|Father time is usually depicted as a bearded old man, dressed in a long white robe, carrying a scythe and an hourglass. He is used as the personification of the old year who hands over his duties to the baby New Year, of course after being visited by the Grim Reaper and Chronos, the Greek god of time.
And here we are again as the Grim Reaper puts an end to the year before giving birth to another New Year.
For our last newsletter of the year, we leave you with some interesting thoughts to ponder. We look closer at changes happening around you that might not be so obvious, but nonetheless impact your life. How global governance and global taxes are closer than you think. And how proper planning can replace hope.
Death by a Thousand Cuts
The phrase “death by a thousand cuts” refers to a form of torture originating from Imperial China, also known as slow slicing. The term is sometimes used to describe the way a major change happens around us, slowly, in seemingly insignificant ways, but the outcome of which goes almost undetectable. In either case, the outcome is the same – the slow process of a lingering death - in contrast to a sudden decapitation.
By the lack of life in Washington – even following the last election – if the past year is an indicator of what’s in store for the new year, then it all looks rather morbid. Uncertain economy. More taxes. Weak leadership. No direction. No heartbeat. Maybe that’s the change that was promised two years ago. Even with the recent elections, do you really believe “change” finally arrived in Washington and in the state capitals? I doubt it, but I remain hopeful.
One perfect example is newly elected Florida Rep. Frederica Wilson, who ran for Congress on a vow to change Washington. Her first order of business has nothing to do with health care, the economy, or the usual mix of issues that come up in the early days of a new Congress.
Instead, Wilson's first goal is to overturn a rule that blocks her from wearing a hat on the House floor. The freshman Democrat is pressing incoming House Speaker John Boehner to overturn the rule, which dates back to the 1800s, or at least to make an exception for her. It will take a full house debate and full house vote to overturn the House's hat ban. Now that’s change we can count on.
But one sign of life is the pulse of 75 year old Ron Paul, the likely Committee Chair overseeing the Federal Reserve. I’m a long time supporter of Ron Paul, but do you really think he can – or should – end the Federal Reserve? Do you think it’s possible against all hope – and against all odds - that Washington and main street America will even start to pay attention to Congressman Paul while there is still hope?
In the 1939 movie classic Mr. Smith Goes to Washington (if you said Jimmy Stewart, you are correct), just in the nick of time the President of the Senate fails in a suicide attempt, rushes onto the Senate floor to redeem Mr. Smith, and all of Mr. Smith’s Congressional supporters cheer and hug one another, and everyone lives happily ever after. The morale of the story is that one man or woman in Washington can make a difference.
Do you think the remake of the movie today would have the same happy ending for Mr. Smith? Or Mr. Paul?
Slow Slicing & Dicing Taxes
In case you were too busy to take notice last week, President Obama signed into law an extension of the Bush tax cuts for two more years, with some additional changes. In addition to the extension of the Bush tax cuts across all income levels - everything Obama ran against - the new law sets forth a number of tax relief measures.
There’s a two-year AMT patch, a one year tax cut on Social Security taxes for individuals, and at long-last an increase in the estate tax exemption to $5 million.... but again scheduled to sunset on 31 December 2012. Why can’t tax laws be passed that are long term and definitive (and fair) in Washington so we can plan properly for the future?
The good news is that the new tax law decreases the top estate tax rate from 45% to 35%. It also extends the deduction for school teacher expenses, deductions for state and local general sales taxes, and deductions for qualified tuition and related expenses. The new law also reinstates the research and development credit, and extends the credit for energy-efficient appliances, and more.
But why did it take until Christmas week to pass a tax reduction law that was needed for the past two years? Was this supposed to be a gift? And isn’t anyone in Washington aware of how past slow-downs in the economy perked up when personal and business tax credits and tax deductions were passed into law?
And for those who like to organize their taxes early and get on with life - instead of procrastinate until the last minute - due to the eleventh hour passage of the new tax laws, many of the IRS forms and instructions for 2010 will need to be revamped and likely be delayed even longer. Generally the next year’s tax forms are published and posted long before this time of year, but the forms shelf at the IRS is mostly absent of next year’s forms and publications.
One big, new IRS compliance requirement for US taxpayers is the Form 8938, Foreign Financial Assets Report (FATFA) that requires disclosure of all foreign financial assets in the aggregate of $50,000 or more. The IRS has issued a draft form (email me if interested in a copy), but no final version or the instructions are available yet. International tax counsel Vern Jacobs reports that it's even uncertain if it applies to tax year 2010 or begins with 2011. But rest assured that this new obligation is a real pain in the posterior, and basically duplicates the already overly-burdensome TDF 90-22.1 FBAR foreign bank and financial asset disclosures. UGH.
One slice at a time these obligations and reporting requirements act to fence in Americans from the world, as the IRS increasingly implements compliance requirements that often discourage US citizens from interacting with 96% of the global population. Our past newsletter “Do Border Controls Really Affect You? (or are you just paranoid)?” addresses some of the increasing restrictions on Americans.
And the unavailability of forms at the start of the tax season means that accountants, and those that prepare their own tax returns, will likely be scrambling at the last minute waiting on the IRS minions to create and post the forms for 2010. This results in forcing everyone – regardless of other time commitments – to fit their tax planning around the IRS schedule into a much narrower window. Try using IRS tardiness as an excuse for late filing of your tax return.
On a positive note: married couples can now double the federal estate tax exemption from $5 million to $10 million. Integrating estate tax savings and disposing assets through an International Trust at all asset levels is typical planning for many of our clients. Is your estate planning up to date?
What’s more, removing other personally owned assets outside of your estate can also save thousands of dollars – hundreds of thousands for holders of large life insurance policies – with just a few extra simple estate planning steps and a life insurance trust.
Leaving behind your hard earned money for your family or charities of your choosing – instead of being taxed away to the government - should be a top resolution for the new year.
Where will you put all that extra money that you save from the new tax law?
Is Offshore Banking an Option?
I frequently receive inquiries about opening an offshore bank account. Questions include indentifying preferred banks, currencies of choice, or whether it’s even legal to open an offshore account. All good questions.
In reality, going offshore is perfectly legal, and in some respects, it’s actually easier than you might think. All offshore banks today require a high level of information before opening an account, and many will not deal with US citizens due to US compliance and regulations. But there are ways around this problem when creating a planning structure that utilizes an offshore entity for offshore investments and banking.
Furthermore, there are many solid financial reasons for banking in offshore venues instead of keeping all of your eggs in one basket at home. At the end of the day, it depends on the services and financial products you are seeking, but many offshore banks are far safer and offer better service than most US banks.
Keep in mind that if you open a foreign bank account in a local currency, you may also be entering into a “currency play”, meaning if you unwind the transaction back to your home currency a principal gain or loss in principal could occur. Interest rates in many solid banking jurisdictions pay 5% to 7% on deposits with government deposit insurance far exceeding US FDIC (here are a few). But the gain or loss in a currency conversion can far exceed the higher interest rate received on bank deposits.
One way to avoid the currency conversion transaction risk is to maintain an offshore bank account in your home currency – US$ for US citizens – while still diversifying assets outside of your domestic banking system. The US dollar is a foreign currency to a local foreign bank, and by holding a deposit in your home currency you avoid the risk and cost of exchanging currencies, if that’s an objective. The interest rate may still be paltry if held in the US$, but for some it’s a first start to international asset diversification before converting to another currency to obtain higher rates and attempting to benefit from converting between currencies.
The bottom line is that there is no need to purchase a local or foreign currency when you open an offshore account, and you can maintain your cash in a currency of your choosing.
For more on comparing US banks vs. offshore banks, establishing a relationship with an offshore banker, why many offshore banks are superior to the US banking system, and more, follow this link. And the book Offshore Living & Investing is a useful source.
Access to global investments and diversification of assets are important considerations for many who have question of what the future holds, even if not international investors. What's more, this step is one of many excellent asset protection planning steps, when part of a larger, overall planning structure. Go here for more tips.
The world is changing, and so must we.
From Fringe to Main Street
America’s demise was once the topic of fringe newsletters and savvy book authors selling alternative views of America’s inevitable collapse. But no more. Now it’s US leadership speaking bluntly that the end is nigh.
Bloomberg News reports that former Federal Reserve Chairman Paul Volcker – who is now chairman of President Obama’s Economic Recovery Advisory Board - spoke bluntly about America’s declining role going forward.
First, Chairman Volker indicates that the US$ is clearly in danger of losing its role as the global benchmark currency. Second, the US is still facing the most difficult economic crisis since WW II. Third, that the world is in need of clear-headed, confident leadership – but offered no suggestion of anyone that he knows that qualifies to take the helm. Humm.
For the chairman of the US economic recovery team to use such harsh and blunt words - and offering such a negative assessment for the US going forward – is not very comforting. “This is a troubling time for America” says Volcker, and “the US no longer inspires confidence for other countries to trust US leadership.”
As the leader of Obama’s economic recovery team, this is not inspiring.
When the captain of the Battleship US says things look bleak, then we know it’s time to worry.
The candid comments Volker made before the University Club in New York is chilling. And when the chairman of America’s recovery team sees no hope for America’s future – and acts as the principle economic advisor to the president – then how can we hope to see a better America in our near-term future? Thanks for that, Mr. Grim Reaper.
All of this as the financial day of reckoning for many US states is quickly approaching. The potential default rate from state governments is staggering, and has the potential to make the US housing collapse look like small change. That a topic for another day, but you can learn more here if you missed the 60 Minutes program....it's frightening. Addison Wiggin of I.O.U.S.A. fame wrote a great article recently calling Municipal Bonds the "son of subprime" and a classic train wreck.
But wait, there’s more.
Your QE 2 Tax Dollars Shipped to Europe
There’s a very cleaver animated video circulating that answers your every question about Quantitative Easing. If you haven’t seen it yet, it’s worth a few minutes of your time as it’s spot-on.
And on the topic of QE 2 and other dumb ideas, perhaps you’ve heard that the EU countries are also in financial trouble. Think Ireland, Greece, Spain, Portugal, Italy, for starters. But we can all sleep well tonight knowing that US taxpayers will be offering a financial bailout to the EU financial problems. Even though the bailout – excuse me, aid package – is from the International Monetary Fund (IMF) to the European Financial Stability Facility (EFSF), guess who the largest IMF contributor might be? (If you said the US, you go to the front of the class.)
The IMF has already given EUD 250 Billion (approximately US$ 325 Billion) to the European bailout, and now wants to significantly increase this amount with more of your tax dollars.
But where do your tax dollars go after they're redistributed in Europe? Glad you asked.
In the past there has been very little transparency, at least until the EU Bureau of Investigative Journalism (EU BIJ) uncovered where the money goes. The evidence of massive fraud - and even organized crime - in the EU receiving your hard earned tax dollars is staggering. If you think government waste is bad in the US, you haven’t seen anything until you watch this 24 minute video to see where your money eventually ends up once redistributed in Europe. Sit back and enjoy.....or not.
To support QE 2 you must first believe that the individuals that make up the government have superior abilities to allocate your money, are able to make smarter decisions, and thereby create greater productivity than you or me. Look around at those that occupy the desks in Washington, and in your state capitals. Terms like “job security” and “dead weight” immediately come to my mind. I personally know and have worked with many current and past legislators, and government department heads - and while many are good, decent people - I certainly wouldn’t want them managing my money.
To quote our good money management friends at Sullivan & Serwitz, and if you believe as I do, “that by-and-large the individual taxpayer has a superior aptitude to allocate capital, then the effect of government involvement becomes counterproductive to economic growth and the public welfare. I find it incomprehensible that a thinking person could possibly conclude that redistributing this confiscated resource to the same reckless stewards of capital who helped create this mess in the first place, could possibly be a more productive use of our tax dollars.” Kudos Marshall.
We can agree that bureaucrats will not suddenly become wiser, nor legislators more principled, to rise above self interests.
And as “Bernbank” just prints more money - all on the back of American taxpayers - the “Too Big to Fail” mentality continues alive and well at home, and across the ditch. The infectious disease of entitlement, socialism, and tax and spend is crushing the American spirit and way of life, as it has already occurred in other overburdened Western European cultures abroad. Maybe that’s the leadership and change Volcker and Obama are talking about.
In the meantime, Europe continues to struggle with its own financial problems, and that of even maintaining the EUD as a currency. The geopolitics of 27 countries sharing little in common, are fighting for their very survival. And this is supposed to be the source of a new hallmark of global management for the rest of the world to follow?
Philosophically, it’s sad to see America following the European path of punishing success with higher taxes to pay for excessive entitlements. The reward for an individual's outstanding effort is state-sponsored theft - high tax rates. That’s no way to run a merit-based society that’s supposed to award hard work and risk takers.
And global management is more prevalent than you realize.
Have We All Gone Global?
And if that’s not bad enough, it appears we’re going to hear a lot more about global governance during 2011. This double speak means that someone you don’t know from afar wants to tell you how to live your life – and then charge you more taxes for the privilege.
In the past week alone we’ve heard more speeches on the subject of global governance.
First, we heard from the EU Central Bank’s (ECB) VP Vitor Constancio, who argued in favor of global economic governance as a means of overcoming Europe’s “narrow nationalism”. Then came the World Trade Organization (WTO) director general Pascal Lamy, who sees global governance as an answer to correcting global trade imbalances across the world. Lastly, it was the International Monetary Fund’s (IMF) Domique Strauss-Kahn – who is constantly looking to reinvent the IMF for more global authority - who sees the recent GFC as an opportunity to boast his organization’s economic clout.
That’s a powerful combination of global power sources when added to the current US administration’s position on global contributions of your tax dollars. The one thing they all have in common is that they all feel the global financial crisis has presented a once in a lifetime opportunity to set global governance in place.
Have no doubt: there is a universal commitment across the world to manage the economy, and your life.
Lamy was the most candid, calling for “a greater degree of explicit renunciation of national sovereignty”, while Strauss-Kahn talked of the “comeback of the IMF to the centre of global governance”.
What they all seek is an operating framework that is less and less determined by national interests, and more and more controlled at the supranational level. That means more power for the likes of the IMF and other international regulatory bodies over you and me on everything we do. Each slow slice of power granted to an international organization is one slice of sovereignty of national interest that gives way. And that means increasingly a loss of local rights and freedoms to each one of us.
Slow slicing, or death by a thousand cuts - it all ends the same. They all seem to have forgotten that each nation derives their legitimacy from the consent of the governed.
Already, financial regulation is driven at an international level through the Basel banking regulations. Then there’s the reform of the international monetary framework aimed at correcting global macro imbalances and stabilizing the exchange rates (read, a devalued US$ and everything Americans buy costing much more). And the need to “create co-sustainable growth”, which means adjusting and dictating trade between countries at an international level.
What's more, 500 plus representatives of 27 nations, including top regulators and central bankers, met repeatedly during 2010 to hammer out the new rules to govern the world’s financial system through what’s referred to as Basel III. That’s not to say there isn’t a systemic problem with how some banks operate, but how can one set of international rules be successfully implemented in both Punxsutawney, PA and Chiang Mai, Thailand?
These international commitments across the world to manage your life through supranational organizations are but a few more of the many examples of global governance arriving in small increments, one slow slice at a time. And that’s just the good news.
And now for the bad news.
How would the IMF and other global organizations support its growing global dominance, and an increase in support staff and paper shufflers? More taxes from you and me, that’s how.
Two years ago one of our newsletters covered the topic of a global taxing future, and how the scheme operates –find it here. An international currency, or Special Drawing Rights (SDRs), to replace the US$ appears closer on the horizon every day. If you don’t yet see it, then you only need to open your eyes to see what’s occurring (yes, more slow slices).
But even our scenario in past newsletters under-estimated how quick global taxes could all come into a reality.
Just this month sixty (60) nations - including most of the G-20 nations (representing approximately 90% of world GDP) - announced they are lobbying the United Nations for the first international tax. These 60 nations are proposing an international tax on currency transactions to raise funds for “development aid”. Doesn’t that name have a nice ring to it?
The proposal is estimated to raise $35 billion a year the first year. However – as we all know - it is likely that this will just be a foot in the door, and that new taxes and higher tax rates will follow over time.
We’ve also learned that a web site has been publishing embarrassing stories about U.N. corruption. For those that bought into the scare mongering from Washington that the open and honest reporting by Wikileaks founder Julian Assange was wrong, then maybe the U.N. reporters should also be jailed too, you think? Corruption does not make good government, and lying is not patriotic. Government blocking of sites like this was once offensive only in China...but now in America?
Against all odds you can continue to hope for something better for the new year. But in the meantime, have in place a good plan against the worst case scenario.
Hope is Not a Plan
We always hope that the increasing number of Grim Reaper’s and their negative assessments about America’s future are wrong. But hope is not a game plan. Hope does not create grand slams -or complete Hail Mary passes - to win the big game. Hope is not a step to protect and preserve a lifetime of hard work and earnings. Hope is merely a last ditch effort by desperate people.
In school, many of us learned the poem Invictus, by William Ernest Henley. It's about the vulgarities of life and death, and offers much more than mere hope. The final verse of the poem reads:
It matters not how strait the gate,
How charged with punishments the scroll,
I am the master of my fate:
I am the captain of my soul.
Nelson Mandela recited the poem to other prisoners and was empowered by its message of self mastery. So too did Clint Eastwood in the movie Invictus. Humphrey Bogart in his famous role as Rick Blaine in Casablanca recited the last two lines several times. But then so did Timothy McVeigh, the man responsible for the Oklahoma government bombings, as his final words and epitaph.
So while we hope for better times ahead, many smart thinkers take a personal responsibility for their future – and their family – and plan for the worst.
Imagine that .....taking responsibility for oneself. It sounds old fashioned. Even dated. But somehow it’s much more appealing than the alternative.
Every single person is impacted randomly throughout life with unforeseeable and unpredictable events. As John Lennon once famously said “Life is what happens to you while you are busy making other plans.” And Nassim Taleb wrote the well known book The Black Swan, which articulates the randomness of highly improbable and unpredictable events that are certain to have a significant impact on each one of us throughout life.
Planning for the unforeseeable and unexpected is therefore a necessary component of living. This is worth repeating: planning for the unforeseeable and unexpected is therefore a necessary component of living.
If you haven’t started a plan...then when? What better time than now to take the next step?
Is Creating an International Trust a Plan?
The short answer is yes...but it is often asked, how does an International Trust fit into a “plan” today?
Obviously, everyone's situation and objectives vary, but there are some common themes that run constant for many people. Keep in mind that good planning integrates many different legal tools and techniques, and provides a synergy by bringing planning tools together. How to Legally Protect Your Assets explains how this fits together and the different options available to you. Offshore Living & Investing takes a look from another perspective.... in case you are looking to learn more.
It’s worth restating from an earlier newsletter how you can benefit from using an International Trust to protect your hard-earned money as the world around you evolves.
First, an International Trust provides you an opportunity to diversify your assets, bank in stronger financial jurisdictions, and potentially achieve higher investment returns than you might accomplish at home. The world has already become more “international”, so why not you?
Due to over-burdensome domestic rules and regulations, there are more and more offshore financial institutions and investment companies that simply refuse to deal with US citizens. Notwithstanding, there are perfectly legal ways to work around these issues.
Today, more than two-thirds of all worldwide income and equity opportunities are located outside of the US, providing far greater diversification than keeping all of your eggs in one basket at home. Safer banks, offering better returns in multiple currencies, are available. An International Trust can open the doors to better yields, safer banks, and greater financial diversification with proper planning.
Second, an International Trust is an excellent tool to obtain a high level of asset protection. As a former litigation attorney and judge, I don’t need to remind you that there is a lawsuit crazy cancer in our society that has gotten grossly out of control. Too often, greedy plaintiffs and zealous lawyers are looking to win the lottery with your hard-earned money.
There is no end in sight to our litigation gone crazy society. Any and all steps you can take today to reduce your exposure by legitimate asset protection planning provides you an opportunity to control your future. Meeting this goal allows you to plan for successful retirement, leave behind a legacy for your loved ones, or reach other legitimate objectives.
Third, if financial privacy is important to you, then an International Trust can help accomplish this objective as well. A trust organized offshore affords a wonderful opportunity to keep snooping eyes - and potential frivolous claimants - from going after your nest egg.
It's simply a way of flying under the radar screen. Seeking privacy doesn't mean you are doing something wrong or have something to hide, it just means that you don't need to share every aspect of your private life with anyone willing to pay a small fee to obtain all of your private financial and personal information.
Fourth, estate planning can - and should - be integrated into a properly drafted International Trust. Think of this as the “death side” of asset protection. Providing for the future needs of spouses, children, and others is a part of the planning process. Provisions for maximizing the Federal Estate Tax Exemptions, to reduce the taxable estate, is important. And too, allowing for spendthrift provisions for heirs, or sprinkling inheritances over a term of years, can often be accomplished. This is an opportunity to "speak from the grave."
Fifth, an International Trust should aim to provide the maximum possible tax minimization allowed by law. Minimizing, or legally mitigating taxes, is neither illegal nor unpatriotic. You have the legal right to use each and every legal tax reduction technique to reduce your taxes.
And using an International Trust for pre-migration planning for international investing and living can be a powerful tool to keep assets and income outside of a newly adopted homeland.
Trusts have been around since Roman warriors went off to do battle two millennium ago. International Trusts, designed to protect and preserve family assets, are simply using long established legal techniques to accomplish your particular set of objectives. Choosing the best trust structure and laws to protect your assets is critical to reaching these goals.
Yes, the world continues to evolve in slow, incremental slices. But what changes are you making to protect your hard-earned assets? Are you simply relying upon false hopes? Remember, the key is to act now, before it is too late. Here are some good planning tips to get started now.
In the meantime, I “hope” you have a wonderful and prosperous New Year.
Until next time......
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
David A Tanzer & Assoc., PC.
Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999
(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &
Assoc. Member Queensland Law Society, AU - Foreign Lawyer)
The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.
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