Overview

It is an understatement to say that the state of affairs in the offshore landscape is in flux. The fallout from the recent scandal in Panama remains to be seen. The fall of the rich and famous may end up being of epic proportion. 2 Samuel 1:25 “How the mighty have fallen in battle”.

The march against offshore planning and tax haven has been relentless. The UBS scandal resulted in the end of Swiss banking secrecy. The U.S. government in 2016 entered into a 1.3 billion settlement with eighty Swiss banks involving 34,000 American accounts holding as much as $48 billion. The German version of the problem has resulted in an agreement with 50 Swiss banks. The French and Belgian versions of the same problem are also in development.

The Panamanian law firm of Mossack Fonseca suffered a data breach resulting in the unauthorized release of 11.5 million files of shell corporations and tax shelters used by the rich and famous. The prime minister of Iceland has already resigned. David Cameron, the prime minister of Great Britain, has been dancing as fast as he can to explain his family’s use of Panamanian structure. Unfortunately, for government officials or anyone else, the “optics” of the situation are such that regardless of the legality and legitimacy of the planning, you are guilty until proven innocent in the court of public opinion and journalists around the globe. Nevertheless, it has always been a mystery on how government officials making the equivalent of $50,000 per year, end up with a few million dollars in offshore bank accounts. Not only is the cheese rotten in Denmark, but Russia, Brasilia, Buenos Aires and Lagos, Nigeria.

The growing compliance requirements under FACTA and FBAR for Americans has caused many Americans to forego the use of offshore transactions. Unfortunately, in the current environment, explaining the planning business or legal purpose, of offshore planning is the equivalent of explaining to the Dean of a University, the reason you were existing the female dormitory at 2:00 AM in the morning. Many of the member countries of the OECD are creating their own compliance requirements for their nationals in regard to financial and transparency and the reporting assets in tax-haven jurisdictions.

The irony for me in all of this for legitimate taxpayers, is the fact that there was never a need to sneak around and hide assets in offshore jurisdictions for tax and asset protection purposes. This article focuses on how wealthy investors might use existing statutory structures used in non-tax haven jurisdictions such as the United States to produce superior results.  Ross Perot, the former Presidential candidate, once remarked about NAFTA, the “large sucking” sound that would result from all of the trade dollars flowing to Mexico. Now the “sucking” sound is the flow of money once in offshore tax havens flowing into the United States.

Background

1. Private Placement Life Insurance and Annuities

Life insurance and annuity products receive the greatest amount of tax advantage around the world when compared to other investments, including real estate. I am hard pressed to think of any jurisdiction around the world that does not provide significant tax benefits for life insurance and annuity products. Unlike the United States, most modern jurisdictions do not have sophisticated tax definitions of life insurance. The problem in the marketplace has generally been the lack of availability of sophisticated institutionally priced products that provide for customized open architecture investment options for the ultra affluent.

Virtually without exception, most jurisdictions around the world provide for the tax-free buildup of the policy cash value; tax-free policy loans; and an income tax-free death benefit. No other investment category (including real estate) enjoys this preferential treatment. What would possible be wrong with structuring passive investments in a manner that receives a statutory exemption from income taxation? First, there would need to hide the money underneath a rock any longer. Second, many of these jurisdictions provide a statutory exemption from creditors for life insurance and annuity contracts. Third, if you are rich enough, you can start or buy a life insurance company to facilitate all of your rich friends around the world.

Needless to say, the planning and product technology exists but is often difficult to find. Tax-compliant products in regard to the multi-jurisdictional considerations of a client can be paired and owned within the same trust in order to provide tax-free treatment for investment income on a statutory basis and without committing tax evasion.

2. Tax Havens on the Prairie and Heartland

As foreign governments and the federal government continue to turn the “screws,” a number of domestic jurisdictions are becoming wonderful alternatives in regard to privacy, and asset protection. The difference is that none of these options on the prairie, desert or in the Heartland – South Dakota, Nevada or Ohi0- suffer from any of the political baggage of any of the offshore jurisdictions. Furthermore, domestic planning can always be done leaving an escape “hatch” in the event the “going gets tough” legally or politically, and you need to move back into a badly damaged tax haven..

Nevada has a two year statute of limitations for pre-existing and future creditors. The statute of limitations is shortened to six months after discovery. The jurisdiction also does not have any limitation of benefits for “exception” creditors - spouse, alimony or child support obligations including government agencies. No affidavit of solvency is required for transfer to the trust. Additionally, the legal burden for a fraudulent transfer is clear and convincing evidence. Nevada has no state income taxation for trusts. A multi-generational trust may continue for 365 years. The legal structure for South Dakota, Ohio, and Tennessee trusts are very similar in nature.  They may be slightly behind the best of the tax haven trust provisions, but not by much, and without negative optics and scandal.

Improved U.S. tax and trust laws over the last decade have greatly increased the desirability of international families to use the U.S. as their trust jurisdiction. International families may be able to minimize U.S. income taxation especially if there are no U.S. assets. The repeal against of the common law Rule Against Perpetuities in a number of states, would allow family trusts to continue for centuries without estate and generation skipping transfer taxes.  Private placement insurance contracts would provide a legal structure to avoid U.S. income and estate taxation on U.S. investments. 

c. Taxation of Annuity Income for Foreign Investors

Under the majority of U.S. tax treaties, annuity income is only taxed in the foreign jurisdiction when remitted back to the home jurisdiction. Regardless of tax treaty status, a customized U.S. tax qualified private placement variable deferred annuity can be structured and owned within a U.S. trust, with the income converted into tax-exempt annuity income for the trust and its beneficiaries. The annuity contract would also not be subject to U.S. estate taxation.

Summary

Yes, the Mighty have fallen, but they can pick themselves back up and accomplish many of the same tax, asset protection and privacy benefits previously accomplished in Switzerland and Panama in plain sight in the desert of Nevada, the Plains of South Dakota and the Heartland, Ohio.

The point is that even if you are a thief in your home country, you don’t have to act like a thief outside of your home country, because of the strength of the legal provisions of trust law, the statutory provisions of life insurance and annuities, and legal privacy provided in plain sight in the United States. If you are not a thief, the U.S. as a jurisdiction overcomes all of the negative political and social taint of offshore tax havens.

As the dust continues to settle in Panama over the next few rainy seasons, wealthy international families have no time to delay in weighing their planning alternatives. Sometimes, the best answer is the one right in front of you.