Offshore Accounts: Secrecy versus Privacy
Some subscribers who have talked to me by phone have asked why I don't devote much space to the subject of privacy. That's gotten us into a discussion of the difference between financial privacy strategies and asset protection strategies. Sometimes the two goals can be achieved with the same device, but most of the time, the use of some asset protection entities will reduce your privacy and create more exposure of your financial affairs. Most of the lawyers who actually do a lot of asset protection work advocate full disclosure to the various tax agencies and any other regulatory agencies. (I believe the other lawyers are living on borrowed time.)Â
Partnerships, limited liability companies, corporations and private foundations are entities authorized by law. Individuals have certain rights and powers without the consent of the state. A corporation or partnership only exists as a creature of the law. Without virtually full disclosure of the financial affairs of the partnership or corporation, the state won't grant the entity the benefits of a separate entity with its own rights under the law. Trusts do not require registration with any government agency because they are simply agreements between the grantor/creator of the trust and the trustee. While revocable trusts don't provide any asset protection, an irrevocable trust might provide some protection.
Certain aspects of the concern for privacy make a lot of sense. You just never know whether some innocent remark might be misconstrued. If you brag about saving taxes, someone might think you are doing something illegal and turn you into the IRS. If everyone knows you are out of the country for three weeks, will one of those people be a burglar? If you have a lot of money and make sure everyone knows it, aren't you inviting a lawsuit?
Although the use of asset protection devices may be entirely legal, why tell everyone about it? It's one thing to make the necessary disclosures to the regulators, but why let everyone else know what you are doing? Those who set up family partnerships or offshore trusts sometimes seem to feel that using these devices is a mark of success and they have to brag about it at every party or social gathering. It's like the person who is "complaining" about his high tax bracket. It sure sounds a lot like bragging to me.
But there are some forms of asset protection that rely on secrecy and evasion rather than on openly making use of the law. When that happens, the desire for privacy can overlap into a potential felony. If secrecy, subterfuge or fraud are essential to the success of an asset protection device, the odds are that it's illegal. A concern for privacy is reasonable, so long as it's also legal.
Keeping a low profile and keeping your financial affairs private is the first and most important step in avoiding potential lawsuits or even some opportunistic civil forfeitures.
There are many legitimate reasons for wanting to keep your financial affairs to yourself and to not have those affairs easily accessible to any potential plaintiff, private investigator or lawyer who may be curious as to your net worth. In the U.S., such privacy is extremely difficult to secure. The ownership of real estate, corporations, partnerships and limited liability companies is a matter of public record. With nothing more than your name and address or phone number, an experienced investigator can quickly discover your social security number and can then get access to your credit history and even some of your insurance records. Extensive details about your bank transactions and credit card transactions can also be obtained. Getting a copy of your tax return is usually more difficult, but if the price is right, I'm told that it can be done. In some cases, I'm told that a potential plaintiff can get a court to order you to disclose this information even prior to a lawsuit.
None of this kind of transparency has been available through offshore financial institutions. By having an offshore bank account, securities custodian, corporation, LLC or trust, you can shield a lot of your financial affairs from prying eyes. But some people are wondering if the recent assault on financial secrecy by the U.S. and other high tax countries against the tax havens means that offshore financial privacy will also be a thing of the past. If you are looking for secrecy to keep your income hidden from the government, it seems to me that your days are numbered. But if you merely want financial privacy, I don't think you have anything to fear at this time. Right now, it seems to me that the main focus of the U.S. and the OECD is to be able to pursue their own tax evaders without getting stone-walled by bank secrecy laws.
Tax evaders need a lot more than privacy. They need secrecy to hide their unreported gains. I may be mis-reading what is happening right now, but I sense no effort by the big governments to force the financial havens to become as financially transparent as we are in the U.S. Those of you who are reporting your foreign accounts on Treasury Form TD F 90-22.1 and checking the box on Schedule B-III of your 1040 tax return and filing other required tax forms should not have anything to fear from the changes that are going on in the financial havens. If you are contacted by an IRS agent because you have an offshore account or even an offshore credit card, you should be able to avoid a full scale audit by showing the agent that you have been filing these documents.
As I indicated above, I've been told that if someone has enough money and the right connections, then it is possible to get tax return information. But in most cases, that information is very difficult to secure and it's not readily available to potential litigants. There are no meaningful laws in the U.S. to prevent commercial establishments from sharing customer information as there are in many foreign countries. Disclosing information to the IRS is not the same as disclosing it to a local loan broker or credit card company.
Maximum privacy from potential plaintiffs can derail or deter a lot of predatory lawsuits. But when a concern for privacy turns into a paranoid need for secrecy, it begins to look like you are a criminal. If you act and look like a criminal, the authorities will conclude that you are one. Then you have to work much harder to convince them you are not engaging in any crime.
If the IRS believes you are not reporting all your income they will perform a "life style" audit in which they try to measure how much you are spending each year. Then they compute how much income you would need before taxes in order to have that much available to spend after taxes. If your reported income and taxes are substantially less than their computed amount, they will assess you for back taxes, penalties and interest and may even pursue criminal charges. You then have to prove you are innocent. The most effective way to do that is with an annual balance sheet that is tied to your total income and by having an "audit trail" to connect your total income to your bank deposits and then to your tax return and your personal balance sheet. You also need to be able to explain any unusual spending by showing the receipt of non taxable gifts, inheritances or loans that were used to pay for those expenses.
The dividing line between privacy and secrecy is simple. File the required government reports for your offshore financial accounts, trusts and companies. Leave an "Audit trail" to show that you have reported all your income. You may even want to be prepared for a life style type of audit by having an annual personal balance sheet that is connected to your personal income the same way a business balance sheet is connected to the income of the business.
But I really see no reason at this time to close out your private foreign accounts, companies and any trusts if you have been reporting the income from your offshore assets to the tax authorities.
I can't count how many people call me or send me email messages wanting to know if some ''plan" they have concocted to hide their assets in some bizarre manner will work. Often, they want to use a foreign corporation that is "managed" by a nominee and their ownership is evidenced by bearer shares. My answer is always the same. Even if it were legal, secrecy is not a solution because there are too many ways that a plaintiff's lawyers can uncover assets that have been hidden.
By itself, secrecy isn't enough to protect your assets from future lawsuits.
As a practical matter, secrecy is useful in making it difficult for a lawyer to easily find out how much you are worth before the lawyer decides whether to sue you. But if you are sued, the lawyer is then able to use discovery proceedings to require you to disclose some information under oath even before there is a trial. And if you lose a lawsuit, the courts will require you to disclose the extent of your holdings.
You can't make a transfer of real estate without leaving tracks. The same is true for an interest in a corporation, limited partnership or limited liability company. If you make gifts of more than $10,000 to any one person in any year, you are required to file a gift tax return. If you have listed securities, you have to convert them to cash to avoid leaving tracks. When you convert to cash, you leave a record. If you have a gain from selling securities, you have to report that on your tax return.
Whenever there is an inheritance, there are usually some probate records or a federal estate tax return. Any tax return information can be obtained by a creditor/plaintiff unless you claim the 5th and that's almost certain to be passed on to the IRS. I'm told that a bankruptcy trustee has nearly unlimited access to tax information. Any half competent auditor can look at a tax return for two years in a row and quickly identify any assets that haven't been accounted for in the second year.
And, there is always the requirement to report any cash or currency that you take offshore in excess of $10,000. If you use a foreign trust, there are extensive reporting requirements with heavy penalties for not reporting. Ditto for a foreign corporation or foreign partnership. Using a non-profit entity isn't a solution because their records are seldom protected. The list goes on and on.
For those who are greatly frustrated by the growing lack of privacy in the U.S. and most other major countries, the only "solution" I can think of is to expatriate if you have the resources to live elsewhere. If you are self employed and can work anywhere in the world, then you have an ideal situation. Or, if you have ample assets and can live off your investments, you are also in an ideal position to change your country. Of course, you will most likely have to leave some family and friends behind, which is what makes it a difficult choice for most people. As for the prospect of ever regaining any significant personal privacy in the U.S., I'm extremely pessimistic. And, the lack of financial privacy is growing in most other major countries.
Even so, it's foolish to make your financial affairs public any more than is required to avoid problems with the law. If you have assets in an offshore trust, it won't show up on a routine financial investigation by a lawyer who is considering taking on a suit against you on a contingent fee. Assets in the name of a family partnership won't disclose the extent of your financial resources if a trust is the limited partner. (Global Asset Protection, 7/99)
This report is a compilation and update of various articles and correspondence I have written or received in the past few years on the subject of privacy and secrecy. Portions of this report are articles by contributors to previous issues of Global Asset Protection or from Offshore Tax Strategies.
Source: By Vernon K. Jacobs - The Offshore Press, www.offshorepress.com
Vernon K. Jacobs is a CPA, a Chartered Life Underwriter and a Fellow of the Life Management Institute. He is an international tax practitioner and tax author with a focus on international investing and insurance. He has been a college instructor in accounting, personal finance and corporate taxation, and has been a speaker at dozens of professional conferences and seminars. www.vernonjacobs.com
Offshore Investing for Americans
