Asset Protection Comments II
This page contains more commentaries on the subject of asset protection based on recent news items, recently discovered books or websites, and new or “reborn” asset protection products discovered by WIL’s research team.
While the commentaries on these pages – even when considered as a whole – are hardly exhaustive, we believe they will alert and remind our readers of the always-pressing need for implementation of a sound asset protection plan, encourage critical analysis of the various means of asset protection that are available, and help stimulate creativity in the implementation of one’s chosen strategy.
TAX AVOIDANCE STILL LEGAL
For the past several years the U.S. Internal Revenue Service has been aggressively attacking what they call “abusive tax shelters.” As a result, the historical difference between legal tax avoidance and illegal tax evasion has become obfuscated – all aggressive tax reduction measures are now tainted with a “stay away from or else” aroma.
Seemingly usurped is the doctrine expressed by U.S. Supreme Court Justice Learned Hand in days prior to the IRS’s reign of terror: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.” [Gregory v. Helvering, 293 U.S. 465 (1935)]
However, the IRS has suffered defeat in two recent tax cases, against both Black and Decker (link) and against Coltec Industries Inc. (link), in which it alleged that the tax strategies that were used by the companies were abusive. The decisions of the courts were significant, and contain valuable lessons which the astute will incorporate into their own tax and asset protection planning.
Relative to the Black and Decker case, U.S. District Court Judge William D. Quarles Jr. stated, “The court may not ignore a transaction that has economic substance, even if the motive for the transaction is to avoid taxes.” The judge ruled that the transactions undertaken by Black and Decker “cannot be disregarded as a sham,” because they “had very real economic implications for... the parties to the transaction.”
In the Coltec case, U.S. Court of Federal Claims Judge Susan Braden wrote that “where a taxpayer has satisfied all statutory requirements established by Congress... the use of the ‘economic substance’ doctrine to trump ‘mere compliance with the code’ would violate the separation of powers” clause of the U.S. Constitution. (The IRS had admitted that the transactions technically followed the tax code.)
One guiding principle that can be extracted from these two cases is the necessity for strict compliance with the letter of all statutes, codes, regulations and rulings (i.e., proper legal form of every strategy implemented). Another principle is that structures, contracts, and transactions must have real economic substance to be considered valid. By this we mean that actual actions and transactions occur – even if, the judges have ruled, the sole and explicit goal is to reduce taxes paid – as a consequence of of the chosen form. This is as distinct from a paper shuffle that tries to reduce taxes by recasting an existing arrangement while effecting no changes in the transactions or procedures of the parties involved.
We welcome you to contact us for information on and implementation of sound, that is having both adequate form and substance, asset protection strategies.
“DOCTRINE OF DISBELIEF”
Within the last several years, United States courts have begun to utilize a legal doctrine in cases involving assets transferred to offshore entities – specifically offshore trusts – that has left many trust settlors in quite a precarious position. The so-called “Doctrine of Disbelief” is something that anyone incorporating offshore trusts into his or her financial and business planning needs to be aware of and heed.
The Doctrine of Disbelief is a legal principle wherein the court exercises discretion to rule whether a particular transaction is or is not believable, based on reasonable presumption, and if ruled not believable, then deemed invalid.
As an example, let us say Mr. Jones has liquid assets totaling $8,000,000. He makes a $7,500,000 gift to an offshore trust, of which he is not the Trustee, and not the Protector. Later, creditors take Mr. Jones to court seeking a $6,500,000 judgment for an alleged debt.
If Mr. Jones was the Trustee, we know that the court might order Mr. Jones, in his capacity as Trustee, to repatriate the assets to pay the $6,500,000 debt. If Mr. Jones was the Protector, we know that the court might order Mr. Jones to fire the Trustee and appoint a new court-friendly Trustee that would repatriate the assets required in order to pay the $6,500,000 debt.
However, in such a case where Mr. Jones is neither a Trustee nor a Protector, the court might opt to employ the Doctrine of Disbelief. The court might rule, according to the doctrine, that it was not believable that Mr. Jones would gift $7,500,000 (over 93% of his liquid assets at the time of the transfer) to an entity that was located out of Mr. Jones’s home country, that Mr. Jones neither owned nor controlled. Therefore the court might presume that Mr. Jones does in fact have control of the Trustee (thus transferring the burden of proof to Mr. Jones to prove that he has no control of the Trustee) and order Mr. Jones to have the assets repatriated. If this presumption is not effectively overcome, and Mr. Jones really does not have control of the Trustee, Mr. Jones will find himself in a very precarious position wherein the court can hold him in contempt until the assets are repatriated – such repatriation being completely up to the discretion of a foreign trustee!
While there are effective legal remedies available to counter a contempt charge of this nature (like, for example, full compliance with any paperwork ordering the trustee to repatriate assets that the court requests you to sign), nobody wants to spend any time in jail, for contempt or otherwise.
This scenario illustrates the importance of careful documentation of all relationships and transactions with any structure or entity utilized for business, estate planning, or asset protection purposes. Loan agreements (if paid according to the terms of the agreement), sales at market value, fair exchanges, and donations of reasonable percentages of a person’s wealth for charitable purposes are standard fare and are very much believable. Outright gifts of a very large percentage of one’s assets, on the other hand, especially if creditors or other parties have a vested interest in the assets, are far less likely to stand up to legal scrutiny.
To avail yourself of fully legitimate and believable asset protection, and enjoy the benefits of internationalizing your financial interests, contact us to schedule a consultation.
REPORTING REQUIREMENTS REVISITED
In an earlier Asset Protection Comment entitled “Beware Reporting Requirements” we discussed various IRS and Treasury reporting requirements relative to foreign accounts for U.S. citizens. Further details and specifics can be found directly on the IRS’s website here.
In a still earlier comment, we had mentioned that many, many asset protection vehicles exist that trigger reporting requirements and that such requirements compromise your privacy and as such effectively eliminate your first line of financial defense. Personal foreign bank and brokerage accounts, controlled foreign corporations, and traditional offshore asset protection trusts all fall under this category.
As mentioned in the earlier comment, one of the required reporting forms is Form TDF 90-22.1. Form TDF 90-22.1 is not a tax return and therefore, unlike a tax return, is not subject to the strict disclosure restrictions that apply to tax returns. Rather, the information disclosed on Form TDF 90-22.1 may be shared with any federal agency in a criminal, tax, or regulatory investigation or litigation, or with state, local, and even foreign law enforcement and regulatory personnel in the performance of their official duties. As a matter of fact, FinCEN’s Gateway initiative allows direct online access by the mentioned officials to the agency’s Bank Secrecy Act database, which includes information provided on Form TDF 90-22.1. Information available through the Gateway system has even been disclosed to the press.
Form TDF 90-22.1 filings can also be made available by court order in the event of a lawsuit, e.g., a family court style divorce suit filed by a disenchanted and vengeful spouse, or a suit for unlawful termination of employment by an incompetent but angry ex-employee, etc. But these are only the so-called “lawful” uses of the information on the reporting forms.
Generally, whatever information is available to law enforcement on the internet, criminal element hackers can and do gain access to from time to time. As one article on the subject of security and the Internet put it, “... whatever law enforcement can do, hackers will be able to do easier and faster.” This opens up the actual possibility – whose actual risk is admittedly hard to assess – for a variety nefarious schemes targeting you or your assets based on real and actual knowledge of identifiable internationally-based holdings. Such are the hazards of opening up your private financial data to people outside of your intimate circle.
If you are embarking on the wise course of constructing an asset protection plan, be sure and have it reviewed by experts in order to identify whether or not it preserves your first line of defense – data privacy. More importantly still, if your asset protection plan does impose upon you the legal obligation to report your activities, it is important that you do so. Otherwise you may face consequences more deleterious than just loss of assets. You could actually be faced with loss of liberty if your improperly executed scheme is discovered.
To learn how to take advantage of cutting edge asset protection techniques, contact Wealth International, Ltd. immediately.
Several jurisdictions have either already implemented legislation allowing for the registration of private foundations, or are in the process of implementing such legislatiton, e.g., Liechtenstein, Luxembourg, Austria, Panama, Gibraltar, Bahamas, Netherlands Antilles, the Seychelles, and St. Kitts.
Liechtenstein popularized the use of Foundations for asset protection, tax, and estate planning purposes with their “Stiftung,” with legislation dating as early as the Law on Persons and Companies of January 20, 1926. Panama followed suit with a much less expensive and rather more flexible version in 1995. Not wanting to miss out on the opportunity to boost government revenues in their small economies, other traditional asset haven jurisdictions are now coming on board as well.
Foundations differ from ordinary trusts in that there is often not a particular specified beneficiary, but rather a specific purpose for which the Foundation is established to promote – although many jurisdictions now allow for the establishment of “purpose trusts,” which are more similar to Foundations.
Foundations differ from corporations in that a Foundation is generally forbidden by legislation from conducting actual business except where such business relates expressly to the promotion of the Foundation’s specified purpose.
Interaction with a Foundation can provide many benefits as the client seeking offshore services can be associated with the Foundation but, according to the law of the jurisdiction where the Foundation is established, not be considered an actual owner or beneficiary of the Foundation – thus providing possible tax benefits in the client’s home jurisdiction, with obvious privacy and asset protection benefits coming as a result of the client relinquishing legal ownership of assets.
A Foundation is an appropriate vehicle for estate planning and especially where certain charitable purposes are desired. The most appropriate use would be for assets to be held in the name of the Foundation AND in the jurisiction in which the Foundation is established. It is not as effective to hold assets in the name of a Foundation but in a “third-party” jurisdiction.
W.I.L. can help you accomplish your financial and asset protection goals. Contact us for further information.
USA-BASED DOMESTIC APT’S?
Further evidence of the increasingly mainstream demand for asset protection continues to evidence itself. A relatively recent creation is the domestic asset protection trust (more specifically, an irrevocable, self-settled spendthrift trust). Legislation in several U.S. states (Delaware, Alaska, Nevada, Rhode Island, and Utah) has been enacted to allow for the creation of this type of trust. You can learn more about these entities here (reasonably nonintrusive registration required).
In short, the idea of domestic Asset Protection Trust legislation is that the Grantor of the trust is to convey assets to a trust, and that after the conveyance the assets will be protected from the Grantor’s future creditors, claimants, ex-spouses, etc. – with the exception, as in all asset protection plans, that the assets will not be protected in the event of a fraudulent conveyance.
It is possible that these types of entities could provide a useful tool if the Grantor in fact lives in one of the States that has enacted this type of legislation, has all of his or her assets physically within the State, keeps liquid assets in the safe-keeping of banks that have no branches in States outside of the State that has enacted said legislation, and avoids litigation in federal court.
If that is NOT THE CASE – and for the majority of people interested in this type of asset protection tool, it seems self-evident that it will not be the case – there are several potential serious legal flaws to this type of a structure.
All of the theoretical advantages of U.S.-based Asset Protection Trusts exist, and with much more force, internationally. When you are ready to implement an asset protection plan that works, even in the face of the challenges discussed in this article, contact W.I.L. to get started.
This week we will take a reprieve from our normal asset protection discussion. The content of this week’s piece, however, is still certainly relevant to the topic of asset protection – as our readers will readily see. An recent article discussed the failure of companies to wipe their hard disks properly prior to selling them. The result is that the buyer was able to recover a large amount of very sensitive and privileged data.
If such data is so easily recovered from computer storage media that a business is intent on disposing of, imagine how easily accessible the data would be to someone who actually stole your hard disk, took unauthorized copies of the data from within a company or your home, or hacked into your computer via the Internet! If large businesses that can afford to hire technology and security professionals have such huge security holes, how does the data security of the average home computer user fare?
Do you keep your bank records (transactions, balances, etc.) on your home computer? Your credit card records? Databases of investment holdings, personal property, real estate, business interests? Copies of confidential communications with your attorney or tax professional? Client lists? Business contact numbers? Certainly computers make our lives much more convenient in terms of communications and organizing our data. But have you ever considered how it would affect you if those records fell into the wrong hands? We have previously mentioned in these pages that your absolute first line of asset protection defense is your privacy. But privacy is not free – it takes a certain amount of vigilance and effort.
However, with very modest efforts to educate yourself regarding computer and data security, you can drastically reduce the risk of such misappropriations. Here are some resources to help you get started:
Many of these resources are free.
Remember, clients of WIL have the option to store their important documents and/or electronically stored data securely offshore. Contact us to get started immediately.
WHERE CAN ONE FIND FINANCIAL SELF-DEFENSE COACHING?
Gambling has been caustically, albeit accurately, described as “a tax on the mathematically disadvantaged.” People can be forgiven if they conclude that income taxes are really a tax on the legal-advice disadvantaged.
In the U.S. the complexity of the tax code, the cost of legal advice, and the possibility of an outsized response from the taxing authorities if perceived irregularities come to their attention, all militate against a serious search for legal advice on tax matters by the average citizen-tax payer. However, in Europe it appears that stumbling upon such useful advice may be a more routine occurrence.
EU banks assess a 35% withholding tax on interest earned on the savings of their EU citizen customers when the earnings are not already directly reported to the customer’s home country government. However affected banks and other financial service providers did not wait for the official passage of the directive. Luxembourg banks began advising their clients on the many loopholes for avoiding the new tax BEFORE IT WAS EVEN PASSED. Since it applies only to interest on savings, people can diversify their holdings into mutual funds or bonds, which can exempt them from the tax, noted Lucien Thiel, general manager of the Luxembourg banking association, ABBL.
Citizens of EU countries can also avoid the tax by setting up a trust, since the tax only applies to “physical persons.” As Saturday Night Live Hall-Of-Fame character the “Church Lady” might have commented: “Well isn’t that special!”
“Today you don’t need to be really rich and wealthy man to set up such a structure,” Thiel went on in the interview. “What is bad if you try to avoid taxation? This might be considered as being a crime by some countries but for me it’s also an act of self-defense by the customers.”
Our sentiments exactly. We invite you to contact W.I.L. to see whether some financial “self-defense” might make sense in the context of your circumstances and plans.
WHY INTERNATIONAL ASSET PROTECTION? FACTS AND FIGURES
In our last piece we discussed the unbalanced tax burden on the wealthy and the eventual economic and government fiscal policy (taxation) consequences likely to follow therefrom. We also alluded to the additional financial perils of increasing tort liability, and increased risk of asset forfeiture from government.
In addition to these troubling trends, America’s trade and budget deficits are at staggering levels – as discussed in numerous articles linked to from the WIL Financial Digest pages – with no immediate relief in site. (The Dr. Kurt Richebächer piece on this page is a quick, and graphic, introduction to the structural problems confronting the U.S.)
As a result of the unavoidable deteriorating conditions that will arise from the bad economic policy of unbridled debt accumulation, one can reasonably deduce that the “mad dash for cash” both by government – via inflation, taxation, user fees, and forfeiture – and private parties – via tort lawsuits – will only increase going forward. Both government and private persons alike will undoubtedly develop progressively more creative laws and strategies for expropriating your assets. It is also not unreasonable to guess that non-government sactioned fraud, scams and theft will increase as well.
In order to illuminate the reality behind our soapbox “ranting” we will be including actual verifiable statistics in this and future articles, as we locate them.
Our first example: Identity theft – one of the means used by private parties to steal your assets – is one of the fastest growing crimes in the world. Losses already amount to approximately $100 Million annually (link).
The culprit that allows for the rising incidence of this crime is a general lackadaisical attitude by the general populace in relation to their personal and financial privacy, as well as widespread general use of the Social Security Number for almost everything: bank accounts, credit accounts, phone service and other home utilities, tax filings, drivers license and passport applications, and even supermarket frequent shopper cards.
There are simple steps that everyone can take to protect themselves from identity theft. Here are five simple suggestions:
Taking the necessary steps to protect both your wealth AND your financial privacy is simple and can save a world of headache.
FOLLOW THE WEALTHY
According to statistics released by the United States Internal Revenue Service (source) the wealthiest of United States citizens and residents continue to pay the lion’s share of United States taxes. In addition to facing this severely unbalanced tax liability, the wealthy also face an increasing risk of tort liability, and now, with the advent of the Patriot Act, highly increased risk of asset forfeiture from government as well.
In response, many wealthy individuals are expatriating and are taking their assets with them.
This leaves the taxing authorities in a precarious position. By its very nature, government is in the business of cannibalizing the wealth of its citizenry. With its favorite cash cow on the run, a parasitical government must either corral the cash cow or find a new host to vampirize, in order to support its unbridled spending.
This script is only beginning to unfold. Historically speaking, laws are generally enacted to prevent the flight of the rich. Expatriation laws currently in effect in the U.S., that require the payment of U.S. income tax for a period of 10 years after expatriation if one is expatriating to avoid taxation, is a mild example of such laws. However, these types of laws do not serve to stymie the exit of capital. Rather they tend to cause the dam to break and flowing flight capital turns into a flood.
Is government ultimately forced to balance the budget in the face of declining revenues? To decrease spending? No. The consistent historical result has been collapse due to implosion, as government attempts to not only sheer the remaining sheep, but skin them as well, and eventually civil unrest overturns the whole lot – for better or for worse. Even if such an extreme scenario is indefinitely deferred, without drastic reforms, tax and regulatory burdens on the middle class must still increase to a very opressive level – as a mathematical certainty.
The solution? Ayn Rand provided an outline in Atlas Shrugged, and the wealthy have already begun to pave the way. The modus operandi is to get your assets out of the country before your country gets the assets out of you.
Whether you are wealthy and are already planning your “escape,” or whether you are part of the middle class that sees trouble looming on the horizon and want to make your preparations in advance, the more wealth you have distributed internationally, the more viable the expatriation option becomes. Further, whether or not you see expatriation as worthy of serious consideration now or in the future, any review of market history of the past few decades should arouse you to the fact that diversifying asset allocation to include foreign investment makes good sense, and more so in the face current uncertain market conditions.
Financial survival requires action, but where there’s WIL, there’s a way. Contact us to find the way that is right for you.