Assets of foreign grantor trust not includible in grantor's U.S. gross estate.

• Author: Zink, William J.

It is estimated that more than half of the global funds passing through the $5 trillion offshore investment industry belong to multinationals, professionals and entrepreneurs around the world who are looking to safe haven financial centers for security. Within the last two years, the asset protection trust has become the most popular vehicle used to protect funds abroad. Taxpayers use asset protection trusts for future security against such legal contingencies as malpractice suits, bankruptcy, insolvency, fraud and other claims of creditors.

Today, an estimated $1 trillion of foreign trust funds represent asset protection trusts in the Bahamas, Belize, the Cayman Islands, the Cook Islands, Cyprus, Gibraltar, the Turks and Caicos Islands, Nevis, Mauritius, the British Virgin Islands and the Isle of Man.

In this regard, the IRS recently issued Letter Ruling 9332006 in connection with the income, excise, gift and estate tax consequences of the establishment and funding of a trust organized under the laws of a foreign country.

Settler A and Settler B are siblings and U.S. citizens. Each owns a percentage interest in a U.S. corporation (corporation C). C owns all of the voting common stock of corporation B, also a domestic corporation, B's nonvoting common shares are owned by a domestic limited partnership, which conducts no active business. Each settler directly owns a percentage of the interests in the partnership, as a limited partner. C is the sole general partner in the partnership.

The settlers created an irrevocable trust under the laws of foreign country X. The trust beneficiaries include the settlers, a living parent of the settlers who is a U.S. citizen, and the settlers, a living parent of the settlers who is

Either the trustee (an independent X corporation) with the consent of the protector (as explained), or the living parent of the settler as beneficiary may direct trust income or principal to be appointed to or for the benefit of any beneficiary, provided, however, that only the protector may make such appointments for the benefit of either settler or the parent beneficiary.

The term of the trust is 100 years unless terminated earlier under the sole discretion of the trustee. On termination, the trustee can appoint the trust's

assets to any or all of the then beneficiaries or, if there are no living beneficiaries, for charitable purposes.

The protector cannot be a person or entity related to or under the control of either settler.

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