Written by attorney Sebastian Gibson

Offshore Asset Protection

Proper asset planning is a world apart from the tax shelters offered by big accounting firms, banks and promoters in the 1990s and early 2000s which were promised to shelter huge gains made by investors in the internet boom and which caught the attention of the IRS. Such tax shelters are no longer offered except by the unscrupulous promoters who can still sometimes be found on the internet and in spam e-mails. What has always held true in the past is still valid today. If it sounds too good to be true, it probably isn't.

Asset protection is not tax sheltering. It's not even tax minimization at its core, and it's certainly not tax avoidance. Proper asset protection, if done properly, is tax-compliant every step of the way and it must be properly reported on one's taxes yearly.

Asset protection isn't simply used by debtors seeking to protect their money from creditors. It's also used by business owners and professionals who can't obtain insurance or sufficient amounts of insurance for everything from malpractice judgments to environmental claims.

Offshore asset protection can take the form of a foreign trust, an LLC, or simply an offshore bank account. Strategies include the use of foreign trusts, combinations of foreign trusts and LLC's, and having a limited partnership owned by an offshore trust as its limited partner with the grantor the general partner. Another strategy is to make the individual the managing director of a foreign company which is owned by a foreign trust with the trust funds invested in the foreign company.

A common strategy is to utilize a Nevis LLC and a foreign trust in the Cook Islands. All of the membership ownership of the Nevis LLC is placed in the Cook Islands trust. The U.S. taxpayer remains the manager of the Nevis LLC and thus retains control over the assets. In the event of litigation, the manager is temporarily replaced by a foreign trustee, with a trust protector who watches and has power over the trustee. The trust protector must not be the trust beneficiary if the U.S. taxpayer wishes to maintain true asset protection. When the litigation is dismissed, the U.S. taxpayer is restored as the LLC's manager.

Keeping money offshore in bank accounts, foreign trusts or offshore companies is not against the law. What is against the law is not declaring all of a taxpayer's holdings and income to the IRS. A person must declare such holdings and the income derived from them yearly, not just when it's brought back to the U.S. And if an accountant or a promoter or even a lawyer tells you that a financial transaction or the investment of money offshore poses no risk whatsoever, when you are being told that there will be substantial tax savings or when you are urged to keep the advice and the asset protection scheme confidential, and you have given your assets to this person to protect or invest, you are probably the victim of fraud. It's always wise to get a second opinion, especially when the amounts involved or the proportion of your total assets is large.

Offshore bank accounts still provide a safe and as long as they accounts are tax-compliant. They remain a confidential method of holding money overseas to take advantage of the safety of foreign banks and exchange rates. Taxpayers utilizing foreign bank accounts will typically select a jurisdiction with as strict a set of bank secrecy laws as can be found in this new era of crumbling bank secrecy. One should also seek a bank in a jurisdiction that has modern communications and strong financial institutions. For many, that country is still Switzerland. However today, financial institutions in other countries also offer a wide variety of accounts, investment expertise, deposits in every major foreign currency and credit and debit cards.

There is still a use for Swiss banks by tax-compliant Americans and citizens from other countries. While U.S. banks have been offering interest rates as low as 1 to 2 % over the past couple of years, deposits in Swiss banks are often well managed and have earned returns significantly higher than money deposited in U.S. banks, when one adds the exchange rate advantage such funds have garnered the past two years.

If an investor believes that with the increase in the U.S. debt, the value of the U.S. dollar will continue to decline, a non-secret tax-compliant bank account in Switzerland still has significant attractiveness. What tax-compliant bank accounts in Switzerland fail to offer is the asset protection from creditors that is offered in other foreign jurisdictions for assets that are still tax-compliant in the U.S.

Some foreign jurisdictions do not recognize judgments obtained in United States federal or state courts. In jurisdictions in which this is the case, creditors must retry their claim in the foreign jurisdiction. With the daunting prospect of having to hire local attorneys who may not even be hired on a contingency basis, the costs of pursuing such an action can deter all but the most determined creditor and prompt a settlement for pennies on the dollar.

U.S. taxpayers often utilize foreign trusts to accomplish their asset protection. The taxpayer typically chooses a jurisdiction favorable to judgment debtors in which there is a very short (one or two year) statute of limitations for lawsuits for fraudulent conveyances and a high burden of proof required of creditors. Foreign trusts today also utilize a "duress" clause making the trust irrevocable and the trustee able to reject the request of the beneficiary to repatriate the assets to the U.S. during times of duress (e.g. U.S. litigation). A further clause is inserted in such trusts today allowing the trustee to move the trust to yet another offshore jurisdiction with similar asset protection statutes during times of duress, thus making it even more difficult for the judgment creditor.

Those judgment creditors seeking a further layer of confidentiality and protection from creditors often create an offshore corporation. The corporation through its nominee officers and directors is used to hold title to bank accounts, brokerage accounts and other assets. Bearer shares are sometimes controlled by an offshore trust and the offshore corporation is formed in a jurisdiction that is different from that of the offshore trust.

U.S. taxpayers without claims against them, pending litigation or judgments in U.S. courts can seek to protect their assets by a number of domestic actions, such as the creation of a family limited partnership in states such as Nevada or Delaware or by homesteading homes in states such as Florida and Texas.

The greater the variety of asset protection vehicles utilized by persons of wealth, the greater the asset protection that can be afforded to them with a properly implemented asset protection plan. With proper planning and implementation, creditors can find the maze involved in reaching such assets nearly impossible to navigate. And if all offshore reporting requirements are met, as onerous as they may be today, a U.S. taxpayer may still take advantage of these asset planning protections without running afoul of U.S. tax laws.

In compliance with IRS requirements, we must advise you that any U.S. federal tax advice or offshore asset protection advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.

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