Is Offshore Asset Protection Still Viable?
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Is Offshore Asset Protection Still Viable?

08/08/2011

There has been much publicity over the last few years on the erosion of Swiss banking secrecy and the IRS offensive against "secret" foreign accounts, including jail sentences for Americans with non-compliant accounts at UBS and HSBC.  Against this background, it is important to question whether protection of assets by moving them offshore is still viable. The answer is that offshore asset protection is not only still viable but remains extremely effective against civil creditors, provided that the offshore structure is tax compliant.

Fact 1:  It Is Not Illegal for Americans to Have Foreign Assets

Americans can legally invest in foreign markets, own foreign real estate, own foreign businesses, and deposit their assets into foreign bank and brokerage accounts, provided that they disclose their foreign accounts to the U.S. government and pay U.S. tax on foreign income.

While there are some prohibitions against foreign investment by Americans (e.g.,  investing in or transacting with certain countries like Iran or North Korea), there is no prohibition against funding a foreign asset protection trust, opening a foreign bank account or buying a second home in a foreign country.  While holding assets offshore remains legal, it is crucial to be tax compliant.

Fact 2:  Foreign Asset Protection Does Not Rely on Secrecy

The IRS successes against UBS and Swiss banking secrecy, and prosecution of Americans with supposedly "secret" foreign accounts, demonstrate that foreign bank secrecy has been significantly eroded, if not destroyed .  Yet, while we can no longer hide assets offshore from the IRS, we can still protect assets from private civil creditors and litigants.

Experienced and qualified lawyers who specialize in asset protection law understand that the effective protection of assets from civil adversaries does not involve "hiding" those assets.  It is based upon the use of the laws of various jurisdictions, domestic and foreign, to legally protect assets while they are in plain view.  Proper asset protection erects a crystal clear bullet-proof shield around your assets.  In fact, the knowledge that your assets are legally protected often serves to discourage litigation or to force a settlement on favorable terms.  

Fact 3:  There Are Many Valid Reasons to Have an Offshore Presence

As our world becomes a smaller place, many people have a multinational presence.  Business expansion into new markets or new sources of production is routine.  Investment diversification into foreign currencies, foreign equities, funds and financial products is not only common, it may be financially wise.  Many people are concerned about the viability or safety of the US financial system and the US dollar and have diversified their wealth outside the US.  Maintaining foreign accounts and entities like foreign corporations, foundations or trusts may be useful for international business and prudent investment planning.

Our modern world is increasingly a web of domestic as well as foreign relationships, transactions and holdings.  Sophisticated people understand the need for foreign options and foreign diversification.  Among them is the use of foreign laws to protect hard-earned assets.  Many people understand that their retirement plans in the US may provide for their later years, but that a protected nest-egg in a stable foreign country provides a greater level of assurance for wealth preservation.

Fact 4:  Protecting Assets Offshore Is Legal and Effective, but You Can Have No Expectation of Avoiding Taxation

As noted above, placing assets in a foreign asset protection trust is legal and effective against future creditors.  At the same time, it is crucial to recognize that while the assets are outside of the reach of creditors, they are not outside the reach of the IRS.  Settling a foreign trust, for example, is legal and will safeguard your assets from creditor attack, but the IRS still considers trust assets to be your assets, and you will be obligated to declare and pay income tax on any gains in the foreign trust.  Going offshore for asset protection is a legitimate strategy; going offshore to hide income from the IRS is foolish. 

There exist effective, tax compliant offshore strategies to accomplish tax minimization.  These strategies utilize tax-favorable treatment of foreign annuities and foreign life insurance .  Preferential tax treaties between the US and foreign countries are also utilized for tax minimization.  Asset protection is also a byproduct and addition benefit of these offshore tax strategies.  Importantly, these strategies do not rely on secrecy.

Fact 5:  Some Foreign Jurisdictions Are Better Than Others

There is no shortage of promoters of asset protection in a variety of foreign countries.  You should chose a law firm that has years of offshore experience, that has analyzed the laws of various jurisdictions  and has vetted the foreign trustees, attorneys, bankers and other service providers.  Our experience has allowed us to chose the safest, most secure foreign countries and the most experienced and reliable foreign service providers.  We have long-standing relationships with foreign bankers and trustees and we keep in the forefront of offshore developments and changes.

Conclusion

Notwithstanding the IRS successes against Swiss banks for aiding US tax fraud, offshore asset protection is still legal and still very effective, because proper offshore asset protection does not rely on secrecy or tax avoidance.  In fact, having an offshore asset protection structure that is tax-compliant strengthens the asset protection, because it removes creditor leverage and removes tax non-compliance as a vulnerability to effective asset protection.