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                        OFFSHORE, an eJournal [tm]
Volume 7, No. 1, September, 1996, (c) The Global Group Limited, Nassau, all
rights reserved.
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Subject:  The Impact of New U.S. Tax Acts (the '96 Act) Upon Americans
Utilising the Offshore (Foreign Trust) Asset Protection Trusts (APT)---The
"Death" of the Offshore Asset Protection Trust?

*****Of  great interest to Americans, their U.S. (onshore) and offshore
service providers.*****

The full analysis and impact of the '96 Acts are yet to be assessed.  The
following is PRELIMINARY and for your planning purposes. As  a general
statement, the APT as we have known it is a weakened vehicle which will see
limited future use.

The goal of the IRS is to achieve better foreign trust reporting and
reduction or elimination of offshore tax deferral and avoidance techniques
using the APT as a vehicle.

[Vocabulary---
service provider: Financial planner, CPA, attorney, estate planner,
consultant, etc.
grantor trust: a trust in which a U.S. person is the
settlor/grantor/creator, and that person creates an APT.  The income of the
APT is reported on the personal tax return of the settlor.
non-grantor trust: A trust created by a non- U.S. person as settlor.]

Prior law:
A U.S. creator of a foreign trust was required to report such to the IRS.
A U.S. transferor to a grantor or non-grantor trust was required to report.
Reporting for the creator included the name, address and tax ID of the:
        1. Transferor.
        2. Trust
        3. Fiduciary
        4. Trust beneficiaries
        5. The nature of each beneficiary's interest
        6. Location of the trust records
        7. Fair market value of the asset transferred
Where the APT had a U.S. beneficiary, the transferor was required to report
annually, as well.  If the transfer was of an appreciated asset, the
transaction was subject to an excise tax.
5% penalty provision (5% of the value of the trust at year end).  Imposed
upon any one who failed to file a report where they created an APT or
transferred an asset to the APT.
Maximum penalty was US$1,000.

Revised Law:

[New vocabulary---:
reportable event: creation of a foreign trust (grantor or non-grantor),
direct or indirect transfer of money or property to an APT (including upon a
death of a U.S. person)
for a grantor trust, the death of a U.S. resident or citizen who had an
ownership interest in a foreign trust.
responsible party: some grantors, transferors and executors of decedents
estates.
gross reportable amount: gross value of property transferred as of the date
of the "event".]

The '96 Act requires "written notice" within 90 days of the reportable event
by the responsible party.
Initially, the notice must contain:
        1. Amount of money or other property transferred to the APT
        2. The identity of the trust
        3. The identity of each trustee
        4. The identity of the beneficiaries or of the class of beneficiaries
Annual reports. An owner of an APT who is a U.S. person must report annually
and provide a full accounting for the APT's tax year.
Informational reports must also be provided to other U.S. persons who are
treated as owners or who receive trust distributions.

EFFECTIVE DATE: Annual reporting requirements and penalties (see below)
apply to the tax years of U.S. persons starting Jan. 1, 1996.

A U.S. person who is a owner of any portion of an APT is treated as a U.S.
"limited agent" [new vocabulary].
A foreign APT which designates a U.S. limited agent will not be considered
to be engaged in trade or business in the U.S. for this limited activity.
Caveat:  Unless an offshore APT complies with the '96 Act, the IRS may be
free to determine the tax liability.
The IRS has the power to examine trust records and to obtain testimony
similarly as in the foreign owned corporations.
U.S. persons who are beneficiaries to APTs who directly or indirectly
receives a distribution from an APT must report what trust paid how much
during the tax year AND ANY OTHER INFORMATION prescribed. These
distributions are subject to certain throwback rules.

Increased penalties under the '96 Act:
        1. Failure to report the above transfers of money or assets or a
distribution to a U.S. person carries a initial "penalty tax" of 5% of the
"gross reportable amount".
        2. Failure to make annual reports results in a further penalty of 5% of the
"gross reportable amount".
        3. Failure to comply to an IRS notification to the responsible party
results in a further penalty of US$10,000
        4. Reasonable cause exceptions exist.
        5. Offshore privacy laws (civil or criminal) are not a sufficient defense
to not reporting to the IRS.

OFFSHORE's editorial general comments.  The '96 Act enforces the pre-'96 Act
posture that the APT is a tax neutral entity utilised only for onshore
assets protection.  Certain incidental tax deferral features, gifting and
lending features, are now gone or at least seriously limited. The IRS has
been given broad discretionary powers to expand their investigatory needs to
examine the APT and the U.S. persons involved through the settlor,
beneficiaries, transferors, trustees, limited agents and any party they deem
responsible. Penalties for noncompliance are severe.

At this juncture I find it difficult to understand WHY any new offshore APTs
would be established for U.S. persons where merely intended for offshore
asset protection. Perhaps their will be a further resurrection of the
onshore family limited partnerships for this purpose. Without IRS reporting
forms being available, a full assessment of the problems of those existing
and affected APTs must be reported upon at a later date---but I expect
further surprises and more "shockers" to come.

There are three principal APT marketing regions.  A high profile, major law
firm in the West; many offshore service providers in Southern California
asset protection industry---the home of the Cook Islands trust---and; those
bizarre asset protection trust/credit card type of offerings on the "Wild"
Internet Newsgroups.   It will be interesting to see what is the response to
the '96 Act by these three principal groups of offshore service providers.
I will be attending several continuing education seminars to see the CPA and
legal community's response and its effects upon future planning and present
APT compliance and plan on reporting in these pages of OFFSHORE.  So far, I
have seen little other than a an all too brief article in the "International
Herald Tribune", discussing some alternative measures by an offshore firm.

[Continued next issue.  Our firm is available for financial planning
consulting services on these critical issues with your CPA and/or attorney.
We can obtain opinion (comfort) letters from independent, qualified
attorneys and CPAs.
                                                        Arnie and the Staff]
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