Offshore Asset Protection: Where Are We Now?
For a few years in the late 1990s, the term “asset protection” became synonymous with offshore planning. The offshore tax/debtor havens were booming, and offshore trust companies, banks, mutual funds, and other supporting services were sprouting like dandelions after a spring rain. Many planners came to believe that the only effective method of protecting assets was to transfer them offshore, and more specifically in a foreign asset protection trust. The major European banks that had branches in the offshore jurisdictions created trust and incorporation services to attract the literally billions of dollars that were flowing offshore from the overheated U.S. dot-con economy.
In about two years, this all changed. The critical year was 2000 – the OECD and FATF announced that they would seek sanctions against the tax havens unless they agreed to enter into treaties with the U.S. and other industrialized nations to allow the investigation and pursuit of tax cheats. The U.S. stock market started to fall and numerous failures of internet companies made investors realized that they had been dot.conned and money started flowing back onshore to make more conservative investments such as domestic real estate that at least you go out and walk around on, or safe government bonds that paid so little interest that it wasn’t the cost of the planning to avoid the tax. Then, in July the Ninth Circuit dropped a nuclear bomb on foreign asset protection trusts in the Anderson case, and judges throughout the U.S. decided that offshore trusts were bad and they would simply throw people into jail until the money would come back irrespective of what the trust documents said.
As if offshore planners didn’t think that things couldn’t get any worse, 2001 brought the 9/11 tragedy and heightened scrutiny of financial transactions, and particular those involving the offshore havens. The IRS started aggressively pursuing offshore tax shelters. “Offshore” no longer seemed safe or desirable, and money flowed back into the United States like crazy, and people who had involved themselves in stealthy offshore tax schemes quietly started filing amended returns and paying their back taxes, interest, and penalties. By the fall of 2001, the offshore world was a mere shadow of the 1990s boom. The Nassau financial services sector, despite great increases in tourism and gaming revenues, contracted within a year to barely 30% of it’s 1999 size.
Notably, most of the contraction in the offshore industry came from the loss of tax-generated moneys, and undoubtedly some loss of moneys from the decrease in offshore trust formations post-Anderson, as well as the decrease in money laundering activity post 9/11. However, even more than a half-decade later, a solid core of the offshore industry remains and is available for use in certain circumstances. For risk management purposes, offshore planning can sometimes provide unique and effective planning solutions.
We have always been strident critics of unreported or “hide the ball” offshore planning. To the extent you utilize offshore planning, everything should be properly reported to the IRS and done in anticipation that creditors will figure it out. This doesn’t mean that you shouldn’t take the fullest advantage of offshore laws, but just don’t put yourself in a worse position if offshore secrecy and privacy doesn’t turn out to be what it is advertised to be (because it often hasn’t in the past).
Offshore planning for U.S. persons requires extensive reporting, but this reporting basically generates what amounts to a roadmap for creditors to follow in unwinding offshore asset protection schemes. Thus, U.S. persons often must choose between the failure to file the appropriate IRS reporting forms, which will probably lead to fines and possibly lead to imprisonment, or file those forms and give creditors the keys to unlocking the offshore asset protection. Between the two, most people would wisely rather be in full compliance with the law, which is largely why offshore asset protection is much less popular than it was in the mid-1990s when the offshore reporting requirements were significantly more lax.
If you have offshore assets and have a judgment entered against you, the creditor will likely apply for a "repatriation order" that will require you to return the assets to the United States so that your creditors can execute upon them. Repatriation orders are liberally issued by the U.S. courts, and if you have a repatriation order entered against you, then you will probably be limited to one of three options:
Comply with the order and bring the assets back so that the assets are available to your creditors;
Refuse to bring the assets back and risk being incarcerated in jail for contempt for many years (Lawrence sat in jail for over 6.5 years if that gives you an idea just how long); or
Flee the U.S.
Options 1 & 2 being unsatisfactory, your real choice is whether you will flee the U.S. or not if a repatriation order is entered against you. Some debtors can easily do this, such as persons who immigrated to the U.S. but who still have substantial family abroad and can earn an equivalent income abroad: The stereotypical Indian physician working in the U.S. comes to mind. But by like token, it means that for a person with their primary family in the U.S., or who cannot earn an equivalent income abroad, that offshore planning is more of an exotic-sounding pipe dream than a realistic planning option.
There is also a substantial and very real concern that the mere fact that a person has engaged in offshore planning may make them seem less innocent to a judge or jury, because of the growing stigma against offshore planning. The phrase "sunny climes are for shady people" seems to ring particularly true with U.S. judges.
The upshot of all this is that today by far most asset protection planning, and what many planners would consider the highest-quality planning, is conducted domestically and with little consideration of any offshore component. Offshore planning techniques should be kept in every planner's toolbox, but those should be tools of very specialized application and not generally or normally utilized.
Offshore tax savings? Forget it. While some planners continue to pitch exotic-sounding and seemingly sophisticated techniques involving the offshore tax havens to try to outwit Uncle Sam, these schemes blow up with an amazing consistency and usually end up costing the client much more in fines and penalties (not to mention often unconscionably high planning fees) than if the client would simply have taken advantage of the available domestic tax planning techniques even if those did not result in a "zero tax" result -- not to mention the very real risk of your friendly IRS-CI (Criminal Investigations) officer showing up on the doorstep with her gun, badge, and handcuffs.