OFFSHORE MYTHS

Let’s see, tax returns filed – check. Survive Easter Holidays – check. Learn more about offshore myths and controlling assets in offshore trusts – next.

 

If you survived the first two hurdles, the next one is easier than you think.

 

Our last newsletter discussed how relying upon the US news media to stay informed about world events is not a reliable source of information. Sensationalism and hyperbole are the tools used by most media to appeal to their intended audience. As a result, myths are often created by the news-entertainment industry by misinformed ‘reporters’ preaching to the uninformed.

 

There are dozens of myths about the offshore world, and losing control of assets placed in a trust is just one of them.

 

Today we look at  media myths associated with the offshore world, and in particular with maintaining control over assets placed into an International Trust. Control over assets is one of the most misunderstood components of quality asset protection and offshore trusts, and we look closely at this myth today.

 

 

In past newsletters we looked at what an international trust was, examples of how to manage assets in an international trust, what an international trust can do for you, what an international trust means today, and even attempted to demystify the international trust. Follow these links, or visit the many other Past Articles on our site to learn more trust tips.

Today, let’s jump right in and look at seven common, offshore myths:

 

Offshore Myth #1: Registering a trust in a foreign jurisdiction means moving or transferring assets to distant places.

 

This myth is absolutely wrong. What is true, is that money moves around the world with incredible momentum. In our newsletter Following the Money we tracked how and where the flow of cash is today…..and how it gets there. But some individuals are more comfortable with their assets right at home, while other more international individuals live or invest part or full time offshore. For some, it's about their comfort level. And for others it’s more about diversification and planning ahead of different risks.

 

In either case, successful planning means to start with retitling the ‘ownership’ of your assets: from you personally, into an asset protective structure at a time when neither you nor your assets are under threat of attack. Transferring cash assets offshore - or even equity stripping hard assets in the event of a threat - is generally available in the event of a threat, but often not necessary when planning is first implemented.

Many of our clients have a significant portion, or all, of their assets at home. Others don't. Financial independence is about having choices.

 

In another newsletter How Safe is your Cash we pointed out how illusionary ‘safety’ really is in bank deposits in the US. And too, we compared Offshore Banking vs. US Banks in another newsletter to offer a fresh perspective of what the world of offshore banking offers around the globe.

 

But at the end of the day, where you register a trust, and where you deposit your liquid assets, are two very different issues. Keeping cash at home, or offshore, are different options. It’s all about choice. But a trust registered offshore does not mean transferring assets to ‘distant places unknown’, or about giving up control.

More about control of assets placed into a trust structure in a moment.

 

 

This is an oversold myth, often by those ignorant of how planning works. At times this myth is part of a marketing program intentionally designed by government tax bureaucrats to scare tax-payers into keeping their assets easily within reach of their greedy hands. One of our earlier newsletters looked at how border controls affect you and the increasing movement towards more and more physical and legal barriers to restrict the free movement of your assets. But in Currency Controls and the Sovereign Individual we went beyond the ongoing barrage of legal barriers to the free movement of assets, and offered planning steps to keep you, and your assets, free of so many restrictions. Unfortunately, America has developed into its own system of Socialism USA Style, to the disdain of many free thinkers. But this does not mean you should be freighted into complacency, you just need to learn to think and act smart.

 

It is true that judges and tax authorities respond harshly to blatant offshore abuses and disregard for the law, but when legal asset protection planning occurs - with legitimate purposes in mind - this negative stigma can easily be overcome. An important element is avoiding even the appearance of impropriety, and this is an essential start in the planning process with our clients.

 

International Trusts are designed with many intended purposes in mind, including investment diversification, estate planning, pre-migration planning, offshore investing, offshore insurance, offshore annuities, pre-nuptial planning, and - for multi-national and bi-national individuals and businesses - living or investing offshore, to name just a few.

 

To overcome this myth, sometimes it’s simply a matter of demonstrating the legitimate planning purposes integrated into your structure, and a willingness to educate others scrutinizing a planning structure with a critical eye. Asset protection should always be viewed as a component of a larger planning structure.

 

In addition, the type of offshore trust we create is ‘tax neutral’.

For our US clients, for tax purposes, we implement ‘US domestic grantor trusts’, and not offshore trusts. Even though the trusts are registered in offshore jurisdictions (for civil law purposes) creating the option of protecting assets in a more asset protective friendly venue, for tax purposes they are tax neutral and all income from the trust assets flow through directly to the client / settlor’s personal tax returns. The planning can’t be much more user friendly than this, and is certainly well below the radar screen as opposed to the offshore tax variety that is supposed to magically create tax benefits, when none really exist.

 

At all cost, avoid cookie cutter planning, stay away from tax promoted strategies…… and stay clear of overly complex planning structures that are not user freindly.

 

 

Again not necessarily true. A net worth of $500,000 will mean just as much to a person with $5 million, or more. Asset types, risk classes, asset values and client goals certainly drive the implementation variables of a structure, but net worth alone is not ‘the’ determining factor.

 

For example, a young professional, business person, or investor, with only few assets might be a strong candidate for an International Trust due to a positive potential financial future, and the risks associated with those benefits in the years ahead.

 

Risks – apparent and real – vary throughout life, and must always be considered. The concerns for mitigating risk are generally the motivating forces at all net worth levels. Integrating reasonable objectives to protect against those risks is what drives the planning structure.

Asset protection and offshore options can become a risk management tool at all asset levels.

 

 

Yes and no. It depends on the type of trust you design, the activities you generate through the trust, and your domicile jurisdiction. For example, for US taxpayers, a typical foreign trust (from a tax perspective) can and does generate more IRS compliance. However, as long as a trust is set up and continues as a US domestic grantor trust (from a tax perspective), the compliance requirements are generally minimal. At tax time, often only a very minimal informational trust tax return is required for those with little or no offshore activities.

 

As noted above, the trust planning structure we create for our clients is designed to be transparent and ‘compliant light’. All income and expenses are passed through the trust to the trust settlor (the client), and the trust is in essence ‘tax neutral’. The trust by its nature is designed to have neither positive nor negative tax consequences.

 

Some of our clients never invest offshore - or rarely travel far offshore - and stay right at home. These individuals have very limited additional reporting requirements at tax time. One big advantage for them is the asset protection option to force a battle offshore if, and when, a threat arises against them or the assets.

 

Tax reporting is not necessarily burdensome when using an International Trust, particularly when assets are kept right at home. However, the more offshore activities, naturally, the potential for more reporting requirements.

 

 

A terribly wrong, and misinformed myth. It would actually be silly if it wasn’t so serious. Unfortunately, in two highly reported cases a trust settlor was sent to jail for contempt of court where the clients lied under oath and were held in contempt of court. Worse yet, the planning was generally defective, and the defense strategy was poorly implemented (neither were clients of ours).

 

No, these two cases do not mean asset protection is a failure unless you are prepared to go to jail to defend your assets. However, it does mean that you need to implement your planning structure properly, timely, and with experienced legal counsel to make sure it withstands the challenges that might arise later…..and to tell the truth under oath.

 

Implementing a planning structure with an experienced planning counsel with strong litigation experience is essential since the courtroom is often where a planning structure could ultimately stand or fall. 

 

And beware of the legal practitioners or offshore promoters offering services with little or no courtroom experience. While we know that not all planning structures we create will come under a challenge in the courtroom, we do know a certain number eventually will. We just don’t know which ones. Therefore we always start with creating a client’s plan from a litigation perspective that ‘this’ plan could be subject to a challenge from any number of directions at an unknown future date.

 

The unreported tens of thousands - or more - of very successful offshore trusts created demonstrate how effective offshore planning really is. Just one more reason to avoid the misinformed trying to mislead the uninformed.

 

For a good article on how to achieve quality asset protection planning (I'll admit, I'm bias), follow this link to learn more. 

 

Offshore Myth #6: Finally we arrive at the myth of ‘control’. This myth generally states that for an asset protection trust to be effective, you must relinquish all control over the assets in the trust.

 

Again, this myth is simply wrong, and is often promoted by those who simply don’t understand how effective planning works.

 

Maintaining day to day control over trust assets – integrated with asset protection planning, estate planning, or other planning objectives - into one structure can be accomplished if correctly and timely implemented. But setting up an offshore trust alone does not mean you, or your assets, need to be at the mercy of someone else.

 

Control is an important issue for all of our clients. Everyone desires to keep control over hard-earned assets in a protective planning structure. Some are justifiably concerned that giving up control to a foreign trustee – or shifting assets far away – is the only effective means of using offshore trusts for asset protection. The myth is promulgated by those that simply don’t understand or accept the long term and diversified benefits of using an International Trust.

 

Admittedly, there is no ‘bright line’ test or rule that specifically marks acceptable control versus unacceptable control over trust assets. And too, the concept of control can voluntarily change from time to time, depending on your needs, or threats against the assets.

 

To understand how and why control can be maintained over assets transferred into a trust, let’s look at one example of how a typical International Trust (the type we create for our clients) could be structured. The typical planning structure we create might be designed as follows, but this is also an oversimplification. Nonetheless, it is still a good overview of how ‘control’ works. There are certainly many other ways to customize a structure, and rarely are two planning structures the same.

 

First, assets are segregated by asset risk classes. Some assets are inherently low risk – like cash – and other assets are higher risk – like real estate or business assets. Then, similar risk classes are segregated by equity amounts: for example two rental properties with similar risks might have different equity amounts, one at $75,000 and another $500,000. Removing the risk of liability from the lower equity asset away from the higher equity asset is another important part of segregating assets. Risk classes and equity amounts, are starting points.

 

Assets (or a group of assets) are then typically placed into separate entities to isolate them from one another.

 

For example, limited liability companies (LLCs) are available today in approximately forty five different countries, and have become widely accepted and used globally. An international business company (IBC) is also occasionally still used today, but often the LLC is more flexible and offers greater benefits. Family limited partnerships (FLPs) were once widely used, but have been mostly replaced by the modern LLC. These are a few of the different types of entities available in the US, and around the globe, to hold and control title to assets.

 

One objective of placing assets into a separate entity is obtaining a ‘veil of protection’ within a planning structure separate from the entity owner. To obtain a solid veil of protection, the LLC must be properly created, established in a favorable venue with favorable LLC statutory provisions, set up with a strong Operating Agreement and ancillary documentation, and then be maintained correctly during the entity life cycle.

 

An LLC is often an excellent candidate to obtain a veil of protection when created and implemented correctly.

 

But all LLC statutory legislation is not created equal. For example, in the US only a small number of states offer favorable charging order protection, which restricts or prohibits court ordered or forced distributions of LLC assets to owners by judgment creditors. And even though some statewide or offshore jurisdictions offer charging order protection, the value of each can vary widely. The result is that the effectiveness of an LLC can vary greatly.

 

The ownership of the LLCs is then often placed into your newly created, self-settled trust. The trust can be established with discretionary, spendthrift, and favorable asset protective provisions, and the trust is registered in a venue offering aggressive statutory asset protection….that means, the protection is a matter of law. Generally, a self-settled trust with these protective provisions is not available at home, and this was one of the early reasons for growth in this offshore industry.

 

The benefits of segregating assets by risk classes, segregating risk classes by equity amounts, entities with their own veil of protection - and ultimately an aggressive International Trust behind the structure – presents huge planning opportunities. And these benefits can be maintained on a day to day basis while you exercise use and control over the assets.

 

 

In the first instance, you would typically be the manager of the LLC. As manager, you control the assets, and the rights to use the assets placed into the LLCs. If and when you personally desire distributions, you, in your capacity as manager, can exercise that discretion consistent with the Operating Agreement, the terms of the trust, and always acting with entity formalities in mind. To do otherwise could result in the structure being determined as your ‘alter ego’.

 

Maintaining control over the assets as manager of the LLC is the first level of control over the assets themselves, but always acting on behalf of the LLC and trust mandates as first established.

 

Making investments and other day to day decisions regarding the assets, for all practical purposes, is the same as before the structure was created, but now by you acting in the capacity as the LLC manager, and not personally.

 

Next, an International Trust is generally created integrating both the aging/death side of planning, along with the life side of planning. This means that planning for inevitable events of aging and death are integrated into the trust. For the life side, planning means protecting your assets against threats using aggressive asset protection provisions as set forth in the trust, along with other important planning objectives.

 

As part of the trust implementation, a trust ‘Protector’ is designated to act to make sure the terms and provisions of the trust are satisfied – think of the Protector as the ‘watch dog’. Generally you would also be the initial Protector, with adult beneficiaries often acting as successor protectors after the event of your death. During a threat against the trust structure or trust assets, the Protector can resign and be replaced by a committee of protectors who then act in the same capacity as the original Protector, also acting as watchdog over the trust assets.

 

While the direct day to day control over the assets in the LLCs is by you, the manager, during normal times, the Protector is the next, higher level of control over the trust provisions you first created. However, this control is not of an affirmative nature, but instead a negative veto power over actions of the trustees. This is an important protective provision under the trust. The Protector can also replace the trustees, or redomicile the trust to another jurisdiction, if necessary.

 

Generally, the trusts we create have both a foreign trustee in the jurisdiction where the trust is registered, and a domestic trustee in the jurisdiction where the client resides. Worth noting is that at the trust level the foreign trustee generally cannot act without the domestic trustee acting jointly. However, for convenience, the domestic trustee can act unilaterally, meaning without the foreign trustee participating. There are a number of reasons and benefits for having a domestic trustee, particularly for US citizens, but that’s a topic for another day.

 

As a practical matter, all day to day decisions directly affecting the assets are made by you as the LLC manager, and not the trustees. Keep in mind the trustees own the LLC membership interests, and are not generally required to participate in day to day decisions, and rarely is that the case while you maintain control as the manager over the LLC assets.

 

For those events that the trustees become involved with, the most significant variety are always subject to the veto power by you as the Protector. As noted above, you are generally initially the trust Protector with negative veto powers over the trustees; and the Protector does not have active management of the trust, which is generally not necessary.

 

During normal, day to day activities, you maintain control over the LLC assets as manager, and indirectly by virtue of acting as trust Protector with negative veto powers over the trustees. With that being said, it is still in your best interest that the trustees be kept informed. In the event of death - or a threat against the assets - the trustees will need to take a more active role pursuant to the trust terms....so don't take their role lightly.

 

If you wish to share management of the LLCs with a spouse or other business partner, this can be added. If desired, you can also add a successor manager after an event of disability or death, or even following a threat to the assets.

 

And if a serious threat arises, the assets can also be removed from the LLCs, distributed to the trustee, who then invests the assets into your previously arranged offshore bank or financial institution located anywhere around the globe. In such event, the assets are always invested pursuant to the terms and provisions of the trust as you first established - or as you later amended with the trustee - but always under the watchful eye of the trust Protector.

 

Moreover, in the event of a threat against you or the assets, you as Protector can also resign in this capacity and supplement this role with a new successor. This successor can be a trusted individual, a trust company acting as a protector, or even a committee of protectors. In all such cases the successor protectors have the same negative veto powers over the trustees, the right to replace the trustees, or even redomicile the trust to another jurisdiction, if desired. The trust terms and the trustees continue under the watchful eye of the Protector in power.

 

Putting down the myth of control is probably more than you first thought you needed to know, but at least now you know.

 

Offshore Myth #7: Bigfoot lives offshore!

 

Sorry, but I can’t help on this one. As is often said, never let a good story get in the way of the facts. A good story is how myths are often created, but rarely do they have much currency.

 

 

The herd mentality is destructive. Consider this: if only a minority of people create financial independence, why do so many follow what the majority of people think and do?

 

Solid principles of asset protection planning exist that can lead to peace of mind, if timely and properly implemented. But succeeding with these principles requires the courage to step away from the crowd and choose “the road less traveled.”

 

When you accept offshore myths, you accept untold risk. Every single thing you fail to do comes at a cost, and the cost is everything you could have done instead of what you actually did.  One of the most critical steps you can take toward financial independence is to accept the possibility that what you thought to be true about offshore myths may be completely false, and that there are offshore ‘truths’ you have yet to learn.

 

We’ve become a society of people used to accepting assumptions and handed-down advice, often choosing not to take the time and effort to question them. Be curious. Learn every day. Start here by learning more about offshore planning tips.

 

Until next time….

 

David

 

 

 

 

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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