Offshore Asset Protection

Asset protection planning involves identifying and applying legal techniques to protect your assets from claims or lawsuits. These techniques are designed to deter and frustrate potential claims against you by making it difficult or impossible to grab your assets or collect judgments against you.

Attacks on affluent and productive individuals in the U.S. have led to a rising exodus of both assets and individuals to political environments and structures offering greater asset protection, privacy and lower taxation.

When signifiant wealth is involved, asset protection planning may include setting up a series of offshore asset protection trusts, partnerships and/or offshore entities, including: foundations, LLCs, IBCs and controlled foreign corporations, to hold legal title to your assets. When a creditor recognizes how difficult it would be to collect on any judgment, they may well decide to drop a claim or settle for pennies on the dollar. The articles below originally appeared in our montly newsletter, The Sovereign Individual and will give you all the basics, but you may need professional help to guide you along the way. You can learn more about offshore asset protection, tax havens and offshore banking in The Sovereign Individual each month by becoming a member of The Sovereign Society. Click here for details on membership.

Chaos Investing: How to Brace Yourself and Your Portfolio for the Dark Bear Years Ahead

You probably wouldn’t ask the IRS out on a date or join the IRS for happy hour at the bar.

Nonetheless, if you’re a U.S. citizen or you live in the United States you have a relationship with the IRS, whether you like it or not. And if you invest or do business offshore, the IRS needs to know about it.

In any relationship, it pays to put your best foot forward from the outset. And that’s particularly true of the IRS, because the IRS can impose severe penalties for not following the reporting rules for investing or doing business offshore.

If you have signatory or “other” interests in foreign bank, securities or “other” financial accounts, with an aggregate value of US$10,000 or more, you must report those interests.

Given that the deposit minimums for many offshore banks now exceed US$100,000, it’s not hard to meet the US$10,000 threshold.

• Acknowledge that you have signatory or “other” authority over one or more foreign accounts each year on Schedule B of your federal income tax return.

• File Form TD F 90-22.1 (the “foreign bank account reporting” or “FBAR” form) with the Treasury Department. (This is a simple form and it only takes a few minutes to complete.)

If you don’t comply with these requirements, you could face severe penalties. You could be fined a civil penalty up to US$10,000 for... [Click here to Read More]

The PATRIOT Act - Six Years Later:
Three Offshore Strategies to Combat the Assault on Your Wealth and Privacy

By Robert E. Bauman JD

Just six weeks after the September 11, 2001, terrorist attacks on New York and Washington, what can charitably be called a panicked U.S. Congress approved the so-called "USA PATRIOT Act."

The Act's name itself is a public relations acronym. It stands for the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act," a.k.a. Public Law No. 107-56. The Act was passed with little debate by senators and congressmen, most of whom did not even read the bill.

They couldn't read it - no final printed copies of the bill were available when the vote was taken. However, copies of the U.S. Constitution were available and still are today.

This unprecedented PATRIOT Act has been the subject of furious debate and numerous court cases, some reaching the U.S. Supreme Court. In the six years since it became law, more than 300 cities and towns and the states of Maine, Vermont, Alaska and Hawaii passed resolutions asking the U.S. Congress to reconsider this radical law and to make changes to better safeguard our liberties.

So far, Congress, whether controlled by Republicans or Democrats, has not only failed to curb the Act's excesses. They've managed to make them worse.

In effect, the fearful politicians that govern us have decided that we are all terrorist suspects; that the federal police have free reign to watch, investigate and control us as they see fit. On this sixth anniversary of the radical departure from the traditional rule of law, I'll examine some of the most objectionable parts of the Act, especially as it pertains to your wealth.

"THE FEARFUL POLITICIANS THAT GOVERN US HAVE DECIDED THAT WE ARE ALL TERRORIST SUSPECTS; THAT THE FEDERAL POLICE HAVE FREE REIGN TOWATCH, INVESTIGATE AND CONTROL US AS THEY SEE FIT."

The section of the PATRIOT Act, (125 of 362 pages), which pertains to U.S. banking and finance, is the greatest single governmental assault on personal and financial privacy in American history.

Implementing rules issued under the Act now permeate every part of the U.S. financial system.
The net result of all this is that American banks and financial institutions, indeed all American businesses, now by law are required to spy on their clients and "know their customers" and report any "suspicious activity" to the government.

The cost of administering these rules runs to billions of dollars annually. Of course, we, as consumers and customers, pay these bills in increased charges and fees. And the government would be hard put to find one terrorist these financial provisions have thwarted.

Understand that this Act is still sold as being an "anti-terrorist" law. In fact, the Act's police powers have been and are being used broadly to investigate and prosecute all types of crimes, many having nothing to do with terrorism. In 2004, two federal judges secretly ruled that the Act could be used to investigate any criminal or other pending charges, even if unrelated to terrorism.

Coupled with existing anti-money laundering laws adopted during the failed "war on drugs" craze, the Act vastly increased federal investigative and prosecutorial powers over our personal and financial lives. It is not an exaggeration to say that privacy in America is now dead, if the government wants you to know everything and anything about you.

The fact that the PATRIOT Act's police powers operate mainly within the United States means you should arrange your investments, cash, assets, record keeping and financial information in a way that maximizes your privacy.

That means to protect your personal and financial privacy, your structures must be located outside the United States. Here are three major moves to consider... [click here to read more]

Ironclad, Non-Controversial Asset Protection on the Cheap
By Marc Sola

Once you’ve accumulated a significant amount of wealth, what’s the best way to protect it? There are many options—ranging from an offshore account which offers privacy and a limited degree of asset protection, to an offshore trust which offers extremely strong asset protection, but requires that give up full control over your assets.

In Switzerland and Liechtenstein, we have a different approach to asset protection: we use insurance policies for this purpose. Foreign investors are specifically protected.

When you purchase a properly set-up life insurance or annuity policy from a Swiss or Liechtenstein insurer, your creditors can’t seize it—even if you declare, or are forced, into bankruptcy. Your privacy is also protected because like banks in these countries, insurance companies are forbidden to disclose any information on the policies they issue to investigators without a court order or other legal process.

Policies are available to foreign investors for an initial investment as small as US$50,000. And that money goes to work for you, immediately—unlike trusts, there are no big set-up costs required.

Another advantage of using an insurance policy for asset protection is that it’s relatively uncontroversial. In all countries, the purchase of an insurance policy is an ordinary and common transaction. Moreover, most countries don’t tax the growth of value inside insurance policies until it’s actually realized. It may also be possible for the policy and/or death benefit to be passed down to the policy owner’s beneficiaries, tax-free.

Insurance is also amazingly adaptable. In Switzerland and Liechtenstein, for instance, life insurance and annuity policies can also be used as holding structures to protect the value of an underlying investment portfolio. Fixed and variable annuities are available, along with variable universal life policies and various hybrid forms. Individually tailored policies set up to deal with your own special circumstances begin around US$250,000.

In some cases, a Swiss or Liechtenstein insurance policy can be used to replace a trust. In other situations, it can be used to complement a trust and to strengthen its protection. For example, assigning investments to an offshore trust is much cheaper and easier if they are grouped together under one policy. This may also simplify the tax treatment of the structure, and consequently, the reporting requirements, either through a reduction in the number of assets to be listed, or by fulfilling the conditions for tax deferral.

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Assets held within a policy are considered as being owned by the insurance company. This allows individual investors and trusts to hold assets privately, without being subject to the IRS “qualified intermediary” regulations. These rules impose withholding tax rates up to 35% on assets held through foreign accounts if the offshore bank does not fully comply with U.S. recordkeeping requirements, or fully disclose the identity of U.S. investors to the IRS.

Rock-Solid Asset Protection

While Switzerland is much better known for its insurance services, Liechtenstein has had similar insurance laws for 150 years. But in 1996, Liechtenstein signed an agreement making it part of the European Economic Area (EEA), which gave it much better access to European investors and markets. (The EEA is not the same as the EU, and Liechtenstein is not subject to EU law, including EU tax directives.)

Liechtenstein began enacting innovative laws and regulations in order to more effectively compete in the European market. It fully adapted Swiss insurance laws, and, in some cases, enhanced them. Today, many Swiss insurers service the international market exclusively from their Liechtenstein subsidiary.

Asset protection with a Swiss or Liechtenstein insurance policy is tied to the choice of beneficiaries and whether the assignment of beneficiaries is irrevocable or revocable. When a foreign investor (the “policy owner”) purchases a Swiss or Liechtenstein insurance policy and irrevocably names a beneficiary (other than the owner), the policy cannot be included in the owner’s bankruptcy estate, since it is no longer considered the owner’s asset.

If the owner designates a spouse and/or descendants as revocable beneficiaries, the policy is protected against any debt collection procedures instituted by the policy owner’s creditors. If a foreign court orders the seizure of the policy or its inclusion in a bankruptcy estate, the order is not legally binding in Liechtenstein or Switzerland. Debt collection and bankruptcy procedures in Switzerland and Liechtenstein are always based on Swiss or Liechtenstein bankruptcy rules alone, without regard to foreign law.

In Liechtenstein, this protection extends to the unmarried life partner of the policy owner—a rare offshore benefit for same-sex couples.

In the event of the policy owner’s bankruptcy, ownership of the policy is, by law, transferred to the revocable beneficiaries automatically, provided the beneficiaries are the spouse and/or descendents. Hence, the policy will be fully protected and cannot be included in the bankruptcy estate. Only the beneficiaries, the new owners, can give instructions to the insurance company.

There’s even protection against duress; e.g., if you’re forced by a court to revoke a beneficiary designation. If a Swiss or Liechtenstein insurance company receives a letter from the policy owner revoking the beneficiary designation to comply with the order of a foreign court, the company may come to the conclusion that the instructions do not express the owner’s true intent, since they were coerced by legal process.

In this situation, the insurance company, under the anti-duress provisions of Swiss or Liechtenstein law, cannot follow the owner’s instructions. In order to avoid such situations, it’s possible to introduce a third party arbiter to the policy who must agree to all changes of the policy.

Beware Fraudulent Conveyance: Plan Early

Correctly structured, a Swiss or Liechtenstein insurance policy simply can’t be seized, however, you need to be aware of the Swiss or Liechtenstein fraudulent conveyance law. If no debt collection proceedings are initiated against you within one year of naming a beneficiary, the policy will be fully protected. Simply put, if you’re solvent when you purchase a Swiss or Liechtenstein insurance policy or when you name beneficiaries, you’re safe.

As with any asset protection plan, it’s important to purchase a Swiss and Liechtenstein insurance policy before problems arise that could potentially lead to a claim against your assets. When you do, you can sleep soundly knowing that your assets are protected by some of the strongest laws in the world.

Marc Sola is a member of The Sovereign Society Council of Experts and a Managing Partner of NMG International Financial Services, Ltd., a subsidiary of the worldwide NMG Group, incorporated in Singapore. The former CEO of an international and U.S.-registered investment advisory firm, Marc received his law degree at the University of Zurich. An expert on the insurance laws of Switzerland and Liechtenstein, Marc has written and lectured widely on the insurance industries in these countries.

Offshore Trusts: Very Much Alive & Well
By Robert E. Bauman, JD

For most of the last decade the U.S. Internal Revenue Service’s target shooters have slapped a big red bull’s eye on one of the most venerable of all estate planning and asset protection devices—the trust, especially the best ones—trusts located in offshore jurisdictions. The eager IRS seems to presume guilt if one dares to go offshore for any financial activity, but especially if it involves what might be a “sham” trust.

Topping the IRS target list are “people selling fraudulent trusts that they claim will eliminate or reduce income or estate taxes.” The IRS warns both sellers and buyers of “fraudulent trusts” that they face fines and jail, and if intent is proven, “criminal prosecution for tax evasion.”

IRS saber rattling against trusts goes back to 1997 when that agency issued a warning to U.S. persons to shun what they described as “abusive trust arrangements...that are not permitted under federal tax laws.”

The warning came shortly after Congress clamped down on foreign trusts created by U.S. grantors. (A grantor, also called a settlor, is the person or entity that creates and funds a trust.) That law required, for the first time, extensive reporting of offshore trust “events” including creation, annual income and distributions to trust beneficiaries, as well as appointment of a U.S.-based “limited agent” to respond to IRS inquiries. Beneficiaries for the first time had to report income received from an offshore trust. --------------------------------------------------------------------------------------------
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The lure of supposedly tax-free income is a powerful one. But U.S. taxpayers can’t say they weren’t warned about these restrictions. Even before the IRS issued its threats, the American Bar Association and several state attorneys general issued similar warnings. The IRS only was restating established rules that good U.S. tax planners already follow.

As far back as 1976, Congress tried to restrict the ability of U.S. persons to form an offshore trust and obtain related tax benefits during their lifetime. In the interim, many schemes, some illegal, were developed to try to avoid the increasingly strict IRS rules. These now defunct schemes included:

The Sovereign Society and I, as an attorney, emphatically disagree that trusts are on the way out as an estate planning tool. There still is great utility in offshore trusts as asset protection devices and they certainly are worth the efforts required to create and maintain them. Trusts have been around since ancient Egypt and Rome. They have survived because of their unique and useful qualities and will endure, notwithstanding all the world’s eager tax collectors.

But the IRS anti-trust campaign has sown dissension among some professional offshore planners in America and elsewhere. In this sense, the IRS won ground because many planners now advise clients that establishing an offshore trust could trigger automatic IRS audits. That’s not really true, but for timid souls it’s scary.

These IRS initiatives are part of a wider global attack on legal tax avoidance. In past issues of TSI, we exposed the conspiracy by the U.S. and U.K. governments, the United Nations and the European Union to restrict asset havens globally to end “harmful tax competition” and promote “tax harmonization.”

In the forefront of these nefarious efforts has been the U.K. Labour government that forced changes in the laws of its overseas territories requiring them for the first time to enforce foreign tax claims. The jurisdictions affected include Anguilla, Bermuda, the Cayman Islands, the British Virgin Islands, the Turks and Caicos Islands, Gibraltar—and even constitutionally independent U.K. jurisdictions such as Jersey, Guernsey and the Isle of Man.

Beware of false claims of offshore trust tax savings. In truth, offshore trusts offer few tax savings during a U.S. grantor’s lifetime, but they do provide effective asset protection against civil creditors. In pursuing a properly configured offshore trust, a creditor has to bring his claim in a foreign court that is much less receptive to various “deep pocket” theories popular among U.S. contingency fee lawyers.

An offshore trust can also qualify as a “non-U.S. investor” avoiding regulations by the Securities & Exchange Commission that prohibit U.S. persons from purchasing many types of profitable offshore investments.

Under U.S. tax rules, during a grantor’s lifetime, he or she must pay tax on annual income generated by trust assets and investments. No honest professional trust advisor ever claims that an offshore trust can pay for a taxpayer’s personal, living, or educational expenses or make them into tax deductible items. Nor will they try to avoid tax liability by hiding either the true ownership of income and assets or the true substance of trust transactions.

For Americans, a domestic or offshore trust is “income tax neutral.” That’s because all trust income is treated as the U.S. grantor’s personal income, reportable annually on IRS Form 1040 and taxed accordingly. That the trust is “offshore” does not negate the U.S. grantor’s personal obligation to report trust income.

Even with these restrictions, a citizen of a foreign nation is free to create an offshore trust with U.S. citizens or residents as beneficiaries. Income received by U.S. beneficiaries from such trusts is tax-free. Thus, American citizens or residents can receive tax-free income from trusts established by wealthy relatives who themselves are neither U.S. citizens nor U.S. resident aliens. But the foreign grantor must not be acting as an agent or nominee for those U.S. beneficiaries.

As you might imagine, the IRS is highly suspicious of offshore trusts set up by foreign citizens who U.S. beneficiaries claim are such “loving relatives”—especially if your “loved one” turns out to be your offshore attorney.

There is one legal method to cut U.S. taxes using an offshore trust formed by a U.S. grantor, but the generous grantor won’t be around to enjoy the fruits of this legal tax avoidance.

At your death, your estate must pay any U.S. estate tax on assets remaining in an existing offshore grantor trust. But when estate taxes are calculated, all exemptions, such as your lifetime estate tax exemption amount, can be applied to reduce overall estate value.

Assets you place in a foreign trust under the terms of a last will and testament are also counted once for estate tax purposes as part of your estate, but afterwards the trust and its assets may be free of most U.S. taxes.

Once estate taxes are paid, if the trust is structured properly, its assets will escape future U.S. taxation as they pass to succeeding generations. Only income distributed to U.S. beneficiaries will be subject to U.S. taxation. Taking advantage of these provisions requires careful planning and expert advice on structuring an estate.

In spite of the continuing IRS campaign against what they consider “abusive” trusts, there are good reasons why hundreds of thousands of people worldwide are grantors and/or beneficiaries of valid trusts. This most ancient of asset protection devices should not be abandoned simply to appease the likes of IRS bureaucrats.

Robert Bauman is Legal Counsel for The Sovereign Society and editor of The Sovereign Society Offshore A-Letter. A former member of the U.S. House of Representatives from Maryland, he is a graduate of the Georgetown University Law Center (1964) and the School of Foreign Service (1959).

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Offshore Asset Protection