Strategies for Protecting Wealth
by Darrell Aviss

BUY NOW!

Sign Up for Our Quarterly Newsletter:
Private Wealth Journal

Wealth Management

Scenario – An actor with a net worth in excess of US$40 million and an annual income of approximately US $6 million, much of which comes from royalties and participation arrangements, wants to lower his income tax bill.

• 1.
  Several years ago we established a loan-out corporation for the actor in a non-US domicile known for its favorable tax treaties.
• 2.
  We developed a deferred compensation program within his loan-out corporation and directed his non-US royalties and participations into the program.
• 3.
  The assets in the deferred compensation program were invested in offshore annuity contracts to ensure safety of principal.

Result – With this structure, the loan-out corporation can make loans that are interest and principal deferred after one year and one day have passed. Loans were made to the actor using the assets in the deferred compensation program as funding; no current taxes were owed on the loans. This solution allows the actor to access his current earnings while decreasing his current tax obligations.

Scenario – A composer and her husband of 21-years were recently divorced and she owes him a significant lump sum settlement. Her goal is to retain ownership of her song catalog, as it is her largest and most valuable asset, while meeting the terms of the judgment.

• 1.
  We designed a derivative transaction to “convert” the catalog into a security.
• 2.
  We hedged the security to create liquidity and invested 80 percent of the security’s total value - in this case, US$21 million – in a structured note based on a basket of hedge funds.
• 3.
  The investment was leveraged up to three times, increasing its total value to US$63 million.
• 4.
  We used a loan taken against the structured note, at LIBOR + 20 basis points, to zero out the investment profits on an annual basis.
• 5.
  A portion of the loan is used to satisfy the composer’s obligation in her divorce settlement and pay off the loan; she will retain any residual profits.

Result – In five years we will unwind the structured note, at which time the ex-husband will have been paid in total, the composer will realize US $1.9 million in profit, and she will have complete ownership of her catalog.

Scenario – A musician wanted to invest in other artists’ properties that he believes will have long-term popularity by purchasing royalty streams. His goal is to increase his income without adding to his current tax burden.

• 1.
  We establish a trust within a partnership structure; the trust will own any acquisitions.
• 2.
  The trust is funded using pre-tax income from the musician’s own royalty stream.
• 3.
  The musician uses the assets in the trust to purchase the rights to individual songs by other artists.
• 4.
  In two instances we packaged a selection of songs, converted them into derivatives, and leveraged them up. This transaction enabled the trustee to sell a portion of the revenue streams from the package for a specified period of time, after which the revenues reverted to the musician.
• 5.
  The proceeds from the sales were used to purchase additional songs on a tax-advantaged basis and interest deductions were used to offset other income.

Result – The rights acquisitions have helped the musician create a meaningful and growing asset that generates a consistent stream of income, increasing his overall net worth. The trust allows him to own the rights and receive the income without any immediate tax implications. When he eventually takes the profits from the partnership, they will be taxed as capital gains not ordinary income.