosion of 70-80 percent of this wealth.

IRC Sec 457A really deals with two problems. Problem #1 deals with existing deferrals that must be repatriated and Problem #2 deals with the inability to no longer defer the carried interest. In the current interest rate environment, the charitable planning giving solution known as the Pooled Income Fund (PIF) emerges as a powerful solution to address both problems. The PIF is long been considered obsolete and ineffective in the planned giving world. This article addresses certain attributes which make PIF as an ideal solution to address the two problems outlined above- (1) How to repatriate deferred offshore carried interest and (2) How to defer carried interest going forward?

What is a PIF?

IRS statistics in 2012 demonstrate the scarcity of pooled income funds on the tax planning landscape. As of 2012, charities filed tax returns for only 1,324 PIFs. Seventy five percent of the PIFS had assets of less than $500,000.

A pooled income fund is a trust that is established and maintained by a public charity. I.e. 501(c)(3) organization. The pooled income fund receives contributions from individual donors that are commingled for investment purposes within the fund. Each donor is assigned "units of participation" in the fund that are based on the relationship of their contribution to the overall value of the fund at the time of contribution.

Each year, the fund's entire net investment income is distributed to fund participants according to their units of participation. Income distributions are made to each participant for their lifetime, after which the portion of the fund assets attributable to the participant is severed from the fund and used by the charity for its charitable purposes. A pooled income fund could, therefore, also be described as a charitable remainder mutual fund.

Contributions to pooled income funds qualify for charitable income, gift, and estate tax deduction purposes. The donor's deduction is based on the discounted present value of the remainder interest. Donors can also avoid recognition of capital gain on the transfer of appreciated property to the fund.

A cash contribution to a PIF is subject to an income tax deduction threshold of fifty percent of adjusted gross income (AGI). Appreciated assets are subject to the thirty percent of AGI threshold. Excess deductions may be carried forward for an additional five tax years. The taxpayer also receives a charitable deduction for gift tax purposes and the remainder interest is not included in the taxpayer’s taxable estate.

In spite of the commingling aspect of funds or contributions from multiple donors, I can find nothing in the Internal Revenue Code or treasury regulations that would preclude a PIF with a single client. Nevertheless, a more conservative planning posture might dictate a PIF with at least two donors even if the second donor has a small contribution such as $250 to the PIF.

IRC §642(c)(5) defines a pooled income fund as a trust:

1. to which each donor transfers property, contributing an irrevocable remainder interest in such property to or for the use of a public charity while retaining an income interest for the life of one or more beneficiaries (living at the time of the transfer,

2. in which the property transferred by each donor is commingled with property transferred by other donors who have made or make similar transfers,

3. which cannot have investments in securities which are exempt from taxes imposed by this subtitle,

4. ,which is maintained by the public charity to which the remainder interest is contributed and of which no donor or beneficiary of an income interest is a trustee, and

5. from which each beneficiary of an income interest receives income, for each year for which he is entitled to receive the income interest determined by the rate of return earned by the trust for such year.

The trust instrument of the pooled income fund must require that property transferred to the fund by each donor be commingled with, and invested or reinvested with, other property transferred to the fund by other donors. Charitable organizations are permitted to operate multiple pooled income funds, provided that each such fund is maintained by the organization and is not a device to permit a group of donors to create a fund which may be subject to their manipulation. Such manipulation is, however, highly unlikely because the regulations require the governing instrument of a pooled income fund to (1) prohibit a donor or income beneficiary of a pooled income fund from serving as a trustee of the fund, and (2) include a prohibition against self-dealing.

For tax purposes, pooled income funds are, with one important exception discussed below, taxed as complex trusts. Pooled income funds seldom pay any tax, however, for several reasons. First, pooled income funds receive an unlimited deduction for all amounts of income distributed to fund participants. Because pooled income funds are required to distribute all income earned each year, there remains no income to be taxed.

Second, pooled income funds are permitted a special deduction for long-term capital gains that are set aside permanently for charity. In essence, long-term capital gains produced by a pooled income fund are allocated to principal. Because principal is earmarked for charity, such amounts escape income taxation. For purposes of tracking income and gain attributable to contributed assets, pooled income funds take on the donor's holding period and adjusted cost basis in the contributed property.

Nevertheless, the trust document for most pooled income funds defines income as that term is defined in IRC Sec 643(b). Under this section, the term income, when not preceded by the words taxable, distributable, undistributed net, or gross, means the amount of income of the trust for the taxable year determined under the terms of the governing instrument and local (state) law.

The Uniform Income and Principal Act or Revised Uniform Income and Principal Act adopted by most states defines income to include interest, dividends, rents, and royalties. Unless otherwise defined, income does not ordinarily include capital gains. Provided that such definition is compatible with state law, however, pooled income funds can expand the definition of income to include capital gains.

Pooled income fund beneficiaries are required to include in their gross income all amounts properly paid, credited, or required to be distributed to them during the taxable year or years of the fund ending within or with their taxable year.

Distributions from pooled income funds are taxed under the conduit theory applicable to IRC Sec 661 and 662. Because pooled income funds distribute all income earned during the taxable year, the tax character of amounts distributed to each income beneficiary is directly proportional to the tax character of investment income earned within the PIF.

The Case for PIFs

You may still be asking why consider the PIF as a tax planning solution if it is obsolete in the minds of most public charities.  What’s the point? The taxpayer does not recognize gain or loss on the transfer of property to the PIF. If a pooled income fund has existed for less than three taxable years, the charity is able to use an interest rate in calculating the charitable deduction by first calculating the average annual Applicable Federal Midterm Rate (as described in IRC §75200 for each of the three taxable years preceding the year of the transfer. The highest annual rate is then reduced by one percent to produce the applicable rate. The rate for the 2016 tax year is 1.2 percent.

In practice, this feature makes pooled income funds ideal for use by persons who desire to dispose of highly appreciated, low yielding property free of capital gains tax exposure in favor of assets that will produce higher amounts of cash flow. It is important to note the double tax leverage that can be accomplished by avoiding recognition of capital gain and creating an immediate charitable income tax deduction.

This interest rate provides a significantly larger deduction than a comparable contribution to a CRT.  The following chart compares the percentage of deduction based upon a charitable deduction of $100,000. The CRT assumes the minimum CRT payout of five percent for the taxpayer’s lifetime. Deductions for cash contributions is subject to the fifty percent of adjusted gross income threshold. Deductions of appreciated property are subject to the thirty percent of AGI threshold. The taxpayer may carryover excess deductions for an additional five tax years beyond the current year.

While a PIF may not have a unitrust payout in a manner similar to charitable reminder trusts, the trustee of a PIF may allocate a portion of long term short term capital gains to trust accounting income while taking a charitable set aside deduction for long term capital gains that are not paid out to the income beneficiary of the PIF, but permanently allocated to PIF principal. In effect, the trustee’s power to adjust creates a total return for the PIF.

Comparison of Charitable Remainder Trust vs. Pooled Income Fund

1. The Facts

Joe Smith, age 60, is the managing member of Acme Funds, a hedge fund.  Acme is a $1 billion fund with assets equally split between the onshore and offshore funds. Joe’s deferred offshore carried interest is $25 million. Joe would like minimize income and future estate taxation while maintaining an income for the joint lifetime of Joe and his wife. Joe would also like for Acme to continue managing the funds and accrue the investment gains on a tax deferred basis. Additionally, he would like to cap the upside of the PIF and allow his family’s dynasty trust

2. Solution

Good Samaritan Charities is a 501(c)(3) organization that sponsors donations to pooled income funds. The charity creates a new pooled income fund. Joe contributes $20 million to the new PIF. Joe’s brother Sam contributes $250 to the PIF. Joe’s donor advised fund is the remainderman of the PIF. The tax deduction is 78 percent of the PIF contribution or $15.6 million.

The PIF will be managed by Acme Funds. The trustee of the PIF invests the funds into a new LLC that is capitalized with non-voting preferred shares (Class B) and voting common shares (Class A). The preferred units constitute 90 percent of the units. The common units represent 10 percent of the units.  Joe’s family investment company will serve as the managing member of the new LLC.

The preferred units provide a cumulative return of five percent and a par value of one dollar per unit. The Class B units will have a liquidation preference. The Class A common units will receive an investment return equal to the excess amount above the preferred return. The projected income for Joe and his wife is $1 million per year for their joint lifetime. The full value of the PIF contribution is outside of their taxable estates.

As an additional planning strategy, the manager purchases life insurance so that a portion of the LLC income will enjoy the tax-advantaged benefits of life insurance –(1) Tax-free build up (2) Tax-free withdrawals and loans that pass through to the Class B members (3) An income tax-free death benefit. If the entire amount is invested in life insurance, the trustee will utilize tax-free loans in order to make the preferred return payments. Joe and his wife will receive tax-free treatment for their joint lifetime. The death benefit will receive tax-free treatment.

Upon the death of Joe and his wife, the Class B units will pass to their donor advised fund. Upon liquidation of the LLC, the Class B units will be redeemed at par value plus any portion of the cumulative return. The excess return will be paid to Joe’s dynasty trust.

Summary

The PIF provides substantially larger income tax deductions in the current interest rate environment when compared to the very well-known and “time-tested” CRT.  Sophisticated law firms have utilized charitable lead annuity (CLAT) trusts in order to minimize current taxation on the repatriation of offshore carried interest. It is an excellent solution, but the hedge fund manager who wants current income from all or part of the repatriated funds has to wait until the expiration of the CLAT term.

The pooled income fund provides a higher deduction threshold while providing the hedge fund manager and his family with current income. The PIF eliminates future estate taxation and provides the manager with the ability to continue managing the assets. Sophisticated PIF planning provides the hedge fund manager to provide a total return that approximates the CRT unitrust payout. Additional planning allows the hedge fund manager to leverage the assets on a tax-advantaged basis and cap the upside passing to charity.

As this article points out, it is time to rescue the PIF from tax obsolesce. The planning potential for hedge fund managers in the repatriation of offshore carried interest is enormous.

Gerald Nowotny – Osborne & Osborne, PA
266 Lovely Street
Avon, CT 06001
United States
860-404-9401
TaxManDotCom.com

Your investment account gives you control Control over your financial situation is only what your investment account allows it to be. Control is owning a foreign investment account that is a deemed professional investor, foreign resident and non-U.S. Person. When you have done that, then you are in the clear and you do not need to explain yourself any further. Whether you are or are not a U.S. Person is exempt from foreign financial institution reporting; which means there is no U.S. Person blockage overseas.

Tax effected yield ''turbo-charges'' future values You want to save for retirement. Well, doesn't everybody? Then construct a foreign retirement plan registration that is integrated with your Self Directed IRA that has tax effected yield.

Control is this IRS and FATCA category foreign investment account entity The Internal Revenue Service, the U.S. Treasury and FATCA acknowledge this foreign investment account entity's FATCA reporting exemption on IRS Form 8957 and on W-8BEN-E. That all means you are free to deal without U.S. Person restrictions, restraints or blockage to investments globally.

Your IRA tax effected yield “turbo-charges” accumulations; which means higher after tax gains. Internationally recognized exempt entity This exempt reporting credential is also documented in Intergovernmental Agreement (IGA), Tax Information Exchange Agreements (TIEA) and Double Tax Agreements (DTA) which all define it exactly and other investment entities are not even mentioned anywhere. Tax effected yield ''turbo-charges'' future values You want to save for retirement. Well, doesn't everybody? Then construct a foreign retirement plan registration that is integrated with your Self Directed IRA that has tax effected yield.

Implementation provides:

• a foreign investment account Ordinary or Roth IRA
• access to all investment sources globally for income from capital which is the whole point and purpose of all retirement plans in perpetuity

The result of holding this specific foreign investment account is:

• no Unrelated Business Income Tax or Income (UBIT or UBTI)
• recognized exempt from tax in Common, Civil and Sharia law

The intended use of this recommendation is:

• to provide multi-jurisdictional investment choice without U.S. Person investment restrictions, restraints or blockages.
• to comply with disclosure reporting, tax compliance.
• to provide statutory asset protection acknowledged by the IRS.

A relevant foreign investment account must provide at minimum:

• Choice and control over investment class, type, currency and securities market
• No U.S. person restrictions, restraints or limitations
• Full disclosure reporting.
• Recognized asset protected by foreign domestic law, Double Tax Agreement (DTA) and Tax Information Exchange Agreement (TIEA)
• Pension law that preempts securities regulatory law
• Safety & Security in a multi-jurisdictional “Triangle of Security”
• An investment account pre-qualified as a professional investor
• Operational use to investment dealings both from inside or from outside the USA
• U.S. Person access to investing in the same manner as a tax-free foreign resident
• This puts your qualified plan assets under your control without a change in your tax consequence. and you will be able to purchase from offshore any registered, regulated and recognized security globally as a foreign investor.

Tax and regulatory protection is an ORS402(b) occupational pension which is Hong Kong Government regulated, registered and recognized by the People’s Republic of China (PRC). Contact us now about "How to move your 401k assets into an IRA offshore.

Contact us today for the corresponding white paper - 402(b) and/or a free consultation.

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