Practically Untouchable: Going Offshore Still Has Benefits
THE RECENT LEAK of millions of documents from Panamanian law firm Mossack Fonseca served as a reminder of what wealthy Americans should already know: Hiding assets offshore can be risky and hiding them from Uncle Sam is a crime. Yet law-abiding folks continue to stash money offshore for reasons that include asset protection, privacy, investment diversification and, yes, in some cases, legal tax savings.
Be prepared to spend $50,000 in legal and trust fees to set up an offshore trust and $10,000 a year to administer it. You’ll also incur extra U.S. compliance costs.
Trust reporting rules are tricky, but U.S. citizens and residents with offshore accounts worth $10,000 or more must not only disclose them on their tax returns (and pay taxes on any earnings) but also report them in a separate annual filing with the Treasury known as a Foreign Bank Account Report (FBAR). The penalty for failing to file a required FBAR can be up to 50% of the account’s value for each missed year.
So don’t consider an offshore trust unless you’re putting at least $1 million in it, says Philadelphia trust and estate lawyer Paula M. Jones. And as with a domestic asset protection trust (DAPT), to avoid the appearance of a fraudulent transfer, you’ll need to keep sufficient assets outside the trust to pay day-to-day expenses and current liabilities.
With 16 states now permitting DAPTs and places like Delaware, Nevada and Wyoming allowing the true (beneficial ) owners of shell corporations to remain secret, why go offshore for asset protection? It’s an even “greater obstacle for creditors,” answers New York trust and estate lawyer Gideon Rothschild. That means they’re more likely to settle for insurance and/or your nontrust assets.
In the Cayman Islands it’s a crime to even inquire about a person’s accounts, let alone to disclose their contents. Assets you put into a Belize trust can get protection from creditors nearly immediately, compared with a two-year wait in Nevada, the most debtor-friendly U.S. state.
Yet anyone who thinks foreign trusts can be used to hide assets from an angry ex or to avoid a current court judgment “is kidding themselves,” Rothschild says. If a court asks you about a trust’s existence, you must disclose it. Lie and it’s perjury. Refuse to answer and you’re in contempt.
What if a U.S. judge concludes you fraudulently moved assets into a trust and orders them returned? If it’s a DAPT, then the U.S. trustee will have to comply. If it’s a foreign trust, the independent trustee may respond that the laws of his own country bar turning over the funds. The Cook Islands doesn’t even recognize foreign judgments.
So then what? In the worst case, you could end up rotting in jail for contempt until you comply. Sure, there’s the impossibility defense–as in, it’s impossible for me to get at the assets to comply. But courts have held that’s no defense when your inability to repatriate the assets is the intended result of your own conduct in setting up the trust. In the most famous case a couple that moved cash to the Cook Islands to protect themselves from the consequences of their Ponzi scheme spent five months in jail.
Offshore trusts can also come in handy to build as well as to protect wealth. Hedge funds are often incorporated offshore to avoid both heavy U.S. regulation and entity-level taxation. And there are some exotic investments that are simply easier to hold in a foreign entity.
Liesel Pritzker Simmons, heir to a piece of the Pritzker family fortune, and her husband, Ian, turned up in the leaked Panama law firm papers as shareholders of a Panamanian-registered company called Blue Valley Agroinvestment. Turns out the couple was using it to make a social impact investment–in a sustainable-agriculture project in Colombia.