Looming Deadlines Make For Busy Wealth Structuring Season

Tom Burroughes

14 May 2012

It has been hard for any international lawyers dealing with US clients to ignore the sweeping provisions of the FATCA Act, but this tax compliance juggernaut is not the only issue that wealthy US citizens must grapple with, a specialist in the field told this publication.

By the end of this year, the US gift tax exemption will be reduced back down to $1 million from the $5 million that has been in force since 2010, which means would-be gift-makers have fewer than eight months to make any transfers, Beth Tractenberg, partner at Katten Muchin Rosenman in New York, said in an interview.

And with the presidential elections in November, any uncertainties over who will be in the White House next year could also encourage clients to adjust their affairs against any potential tax hikes, she said.

“You will see a major emphasis over the next eight months in planning for the additional $4 million of gift exemption. Some clients are just starting to think about additional gifting now and will need to act quickly. It is going to get very tight as we get closer to year-end and I am urging people to start acting now,” she said.

“Appraisals are needed, decisions have to be taken and documents drawn up,” she said.

She is not the first advisor to fire a warning about the gift tax exemption deadline. In April, DeYoe Wealth Management advised clients to start preparing immediately for the end of the Bush tax cuts. Wilmington Trust pointed out the need to seize wealth transfer opportunities this year. (To view an article on that issue, click here).

FATCA

But while this process is driving a good deal of her firm’s work, the FATCA Act, due to start taking effect from next year, is a piece of legislation that looms large.

“People are moving around the world a lot more and we now have so many US requirements in terms of reporting on foreign accounts and foreign financial assets. In addition, foreign banks will now be subject to withholding rules as to US account holder's foreign accounts,” she continued.

A big headache for US expats – as has been recounted by this publication and others – is how rising compliance costs associated with handling the affairs of Americans means some of the world’s biggest financial institutions have, to all intents and purposes, put a “US clients unwelcome” sign over their front doors.

The issue can be particularly tricky in countries already in dispute with the Internal Revenue Service and other US departments over tax, as in the case of Switzerland. “It’s very difficult for US people to have a bank in Switzerland. They have found some small private banks that will take their business,” Tractenberg said.

HSBC Holdings, Deutsche Bank, Bank of Singapore and DBS Group Holdings all say they have turned away business (source: Bloomberg). In the UK, for example, C Hoare & Co, one of the country’s most exclusive private banks, has closed its portfolio management service for US clients.

Experience

Tractenberg has plenty of experience handling cross-border wealth structuring issues for clients. She focuses on estate planning, estate administration, prenuptial agreements and not-for-profit organizations. She also acts for several wealthy individuals and families with significant real estate and business holdings in the US and abroad.

At Katten, she works for a nationwide US business that has one of the largest trusts and estates practices in the country; it also has an office in London. Katten is a full-service legal powerhouse: it covers every field from commercial litigation to anti-trust and environmental issues.

Tractenberg’s clients often come from other law firms that cannot or do not specialise in her line of work; from accountants, independent financial planners, banks and other institutions, as well as word of mouth recommendations.

So where are clients coming from?

“I am starting to see more clients coming from Asia,” she said. She also, due in part to her background experience, gets work from Canada.

The November US elections – and the risk of a hike to tax rates – could produce a surge in work as people seek to front-load any income possible to recognize that income this year when income tax rates are lower than they may be next year,” she said. “It is going to be extremely busy.”

And her business means a tight focus on the web of different trust structures and protections that vary from state to state across the US. She discussed how attractive trust structures in states such as Delaware and Nevada create a regular source of business from clients seeking tax-advantaged, secure trusts. If someone wants to set up a discretionary trust, say, and is the discretionary beneficiary, they have to be in a state where the creditor cannot get his/her hands on the trust to avoid possible estate tax inclusion of the trust assets. Besides Delaware and Nevada, other states that offer attractions of this sort are South Dakota, New Hampshire and Alaska.

She and her colleagues are going to be busy.