Transnational Estate Planning in a Transparent Environment

Reflections on Forty plus Years of Evolution in the Applicable Law (1972 2014)
Christopher S. Armstrong, Armstrong & Hastings LLP

Table of Contents
1. Beyond the client, to whom does the planner owe a duty? ............................................................ 1
2. Prior to the end of the 20th century laws governing the succession to a decedents property and
tax laws were widely viewed as local matters to be enforced locally; foreign laws were suspect and
typically ignored by practitioners or expressly excluded by purposeful drafting when operating within
their own jurisdictions. ........................................................................................................................... 4
3. The beginning of the end of US tolerance for offshore haven use when it adversely impacted the
taxation of certain revenue streams ....................................................................................................... 7
4. Contrarian actions by the US for the purpose of facilitating foreign lending to US persons and
foreign investment in US equities and realty. ......................................................................................... 8
5. Continental Europeans seek to reign in the use of local law statutes by calling for the
application of the succession laws of ones nationality or domicile...................................................... 12
6. UK assault on the tradition of attorney client privilege in response to concerns about terrorism
within the UKthe UK Proceeds of Crime Act (1988) established precedent for the destruction of
privilege in order to enable more effective policing of money laundering and was taken up by the
Financial Action Task Force (FATF) as a template for the governance of attorney conduct in all
jurisdictions. ......................................................................................................................................... 14
7. FATF reports in 2006 that US attorneys, accountants and unlicensed trust company service
providers are seriously deficient in their client due diligence and calls for them to be subject to KYC
and STR rules similar to those now in force in Europe and the UK........................................................ 16
8. The whistleblower revelations by Bradley Birkenfeld, an American banker in the employ of
UBS, a Swiss bank, of widespread misconduct in the US by UBS bankers which was corroborated by
massive data leaks enabled by modern technology incensed the US government, resulted in a fine of
US$780 million being imposed upon UBS and in the disclosure of information about US holders of
previously unreported Swiss accounts putatively protected by Swiss bank secrecy and gave impetus to
the enactment by Congress in March 2010 of Foreign Account Tax Compliance Act (FATCA). .......... 18
9. The mistake of believing that the US is the worst of jurisdictions and that all problems will be
solved by avoiding all US contacts when planning, even to the extent of forbidding US beneficiaries of
a foreign trust. ...................................................................................................................................... 21

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1. Beyond the client, to whom does the planner owe a duty?

a. His own government wherever he may be?

i. A US citizen even when abroad can be served in absentia and compelled to

give testimony in a US court. See 28 USC 1783(a).

ii. IRC 7701(a)(39) provides that in the case of any citizen of the United States
who does not reside in any United States judicial district, such
citizenshall be treated as residing in the District of Columbia for purposes of
any provision of.. the tax laws relating to the jurisdiction of the courts or
the enforcement of a summons. Permission to serve a US citizen abroad does
however require the consent of the foreign government where such citizen is
physically present. See CCA 200107032 (2/16/2001).

b. The bar pursuant to whose rules he or she practices?

i. The practice of law when travelling outside the jurisdictions pursuant to

whose rules one is licensed may be construed as the unauthorized practice of
law. See Reimer and Heimos, Ethical Considerations in International Estate
Planning, BNA Tax Management Estates, Gifts and Trusts Journal (2011).

ii. A foreign lawyer practicing under special license in a jurisdiction other than
his home jurisdiction may find himself caught between opposing codes of
professional ethics absent clear deference to the rules of the jurisdiction
within which the advice is being rendered. See Persky, Despite Globalization,
Lawyers Find New Barriers to Practicing Abroad, ABA Journal (November
2011).

c. The foreign government to whose laws the client (or his or her property) might be
subject?

i. Does the US Supreme Court holding in Pasquantino v. United States, 544 US

349 (2005) holding that the US government could prosecute US citizens
under the wire fraud law for violation of a Canadian revenue statute truly
expose US attorneys engaged in counselling foreign clients in the US
regarding estate planning matters to prosecution in US courts by the US
government for abetting the violation of a foreign revenue law?

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 ii. Compare Leitner, CA-2s Narrow View of Pasquantino Does Not Affect
Enlarged Scope of Federal Fraud and Money Laundering, Roberts & Holland
LLP Journal of Taxation (January 15, 2006) with Lowthers well-reasoned
critique of the Supreme Courts 5-4 decision in Pasquantino. Pasquantino v.
U.S.: The Supreme Courts Misstep in Prosecuting International Tax Fraud
Under the Wire Fraud Statute, 7 Houston Business & Tax Journal 102
(2007).

iii. An individual temporarily resident in a foreign jurisdiction may render

himself subject to prosecution without resort to the procedurally and
substantively complex question of how far a sovereign may go outside its
own jurisdiction to bring an action against a foreign person including an
attorney for the alleged violation of its laws.

iv. What impact if in the future American attorneys are subjected to the same
gatekeeper rules as presently require attorneys practicing in the United
Kingdom (and many other jurisdictions) to disclose to his local government
(without tipping off the client) any suspicious transaction in which the
client or a member of the clients family might have engaged without regard
to whether the local governments laws are implicated.

d. When are qualitative judgments about a foreign jurisdiction appropriate?

i. Is the same deference owed to the laws of North Korea that might be owed
to the laws of a close neighbor such as Canada or Mexico?

ii. Relevant to this question are the recently reported observations of the DC
District Court in response to the assertion of the Florida and Texas Bankers
Associations that there is a substantial difference between sharing tax
information with Canada and sharing it with countries such as China and
Egypt. See Florida Bankers Association et al v. US Dept. of Treasury, 2014 U.S.
Dist. LEXIS 3521 at 26-27 (1.13.2014) [Especially in light of the fact that the
IRS narrowed its list from all 196 countries worldwide to our 70 treaty
partners, it was hardly arbitrary or capricious to extend the reporting
requirements to that specific group. Indeed, because the regulations are
geared toward improving our treaty compliance, it would not make much
sense to narrow the group any further. This choice, then, presents no
obstacle to the IRS under the APA.]

iii. The announcement by the OECD of an intention to use the FATCA

information sharing agreements developed by the US as a template for

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 worldwide sharing of information between all governments enhances the
probability of information which is shared by one country with another
ultimately being used either by such other country for inappropriate
purposes or by a third country to which such other country passes the
information. See OECD delivers new single global standard on automatic
exchange of Information (2.13.14). http://www.oecd.org/tax/oecd-delivers-
new-single-global-standard-on-automatic-exchange-of-information.htm.

e. Adherence to the medical injunction First do no harm when engaged in

international estate planning

i. Even if the American counsellor may feel reasonably secure that if he

doesnt touch the (hot) money and does not counsel on evasion
techniques that would cause him to be in violation of his own government
or bar association rules, what of the client who may be given a false sense
of security about the consequences of violating the laws of his home
country?

ii. Cf., Hughes, FAMILY THE COMPACT AMONG GENERATIONS at 234 (2007)
[Todays Legal Profession: A Failure to Serve wherein the author derides
professionals who masquerade as family counsellors while conducting an
adversarial practice that consists of feuding with the government about
taxes.]

f. If laws or mores of one jurisdiction conflict with those of another, one may be put to
the choice of deciding where to do business and where not to do business (or
travel).

i. See, e.g., US et al v. Chase Manhattan Bank, NA, 584 F. Supp. 1080, n.7
(SDNY 1984) [That a bank cannot serve two sovereigns was noted by the
court in United States v. First National City Bank, 396 F.2d 897, 905 (2d Cir.
1968). But the court added that the bank's predicament is due to its having
chosen to do business in a jurisdiction in which the laws are at odds with
those of its home jurisdiction. In this situation, the bank must either
surrender to one sovereign or the other in return for the privileges it
receives "or alternatively ... accept the consequences" Id.]

ii. Consider also the history of the U.S. Philips Trust and the seeming curious
selection in 1939 just prior to the German invasion of the Netherlands (at a
time when the United States was still neutral) of the Hartford National

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 Bank and Trust Company (rather than a major NYC bank) to act as trustee
of a trust which would hold all of the Western Hemisphere affiliates of N.V.
Philips Gloelampenfabriken for the benefit of individual ultimate beneficial
owners for the duration of what would soon become known as the Second
World War.

2. Prior to the end of the 20 th century laws governing the succession to a decedents
property and tax laws were widely viewed as local matters to be enforced locally; foreign
laws were suspect and typically ignored by practitioners or expressly excluded by
purposeful drafting when operating within their own jurisdictions.

a. NYS law which permits an individual to choose local law in lieu of the law of his
domicile or nationality for purposes of determining succession rights materially
influenced the Cayman Islands when it pioneered choice of local by the offshore
jurisdictions (viz., the Cayman Islands Trusts (Foreign Elements) Law)

i. NY E.P.T.L. 3-5.1(h) which derives from the NY Decedent Estate Law Section
47 provides that Whenever a testator, not domiciled in this state at the time
of death, provides in his will that he elects to have the disposition of his
property situated in this state governed by the laws of this state, the intrinsic
validity, including the testator's general capacity, effect, interpretation,
revocation or alteration of any such disposition is determined by the local
law of this state." The application of the law to the NY will of a French citizen
who died domiciled in France was upheld in In re Estate of Renard, 108
Misc.2d 31 (Surr. Ct. 1981), affd 71 A.D.2d 554 (1st App. Civ.), affd 56 N.Y.2d
973 (1982).

ii. New Yorks statutory enablement of choice of local law to govern the
disposition of NY situs property in derogation of the forced heirship law of a
decedent or trustors domicile served as a precedent for the Cayman Islands
adoption of a similar statutory enablement in the Trusts (Foreign Element)
Law 1987.

iii. The Caymans Foreign Element legislation has since been copied by numerous
jurisdiction both outside and inside the United States. See Address of
Cayman Islands Chief Justice Smellie, QC to the 28 th Annual Transcontinental
Trusts Conference (June 19, 2013) at page 7 of 25. Jersey and Guernsey have
taken its application further in an effort to build firewalls against UK family
court attempts to access Channel Islands trust assets in the course of divorce
proceedings. See Warnock Smith and De La Rosa, Foreign Laws, Foreign
Judgments and Cayman Islands Trusts, IFC Review (January 6, 2012).

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b. Lord Mansfields rule regarding non-enforcement of foreign tax laws as stated in
Holman v. Johnson, 1 Cowp. 341, 98 E. R. 1120 [1775] has been recognized as
persuasive by US courts.

i. The House of Lords held in 1955 in Government of India v. Taylor, 1 All E. R.

292 [1955]; that it was elementary that a foreign government could not
come into the UK courts to pursue a tax claim.

ii. Although the rule as enunciated in Government of India v. Taylor has never
been expressly overruled in the UK, it has been argued that functionally it has
been overruled by reason of enhanced information sharing between
governments and assistance they have undertaken by treaty to provide to
each other in the enforcement of foreign tax judgments. See Rogers, Cross-
Border Collection, STEP Journal (September 2013).

iii. New Yorks highest court gave deference to Lord Mansfields revenue rule
in Banco Do Brasil v. A. C. Israel Commodity Co., 12 N.Y.2d 371 (1963). This
case was however distinguished and therefore not followed by the US
Supreme Court in Pasquantino v. United States, 544 U.S. 349 (2005) on the
ground that it was insufficiently well established to narrow application of the
wire fraud statute on the ground that it effected indirect enforcement of a
foreign revenue law.

iv. In the case of trusts and estates English courts have acknowledged that the
revenue rule precludes direct enforcement of a foreign governments tax
claim against the trustees of a trust or the executor of an estate but that this
does not preclude a trustee subject to personal liability from indemnifying
itself from trust assets in one jurisdiction to settle a tax claim brought in
another jurisdiction where trust assets are insufficient for settlement. Re
Lord Cable [1977] 1 WLR 7. See generally Thomson, How Should Trustees
Deal with Foreign Tax Issues, 21 The Association of Corporate Trustees
(October 2002). http://www.trustees.org.uk/review-index/Trustees-How-
should-trustees-deal-with-foreign-tax-issues.php

c. Deference to the American rule of law and antipathy toward revolutionary regimes
predisposed American courts to refuse enforcement of claims on US situs property
when predicated on politically motivated confiscations (particularly when the
perpetrator was a communist government or in sympathy with the Soviet Union).

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 i. Republic of Iraq v. First National City Bank, 353 F.2d 47 (2d Cir 1965), cert.
den. 382 U.S. 1027 (1966) n.3 [It might be argued that, with respect to the
shares in the Canadian investment trust, a United States court ought to
consider whether a Canadian court would regard the confiscation decree as
consistent with the policy of Canada. But, apart from factors tending against
such an argument, see Ehrenzweig, supra, 84 & n. 52, appellant has not
contended that the shares should be treated differently than the bank
account, it has presented no evidence as to the attitude of Canada toward
foreign confiscations, and although we could take judicial notice of Canadian
decisions, see Siegelman v. Cunard White Star Ltd., 221 F.2d 189, 196-197 (2
Cir. 1955), we are not obliged to do so under these circumstances.]

ii. Bandes v. Harlow & Jones, Inc., 852 F.2d 661 (2d Cir. 1988) [Only acts that
are consistent with this nation's policies will be given effect within our
borders. Restatement (Second) of Foreign Relations Law 43 (1965). See
Restatement (Third) of Foreign Relations Law 443 comment b (1987).]

iii. Does the obliviousness of the District of Columbia Federal District Court in
Florida Bankers Association et al v. US Dept. of Treasury, 2014 U.S. Dist. LEXIS
3521 at 26-27 (1.13.2014) to the possibility that wholesale sharing of
information about US situs assets with foreign regimes (many of which
manifestly do not offer the same protections to their citizens and residents
as the US) constitute an implicit rejection of the long standing judicial tenet
that American courts should not assist confiscations of US situs assets in
favor of the determination such assistance is necessary to assure the
effectiveness of US revenue collection in respect of its own citizens and
residents?

iv. Would the fiscal and foreign policy interests of the United States be better
served if, instead of indiscriminate information sharing with all manner of
foreign jurisdictions, it were to eliminate the tax incentives for foreign
investment in US securities? Such an action would undercut the claims of
foreign governments and of certain outspoken commentators that the US is a
tax haven. At the same time it would materially lessen the incentive of US
persons to masquerade as foreign persons for the purpose of making
investments in securities issued by US persons.

d. Should a court in the US even be permitted to cite foreign law as potentially

persuasive for purposes of rendering a decision?

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 i. See Transcript of Discussion between US Supreme Court Justices Scalia
[opposed to citation to foreign law] and Breyer [in favor of citation to foreign
law in appropriate circumstances] at American University Washington
College of Law on January 13, 2005 regarding the Constitutional Relevance of
Foreign Court Decisions (Federal News Service Washington, D.C.).

3. The beginning of the end of US tolerance for offshore haven use when it adversely
impacted the taxation of certain revenue streams

a. Foreign bank secrecy laws are dismissed as a defense to the compulsion of

testimony regarding foreign accounts belonging to US persons.

i. See In re Grand Jury Proceedings, U.S. v. Field, 532 F.2d 404 (5th Cir. 1976)
[Part of this investigation centers on the use of foreign banks to evade tax
enforcement. Field, a Canadian citizen, is the managing director of Castle
Bank and Trust Company Field, however, refused to answer these
questions on the ground that he would incriminate himself in violation of
his Fifth Amendment rights and also on the ground that his testimony
would violate the bank secrecy laws of the Cayman Islands Before
discussing in detail Field's contentions, we should make clear what is not
involved in this case. Field does not argue that the content of his answers
before the grand jury will subject him to prosecution in the Cayman Islands.
The problem is not the answers that Field will give to the grand jury but the
fact that he will give any answers at all This subpoena is not an attempt to
elicit information from Field which will later be used against him in a
criminal case. The Fifth Amendment simply is not pertinent to the situation
where a foreign state makes the act of testifying a criminal offense.]

b. The scanning by the Grand Central Station (NY) Post Office of meter marks on bank
statements mailed from Switzerland to US residents in the autumn of 1968 to detect
undeclared ownership of Swiss bank accounts by US residents is a precursor to the
use of enhanced electronic discovery techniques by the IRS.

i. See U.S. v. Leonard, 36 AFTR 2d 75-5679 (2d Cir 1975) for a description of the
mail cover operation and its citation to and quotation from California
Bankers Ass'n v. Shultz, 416 U.S. 21, 28-29 (1974) [One of the most
damaging effects of an American's use of secret foreign financial facilities is
the undermining of the fairness of our tax laws The former U.S. Attorney
for the Southern District of New York has characterized the secret foreign
bank account as the largest single tax loophole permitted by American law.]

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 ii. The mail watch program was terminated after 1971 in part because the US
felt it would jeopardize the negotiation of a new mutual assistance treaty
with Switzerland, in part because of privacy concerns voiced in Congress
about computerized files of suspected tax violators and in part because the
IRS did not think the mail watch program would be an effective long term
solution to the foreign bank account problem. See Anderson Testimony to HR
Subcommittee on Commerce, Consumer and Monetary Affairs on Federal
Efforts to Define and Combat the Tax Haven Problem (April 12, 1983).
http://archive.gao.gov/d40t12/121055.pdf

c. The Gordon Report on Tax Havens makes manifest Treasury Department intention
to attack tax havens.

i. See IRS, Tax Havens and Their Use by United States TaxpayersAn Overview
(1981).

d. The British Virgin Islands Treaty termination effective January 1, 1983 signals the end
of the availability of double taxation agreements to third country nationals for the
avoidance or material reduction of US tax. See Anderson, supra, at page 32.

i. In the late 1970s a small group of knowledgeable international planners used

BVI companies and the old US UK Income tax treaty as extended to the BVI
to extract dividends from US companies at reduced rates of withholding for
the ultimate benefit of persons resident in neither the BVI nor the UK. One of
the first acts of the Reagan Administration was to unilaterally terminate the
US tax treaty with the BVI.

ii. The miniscule size of the US source income paid to BVI companies in 1981
only US$ 24 millionand the limited financial dealings between the US and
the BVI made allowed Treasury to send a signal to other non-cooperative tax
haven jurisdictions without seriously disrupting international commerce and
lending.

4. Contrarian actions by the US for the purpose of facilitating foreign lending to US persons
and foreign investment in US equities and realty.

a. Facilitation of anonymous and tax free bank deposits and investment in US issuer
debt

i. Langer, Pending Stop Tax Havens Abuse Act Would Wrongly Blacklist
Cooperating Countries, BNA Daily Tax Report No. 56 (3.26.2009) Page J-1,

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 ISSN 1522-8800 [The proposed blacklist consisting of 34 countries named in
Sen. Levin's bill makes no sense for a number of reasons. Many of the
countries named in the bill are far less abusive tax havens than is the United
States itself To this day the United States does not and cannot provide
information to any of its tax treaty or TIEA partners (except Canada)
concerning interest paid on deposits by their residents in U.S. bank accounts.
IRS does not tax such deposits and it does not collect any information
concerning them. The United States has more than 7,000 banks, some of
which have hundreds of different branches. IRS is generally unable to provide
information requested by a tax treaty partner concerning a bank deposit
allegedly held by one of its residents unless that country's revenue service
can give IRS detailed information, including at least the name of the bank at
which the account is held.]

ii. Christensen, Recent Tax and Legislative Developments in the United States,
Paper prepared for the International Trust & Tax Planning Summit
(11.12.2008 at Coral Gables FL) [With all of the uproar about lack of
transparency and reporting by offshore secrecy jurisdictions, foreign
countries are understandably angry at the continuing refusal of Congress to
permit the Treasury to adopt Proposed Treas. Reg. Sect. 1.6049-8. Originally
proposed during the Clinton administration, this Regulation would require
United States banking corporations to report annually to the Internal
Revenue Service on Form 1099s the interest earned on U.S. bank accounts by
residents of 16 major trading partners of the United States (including
Canada, the only nation covered by the existing regulation).

iii. Kirwin, EU Will Try to Expand Savings Tax Directive to Singapore, Hong Kong,
STEP News (7.11.2006) [The less-than-expected sums recovered by the EU
savings tax directive and the push to expand its frontiers come on the heels
of a report citing concerns that certain corporation laws in various states in
the United States are also playing a role in undermining the EU savings tax
directive. The Society of Trust and Estate Practitioners (STEP), which consists
of hundreds of financial experts managing money in various offshore
financial centers, said that considerable funds have been transferred to the
United States to avoid getting caught up in the EU savings tax scheme.]

iv. See authors suggestion, supra, at 2.c.iv that the fiscal and foreign policy
interests of the Unites States might be better served by eliminating the
exemptions and exclusions from federal income tax conferred upon foreign
persons rather than by engaging in indiscriminate information sharing with
foreign jurisdictions many of which do not observe the basic tenets of human

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 rights and privacy and which in some cases openly and notoriously harbor
deep seated animosity toward the United States.

b. Lack of transparency in respect of ownership of entities organized under US law,

most significantly limited liability companies not subject to federal tax which gained
material traction circa 1988
i. Langer, supra, [As noted last week by Sen. Levin when he introduced
another bill, the proposed Incorporation Transparency and Law Enforcement
Assistance Act (S. 569), neither the United States nor any of its states collect
any information concerning corporations and LLCs formed within the country
each year. There is no way for IRS to obtain or provide to U.S. tax treaty
partners any ownership information concerning the many thousands of
single-member LLCs formed by foreign persons and used entirely abroad.
Many of these LLCs have allegedly been used by foreign persons to evade
taxes in Russia, Ukraine, and other countries.]

ii. Christensen, supra, [The Incorporation Transparency and Law Enforcements

Assistance Act, S. 2956this bill would, under the goal of anti-money
laundering rather than anti-tax haven, require nationwide registers of the
beneficial owners of all interests in corporations, limited liability companies,
and partnerships, except those that are publicly traded. This would be a
massive undertaking, but is consistent with a goal of eliminating all
secrecy, and assuring tax collection.

iii. Robert Eugene DiPaolo, Brazil Declares Delaware a Tax Haven. Nevada and
Wyoming Might Be Next, Brazzil (Sept. 11, 2008, 5:04 PM).
http://www.brazzil.com/component/content/article/196-september-
2008/10111-brazil-declares-delaware-a-tax-haven-nevada-and-wyoming-
might-be-next.html

iv. Kirwin, supra, [The United States General Accounting Office has complained
that criminals are increasingly using anonymous tax-free United States
companies to conceal their identity and illicit activity, said Richard Hay, the
co-chairman of the International Committee of the STEP. Virtually every
United States state still permits foreigners to establish such companies, even
while the [Organization ECD], backed by the United States federal
government, has hunted them to near extinction elsewhere.]

c. Treas. Reg. 301.7701-7 (2001) Classification of trusts administered pursuant to US

law by US trustees as foreign trusts for federal income tax purposes if even a minor

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 string of control is possessed by a foreign person or if an automatic migration
provision is included in a trust agreement subject to domestic administration (2000)

i. Harrison, Kirschner and McCaffrey, U.S. TAXATION OF FOREIGN TRUSTS,

TRUSTS WITH NON-U.S. GRANTORS, ANDTHEIR U.S. BENEFICIARIES, ALI-ABA
Course of Study (10.5.2006), SM033 ALI-ABA 247 [It is understood that one
of the principal objectives Treasury sought to achieve by implementing this
new definition [of what would constitute a foreign trust] was to level the
competitive playing field for trust business between U.S. and foreign
institutions. Under the former definition, a foreign person who might have
preferred to use a U.S. financial institution as trustee was generally reluctant
to do so because of the likelihood that the trust would have been taxed as a
U.S. domestic trust. Under the new law a foreign person can easily use a U.S.
financial institution without creating a domestic trust. [FN8: This
understanding is based on conversations with David K. Sutherland, former
Associate International Tax Counsel and a principal draftsperson of the new
statutory definition.]

d. Longstanding acceptance of the use of brass plate companies as blockers for

estate tax purposes (1976).

i. RIA Federal Tax Coordinator R-8010 [The estate of a nonresident alien is

taxed only on the value of property situated in the U.S. But stock owned by
nonresident aliens is deemed situated in the U.S. only if issued by domestic
corporationsThus, nonresident aliens holding U.S. stock and other U.S.
assets through foreign corporations generally avoid U.S. estate tax since
stock in a foreign corporation isn't included in the nonresident alien's gross
estate.]

ii. Armstrong and Hastings, Caught in a Trap, 18 STEP Journal 51 (2010) [The
policy of encouraging investment by NDAs in the U.S. is vitiated by levying a
FET upon capital investment in the stock of a U.S. corporation upon the
NDAs death unless the NDA is knowledgeable enough to know to interpose a
foreign corporation as a holding company and is willing to risk the cautions of
commentators that the interposed corporation may be treated as a mere
nominee.]

e. Absence of taxation of profits realized from the disposition of intangible US situs

personalty other than interests in US RPHCs.

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 i. Capital profits derived from the disposition of US situs property do not
constitute fixed or determinable, annual or periodic income and are in
consequence not subject to withholding tax. Treas. Reg. 1.1441-2(b)(2)(i).

ii. Capital profits derived from the disposition of real property are subjected to
federal income tax regardless of whether actually derived from the conduct
of a business by application of the fiction that any profit attributable to a
disposition by a foreign person of in interest in US real property shall be
taxed as if such person has been engaged in a trade or business and by
deeming the gain or loss effectively connected with such trade or business.
IRC 897.

5. Continental Europeans seek to reign in the use of local law statutes by calling for the
application of the succession laws of ones nationality or domicile.

a. The US Senate declines to sign or ratify The Hague Convention re the Law Applicable
to Succession to the Estates of Deceased Persons (1989) or the Law Applicable to
Trusts and their Recognition (1985). Only the Netherlands signs and ratifies the 1989
Treaty governing succession.

i. The Convention re the Law Applicable to Succession to the Estates of

Deceased Persons, if adopted, would permit a person to designate the law of
a particular state to govern the succession to the whole or a portion of his
estate only if at the time of the designation or his death such person was a
national of that state or had his habitual residence there.

ii. For a strong critique of the Convention re the Law Applicable to Succession to
the Estates of Deceased Persons see Schoenblum, Choice of Law and
Succession to Wealth : A Critical Analysis of the Ramifications of the Hague
Convention on Succession to Decedents' Estates, 32 Virginia Journal of
International Law 83 (1991).

b. Europe develops a strictly European approach to choice of law in respect of

succession. See The Brussels IV Succession Regulation (a/k/a REGULATION (EU) No
650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012 on
jurisdiction, applicable law, recognition and enforcement of decisions and
acceptance and enforcement of authentic instruments in matters of succession
and on the creation of a European Certificate of Succession).

i. The laws of the state in which the deceased dies habitually resident
(regardless of whether it is a Brussels IV state) will apply to succession

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 matters subject to the jurisdiction of a Brussels IV state unless the deceased
was manifestly more closely connected with another state or had chosen to
apply the law of his or her nationality. See Bell, The Long Arm of EU Law: the
new European Succession Regulation, International Law Office (3.7.2013).

ii. Habitual residence which has become the EU connector of choice is itself
a mushy concept not amenable to easy definition in all cases. Commentary
asserts that in the case of the Brussels IV Regulation governing succession
habitual residence is intended to have a closer nexus than that required in
other EU Regulations that utilize the term. See Frimston, Tell me, where did
you sleep last night? STEP JOURNAL (February 2014).

iii. The practical effect of the Regulation is to limit effective choice of law to ones
place of habitual residence or ones citizenship. Even before the adoption of
the Regulation by the EU Parliament commentary was pointing to the
advantage of siting assets outside the Brussels IV states and selecting
jurisdictions which apply strictly local law in order to facilitate avoidance of
forced heirship and what the Europeans call clawback rules which may
nullify living gifts inconsistent with mandated shares. See Frimston, Another
option for International Finance Centres, STEP JOURNAL (February 2011).

iv. The United Kingdom, Ireland and Denmark have opted not to be covered by
the Regulationreportedly there was strong objection in the UK and Ireland
to the infringement by the Regulation upon freedom of lifetime and
testamentary transfer. See Hauser, European Harmonization: Will Brussels IV
Succeed? TRUSTS & ESTATES (November 2010).

v. The original goal of the Regulation was simplicity, but with the
reintroduction of the concept of renvoi in certain circumstances to avoid
unintended results, simplicity may take a back seat. See Frimston, Unity v.
Renvoi: the struggle endures, STEP JOURNAL (April 2012).

c. For evidence of how a US court has struggled recently with the determination of
foreign law governing devolution see Estate of Charania, 133 T.C. 122, affd in part
and revd in part (on another issue) 608 F.3d 67 (1 st Cir 2010). See also Armstrong
and Hastings, supra, 18 STEP Journal 51 (2010) which asserts that the Tax Court,
counsel to the taxpayer and the Internal Revenue Service all failed properly to apply
modern Belgian law re the effect of habitual residence upon the determination of
marital property rights in the context of devolution.

13
6. UK assault on the tradition of attorney client privilege in response to concerns about
terrorism within the UKthe UK Proceeds of Crime Act (1988) established precedent for
the destruction of privilege in order to enable more effective policing of money
laundering and was taken up by the Financial Action Task Force (FATF) as a template for
the governance of attorney conduct in all jurisdictions.

a. See INTERNATIONAL ESTATE PLANNING 14.06 (Matthew Bender 2013) The British
Government Initiative Against Facilitating Use of The Proceeds of Crime

i. Since the passage of the Criminal Justice Act (1988), or at least its
amendment in the Criminal Justice Act (1993), it has become a crime in the
United Kingdom for a trustee or a lawyer to assist his or her client--either
settlors or trustees--in establishing an account, or a trust, which may have
been funded with "the proceeds of crime." While traditional English law, like
that of the United States, did not call for the enforcement by one sovereign
state of the tax laws of another sovereign state, there is developing opinion
in England that the Criminal Justice Act does make it a crime for a solicitor to
assist a client in establishing a trust which is funded with moneys which have
been accumulated as a result of tax evasion in another country.

ii. Thus, if a professional learns or reasonably suspects that the client has en-
gaged in criminal activity giving rise to funds which may be the proceeds of
such activity, the professional would have to disclose his suspicion (or the
facts he is aware of) to the authorities and would not be permitted to inform
his client of such disclosure. Most succinctly put, Sections 93A and 93D
appear to overrule the ordinary duties of confidentiality enjoyed by clients
and their attorneys, and have clear implications for accountants, investment
advisors and bankers as well.

b. In 1989 the G-7 nations (now the G-8) which include the United States formed the
Financial Action Task Force (FATF) to combat the use of the worlds financial
system by criminals. As a result of the terrorist attacks on the United States on
September 11, 2001, the role of FATF was expanded to include preclusion of the use
of financial systems to facilitate terrorist activities.

i. The FATF initiative to combat money laundering evolved in a manner

strikingly similar to the United Kingdom model and radically different from
the long established policy in the United States of reliance upon self-
regulatory bodies to police the conduct of their professionals.

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 ii. Quoting again from INTERNATIONAL ESTATE PLANNING 14.06,
Recommendation 16 of the FATF's 40 recommendations provides as
follows: Financial institutions, their directors, officers and employees should
be protected by legal provisions from criminal or civil liability for breach of
any restriction on disclosure of information imposed by contract or by any
legislative, regulatory or administrative provision, if they report their
suspicions in good faith to the competent authorities, even if they did not
know precisely what the underlying criminal activity was, and regardless of
whether illegal activity actually occurred."

iii. Moreover, the FATF has suggested that such reports should be made
without prior consultation with the client. When coupled with the due
diligence obligations sought by the FATF, an individual could well find that his
banker would be obligated to report the client's activities and assets to the
authorities in the event of suspicion (perhaps suspicion proven to be
ultimately groundless) and without having informed the individual of such
report, and in the further event that the individual suffers a resulting harm
(perhaps in the form of having his assets wrongfully seized or accounts
frozen), the individual may, in fact, have no legal redress.

iv. As the United Kingdom model is pressed upon more and more offshore
jurisdictions with close ties to and dependence upon the British government,
this expanded (if as yet, uncertain in full scope) definition of "money
laundering" will become more prevalent.

v. The uncompensated damage which may be done to a bank customer by a

suspicious activity report which turns out to be groundless was illustrated by
Shah v. HSBC Private Bank [2009] EWHC 79, affd [2012] EWHC 1283 (QB).
See UK Law Society News, Bank wins latest round in Shah v. HSBC (5.17.12).
http://www.lawsociety.org.uk/news/stories/bank-wins-latest-round-in-shah-
v-hsbc/

c. The Canadian Court of Appeal rejects the application of AML statutes and
regulations to attorneys. Federation of Law Societies of Canada v. Canada (2013)
BCCA 147 (April 4, 2013).

i. Federation of Law Societies of Canada v. Canada (currently on appeal to the

Canadian Supreme Court) is being closely watched by ACTEC which
comments in an article currently available on its website title Combatting
Money Laundering; FATF and the Lawyers Role that the case should be
of considerable interest to US lawyers and others who are concerned with

15
 the potentially negative impact of proposed legislation and regulations on
the traditional confidential relationship between lawyers and their clients.

ii. See Lawrence and Van Houten, Anti-Money Laundering and Counter Terrorist
Financing Laws Not Applicable to Canadian Lawyers and Law Firms, FATF
Task Force of the American College of Trust and Estate Counsel (2013)
http://www.actec.org/public/FATF_Whitepaper_Anti_Money_Laundering_La
ws_Not_Applicable_to_Canadian_Lawyers.asp.

7. FATF reports in 2006 that US attorneys, accountants and unlicensed trust company service
providers are seriously deficient in their client due diligence and calls for them to be
subject to KYC and STR rules similar to those now in force in Europe and the UK.

a. FATF Third Mutual Evaluation Report on Anti-Money Laundering: United States of

America (June 23, 2006). http://www.fatf-
gafi.org/media/fatf/documents/reports/mer/MER%20US%20ES.pdf.

i. 887. ...the ABA has no objection in principle to the application of certain

AML requirements on lawyers, as long as they do not conflict with
established ethics requirements and the attorney-client privilege...FinCEN is
reviewing the status of attorneys under the BSA, particularly with respect to
their involvement in certain real estate transactions and corporate formation
capacities.

ii. 992. Accountants, lawyers, real estate agents and TCSPs should be made
subject to AML/CFT obligations and appropriate regulatory oversight. In the
case of TCSPs a registration process should be introduced for agents engaged
in the business of providing company formation and related services
(perhaps with a de minimis threshold to ensure that single company agents
are not required to register).

b. The ABA and ACTEC have stoutly opposed the destruction of attorney client privilege
and the conversion of attorneys to gatekeepers obliged secretly to disclose to
government the suspected financial misdeeds of their clients or prospective clients,
including those indiscretions confessed in the context of an introductory interview.

i. ACTEC, Combatting Money Laundering; FATF and the Lawyers Role (2013)
[In the US, the ABA has led an effort, with ACTEC as an active partner, to
resist the imposition of legislation and regulation that would, in their view,
violate the traditional attorney-client relationship, the duty of client

16
 confidentiality, and the overall lawyer/client relationship.] .
http://www.actec.org/public/FATF.asp

ii. Bellows, ABA President, Letter to Fellow Bar Presidents (July 31, 2013) re
Formal Ethics Opinion 463 on Client Due Diligence, Money Laundering and
Terrorist Financing [As we wrote in our April 2011 letter to your bar, the
ABA believes the Voluntary Guidance, which encourages lawyers to take a
tailored, risk-based approach to client due diligence, is the most effective
means of both combatting money laundering and avoiding the adoption of
much more burdensome rules-based legislation and regulations that could
undermine the attorney-client privilege, the confidential lawyer-client
relationship and traditional state court regulation and oversight of the legal
profession. Although these types of mandates have already been imposed on
lawyers in certain non-US jurisdictions, including various countries in Europe,
the ABA has consistently taken the position that any similar attempts to
regulate lawyers and law firms as financial institutions under the existing
anti-money laundering laws will have deleterious effects on the legal
profession, the rule of law, and the clients we serve.

c. Treasury at first sides with American attorneys regarding the protection of attorney
client privilege, but during the course of the Obama Administration Treasury turns
increasingly sympathetic to FATF calls for the imposition of gatekeeper controls on
attorneys.

i. The simultaneous actions of the US government on June 18, 2013 of (a)

joining in the G-8 call for greater transparency of ownership of corporations
and of beneficial ownership of trusts and (b) publishing a National Action
Plan on Preventing the Misuse of Companies and Legal Arrangements can
reasonably be construed as a statement that The United States, as part of
the G-8 and as part of FATF, has stated in unequivocal terms that US
Treasury, working with other federal agencies, will pursue efforts to enact
legislation and/or regulations addressing collection and retention of
beneficial ownership information (including trust beneficiaries). See ACTEC,
Combatting Money Laundering; FATF and the Lawyers Role under Whats
New? http://www.actec.org/public/FATF.asp

17
8. The whistleblower revelations by Bradley Birkenfeld, an American banker in the employ
of UBS, a Swiss bank, of widespread misconduct in the US by UBS bankers which was
corroborated by massive data leaks enabled by modern technology incensed the US
government, resulted in a fine of US$780 million being imposed upon UBS and in the
disclosure of information about US holders of previously unreported Swiss accounts
putatively protected by Swiss bank secrecy and gave impetus to the enactment by
Congress in March 2010 of Foreign Account Tax Compliance Act (FATCA).

a. The objective of FATCA is to force the reporting by foreign financial institutions

(FFI) and non-financial foreign entities (NFFE) of financial assets belonging to US
persons; a FFI which fails to comply is subject to 30% withholding on all income
including, not only those species of income long identified by the IRC as fixed or
determinable, annual or periodic income, but also gross proceeds from dispositions
of US situs assets. IRC 1473(1)(A).

b. As part of the implementation process for FATCA, the IRS has solicited
intergovernmental agreements (IGA) pursuant to which agreed information
sharing procedures are established on a bilateral basis. The IGAs extracted from
other governments by the US have had a possibly unforeseen consequence: just as
the UK Proceeds of Crime Act provisions which forced attorneys to become
gatekeepers and whistleblowers became a template for FATF, the IGAs created by
the US have rapidly become a template for other governments to ask for reciprocal
treatment long denied by the US and to seek bilateral exchange from other
governments where the US is not even a participant.

i. Under the Model 1 Agreement a FFI in a partner country reports

information on US account holders directly to its national tax authority who
in turn report such information to the American IRS. The Model 1 Agreement
provides for reciprocal sharing (i.e., the US undertakes to require its financial
institutions to gather certain agreed information in respect of the residents
of the partner country).

ii. Under the Model 2 Agreement a FFI reports information directly to the IRS.
There is no provision for reciprocity under the Model 2 Agreement.

iii. The UK enters into IGA with the Crown Dependencies, Isle of Man, Guernsey
and Jersey, in October 2013 before those jurisdictions had entered into IGAs
with the United States in December 2013 (one might suspect that
inappropriate tax avoidance using IOM, Jersey and Guernsey is more a

18
 problem for the UK in respect of its residents than it is for the US in respect
of its residents).

iv. The OECD announces that working from the template established by the US
for the enforcement of its FATCA legislation it will recommend a worldwide
sharing of information between all countries. See OECD delivers new single
global standard on automatic exchange of Information (2.13.14).
http://www.oecd.org/tax/oecd-delivers-new-single-global-standard-on-
automatic-exchange-of-information.htm.

c. Mexico signs an IGA with the US enthusiasm (all US financial institutions must
demand of Mexican customers their Mexican tax ID numbers and provide same to
the US Treasury effective 1.1.2017 to facilitate a flow of information back to Mexico
from the US).

i. Agreement Between The Department Of The Treasury Of The United States

Of America And The Ministry Of Finance And Public Credit Of The United
Mexican States To Improve International Tax Compliance Including With
Respect To FATCA (11.19.2012). http://www.treasury.gov/resource-
center/tax-policy/treaties/Documents/FATCA-Agreement-Mexico-11-19-
2012.pdf

ii. For a discussion of the material break that the US Mexico IGA represents
with past US policy of providing no information to foreign governments other
than Canada regarding deposits by their residents in US banks see Goulder,
How the U.S. is a Tax Haven for Mexicos Wealthy, Tax Analysts (9.24.2012).
http://www.taxanalysts.com/www/features.nsf/Articles/522A39903AFD6CF
B8525761D004F113B?OpenDocument

iii. Mexico and the United States have treated their IGA as merely an
interpretation of an existing treaty not subject to internal ratification or
implementation processes. For a critique of this position asserted by the
governments of Mexico and the United States see Christians, US-Mexico IGA
on FATCA: in force as of Jan 1 2013, Tax Society & Culture (1.17.2013)
http://taxpol.blogspot.com/2013/01/us-mexico-iga-on-faca-in-force-as-
of.html.

iv. The American Bankers Association has asserted that the US Mexico IGA has
been entered into in flagrant disregard of an earlier US Treasury Department
undertaking that concerns about how the NRA information provided to
certain foreign governments might be misused had been addressed by

19
 existing legal limitations and administrations safeguard that govern tax
information exchange. See American Bankers Association Letter to The
Honorable Timothy Geithner Treasury Secretary, The Honorable Steven
Miller, Acting Commissioner of the IRS, et al dated 12.12.2012 Re: U.S.
Mexico Intergovernmental Agreement (IGA) to Implement the Reporting and
Withholding Provisions of the Foreign Account Tax Compliance Act (FATCA).
http://www.aba.com/Tools/Function/Acct/Documents/ABANRALetter(USMe
xicoIGA)121212.pdf

d. Bankers in Texas and Florida have fought a thus far unsuccessful legal battle to
prevent the leakage of data to Mexico (and in due course other South American
countries) which will destroy the bank secrecy heretofore accorded by US banks to
all foreign persons save Canadians.

i. The US District Court for the District of Columbia dismissed a request by

Florida and Texas Bankers Association for injunctive and declaratory relief in
respect of FATCA reporting requirements. See Florida Bankers Association et
al v. U S Treasury Department, 2014 U.S. Dis. LEXIS 3521 (1.13.2014).

ii. The Texas and Florida Bankers Associations have appealed the DC District
Courts dismissal of their lawsuit challenging the reciprocal information
sharing enabled by the Model 1 IGA and have advised that the
implementation of such sharing has already precipitated the removal of
US$500 million from the Texas banking system. Aubin, Bankers take fight
over U.S. anti-tax dodge rules to appeals court, Reuters (2.5.2014).
http://finance.yahoo.com/news/bankers-fight-over-u-anti-tax-dodge-rules-
183244038--sector.html.

iii. Not all commentary accepts that the U.S., having signed a reciprocal
agreement with Mexico, will actually produce information to Mexico
regarding its residents holding accounts in the U.S. See, Sheppard, Will U.S.
Hypocrisy on Information Sharing Continue?, Tax Analysts (1.23.2013)
[Nonetheless, the IGA spells out concrete steps for gathering and sharing
information. The IGA requires reporting of average monthly account balances
-- a unique provision. The agreement also allows the Servicio de
Administracin Tributaria (SAT) to contact U.S. banks directly, but the IRS
must go through the SAT if it wants to contact Mexican banks. Mexico also
got a most favored nation clause. The IGA requires consultation if
implementation is a problem. This same provision is in the British and Danish
IGAsThe definition of account holder under the Mexico IGA has a look-
through rule, the same as in the Model II unilateral agreement, but it appears

20
 to cover only agents, not entitiesThis is a ticket to putting the accounts in
third-country corporate shells -- again displaying the inefficacy of bilateral
agreements. The Mexican IGA might effectively be a nonreciprocal
agreement disguised as reciprocal.]
http://www.taxanalysts.com/www/features.nsf/Articles/0C26B2CFD92F1FBE
85257AFC004E8B38?OpenDocument.

9. The mistake of believing that the US is the worst of jurisdictions and that all problems will
be solved by avoiding all US contacts when planning, even to the extent of forbidding US
beneficiaries of a foreign trust.

a. See Cherry, Barg, Harris and Vetter, FATCA update: planning for compliance within
structures for international families, International Law Office (11.21.13)

i. A common reaction is to remove the grandchild from the beneficiary class,

but is this really necessary

What are the settlor's wishes? Would the settlor have wanted her
grandchild to be excluded from benefiting from the trust because he
or she fell in love or pursued a business opportunity?

Does the US grandchild need distributions? Perhaps he or she has

other sources of wealth. In that case, is it necessary to exclude the
grandchild from the discretionary beneficiary class? The trust will still
be classified as a trustee documented trust and deemed compliant
for FATCA withholding purposes. Therefore, the fact that a
discretionary beneficiary has become US tax resident does not cause
FATCA withholding on US source dividends and interest.

ii. While many families and trustee companies wish to disengage from any US
contact in response to FATCA and remove beneficiaries from succession
planning structures if they become US tax resident, the reality is that
countries other than the United States are also asking financial institutions
and governments to report on accounts held by their tax residents

b. The OECD has proposed that the US inspired FATCA disclosure rules should become
the template for worldwide information sharing between all countries. See OECD
delivers new single global standard on automatic exchange of Information (2.13.14).
http://www.oecd.org/tax/oecd-delivers-new-single-global-standard-on-automatic-
exchange-of-information.htm.

21
 i. Responding to a mandate from G20 leaders to reinforce action against tax
avoidance and evasion and inject greater trust and fairness into the
international tax system, the OECD has unveiled today a new single global
standard for the automatic exchange of information between tax authorities
worldwide

ii. The new standard draws extensively on previous OECD work on the
automatic exchange of information. It incorporates progress made in this
area within the European Union and ongoing efforts to reinforce global anti -
money laundering standards. It also recognises the catalytic role that
implementation of the US Foreign Account Tax Compliance Act (FATCA) has
played in the G20 move towards automatic exchange of information in a
multilateral context.

c. The EU, not content to have forced financial institutions and professionals subject to
their rules into the role of gatekeeper with a duty to collect and report to
government all suspicious activities of their customers and clients, now wants to
impose public disclosure requirements that, if adopted by the EU (over the
resistance of the UK) would result in widespread public dissemination of information
regarding the beneficiaries of private family trusts.

i. See Karins, New anti-money laundering rules a step in the right direction,
The Parliament.com (2.12.14) http://www.theparliament.com/latest-
news/article/newsarticle/new-anti-money-laundering-rules-a-step-in-the-
right-direction#.Uv0bkdGYaUk. [As co-rapporteur, I have introduced the
creation of an EU-wide register of beneficial ownership as a step in reducing
the use of offshore companies as a convenient vehicle to anonymously move
funds around Europe - a convenience that criminal organisations have widely
adopted Some MEPs are arguing for unrestricted access to these registers
by any and all citizens via a simple internet search. Others are somewhat
more concerned about individual data protection and envision a somewhat
more regulated approach.]

ii. The implications of the Karins proposal for the privacy of family trust
information is discussed in Withers, Public Register on EU Trusts?
Withersworldwide (2.12.14) http://www.withersworldwide.com/news-
publications/public-register-on-eu-trusts--
2?j=606742&e=chris@armstronghastings.com&l=346_HTML&u=14403350&
mid=1062735&jb=0. [The proposal to introduce a register of trusts has wide
implications for clients who use lawyers and banks to plan their family affairs

22
 through the creation of trusts and other legal mechanisms to smooth the
transfer of assets to the next generation and the creation of governance
rules around their businesses What this means is a crass intrusion into the
private sphere and family life of common citizens (something that is
protected by the European Convention on Human Rights), without any public
interest and in violation of the principle of proportionality, which means that
a measure should only be adopted if there is not a less intrusive measure
that may achieve the same objective.]

4812-8265-6792, v. 2

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