Hiding Money With Offshore Trusts

What exactly are offshore bank accounts?

In short, you place your money with a bank located in a foreign country. They state the money is theirs, and you claim the money is not yours. The money compounds tax-free, your creditors can’t find the account, and all seems to be well... in theory.

What problems do they commonly have?

(1) Whomever you’ve given your money vanishes, or refuses to acknowledge it's yours, and you are left without recourse since reporting this to the authorities amounts to admitting you have committed tax evasion.

(2) The individual you conspired with not only steals your money, but proceeds to blackmail you, which you feel compelled to pay so that they don’t reveal that you have committed tax evasion.

Likelihood of this occurring?

This happens ALL THE TIME. Uninformed people depart their cruise liner near some offshore center, saunter to the nearest bank and declares "I need a trust with a secret bank account" and proceeds to "deposit" their hard earned cash. Approximately once a month, publications run a story about offshore service providers disappearing with client's money. And those are only the stories you hear about. This is one reason to lean towards Wyoming asset protection trust , rather than overseas trusts.

There's no statistical breakdown of how frequently money disappears through this process, but the secretive nature of these transactions prevents anyone from reporting. Estimates suggest such losses exceed US$100 million annually, and are perhaps far greater.

It is surprisingly easy to be tricked by offshore service providers. The well-known offshore banks, do after all, encourage secret accounts. This is due to the prevalence of the "Hide the Money" mentality in these jurisdictions. They will point at the laws of their country, which are formed specifically for this purpose, and state it's impossible the I.R.S. will ever find out about your doings. The catch though is that for this to work you may not declare the account or any interest earned. This means, by definition, you are committing tax evasion. This crime, at minimum, 150% of the value of the hidden account. So the worst case scenarios are either losing everything to an unscrupulous offshore provider, or losing 50% more than you originally put in because you are found out. Further, the government of your banks' country will in most cases protect the offshore service provider over assisting you. Consider that it is bad business to admit their offshore service providers engage in embezzlement. So, you have no recourse and may face blackmail if you don’t cooperate.

Exotic Offshore Trusts

So far, we have focused our discussion on entities which are recognized under what is labeled "Anglo-American jurisprudence", that is, those entities which are formed under the well-documented statutory law and common law of the United States and England. Even the relatively recent U.S. LLC, an entity which does not have a direct counterpart, under English law, is in truth just a hybrid, combining attributes of U.S. partnerships and corporations. Read for more about offshore trusts, but we recommend Irrevocable Wyoming Trusts.

It is easy to note a majority of popular offshore havens are English in nature, including, but not limited to, the Bahamas, Bermuda, B.V.I., the Caymans, St. Kitts and Nevis, and the Cook Islands. While the particular laws of these jurisdictions are clearly debtor-friendly, their laws are still fundamentally English in nature and thus fit easily into English and U.S. norms.

Even given the above list, Anglo-American Jurisprudence is has limited geographic expanse. Though Britain may wield considerable influence over the most common offshore centers, and the U.S. dominates commerce, many jurisdictions have adopted unique legal systems, mostly falling under the concept of civil law jurisprudence which is formulated off the Napoleonic Code. A majority of European countries uphold civil law traditions as do the plethora of former French, Spanish and Dutch colonies.

Though civil law jurisdictions enable various entities considered similar in structure and formulation to their common law entities, they also form entities which are quite alien, to say the least, to Anglo-American sensibilities. Some U.S. asset protection planners have taken an interest in these novel arrangements, primarily for tax reasons. Some are under the impression the IRS may struggle with how to conceptualize such formulations with regard to taxability, thus leading to the distinct possibility of a more favorable tax consideration than that traditionally received by traditional U.S. entities.

The treatment of these structures is beyond our websites scope; though, one should be cautious while pursuing these as the heightened hopes of favorable tax treatment may lead to disappointment. The IRS may very well characterize such an entity in a decidedly worse fashion than if the entity were of a well-recognized domestic variety and disregard the structure altogether. This makes exotic trusts a very uncertain strategy for protecting assets.

Nevertheless, however the IRS chooses to treat these civil law organizations, they do raise unique possibilities from the perspective of asset protection because of the simple fact U.S. creditors, and the U.S. legal system, may find it difficult to grasp the inner-workings of unfamiliar civil law trusts. Not all these entities require individual persons or entities as owners or beneficiaries. Similar to U.S. non-profits, they can be created for a, often vaguely, defined purpose or intent. They can be thought of as being similar to a “purpose trust”, a common law trust lacking defined beneficiaries.

Remember, an integral goal in asset protection planning is the creation of doubt in the creditor's mind about the possibility of recovery. Should a creditor have difficulty understanding a particular entity, and thus in formulating an attack plan against the entity, the creditor is increasingly likely to agree to a settlement.

In the above case, should an entity have no specifically defined beneficiaries, then it's more difficult for the creditor to argue a transfer was made with a fraudulent intent rather than being altruistic. Further, lacking specific beneficiaries means there are no creditors of beneficiaries which need to be considered. For so long as the original contribution was not fraudulent, the assets in question are protected from creditors. These are some of the reasons such “exotic” civil law entities/trusts may potentially play a role in asset protection planning.

Abusive Offshore Tax Avoidance Schemes

What follows are summaries of some identified and emerging schemes. All of which we strongly discourage in favor of forming a domestic trust and taking advantage of Wyoming's favorable laws.

FATCA Compliance

Recent efforts by the (OECD) seeks to eliminate damaging tax competition between member-states. Nations labeled "tax-havens" have been accused by OECD members of engaging in the very practices the members desire to cease. A common scenario put forth is the simplicity nonresident aliens have engaging in business funnelled through a U.S.A. domiciled limited liability company (LLC), with a comparatively high degree of anonymity, that has no U.S. tax consequences. A report by the GAO states corporations act as conduits for illicit funds. This abuse of the anonymity provided by corporations in the U.S. by foreigners directly mirrors the very abuse allowed by tax haven entities by U.S. persons that are so firmly scolded.

Deferred Compensation Arrangements

Highly paid professionals, and business owners, are frequently solicited to engage in "offshore deferred compensation plans". The individual is encouraged to terminate an existing employment relationship and replace it with arrangement wherein the nominal employer is an overseas "employee leasing" business. The desired result of this abusive structure is that taxes for most of the salary are deferred, meanwhile the individuals has immediate access to "other" funds through establishing loans and/or offshore based credit cards. The corporate tax return will also have an improper deduction for employee leasing expenses.

Fictitious or Overstated Invoicing

U.S. taxpayers have for some time been concocting schemes whereby the taxpayer's U.S. business is invoiced by an ostensibly unrelated offshore entity for services and goods (e.g., "marketing services") which are nonexistent or overpriced.

Factoring of Accounts Receivable

A taxpayer's company may discount receivables to a supposedly unrelated foreign company. This factoring fee significantly reduces tax liability, and is relocated to an offshore entity allowing it to be either invested free of U.S. tax or repatriated for the taxpayer's free use.

Abusive Insurance Arrangements

Some promoters have devised arrangements that are characterized as insurance arrangements, giving rise to a deduction for the U.S. taxpayer for "premiums" paid to a purportedly unrelated offshore insurance company. Often these arrangements are merely self-insurance, lacking in real transfer of risk.

Shifting of Income Using Offshore Private Annuities

Tax avoidance promoters have created an arrangement whereby taxpayers can substantially defer tax on income and capital gains through exchanging property for unsecured private annuities.

Offshore Variable Life Insurance and Annuity Products

Another common scheme involves using annuity contracts or foreign variable life insurance policies to effectively control and own a foreign entity which is to be used in an abusive transaction.

Offshore Internet Business

Businesses conducted primarily by computer are frequent targets of promoters because their businesses are location independent. Promoters offer "kits" giving the guise of a foreign corporation with operations. Transactions are generally routed offshore, sometimes into offshore trusts for additional anonymity, and business receipts are collected via bank accounts or merchant accounts. These schemes generally go after businesses specializing in intellectual property, e.g. the computer software, music, pictures, or video. They may also provide a means of operating offshore gambling activities.

Offshore Wagering

The last decade has seen a proliferation of available gambling websites. These virtual casinos are operated from offshore locations, where the owners feel unbound from U.S. The owners of these casinos often imply that players in the U.S. are not liable for taxes on their winnings, and often flout U.S. law through handling collections and disbursements in ways designed to avoid the I.R.S.

Repatriation of Offshore Funds Using Credit Cards

Credit cards, most frequently either MasterCard or VISA, issued by tax haven domiciled banks are popular for taxpayers wishing to anonymously repatriate offshore monies. American Express cards are used in a similar fashion and differ only in that they are issued directly by American Express rather than via banks.

Perhaps the most onerous and burdensome provisions in the new regulations for tax practitioners are the rules pertaining to maintenance for offshore trusts .

The new regulation with respect to list maintenance expands the requirement to any organizer or seller that is involved with a “potentially abusive tax shelter.”19 An organizer or seller is defined as a person that is a material advisor to the transaction. A material advisor is defined as any person who (or through its employees, shareholders, partners, or agents) receives, or expects to receive, at least a minimum fee of $250,000 for a transaction that is a potentially abusive tax shelter if all persons who acquire a direct or indirect interest are corporations (other than S corporations), and $50,000 for any other transaction that is a potentially abusive tax shelter. 20/21Under the previous list maintenance rules for tax shelters, organizers and sellers were responsible for maintaining the lists. That requirement now belongs principally to lawyers and accountants who participate in the transaction as “material advisors” and provide consultative advice with respect to potentially abusive transactions (which now include all reportable transactions). Our Wyoming asset protection Trusts.

Potentially abusive tax shelters are defined as any transaction that is a §6111 tax shelter (whether or not the transaction was registered) or that has the potential for tax avoidance or evasion as a listed transaction or reportable transaction under regulation §1.6011-4T (whether or not the transaction was properly disclosed). In addition, if a transaction becomes a listed transaction after the transaction is entered into or an interest in the transaction is acquired, then list maintenance is required after January 1, 2003 for all transactions entered into after February 28, 2000. As a result, list maintenance requirements can become effective via a subsequent event that occurs after the initial date of the transaction.

A separate list of persons must be prepared and maintained for each transaction that is a potentially abusive tax shelter. However, one list must be maintained for substantially similar transactions that are potentially abusive tax shelters.22 A material advisor is required to list each person to whom the material advisor makes or provides a statement, oral or written, as to the potential tax consequences of a transaction that is a potentially abusive tax shelter, if the material advisor knows or has reason to know that the person or any related party participated in or will participate in the transaction (or a substantially similar transaction that is a potentially abusive tax shelter). Browse other asset protection strategies here.

In addition, the material advisor shall treat a person (including any related party) as having participated in a transaction that is a potentially abusive tax shelter if the material advisor knows or has reason to know that the person sold or transferred, or will sell or transfer, to another person an interest in that type of transaction that if entered into would be a potentially abusive tax shelter. The material advisor also must list any subsequent participant if the material advisor knows or has reason to know the identity of that subsequent participant, and the material advisor knows or reasonably expects the subsequent participant will participate in, or sell or transfer to another subsequent participant an interest in that type of transaction, that if entered into would be a potentially abusive tax shelter. Consider contacting our asset protection attorney today.

Regulation §301.6112-1T(e)(3)(i) contains the list maintenance requirements. Under the new regulation, the following information must be maintained:

1. The name of each transaction that is a potentially abusive tax shelter and the registration number, if any, obtained under section 6111;

2. The TIN, if any, of each transaction;

3. The name, address, and TIN of each person required to be on the list;

4. If applicable, the number of units (i.e., percentage of profits, number of shares, etc.) acquired by each person required to be included on the list;

5. The date on which each interest was acquired;

6. The amount invested in each transaction by each person required to be included on the list;

7. A detailed description of each transaction that describes both the structure and its expected tax consequences;

8. A summary or schedule of the tax consequences that each person is intended or expected to derive from participation in each transaction, if known by the material advisor;

9. Copies of any additional written materials, including tax analyses or opinions, relating to each transaction that have been shown or provided to any person who acquired or may acquire an interest in the transactions, or to their representatives, tax advisors, or agents, by the material advisor or any related party or agent of the material advisor; and

10. For each person, if the interest in the transaction was not acquired from the material advisor maintaining the list, the name of the person from whom the interest was acquired.

Privilege

Transactions of the type contemplated under §§ 6011 and 6112 and the have the involvement of attorneys frequently contain elements of attorney-client privilege. Regulation §301.6112-1Te)(3)(ii) provides that in the case where an attorney or federally authorized tax practitioner within the meaning if §7525 is required to maintain a list with respect to a transaction that is a potentially abusive tax shelter, and that person has a reasonable belief that information required to be disclosed is protected by attorney-client privilege or by the confidentiality privilege of §7525(a), the attorney or federally authorized tax practitioner must still maintain the list of persons pursuant to the new regulations. When the list is requested by the IRS, the material advisor may assert a privilege claim supported by a statement that is signed by the attorney or federally authorized tax practitioner under penalties of perjury that must identify the nature of each document or category of information that is not produced which will allow the Service to determine the applicability of the privilege protection claimed, without revealing the privileged information itself. In addition, the following representations must be specifically made for each document or category of information for which privilege is claimed:

1. Representation that the information was a confidential practitioner-client communication and, in the case of information which a federally authorized tax practitioner claims is privileged under §7525, that the omitted information was not part of tax advice that constituted the promotion of the direct or indirect participation of a corporation or tax shelter.

2. Representation that to the best of such person’s knowledge and belief, all others in possession of the omitted information did not disclose the omitted information to any person whose receipt of such information would result in the waiver of the privilege.

If a material advisor has list maintenance obligations, he or she must maintain the list for ten years following the date on which the material advisor made a statement, oral or written, as to the potential tax consequences of the transaction. If the material advisor is an entity that has liquidated before completion of the ten-year period, the person responsible for winding up the affairs of the entity under state law must prepare, maintain and furnish the list on behalf of the entity, unless the entity submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days after the liquidation.

Upon written request from the IRS, each material advisor and person responsible for maintaining a list of persons must furnish the list within 20 days of the request. The request is not required to be in the form of an administrative summons. The list may be furnished to the IRS on paper, card file, magnetic media, or in any other form, provided the method of furnishing the list enables the IRS to determine the information without undue delay.

If more than one material advisor is required to maintain a list, the material advisors may designate by written agreement a single advisor to maintain a list or a portion of a list. The designation of one material advisor does not relieve the other material advisors from their obligation to furnish the list to the IRS. However, the fact that a material advisor is unable to obtain the list from any designated material advisor, the fact that any designated material advisor did not maintain a list, or the fact that the list maintained by any designated material advisor is not complete, will not relieve any material advisor from the list maintenance requirements.

A person may submit a request to the IRS for a ruling regarding whether a transaction is a potentially abusive tax shelter or whether a person is a material advisor with respect to the transaction. If the request fully discloses all relevant facts relating to the transaction, (including all the relevant facts regarding the person’s relationship to the transaction), then the requirement to maintain a list shall be suspended for that person during the period that the ruling request is pending and for 60 days thereafter. If it is ultimately determined that the transaction is a potentially abusive tax shelter, the ruling request shall not affect the requirement to maintain the list, nor shall it affect the persons required to be included on the list or the other information required to be included as part of the list.

Conclusion

As previously discussed in the introduction to this article, the IRS has issued a Notice that delays the effective date of the revised regulations for disclosure and list maintenance. This delay in effective date is the result of comments received by Treasury regarding provisions in the regulations that clearly place an undue burden on taxpayers and practitioners. Namely, the provisions in the disclosure regulations regarding reportable transactions attributable to book-tax differences should be revised to incorporate exemptions for transactions such as like-kind exchanges and corporate reorganizations. In addition, the tracking of these book-tax differences by non-public entities and clients that lack sophisticated accounting systems may not be practical.

From the tax practitioner’s standpoint, the new list maintenance rules will generally require accountants and attorneys to revise their methods for monitoring work that is performed for clients to determine if a transaction has been contemplated that meets the definition of a reportable transaction. In addition, the ability to determine if the fee thresholds have been met to qualify as a material advisor may require significant alterations in the manner that time and billings are tracked for clients. Ultimately, it can only be hoped that the cooperation of Treasury with ethical tax practitioners can create a system of disclosure and list maintenance that does not place an undue burden on taxpayers and practitioners, while meeting the goals of the government with respect to eliminating the use of abusive tax shelters.