A US law firm has seen interest in setting up trusts soar, after alerting clients to a little-known tax savings opportunity for US citizens and green card holders.

US law firm Withers has seen interest in setting up trusts soar, after alerting clients to a little-known tax savings opportunity for US citizens and green card holders. 

From 1 January 2013, there will be a dramatic change in US estate and gift taxes according. The US estate and gift tax levy will increase from 35 per cent to 55 per cent of asset value, and lifetime exemption will be reduced from US$5 million to US$1 million. If this additional exemption is not used by year-end, it could be lost forever.

It could have a severe impact on Hong Kong's community of wealthy Asian-based US expats and Asian families holding US citizenship, estimated at about 60,000, said Hong Kong-based Withers partner, Erik Wallace. Wallace said that since the beginning of the month, he has received inquiries from an average of three new clients per day. Two out of three of these calls result in the client setting up a trust.

"It's a no brainer," he said during a telephone interview. "If US citizens and domiciliaries begin to evaluate their options and tailor an approach best suited to their family circumstances before the end of the year, they could save vastly on inheritance."

He added that while gifts can, of course, be made outright, many instead prefer to utilize trust arrangements to further intergenerational family planning goals, to provide credit protection and spousal protection, and to provide additional tax savings benefits.

He added: "What we have seen is that trusts tend to be less popular in Asia where death is considered a taboo subject by many, and first generation business owners are often reluctant to give up control of their assets. But a window of opportunity like this could spur those individuals to act."

Helpfully, the current low interest rate environment is ideal for obtaining additional saving opportunities for gift planning via trust structures, he added. Trust structures can be used to pass upside growth on vastly more than US$5.1 million, tax free to family members.

Additionally, many individuals who are considering giving up their US citizenship or green cards may use the exemption to avoid ‘covered expatriate’ status.

Wallace added that setting up a trust has its costs and complications. He explained that costs can vary depending on a number of factors, such as who is serving as trustee, the trustee's responsibilities, the type of assets held by the trust and whether the assets are actively managed or whether it is settlor directed.