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The Tax Prophet Newsletter   Issue #106 March, 2012


In This Issue:
Offshore IRA
UBI and Blockers
Defective Grantor Trust

Mitt Romney's Tax World

Part 2 of 3

Offshore IRA

An offshore IRA is a tax ploy used by the ultra-wealthy to invest in foreign partnerships and hedge funds using debt (leverage), investments prohibitively expensive for a conventional IRA.

Also, unlike most conventional IRAs, an off-shore IRA may investment in gold, silver, foreign currencies, private stock, and foreign real-estate.

A substantial portion of Romney's wealth, between $20.7 million and $101.6 million, is held in several offshore (Cayman Island) IRA accounts, producing between $1.5 million and $8.5 million in income over a 19 month period.

UBI and Blockers

An IRA that invests in debt-financed entities is subject to the "unrelated business income" (UBI) rules. UBI is taxed at 35% federal and requires detailed reporting.

To circumvent UBI, an offshore "blocker" corporation is formed, the IRA invests in the blocker corporation which, in turn, owns the entity generating UBI.

Because the IRA did not invest directly in UBI-producing entity, it escapes the tax. Although not illegal, blockers cost the Treasury nearly $1 billion a decade.

Defective Grantor Trust

Romney also created a "intentionally defective grantor trust," which shifts wealth to his five sons in a tax efficient manner. The trust is now valued at $100 million.

Romney transferred assets to a trust for his children, but he continues to pay taxes on the income generated by the trust. The tax payments are not considered additional gifts to the children and upon death, the trust assets are not considered part of either Mitt or Ann Romney's estate for estate-tax purposes.

While either Mitt or Ann Romney is alive, the trust for the children grows tax-free -- the trust income is accumulated and added to principal for the benefit of children and descendants without the trust paying taxes.


Assume Romney held $100 million in investments generating $5.0 million in dividends and long-term capital gains. If he gifted the $5.0 million directly to his children, he would pay income taxes on the income (assume 15% federal) and would be liable for gift taxes as well (assume 35% federal).

Instead, by using an intentionally defective grantor trust, Romney pays no gift tax on the $5.0 million, thereby saving $1,750,000. He pays income taxes of $750,000.

This accomplishes two objectives: (i) his estate is reduced by the income taxes paid, which, in turn, lowers his potential estate tax (assume 35% of $750,000 or $262,500) and (ii) the trust does not pay taxes on the $5.0 million of income it received, thus increasing its principal by $750,000.

End of part 2 of 3.

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All contents copyright 2012 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.