Is international asset protection right for you?

May 1, 2010

Throughout the last decade, an increasing number of doctors have looked internationally for wealth planning, although overall it’s still a small minority. To be sure, there are numerous pitfalls involved with international planning, all of which can catch up to naive doctors.

Throughout the last decade, an increasing number of doctors have looked internationally for wealth planning, although overall it’s still a small minority. To be sure, there are numerous pitfalls involved with international planning, all of which can catch up to naive doctors.

In this article, you’ll learn what to do (and what to avoid) when it comes to international asset protection planning. You’ll also learn about specific tools that top attorneys use in their international planning efforts.

Risking tax evasion

Americans are liable for taxes on all income earned offshore. However, it is true that many international banks, mutual funds and other financial institutions will not report earnings/interest to the IRS. This is the chasm in which many greedy clients - or unscrupulous advisors - operate. This is also where tax evasion - a federal crime - is committed.

While the client is required under U.S. law to make the necessary tax reporting on income earned internationally (and advisors should instruct their clients to do so), many clients may keep quiet and hope that they are never caught. This “hide the ball” strategy is used not only by informed clients, but also by shady advisers who concoct ever-more sophisticated schemes such as moving money from one trust to another company to a third foundation, and so on in hopes of avoiding detection.

Although the pitch may seem complex and impressive, astute doctors know to always ask the following question: If the income will eventually accrue to my benefit, why don’t I have to report it to the IRS? Intelligent doctors know that they must steer clear of these schemes unless they want the cloud of a possible tax evasion indictment hanging over them for years to come.

In fact, in 2009, the IRS implemented a voluntary disclosure program for offshore accounts, for U.S. taxpayers who had not disclosed the accounts previously. This program, which was announced by the IRS on March 26, 2009, enables a taxpayer to become compliant with reporting obligations and avoid harsher civil penalties, and it may eliminate the risk of criminal prosecution. The bottom line: Going offshore to save taxes has rarely been tax-compliant, and many tax evaders are now coming clean.

Get-rich-quick scams and frauds

The desire to get rich quick leads many clients into problems most pervasive in the investment arena. Here, scam artists and fraudsters abound, poised to take advantage of the next client who wants to “get rich offshore.”

The savvy doctor understands that any investment that offers truly outstanding returns is on the radar screen of the world’s most sophisticated financial institutions, as well as their affluent clientele. They know that the only thing that can be achieved from chasing fantastic returns in international markets is a significant, if not complete, loss of principal.

International LLCs and trusts

Done right, international LLCs and trusts can be used to achieve a high (+4/+5) level of protection. Compared to state (+5) exempt assets (discussed in other articles) - which do not have professional, government or accounting fees - these tools are expensive, but they may be the best nonexempt options for doctor clients who must have a high level of protection.

A number of jurisdictions have adopted LLC legislation over the last decade, most notably Nevis. In addition, many jurisdictions have international trust (IT) laws as well. Common uses of these tools include:

1. Owning foreign insurance policies: One of the leading international financial planning strategies today is purchasing a permanent (cash value) life insurance policy offshore. In terms of tax planning, if the policy is U.S. tax-compliant, then all of the growth within the policy will accumulate tax-free. Furthermore, the proceeds will pay out to the beneficiary income tax-free, and the client can take loans against the accumulated cash values during his life tax-free. This is similar to the benefits of a domestic cash value life insurance policy.

2. Multi-generational planning for an international family: Let’s say the goal of a client is to create a nest egg for future generations. And let’s say it’s important that the nest egg be asset protected in an ironclad way. In this circumstance, an international trust would be an ideal tool. This would be especially appropriate if the trust was created in a country where the law does not limit the duration of trusts under the “law against perpetuities,” a law found in many of the states.

By using an IT, the client from an international family could literally secure the family’s ability to enjoy the fruits of the gift for hundreds of years, as long as other tax issues were addressed by an experienced tax expert.

Importance of international planning

The benefits of international planning can be significant. However, international tax and reporting laws are highly complex. There are many areas where an individual or adviser could make a mistake. Though all areas of planning require the assistance of advisers, no area of planning requires greater expertise than international planning.

Make sure your team of advisers has an asset protection expert who can help you navigate the tricky waters of international planning.

Disclosure: This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. U.S and International tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.