Tax Avoidance

[TheBramble]

Here in wet, windy, cold Cambodia, we don't have too much of a problem with this issue, but I understand some of you based in some of the more draconian, repressive and totalitarian states like the US and UK (oh, and I almost forgot France LOL) do.

So maybe the few snippets below which I've collected from God knows where (I'll fess up at the first suggestion of infringement...) might help, or even better, give you fresh ideas.

I take no responsibility for the current legal status of these suggestions in your locale nor for any development of a legal nature which might ensue should you choose to utilise or develop any of them.

Happy hiding.

 

[TheBramble]

Cashing in on stocks without triggering capital-gains taxes

An executive has $200 million of company shares. He wants cash but doesn't want to trigger $30 million or so in capital-gains taxes.

1. The executive borrows about $200 million from an investment bank, with the shares as collateral. Now he has cash.

2. To freeze the value of the collateral shares, he buys and sells "puts" and "calls." These are options granting him the right to buy and sell them later at a fixed price, insuring against a crash.

3. He eventually can return the cash, or he can keep it. If he keeps it, he has to hand over the shares. The tax bill comes years after the initial borrowing. His money has been working for him all the while.

 

[TheBramble]

Partnerships that let property owners liquidate without liability

Two people are 50-50 owners, through a partnership, of an office tower worth $100 million. One of the owners, let's call him McDuck, wants to cash out, which would mean a $50 million gain and $7.5 million in capital-gains taxes.

1. McDuck needs to turn his ownership of the property into a loan. So the partnership borrows $50 million and puts it into a new subsidiary partnership, which contributes the cash to yet another new partnership.

2. The newest partnership lends that $50 million to a finance company for three years in exchange for a three-year note. (The finance company takes the money and invests it or lends it out at a higher rate.)

3. The original partnership distributes its interest in the lower-tier subsidiary to McDuck. Now, McDuck owns a loan note worth $50 million instead of the property, effectively liquidating his 50 percent interest.

4. Three years later the note is repaid. McDuck now owns 100 percent of a partnership sitting on a $50 million pile of cash—the amount McDuck would have received from selling his stake in the real estate—without triggering any capital-gains tax.

5. While this cash remains in the partnership, it can be invested or borrowed against. When McDuck dies, it can be passed along to heirs and liquidated or sold tax-free. The deferred tax liability disappears upon McDuck's death under a provision that eliminates such taxable gains for heirs.

 

[TheBramble]

How to leave future stock earnings to the kids and escape the estate tax

A wealthy parent with millions invested in the stock market wants to leave future earnings to his kids and avoid the estate tax on those earnings.

1. The parent sets up a Grantor Retained Annuity Trust, or GRAT, listing the kids as beneficiaries.

2. The parent contributes, say, $100 million to the GRAT. Under the terms of the GRAT, the amount contributed to the trust, plus interest, must be fully returned to the parent over a predetermined period.

3. Whatever return the money earns in excess of the interest rate—the IRS currently requires 3 percent—remains in the trust and gets passed on to the heirs free of estate and gift taxes forever.

 

[TheBramble]

"Freezing" the value of an estate so taxes don't eat up its future appreciation

A wealthy couple wants to leave a collection of income-producing assets, such as investment partnerships that own shares, valued at as much as $150 million, to their children. So they "freeze" the value of the estate at that moment, maybe 20 years before their death, pushing any future appreciation out of the estate and avoiding what could be a $50 million federal estate tax bill.

1. The best approach is an "intentionally defective grantor trust." The couple makes a gift of $10 million—the maximum amount exempt from the gift tax for the next two years—to the trust, which lists the children as beneficiaries.

2. The trust uses that cash as a down payment to buy the partnership from the parents through a note issued to the parents, but the partnership contains a restriction on the trust's use of the assets, thus impairing the partnership's value by, say, 33 percent. That enables the trust to buy the $150 million partnership for just $100 million.

3. The income produced by the investment partnership helps pay off the note. The tax bill on that income is borne by the parents, essentially allowing gifts exempt from the gift tax.

4. When the note is paid off, the trust owns that $150 million worth of assets minus the $90 million note and interest—plus any appreciation in the meantime. The trust has swept up a $150 million income-producing concern without triggering the federal estate tax.

 

[TheBramble]

Stock options allow executives to game the taxes on their compensation in a big way

An executive is negotiating his employment contract for the coming five years. The company might offer millions in shares. But who wants to pay taxes on millions in shares?

Better to take options. The executive owns the right to buy the shares at a time of his choosing; he's been compensated, but he hasn't paid any taxes. Gains from nonqualified stock options, the most common form, aren't taxed until the holder exercises them. That means the executive controls when and if the tax bill comes. It isn't just icing, either. Often, it's the cake. Lawrence J. Ellison, CEO of Oracle (ORCL), earned $250,001 in salary in 2010 and was awarded $61,946,500 in options.

 

[TheBramble]

Using, but not unloading, underwater stock shares to adjust your tax bill

An investor has capital-gains income from a sold-off stock position. Separately, the investor has other shares that are down an equal amount; if he sold them he'd realize a loss to offset the gains and pay no taxes. But no one likes to sell low. So he wants to use that loss without actually selling the shares. IRS rules prohibit investors from taking a loss against a gain and then buying the shares back within 30 days.

1. At least 31 days before the planned sale, the investor buys an equal value of additional shares of the underwater stock.

2. The investor buys a "put" option on the new shares at their current price, and sells a "call" option. Now he's protected from the downside on that second purchase.

3. At least 31 days later, the investor sells the first block of underwater shares. He now has his tax loss, without having taken any additional downside risk from the purchase of the second block of shares.

 

[TheBramble]

With this deal, an investor can sell property without selling—or incurring taxes

An investor owns a piece of income-producing real estate worth $100 million. It's fully depreciated, so the tax basis is zero. That means a potential (and unacceptable) $15 million capital-gains tax.

1. Instead of an outright sale, the owner forms a partnership with a buyer.

2. The owner contributes the real estate to the partnership. The buyer contributes cash or other property.

3. The partnership borrows $95 million from a bank using the property as collateral. (The seller must retain some interest in the partnership, hence the extra $5 million.)

4. The partnership distributes the $95 million in cash to the seller.

Note: The $95 million is viewed as a loan secured by the property contributed by the seller instead of proceeds from a sale. For tax purposes, the seller is not technically a seller, and so any potential tax bill is deferred.

 

[TheBramble]

So-called permanent life insurance policies are loaded with tax-avoiding benefits

A billionaire wants to invest but doesn't need the returns any time soon and wants to avoid the tax on the profits.

A world of tax-beating products is available through the insurance industry. Many types of so-called permanent life insurance—including whole life, universal life, and variable universal life insurance—combine a death benefit with an investment vehicle. The returns and the death benefit are free of income tax. If the policy is owned by a certain type of trust, the estate tax can be avoided as well. "It is a crucial piece of any high-net-worth tax planning in my experience," says Michael D. Weinberg, president of an insurance firm that specializes in planning for high-net-worth individuals.

 

[TheBramble]

Deferred compensation plans can mean decades of tax-free growth

Executives want generous pay but don't want immediate tax bills from salaries or cash bonuses.

Instead, they elect to set aside a portion of their pay into a deferred compensation plan. Such plans allow the compensation, plus earnings, to grow tax-deferred, potentially for decades. Starbucks (SBUX) Chief Executive Officer Howard Schultz had about $88 million in his plan as of the end of 2010, Securities and Exchange Commission filings show. Verizon's (VZ) CEO, Ivan G. Seidenberg, had $62 million. Richard B. Handler, CEO of Jefferies Group, had $225 million. It's their money, they just haven't paid taxes on it yet.

 

[Mr. Charts]

What are you doing giving all the secrets away ? !!!!

Welcome back, Tony

Richard

 

[TheBramble]

What are you doing giving all the secrets away ? !!!!

I'm a secret agent for the IRS & HMRC (& DGFIP). They've asked me to setup a sting and contact them with anyone showing intrest in this topic.

 

[scose-no-doubt]

This is all well and good but in the UK you'd have to charge an arms length and market based interest rate on all of these related party loans for any of this to be acceptable. How much would that set you back? 50m @ 2-3% until you unwind the scheme isn't really that cheap. better to just set something up for offshore ownership in a 0% tax gaff.

 

[rsh01]

So maybe the few snippets below which I've collected from God knows where (I'll fess up at the first suggestion of infringement...)

Business week
E.g:
How to Pay No Taxes: 10 Strategies Used by the Rich - Businessweek

Good articles.

 

[TheBramble]

Business week
E.g:
How to Pay No Taxes: 10 Strategies Used by the Rich - Businessweek

Good articles.

Thanks. Always good to get attribution sorted.

 

[TheBramble]

This is all well and good but in the UK you'd have to charge an arms length and market based interest rate on all of these related party loans for any of this to be acceptable. How much would that set you back? 50m @ 2-3% until you unwind the scheme isn't really that cheap. better to just set something up for offshore ownership in a 0% tax gaff.

But you're not going to be paying interest/premium at anything like the current tax rates in those categories though.

Offshore etc. fine, but the methods mentioned were legal tax avoidance without and shades of grey. I'm fine with shades of grey providing they don't attract more attention to you than you would have had without them.