In this edition of our Tier One interview series, our CEO, Jay Judas, spoke to Christiana Lazo, a Partner in the Trusts & Estates Practice Group at Kirkland & Ellis, LLP in their New York Office. The interview covers cross-border clients, pre-immigration planning and.....Ally McBeal!
Jay: Tell me about your role and responsibilities with Kirkland & Ellis?
Christiana: I joined Kirkland & Ellis as a partner to lead its New York office’s trusts & estates department in early May of this year. Kirkland & Ellis’ private client department focuses on servicing the ultra-high net worth client base, and differentiates itself as among the industry’s market leaders in three key areas of our practice.
First, with approximately 660 attorneys in the firm’s New York office alone, many focused on the funds industry, Kirkland & Ellis’ trusts & estates practice has a particular expertise in planning for the principals of those funds.
Second, and also as a natural corollary to the firm’s strengths in trusts & estates and in fund formation work, we have a deep bench of experience working with clients considering the formation of family offices, many of which now are functioning like private equity funds in terms of their investment model, and in considering the role of a private trust company in their family’s estate plan and governance structure.
Finally, throughout my career my practice has been particularly focused on planning with individuals and families with cross-border tax exposure. With my addition to the department, we have been able to grow our international estate planning capabilities significantly. With so many wealthy families and family offices now having an international flavor, either because of individual family members or investment decisions, the international estate planning skill set has helped to round out the department’s capabilities.
Jay: What was your educational and career path that led you to where you are today?
Christiana: I completed my undergraduate and law degree at Columbia University. I had a lot of reasons - none too compelling, and some patently embarrassing (like the television series Ally McBeal!) - for entering law school.
After a first year internship, I realized that I definitely did not want to be a litigator, and I maybe did not want to be a lawyer at all. Thankfully I returned for my second year of law school and spent my next summer’s internship rotating through various transactional and tax based practices, including trusts & estates.
I ended up starting my law career in a trusts & estates department at a large New York law firm and, happily, never looked back on the decision to get my law degree. After a year of practice I decided to pursue my LLM in tax at New York University’s law school (where I now am an adjunct professor) and also to move my career to a trusts & estates department where I spent the greater part of a decade and ultimately was able to learn and train under one of the legends of international estate planning.
The rest is a bit of history (as I guess they say).
Jay: You are well-known for your work with non-U.S. clients or clients with a U.S. nexus. How did you end up with this client base and what are some of the issues you find yourself involved in with them?
Christiana: As I mentioned, I spent the greater part of a decade working with one of the legends of international estate planning. That experience was the catalyst for the focus of my current practice, but working with cross-border clients also suited me we well.
The effort to map each client’s bespoke fact pattern, and to thread the needle between a US tax-efficient plan with a plan efficient in the client’s home (or any other) jurisdiction, is the kind of complex planning work that I most enjoy. Cross-border planning work requires careful consideration of nuanced income and transfer tax issues as well as property law consequences, which sometimes may vary across jurisdictions.
A large majority of my cross-border clients are inbound in nature, either because of a wealth shift from a generation outside the US to a generation inside the US or because of an immigration of a foreigner to the US. However, I have been working increasingly with clients in an outbound context, because of a move or an investment outside of the US. Oftentimes my client’s underlying assets introduce particular complexities, either because they may be closely held companies which can attract CFC or PFIC considerations or because they may be carried interests in a fund which can have interesting tax ramifications in the cross-border context.
Jay: I’ve worked with you on complex life insurance matters in the past. What are some of the problems your clients have where life insurance is a solution?
Christiana: Client’s use life insurance to solve for problems that can range from the most basic to the most complex, and I tend to like to bucket life insurance solutions in two classes - either as a hedge against estate or inheritance tax concerns or as an income tax planning technique.
For example, life insurance is used often by foreigners who are not necessarily immigrating to the US, but may be investing in the US in a way that otherwise could create US estate tax exposure. As nonresident aliens, any US situs assets of these clients with a value in excess of $60,000 will be subject to US federal estate tax. Purchase of a life insurance policy (proceeds of which, given the right facts, will not be subject to US estate tax) can provide wealth replacement and liquidity for the eventual US estate tax liability. Although this has always been a popular planning solution for this client base, it has become increasingly so since our 2017 tax reform. 2017 tax reform added a few wrinkles to one of the planning techniques that offered an alternative to the life insurance hedge - the foreign blocker structure - if the foreigner hopes to benefit US beneficiaries at her death. Because of the complexities and tradeoffs now inherent in the foreign blocker structure for these clients, life insurance has become an increasingly popular part of our planning conversation.
Also, recently I have been working with a handful of clients who have been resident in the US and are exiting (either as covered expatriates or not). Life insurance can be an important cost-efficient hedge against US estate tax exposure for this client base as well. Oftentimes these outbound clients have invested heavily in US real estate while living here, either for personal use or for investment. Once they leave the US, and are no longer domiciled here, those investments represent a significant eventual US estate tax liability, and the options for reducing that US estate tax liability in a US income tax efficient way if the properties are highly appreciated are limited. Again, life insurance becomes an important element of planning for this client base as they reorganize their estate plans.
I enjoy my practice so much because of the impact our planning can have on our client’s (and their heirs’!) lives, but it is always important to remember that we take our clients as they come. That means accepting them with all of the lack of planning, or poor planning, that may have preceded your engagement and also accepting that our tax planning techniques should never dictate their lifestyle. Life insurance often proves a good solution when some of the more complex techniques that might upend that lifestyle would not allow a client to live the life she wants.
Jay: Life insurance can be an excellent tool to incorporate into a pre-immigration plan. In general, what type of planning do you find clients undertaking before they move to the United States?
Christiana: In the pre-immigration context, life insurance can again play an important hedge against a trailing estate or inheritance tax concern in the ‘home’ jurisdiction. For example, many clients immigrating to the US from the UK may be riding out the tail period on deemed domicile status, or may have settled trusts and are waiting on the 7 year inheritance tax exposure period to pass. These clients may consider purchasing a shorter term policy, oftentimes in a trust, to cover that exposure while it lasts. Typically the trust can be funded in an efficient way, and the proceeds can provide wealth replacement and liquidity if the client dies before those periods expire.
In the more complex variety, clients may consider how PPLI policies held by foreign trusts that now will have US beneficiaries can protect against the accumulation of UNI in those trusts. This latter technique falls into the income tax planning bucket that I mentioned earlier and can be a powerful tax efficiency.
As with any move - inbound or outbound - it is important for clients to consult with advisors in both jurisdictions (the old and the new) well in advance of the move. Oftentimes clients will need to re-evaluate the advisability of existing structures. Have assets been settled in structures already, and what are those structures - trusts, foundations, usufructs or entities, domestic or foreign to the US? Who benefits from those structures, and will the tax consequences of the structures be similar for all beneficiaries - US and non-US. If the structures will create tax exposure in more than one jurisdiction, will timing and allocation of tax liabilities match up so that available tax credits are not lost? If trusts, or trust-like structures are involved, who is acting as fiduciary and should that person continue to hold the role? Are there underlying investments of the trusts that will prove problematic because of the US anti-avoidance rules for CFCs, PFICs and the new GILTI regime? Or are investments held directly by the client through entities, including domestic ones like LLCs, which may be treated differently in one jurisdiction versus the other. Is the client leaving a jurisdiction with a community property regime or with forced heirship rules, and should any elections or agreements be entered that might preserve, or limit, any rights arising because of those regimes.
There are so many pitfalls for clients who move without seeking proper advice but often, with careful counsel, true efficiencies can be found, including through life insurance strategies. We work closely with the client and with her other team of advisors, including financial advisors, accountants, local counsel and insurance professionals like yourself to develop a holistic plan that, yes, offers tax efficiencies, but also allows the client to continue to live the life she wants.
Jay: Word on the street is that you are doing some teaching at New York University School of Law, which is a very prestigious school. How did you get into that and what are you teaching?
Christiana: I have been teaching Generation-Skipping Transfer Tax at New York University’s LLM, Masters in Taxation program for the past two years, and am looking forward to the start of a new semester in January. As I mentioned above, I attended New York University’s LLM program on a part-time basis in the early years of my career. During it, I discovered that I was a bit of a tax nerd and so I was delighted to have the opportunity to return and (do my best!) to teach another generation of lawyers who hopefully will enjoy practice as much as I do. I can only credit my position to the advocacy of a former colleague of mine who heard of the position’s opening and helped to put my name in the ring.
Jay: Because you have been to a life insurance conference dinner I hosted at a steakhouse, you know my industry colleagues love a good steak dinner. You don’t have to name a steakhouse but what is one of your favorite restaurants for a business meal and what do you order?
Christiana: New York has amazing restaurants, and I love a good meal as much as anyone else. However, and I recognize that this will sound a bit packaged, I honestly remember my favorite meals less for the food that I ate, than for the company that I kept. If I forgot to eat the food on my plate because I was too wrapped up in the conversation, then it is a sign of a good meal for me.
Read our companion Tier One blog post on PFICs by clicking here.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.