planning for the international estate non tax

8/6/2019 Planning for the International Estate Non Tax

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PLANNING FOR THE INTERNATIONAL ESTATE:NON-TAX CONSIDERATIONS

Christopher S. ArmstrongLaw Offices of Christopher S. Armstrong, PC.

I. IDENTIFYING THE STATUS OF THE OWNER AND THE OWNER'S ASSETS

A. What Is Your Client's status?

1. A client's "nationality", "domicile", "habitualresidence" or "jurisdiction of closer connection" may be decisivein the determination of the validity of an estate plan. Anindividual's domicile is the point of reference favored by thelaws of the American states for the purpose of determiningquestions of succession with respect to personalty. SeeRESTATEMENT (SECOND) CONFLICTS OF LAW 263 (1971); Schoenblum,Choice of Law and Succession to Wealth: A critical Analysis ofthe Ramifications of the Hague Convention on Succession toDecedents' Estates, 32 VIRGINIA JOURNAL OF INTERNATIONAL LAW 84,n.15 at 87. Habitual residence (together with nationality) isfavored by the Hague Convention on the Law Applicable toSuccession to the Estates of Deceased Persons, Aug. 1, 1989, 29I.L.M. 150 [The "Succession Convention"].

2. Domicile is not construed in the same manner inall jurisdictions. Intent is an important component of theAmerican and English tests for domicile. See RESTATEMENT(SECOND) CONFLICTS OF LAW 18. Many countries construe domicileas being something closer to the American concept of "residence".See Ziegler, Typical Plan, INTERNATIONAL ESTATE PLANNING:

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PRINCIPLES AND STRATEGIES 187, 198 (Kozusko & Schoenblum eds.1991). Arguably the American Internal Revenue Service ("IRS"),by ruling that legal authority to reside permanently in the U.S.is irrelevant to the bona fides of intent, has endeavored totransform the concept of domicile for estate tax purposes intosomething closer to "habitual residence" for the purpose ofexpanding the class of persons liable for federal estate tax onworldwide assets. Compare Treas. Reg. 20.0-1(b) ["A personacquires a domicile in a place by living there ... with nodefinite present intention of later removing therefrom."] andRev. Rul. 74-364, 1974-2 C.B. 32 [Nonimmigrant visa makes holderincapable of forming requisite intention to be domiciled in U.S.]with Rev. Rul. 80-209, 1980-2 C.B. 248 [Illegal alien may becomedomiciled in U.S.; legal basis to form intention to residepermanently is effectively eliminated as part of the test;although the ruling might have produced an equitable result forthe circumstances described, its reliance upon the holding instifel v. Hopkins, 477 F.2d 1116 (6th Cir. 1973) for its legalbasis is dubious.]

3. Nationality has been favored over domicile bycertain European nations, habitual residence by others, not onlyfor the purpose of determining transmission of personalty, butalso in certain circumstances real property. In other words,many jurisdictions do not recognize a "scission" between themethods for determining choice of law with respect to realproperty and personalty. Nationality has been a more importantpoint of reference for countries which have not attracted largenumbers of immigrants. Consistent with the provisions of theSuccession Convention which it has ratified, switzerland permitsan alien domiciled in its territory to elect his or her nationallaw to govern his or her estate. Some suggest that nationalityis in the ascendancy as a basis for determining the law whichgoverns succession issues. See Pease, Asset Protection Vehicles;The European Perspective, THE CAYMAN ISLANDS BANKERS ASSOCIATIONTHIRD BIENNIAL CONFERENCE (11/21-11/22/91) [hereinafter referred

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to as the "Bankers Association Conference Materials"] at 10; butsee Schoenblum, supra, 32 VIRGINIA JOURNAL OF INTERNATIONAL LAW83, 92-93 and 109-111.

4. Habitual residence might best be described as a"watered down" version of domicile lacking the requirement ofintent. See Schoenblum, supra, 32 VIRGINIA JOURNAL OFINTERNATIONAL LAW 83, n.95 at 107. The Succession Conventiondoes not endeavor to define the term and it is not a termfamiliar to American jurisprudence. The reaction of the Americanestate planning community to the proposed sUbstitution of a"habitual residence" test for the domicile test has not beenenthusiastic. See, ~ Lawrence and Vinciguerra, Planning toProtect Against Forced Heirship, Sovereign Acts and Creditors,INTERNATIONAL ESTATE PLANNING: PRINCIPLES AND STRATEGIES 75(Kozusko & Schoenblum eds. 1991). The reasons for such lack ofenthusiasm would seem well founded, particularly to those whovalue predictability in estate planning.

B. What Does Your Client Own?

1. The typical client's estate will be comprised of amixture of real property, tangible personalty and intangiblepersonalty. Whose law governs the validity of a proposeddevolution of property may depend upon how such property ischaracterized. The jurisdiction of situs has traditionally beenrecognized by the United States, the United Kingdom and manyother nations as having a significant interest in the devolutionof real property. In consequence it is typically the law of thesitus jurisdiction which would apply to the transmission of realproperty (whether the "whole law" or local law may vary fromjurisdiction to jurisdiction). The rationale for deference tothe law of the situs is multi-faceted (eg. protection of theintegrity and effectiveness of the jurisdiction's land recordingsystem, control of land use, prevention of perpetuities,predictability of land transfer procedure and confirmation of

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state sovereignty). Control over the devolution of personalty isfrequently (but not universally) conceded to the jurisdiction ofdomicile. The Succession Convention, if adopted by theunited states, would alter the foregoing rules by giving primacyto a decedent's nationality and to his habitual residence. SeeSuccession Convention, Article 3.

2. In the case of certain species of intangiblepersonalty such as the shares of stock issued by a corporation,situs might arguably be assigned to several jurisdictions (eg.locus of incorporation, locus of a bearer share certificate orlocus of shareholder domicile). A client and his or her advisormay purposefully endeavor to alter applicable law by convertingthe character of property through the use of a partnership, trustor corporation. Conversion of real property to intangiblepersonalty is frequently advised for both estate planning and taxavoidance planning purposes. However, the conversion may be opento attack. See Schoenblum, supra, 32 VIRGINIA JOURNAL OFINTERNATIONAL LAW 83, n. 50 at 96. The interposition of acorporation may create new and unanticipated problems. SeeArmstrong, Selection of A Tax Favored Jurisdiction for U.S.Investment: Analyzing the Protections and the Costs;INTERNATIONAL ESTATE PLANNING: PRINCIPLES AND STRATEGIES 441(Kozusko & Schoenblum eds. 1991).

C. May the Applicable Law be Chosen?

1. Several u.S. states now have statutes (patternedon the 2-703 Uniform Probate Code as amended) which permit atestator to affirmatively select the local law of any state togovern the meaning and legal effect of all dispositions of realand personal property made by his or her will (or governinginstrument) regardless of the location of such property but onlyso long as the selection does not prejudice the rights conferredupon the surviving spouse by the permitting state or offend thefamily maintenance requirements or other public policy of the

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permitting state. The word "state" is intended to refer only toa state of the United states, the District of Columbia, PuertoRico and territories and possessions. See gg. Calif. ProbateCode 6141; see also, 16 Calif. Law Revision Commission 2328(1982). New York, Illinois, Florida and Connecticut are amongthe jurisdictions in the united states whose statutes endeavor toattract the assets of non-domiciliaries (including personsdomiciled outside the united States) by offering to apply theirown local laws to the devolution of assets brought within theirterritorial borders regardless of the rules which would otherwiseapply by reference to the law of the domicile. The validity ofsuch statutory choice provisions has been tested and upheld inNew York and Florida. See Matter of Estate of Renard, 56 N.Y.2d973, 439 N.E.2d 341, 453 N.Y.S.2d 625 (1982); Sanchez v. Sanchezde Davila, 547 So.2d 943 (Fla. App. 3 Dist. 1989).

2. Several tax favored jurisdictions have recentlyfollowed the American lead in the development of choice of lawprovisions for non-domiciliaries. See, ~ TRUSTS (FOREIGNELEMENT) LAW 1987 [The Cayman Islands]; THE CREATION OF TRUSTS(CHOICE OF GOVERNING LAW) Act 1989 [The Bahamas]. It isgenerally recognized that the Cayman Islands legislation whichhas since been copied in varying degrees by other tax favoredjurisdictions drew its original inspiration from NEW YORK ESTATESPOWERS & TRUSTS LAW, 3-5.1(h), the ambit of which was construedby the Renard case. See Duckworth, The Offshore Trust inTransition, INTERNATIONAL ESTATE PLANNING: PRINCIPLES ANDSTRATEGIES 139 (Kozusko & Schoenblum eds. 1991).

3. Reliance on the flexibility and additionaltestamentary freedom conferred upon the testator or trustor bylaws such as are found in the united states and in certain taxfavored jurisdictions should be tempered. A mere choice of lawunsupported by either (a) a persuasive connection between certainelements of the estate or trust and the chosen law or (b) thelocation of the assets in the jurisdiction whose law is chosen or

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in another jurisdiction likely to be sympathetic to such choiceof law will probably render the testator or trustor's selectionof law ineffectual if it should be challenged. See Schoenblum,An Introduction to Non-Tax Aspects of International EstatePlanning, INTERNATIONAL ESTATE PLANNING: PRINCIPLES ANDSTRATEGIES 5 (Kozusko & Schoenblum eds. 1991).

II. WHAT ARE YOUR CLIENT'S GOALS AND CONCERNS?

A. Overview.

Although tax questions seem never to be far from themind of the client who seeks advice with respect to aninternational estate, it behooves the advisor to recognize thatnon-tax issues might hold greater emotional significance for theclient than potential tax costs. The opening question may be assimple as the question whether a u.S. will is required to disposeof the client's u.S. assets. See Ziegler, Typical Plan,INTERNATIONAL ESTATE PLANNING: PRINCIPLES AND STRATEGIES 193(Kozusko & Schoenblum eds. 1991). Quite likely, the client willalso spend considerable time worrying "how much is enough" foryounger generation family members. See Zabel, Time Out for theHuman Side of Estate Planning, 127 TRUSTS & ESTATES 8 (May 1988).A keen appreciation of the issues likely to arise in a crossborder context coupled with patience, tolerance for culturaldifferences and a determination on the part of the advisor not tooverwhelm the client and not allow himself or herself to becomeoverwhelmed by the complexities of cross border planning (bothreal and hypothetical) are essential to the successful creationand implementation of an international estate plan.

B. Lifetime Control and Confidentiality.

1. Frequently, it will be important to the clientboth (a) that the estate plan permit him or her to retain

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significant controls over the investment of plan assets and thedisposition of same and (b) that the plan not compromiseconfidentiality with respect to the size and composition of hisor her prospective estate. The motives for an individual'sdesire to retain control are easily understood and seldomsuspect. At first blush, maintenance of confidentiality mightstrike some American estate planners as mischievous if not wrongand possibly illegal. In some circumstances, their suspicionswill be justified. There are, however, rational concerns forprivacy, concerns for freedom from the importunings of issueseeking early advances and from public organizations seekingdonations, and most seriously concerns for kidnapping whichwarrant the international estate planner's attention andassistance. See, ~ Mason, Don't Become a Kidnap Statistic, THEWALL STREET JOURNAL at A14 (5/18/92).

2. For over fifty years American jurisprudence, withonly occasional exceptions, has been willing to recognizeretention by a trustor of various powers to control both trustinvestment and the disposition of trust principal and incomeduring his lifetime as being consistent with the creation andmaintenance of a valid trust. See Newhall, Validity of RevocableTrusts, TRUSTS & ESTATES 482 (November 1944); FRATCHER, SCOTT ONTRUSTS 57.2 at 140 (4th ed. 1987). In deference to the trend infavor of recognizing a trust with respect to which sUbstantialpowers have been reserved by the trustor as a "trust" and not asan "agency" in violation of the statute of Wills, the RESTATEMENT(SECOND) OF TRUSTS 57 (1957) adopted the following language:

"Where an interest in the trust property iscreated in a beneficiary other than thesettlor, the disposition is not testamentaryand invalid for failure to comply with therequirements of the Statute of wills merelybecause the settlor reserves a beneficiallife interest or because he reserves in

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addition a power to revoke the trust in wholeor in part, and a power to modify the trust,and a power to control the trustee as to theadministration of the trust."

3. Two recent decisions rendered by the Jersey[Channel Islands] Royal Court have caused a number ofpractitioners and commentators (principally in the U.K. andvarious tax favored jurisdictions) to argue that a trust may notindeed be a "trust" if the trustee does not have full or verysUbstantial discretion to control the investment of and thedisposition of trust assets during the lifetime of the trustor.See Ex parte Viscount Wimborne (unpublished decision, Royal Court[Jersey, Channel Islands] 1983); Rahman v. Chase Bank (C.I.)Limited (unpublished decision, Royal Court [Jersey, ChannelIslands] June 6, 1991); and Hayton, When is a Trust Not a Trust?,1 JOURNAL OF INTERNATIONAL PLANNING 3 (April 1992). ProfessorHayton (who headed the U.K. delegation to the SuccessionConvention) goes so far as to assert that the legal adviser whoprepares a trust which is subsequently construed as an agency byreason of the unfettered rights of the trustor may be held liablefor negligence by the disappointed beneficiaries of the trust.See Hayton, id., n.6 at 4.

4. Both the Wimborne and the Rahman decisions weredecided with reference to an old Norman doctrine known as "donneret retenir ne vaut rien", a doctrine which in its origin wasintended to allow heirs of a decedent to invalidate qualified orcontingent gifts of movables made during the lifetime of thedecedent. The 93-page decision in Rahman also considered atgreat length in what was obiter dicta the possibility that theRahman trust might also be construed as a mere agency by reasonof the dominion and control exercised by the trustor over theassets and over the trustee. It is a curious footnote to theRahman case that Deputy Bailiff Vernon Tomes who wrote thedecision was recently dismissed by Queen Elizabeth by reason that

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" . as a senior judge, he had been repeatedly late indelivering judgments." See Riding, The Jersey Rebellion: ChannelTax Haven Is Fed Up with "Meddling" by London, INTERNATIONALHERALD TRIBUNE 4 (June 11, 1992).

5. Much can be (and has been) said in criticism ofthe laxity of Kamel Abdul Rahman's trustee. See, ~ Stoyanov,Lessons from the Rahman Case, OFFSHORE INVESTMENT 23 (November1991). It is arguable, however, that various professionals andcommentators in their haste to criticize the trustee in Rahmanhave neglected to observe that, as a de facto matter, many trustsare dominated by the trustor during his or her lifetime, and thatthe administration of trusts is often carried on with aconsiderable degree of informality during the trustor's lifetime.In this author's view, the Rahman dicta is correct to the extentthat it stands for the principle that the terms of a trustagreement govern only those assets which comprise the trust fund.In other words, if the trustor manifests by his actions thatcertain assets either have not been lodged in the trust fund orhave been withdrawn from same, such assets will not be governedby the terms of the trust on his decease. However, from anAmerican standpoint the precept that a lack of trustee discretionduring the lifetime of the trustor will invalidate the trust onthe ground that it violates the Statute of Wills is plainlywrong. Planners considering the use of tax favored jurisdictionswhich indicate a predisposition to be influenced by the dominionand control argument advanced by Professor Hayton are cautioned.

C. Testamentary Freedom.

1. Testamentary freedom is a relative matter. Mostjurisdictions including the political subdivisions of the unitedStates, show SUbstantial solicitousness for the rights of asurviving spouse. Given changing social mores, this includes notonly the surviving female spouse but also the surviving malespouse. See, ~ the English case of Browne v. Browne, Court of

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Appeal 1988 [albeit a divorce case and not a succession case],wherein Lord Justice Butler-Sloss was reported as follows:

"In her lordship's view, it was a sadreflection in times of much vaunted equalitybetween the sexes that a husband was seen tobe acting improperly by exercising his rightsin the matrimonial jurisdiction to claim ashare of a wealthy wife's money incircumstances where the law had provided andencouraged such applications to be made."

2. Eight states in the u.S. are "traditional"community property states while one, Wisconsin, joined thecommunity property system as of January 1, 1986, presumablymotivated both by tax considerations and by considerations ofequity as between the spouses. It is reported that a number ofAmerican common law states (including Illinois, Indiana,Connecticut, Kansas, North Dakota, Michigan and Oklahoma) arecurrently considering adopting "community property-like" lawspatterned upon the Uniform Marital Property Act which influencedWisconsin. See Ness, Death Can Be a Better Tax Shelter If YourState Adopts the Uniform Marital Property Act, TAX NOTES 1419(June 8, 1992). The community property system, which gives aspouse a vested right in one half of all "marital property" uponthe termination of the marriage by death or otherwise, iscommonly recognized in most civil laws countries. Survivingspouses domiciled in American states other than the traditionalcommunity property law states are generally protected in varyingdegrees by elective share statutes. See FRATCHER, SCOTT ONTRUSTS 146A, n.1 at 54-56 (4th ed. 1987). [This footnote whichcites each of the state statutes providing for an elective sharealso comments that the United Kingdom has a statute analogous to,but more flexible than, the typical American forced sharestatute. ]

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3. within the u.s. judicial system, an effort toavoid the effects of an elective share statute will fail on oneof two grounds. Either a court will not permit a spousedomiciled in another American state to avoid the elective sharerules of his home state. See Matter of Clark, 21 N.Y.2d 478, 236N.E.2d 152, 288 N.Y.S.2d 933 (1968). Or, in the alternative, thenon-domiciliary, who purposefully elects into the law of ajurisdiction outside of his domicile in order to avoid theelective share rules (or other rules) applicable under the law ofhis domicile, will have applied to his or to her estate theelective share rules of his or her chosen jurisdiction. Thislatter outcome appears particularly likely if the law of thechosen state is more favorable to the surviving spouse than thatof the state of decedent's domicile. See Matter of smith, 182Misc. 711, 48 N.Y.S.2d 631 (1944) [affirmative choice of New Yorklaw by American citizen domiciled in Spain]; In re Gould'sEstate, 140 N.E.2d 793 (Ohio P.ct. 1956) aff'd 140 N.E.2d 801(Ohio 1956) [original probate in Ohio of will of American citizendomiciled in Bermuda]. See also, Ziegler, supra, INTERNATIONALESTATE PLANNING: PRINCIPLES AND STRATEGIES 201 [liThechoice oflaw clause may give rights of election to the spouse which wouldnot exist otherwise .11] and FRATCHER, supra, 589 at 260-261.

4. In the international context, American courts havebeen equally solicitous in regard to the rights of non-U.S.citizen spouses. See Cardenas v. Solis, 570 So. 2d 966 (Fl.App.3 Dis. 1990) wherein the court stated

II the suit in Guatemala is a domesticrelations suit in which the plaintiff seeks,in effect, support from her husband in theform of one-half of the party's maritalproperty . The defendant husband oughtnot to be able to escape his financialobligations to his wife in Guatemala by

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secreting the parties' marital assets inMiami banks. "

5. The American and English systems of law governingsuccession have not been concerned to force a share of thetestator or trustor's estate to issue save in the circumstancewhere the issue are young or incapacitated. Of all of theAmerican states, only Louisiana provides forced heirship forissue, and even there the doctrine has recently been challengedand the ambit of the law limited to children under the age of 23or incapable of caring for themselves. See Louisiana civ. CodeArticle 1493 (West 1991).

6. By contrast, forced heirship appears wellentrenched outside of those jurisdictions influenced by Englishand American concepts of testamentary freedom. See, ~ CIVILCODE OF THE PHILIPPINES (ANNOTATED), Art. 886 (10th ed. 1981,Comment (1) [". The system of legitime is preserved in thenew Code. It is in vogue in almost all countries in Europe andLatin America. China has realized that legitime isessential ... "]; Coulson, SUCCESSION IN THE MUSLIM FAMILY 1-2(1972) ["The power of the deceased to dispose of his property bywill is recognized but is basically restricted to one-third ofhis net assets. Only where the legal heirs are preparedvoluntarily to forego their rights will testamentary dispositionin excess of this limit be operative .. This approach standsin sharp contrast, for example, with that of English law ... ".But cf. Pease, supra, Bankers Association Conference Materials 9[liltis perhaps not surprising that an increasing number ofcontinental Europeans find the strict rules of forced heirshipunacceptable ... most civil law jurisdictions would allow thesettlor to deal freely with certain part of his estate(la quotite disponible) . Some jurisdictions (eg.Switzerland) would allow the settlor and his legal heirs to enterinto a testamentary pact which could give the settlor an evenwider freedom ... "].

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7. When estate plans seeking to circumvent forcedheirship rules have been tested in u.s. courts, the generaldisposition has been to honor the intentions of the testator orthe trustor and to reject the claims of heirs based on foreignlegitime statutes. See, ~., the Renard case and the Sanchezcase discussed supra. However, claims that forced heirshiprights have been violated are likely to receive a much moresympathetic hearing in jurisdictions which either adhere to orare sympathetic to forced heirship and to the concept that itoffers a species of "family protection". Jersey, whose RoyalCourt rendered the Rahman decision overturning a carefullycrafted estate plan, is itself a forced heirship jurisdiction andits conflicts of law rules are said to have referred questions ofpersonal capacity to the law of the domicile prior to July 21,1989. See Duckworth, supra, INTERNATIONAL ESTATE PLANNING:PRINCIPLES AND STRATEGIES 144. It has been speculated that thecourt was motivated to invalidate the Rahman trust in partbecause it represented an obvious attempt to circumvent theforced heirship rules of the trustor's domicile, Lebanon.

8. Arguably, the attack on trusts, with respect towhich a trustor has reserved powers (or dominion and control), asmere agencies (which are in violation of the Statute of Wills) isbut another facet of the attack on freedom of testamentarydisposition. Although as noted supra, the trend of American lawis now strongly against the proposition that a trust may beconstrued as an agency by reason of powers reserved to thetrustor, there are a relatively small number of modern Americancases which have held trusts illusory by reason of controlsretained by the settlor particularly where the intent of suchtrusts has been the frustration of an applicable "right ofelection" statute. The apparent inconsistency in American legalreasoning is perhaps best explained by commentary in SCOTT ONTRUSTS.

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"On the other hand, it is arguable that eventhough the creation of a revocable trust isnot so far testamentary as to be invalidunder the statute of Wills, yet it is so fartestamentary as not to preclude the survivingspouse from claiming the distributive shareof the property. It may well be contendedthat it is against the policy of the statutepermitting the surviving spouse to reach ashare of decedent's estate to allow thedecedent to have the practicable advantagesof entire ownership as long as he lives andyet to deprive the surviving spouse of adistributive share. There is authority tothis effect."

See FRATCHER, supra, 57.5 at 175.

D. General Political Security.

1. Times change, but fears of uncertainty remainimmutable. Concerns in Europe about the Cold War havetransformed to concerns about political disintegration andpossible anarchy. Concerns for the application by the u.s.government of Trading with the Enemy Acts to an individual'sassets have given way to concerns about executive and judicialactions in the pursuit of assets tainted by an alleged criminalconnection where the burden is on the owner to prove that he orshe is an "innocent owner". See Tompkins, Legal and RegulatoryDevelopments in the united States Affecting the Cayman RegulatoryEnvironment, Bankers Association Conference Materials; In re: TaxLiabilities of John Does (No. Calif. Dist.) [IRS serves "John Doesummonses on Bank of America in San Francisco seeking all recordswhich reflect transfers of a minimum total of $9,500 during any90-day period in 1986 and/or 1987 by any person by any means toor from any of a number of jurisdictions including Hong Kong, the

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Cayman Islands, the Bahamas, the Netherlands Antilles andPanama]; and British Government Objects to Bank of America JohnDoe Summonses Issued for Cayman Islands Records, 92 TAX NOTESTODAY 102-6 (May 14, 1992) [The amicus brief contends thatenforcement of the summons order with respect to the CaymanIslands will violate U.K. sovereignty and exceed U.S.jurisdiction under the principles of international law andcomity. ]

2. Not surprisingly, views differ widely regardingcapital flight and bank secrecy depending in part upon thevantage point from which an individual views the situation. Forsome, bank secrecy, tax evasion and capital flight are a"symbiotic ~ trois". See Spencer, Capital Flight and BankSecrecy: The End of an Era?, 11 INTERNATIONAL FINANCIAL LAWREVIEW 17 (May 1992). For others, capital flight is a referenceto " ... family patrimony which is deposited or invested outsidethe home-country jurisdiction because of a perceived political oreconomic risk."See Field, Systematic Migration of Capital,OFFSHORE INVESTMENT 26 (February 1992).

3. Capital flight has generally been respected byU.S. courts where the government claimant is seen to be apolitically unpalatable expropriator. See, ~ Republic of Iraqv. First National City Bank, 353 F.2d 47 (2d Cir. 1965) cert.denied, 382 U.S. 1027 (1966) and Bandes v. Harlow & Jones, Inc.,852 F.2d 661 (2d Cir. 1988).

4. The reactions of U.S. courts might be expected tobe less predictable where the contesting foreign government isdeemed friendly and its attempted taking has been accomplishedthrough "creeping expropriation" involving actions more subtlethan outright seizure (eg. exchange controls, restrictions ofimports of necessary materials, price controls, manipulation ofcitizenship laws, compulsory investment of profits in the hoststate, etc.). It has previously been assumed that u.S. courts

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might be reluctant to inquire into the intent or motive of theexpropriating state because such would be embarrassing and wouldexacerbate international tensions. See Pederson, Expropriationin International Law - Strategies of Avoidance and Redress, 10TOLEDO LAW REVIEW 73, 79-80 (1978); But cf. W.S. Kirkpatrick &Co. v. Environmental Tectonics Corporation, 493 U.S. 400 (1990)[U.S. Supreme Court holds that inquiring into the motive of aforeign sovereign is not barred by the act of statedoctrine. . The act of state doctrine does not establish anexception in cases and controversies which may embarrass foreigngovernments.] Today it would appear that a U.S. court does havethe authority to inquire into the motives of a foreign government(i.e., did such government intend by indirection to confiscatewithout appropriate compensation). If the aggrieved party candemonstrate that confiscation was the motive, he or she must nextprove that the act of confiscation occurred with respect to U.s.situs assets. Cf. Republic of Iraq v. First National City Bank,supra, 353 F.2d n.3 at 51. [Consideration of how to treatCanadian investment trust shares held by an Americanadministrator.]

5. Of course, the foreign client will hope that hisor her advisor can structure the prospective estate in such amanner as to avoid the clutches of an expropriating government.Such government may be the government of the testator ortrustor's domicile or it may be the government of a tax favoredjurisdiction where a trust or holding company has been sited.The interposition of an entity sited in a tax favoredjurisdiction can affect the resolution of the client's homepolitical problems by interposing the biases and preferences ofthe tax favored jurisdiction. See Armstrong, supra,INTERNATIONAL ESTATE PLANNING: PRINCIPLES AND STRATEGIES 456-459.Clients might take heart from the tempered and fair minded actionexhibited by the Bank of England in its interpretation of theStatutory Instrument 1990 No. 1591 issued in connection with theKuwait crisis whereunder in the case of irrevocable discretionary

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settlements, the beneficiaries of which included residents ofKuwait, the Bank of England ruled that accounts held in London bythe offshore trustees were not subject to freezing because theoperation of such accounts was not "by order given by or onbehalf of . any resident of Kuwait". See Pease, supra,Bankers Association Conference Materials 14.

6. SUbstantial attention has been paid to "protectivedevices" which may be used for the purpose of extracting aclient's assets from harm's way in the event of the occurrence ofsudden adverse political developments in a jurisdiction affectingan interposed trust or judicial entity (particularly where thevaluable underlying assets are themselves situated in a safethird country jurisdiction). See generally, Lawrence andVinciguerra, supra, INTERNATIONAL ESTATE PLANNING: PRINCIPLES ANDSTRATEGIES 96-106 which includes a discussion of transfer of thecorporate domicile and the use of options, corporate assignments,merger, liquidation, redeemable shares and powers of attorney.The use of powers of attorney is somewhat favored as a means forlast minute extraction of assets from corporate solution becausethe power of attorney as a protective device has been tested andupheld. See Tabacalera severiano Jorge, S.A. v. Standard CigarCo., 392 F.2d 706 (5th Cir.) cert. denied 393 U.S. 924 (1968)[Note, however, that under the facts as presented in theTabacalera case, the power of attorney had not been revoked bythe Cuban government in advance of the date on which it was usedto assign corporate assets].

7. The power of attorney has been favored not onlyfor the purpose of meeting political contingencies, but also forthe purpose of facilitating the retention by family members ofcontrol over special companies whose stock is placed in trust.Great caution should be exercised in the use of powers ofattorney over such companies lest it be determined in the face ofa later challenge by heirs that the assets subject to the powerof attorney were not in fact part of the trust fund. Cf.

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Stoyanov, supra, OFFSHORE INVESTMENT 26 ["Also the trustee doesnot seem to have reacted to the fact that, despite the assignmentby KAR to it of the benefit of a contract, the obligors from timeto time accepted KAR's instructions to divert funds properlypayable to the trustee. In the same context, the trustee did noteven know that these instructions had been given to the bank torelease the security available to the trust for the proceeds ofthe assigned agreement."]

E. Private Creditor Claims

1. Although in times past protection from the claimsof private creditors has occasionally been a motivating factor inthe creation of an estate plan, it is not typically the primarymotivation. The emergence of the "asset protection trust"assisted by the adoption of facilitating legislation in variousjurisdictions including the Cook Islands, the Bahamas, Gibraltar,Turks and Caicos and the Cayman Islands has focused sUbstantialattention on the use of trusts for the avoidance of creditorclaims.

2. Another speaker is scheduled to address in somedetail the formation and use of asset protection trusts.Accordingly, it is noted here only that asset protection trustshave been robustly defended by their supporters. See, ~Kleinfeld, The U.S. Perspective - Use of Asset Protection Trustsin International Planning, Bankers Association ConferenceMaterials. The media has been alert to the emerging use of assetprotection trusts and to the claims of both their proponents andtheir detractors. See, ~ Salting It Away, THE ECONOMIST 54(October 1991); Button, Pulling Up the Drawbridge, FORBES 80(April 27, 1992). Although the FORBES article reports that "mostestate planning lawyers at big firms see nothing wrong with theconcept of protecting assets by moving them overseas", many suchattorneys are circumspect in their approach to such trusts. See,~ Field, supra, OFFSHORE INVESTMENT 27 (February 1992) ["While

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we have been active in preparing trusts for wealthy individualswhich would also provide a degree of protection against futurecreditors, we are deeply concerned about generic use of trustsfor this principal purpose."]

F. Avoidance of Tax Liabilities and Exchange Controls

1. It is the rare client who will wish to expose hisor her assets unnecessarily to the tax or exchange control lawsof any jurisdiction. Successful estate planning is frequentlymeasured by the degree to which government levies or currencyblockades can be avoided or mitigated. It is generallyrecognized by both estate planners and scholars that one countrywill typically not take notice of the revenue laws of another.This maxim's origins are traced to the dictum of Lord Mansfield.See Holman v. Johnson, 1 Cowp. 341, 98 Eng. Rep. 1120 (K.B.1775) .

2. Although Lord Mansfield's remarks on theenforcement of foreign revenue laws continue to be honored,occasional exceptions have been carved. See, ~ Banco Frances eBrasileiro, S.A. v. Doe, 331 N.E. 2d 502, cert. denied 423 U.S.867 (1975). [New York's highest court defers to considerationsof a treaty relationship and the principle that when the truegovernment interests of a friendly nation are involved, a stateforum should be provided as a matter of cooperation.] Similarsentiments have been expressed in the united Kingdom. SeeRegazzoni v. Sethia, 1956 2 Q.B. 490, 515 ["It is perfectly truethat the Courts of this country will not enforce the Revenue laws

. of another country at the suit of that other country,either directly or indirectly. It is quite another matter to saythat we will take no notice of them. It seems to me that weshould take notice of the laws of a friendly country, even ifthey are revenue laws . At least to this extent, that if twopeople knowingly agree together to break the laws of a friendly

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country . . then they cannot ask this Court to give its aid tothe enforcement of their agreement."]

3. It is argued by some that the u.s. government andthe governments of certain other major financial centerspurposefully hold themselves out as tax havens to foreignpersons. See Spencer, supra, 11 INTERNATIONAL FINANCIAL LAWREVIEW 17. Nonetheless, American estate planners areunderstandably reluctant to counsel clients to take actions whichmight be construed as evasion of u.S. tax laws. See Ziegler,supra, INTERNATIONAL ESTATE PLANNING: PRINCIPLES AND STRATEGIES194-195. See also, Justice Department News Release, EightSentenced in Kansas District for Roles in Bogus Trust Scheme, 92TAX NOTES TODAY 144-10 (July 15, 1992) [eight persons includingaccountant and tax advisor sentenced to multi-year prison termsfor conspiring to defraud the U.S. government through thepromotion and marketing of fraudulent trusts designed to concealassets and taxable income from the IRS]. Presumably, foreign taxadvisors would be equally circumspect regarding the advice theymight give with respect to their own jurisdictions. See, NissanU.K. Advisors Granted 100,000 Bail, THE DAILY TELEGRAPH(October 9, 1991) [Two financial advisors to Nissan U.K. arecharged with conspiracy to cheat the Inland Revenue and remandedon bail of 100,000 each].

4. Where the American practitioner is called upon todeal with questions of tax avoidance or exchange controlavoidance involving a foreign jurisdiction, it has been suggestedthat he is governed by Rule 1.2(d) of the ABA Model Rules ofProfessional Conduct [A lawyer shall not counsel a client toengage, or assist a client, in conduct that the lawyer knows iscriminal or fraudulent, but a lawyer may discuss the legalconsequences of any proposed course of conduct with a client andmay counselor assist a client to make a good faith effort todetermine the validity, scope or application of the law."]Commentary on Rule 1.2(d) has been construed as leaving

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"relatively intact" the international estate planner's freedom toadvise his client of tax planning tactics not sanctioned bygovernmental authorities." See Hendrickson, Ethical Issues inInternational Estate Planning, INTERNATIONAL ESTATE PLANNING:PRINCIPLES AND STRATEGIES 739, 751 (Kozusko & Schoenblum eds.1991) .

5. Information developed by the American IRS may becommunicated outside of the United states by the IRS pursuant tothe provisions of various bilateral tax treaties providing forexchange of tax information and of various tax informationexchange agreements. See LXXVb CAHIERS DE DROIT FISCALINTERNATIONAL 311 (1990). See also, Gordon, venuti and Galin, AnAnalysis of Tax Information Exchange Agreements Concluded by theU.S., 20 TAX MANAGEMENT INTERNATIONAL JOURNAL 187 (May 10, 1991).Commentators have, however, expressed the view that U.S.responses to foreign country requests for specific informationare (and will continue to be) far more common than spontaneousexchanges of information. See Gordon et al. id.

Dated: July 20, 1992

planning for the international estate non tax

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