With tax trauma still fresh, wish you could stash your cash where the IRS can’t reach it? You can—in an offshore account.
Details magazine, May 2003
Tax time hurts. No matter how tall last year’s pile of cash was, getting cut down to size every April 15 is not just a painful side effect of capitalism but a nauseating ritual that can leave you questioning the very tenets on which this country was built.
So if our forefathers went astray in giving us the IRS—you can blame Lincoln, who appointed the first Commissioner of Internal Revenue in 1862—why not just seek out different rules to play by, preferably ones that don’t ask for almost 40 percent of your income?
Fortunately, such rules exist, and they can be found in places like Bermuda, the Cayman Islands and tiny Vanuatu, as well as in Switzerland and its little cousin Liechtenstein.
The words “Swiss bank account” conjure images of tax-free windfalls, untouchable millions, and a safe place to store the extra scratch you have coming from any extracurricular deals. Moving money offshore means it’s out of the government’s hands—no taxes, no regulations, and no prying eyes watching over your every financial twitch.
Or so myth would have it. Though your identity is supposed untraceable through a “numbered” account (one that carries only a password as identifying information instead of your Social Security number or your mother’s maiden name), the reality is a bit more transparent. Tyco chief Dennis Kozlowski allegedly sidestepped more than $1 million in sales tax and shifted around far vaster sums—until banking regulators homed in on questionable offshore transfers involving Tyco accounts, which were based in Bermuda. The CEO was indicted for a cornucopia of offenses, but the offshore shell games didn’t help.
The good news is, you can profit from other countries’ banking laws—even if they’re not as generous as Kozlowski’s Bermudian fantasies might have led you to believe. Just remember that any income earned by a U.S. resident is taxable by the U.S. government. So if you’re trying to hide something, the thinking goes, you’re either fudging on your taxes or sheltering ill-gotten gains—and the government is likely to look into your affairs.
If you decide to roll the dice, it takes more thanjust opening an account. You won’t find an offshore banking section in most bookstores, but a quick surf of Amazon turns up a long list of titles, including how-tos like The Complete Guide to Offshore Money Havens by Jerome Schneider and The Offshore Solution by Terry L. Neal. Problem is, Schneider and Neal were both indicted late last year on tax-fraud charges. Offshore tax dodges and their dodgy promoters are at the top of the IRS’s “dirty dozen” list of tax scams.
Numbered accounts have taken on “a really unsavory character,” according to Don Weigandt, a managing director at , because of their association with filthy lucre like Mobutu’s booty and hidden Holocaust cash. “Whatever protection they might have offered in the past,” Weigandt adds, “it’s been eroded significantly.” The United States has been signing Tax Information Exchange Agreements that give the IRS access to information about U.S. holders of offshore accounts—even in places like the Caymans.
If you don’t mind coming clean, one of the most popular offshore techniques is what’s called private-placement life insurance, according to John Bergner, a wealth-preservation attorney with the Dallas law firm Winstead, Sechrest & Minick. Through an offshore bank, the client—that’s you—sets up a trust, an account you’ve given up control of and which is managed by a trustee, usually a bank officer. The trust negotiates a large policy directly with an insurance company. The company invests the premium with an offshore portfolio manager and kicks the returns back—tax-deferred—to the trust, from which the client can borrow tax-free.
The “gravy on top,” says Bergner, is that there are asset protection advantages. If you’re sued, your money may be harder to get at. Even if you lose a case in U.S. courts, your creditors will have to sue you in, say, Bermuda if they want to have a chance at your stash, because offshore trusts are governed by the laws of the country in which they’re established. (Although U.S. courts have been known to hold defendants in contempt if they fail to move their money back to the States so it can be handed over to plaintiffs.)
Access to offshore hedge funds and other foreign investments is another advantage of establishing an offshore trust. Funds that accept U.S.-based investments are subject to U.S. securities regulations. In order to avoid such hassles, most funds outside the States don’t take U.S.-based cash. But because the money in an offshore trust technically belongs to the bank that’s managing it, foreign funds can accept it as an investment without a thought to pesky U.S. regulators.
According to Antoine Bernheim of HedgeFundNews.com, the sorry state of US equity markets has led investors at home and abroad to turn to offshore hedge funds lately, and has even led fund managers to accept investors at slightly less than the $1 million buy-in that’s usually required. Most US advisors won’t set up an offshore account that’s less than seven figures. You can fly to Belize and do it yourself, but the experts, not surprisingly, don’t recommend it. “Get with a knowledgeable planner who knows about international tax planning before you undertake any of these activities,” says Larry Campagna, a tax-controversy lawyer with the Houston firm Chamberlain, Hrdlicka. Handing your cash over to a Bahamian with a business card is a different matter from walking into a century-old Swiss institution like Bank Julius Baer.
But the benefits can be very real. Bergner moved $40 million into offshore hedge funds for a client last year—at a cost of $150,000. “His income tax savings covered the transaction costs and the cost of insurance,” he reports. “It’s a no-brainer.” Bergner prefers established jurisdictions like Liechtenstein, Bermuda, and the Channel Islands.
Once you have money offshore, it doesn’t mean you don’t have to report any income your funds are making. The IRS estimates that about 1 million Americans have unreported offshore accounts that are accessed via credit cards linked to them, and it is moving quickly to crack down on the practice. The bottom line is that the legitimacy of offshore credit cards and similar arrangments should be checked out through lawyers who are specialists in the field.
“There have been some promoters who have enticed U.S. taxpayers to undertake offshore planning techniques that simply aren’t legal,” says Larry Campagna, the Texas tax-controversy lawyer. “Most taxpayers don’t have the expertise to determine whether these schemes are legal or not.”