Another Blow to Swiss Bank Secrecy

As highlighted yesterday on the front pages of the Wall Street Journal, the New York Times and other newspapers across the country- - Credit Suisse has pled guilty to conspiracy to aid tax evasion (by helping U.S. citizens unlawfully evade taxes through Swiss bank accounts).  The large bank agreed to pay about $2.6 billion in penalties.

U.S. regulators have spared the bank from losing its U.S. investment adviser license and other potentially harsh results.  So other than the monetary penalties, the negative impact on the bank may be limited.  In any event, this is another significant reminder that attempts by U.S. citizens to evade taxes through offshore accounts (and the institutions that help facilitate that tax evasion) are under close scrutiny by the U.S. Department of Justice and other federal regulators.

All of this unfortunately means that U.S. citizens who legally and properly take advantage of foreign bank accounts will likely have even more paperwork and regulatory hoops to jump through when they open offshore accounts. 

Trust Protector Can Provide Added Flexibility For An Irrevocable Trust

A recent article in the New York Times by John F. Wasik provides an excellent discussion of trust protectors.  Many states now allow for trust protectors - - someone other than the trustee who essentially provides some checks and balances in a trust arrangement.

A trust protector is a bit like a watchdog.  He or she is not the trustee, but rather someone who keeps an eye on the trust (and the trustee) to be sure it is operating the way it was intended to.

A trust protector also might be able to make certain changes in an irrevocable trust arrangement in response to changes in the law.  Since asset protection statutes, tax laws, and trust laws are changing so rapidly these days, it is advisable to build as much flexibility as possible into an irrevocable trust.

A trust protector may be given the power to replace the trustee under certain circumstances, which obviously provides a very significant check on the power of the trustee. 

The role of a trust protector should be discussed with your asset protection attorney and/or your estate planning attorney whenever you set up an irrevocable trust.

Considering an Offshore Trust? Then Consider the Cook Islands

Many foreign jurisdictions provide opportunities for offshore trusts.  But if you are seriously considering such a trust, the Cook Islands deserve your attention.

Asset protection lawyers frequently debate the pros and cons, risks and possible rewards of offshore versus domestic asset protection trusts.  And there are lots of potential asset protection strategies that do not involve a trust at all.

But if you are one of the relatively limited number of people considering an offshore arrangement, you should consider the Cook Islands.  A recent lengthy article in the New York Time by Leslie Wayne provides lots of comments about Cook Islands trusts - - both positive and negative.  As the article points out, the Cook Islands are a global pioneer in offshore asset protection trusts.  Its laws are specifically designed to protect foreigners’ assets from legal claims in their home countries.  Some unscrupulous characters have used these trusts (which can give them a bad reputation); but so have individuals who are simply affluent and feel the need for asset protection. 

One conclusion seems clear.  If you are in that relatively limited category of people who are seriously considering an offshore trust, the Cook Islands is clearly a jurisdiction to consider for that trust.  

FBAR and FATCA Provide Separate Reporting Requirements for Offshore Accounts

FBAR and FATCA (which require reports by U.S. persons of interests in foreign accounts) overlap to a large extent.  But they impose separate reporting requirements.  Failure to comply (especially with regard to FBAR) can have very severe consequences. 

FBAR (a foreign bank account report) stems from a banking regulation under the Bank Secrecy Act.  It is specifically designed to inform the U.S. government of funds held by U.S. persons in foreign accounts.  Since the purpose of this report relates at least in part to the fight against terrorism, penalties for failure to file can be very severe. 

FATCA (the Foreign Account Tax Compliance Act) is a tax statute.  Pursuant to this federal law, the IRS requires that Form 8938 (Statement of Specified Foreign Financial Assets) be filed annually to report interests by U.S. persons in foreign accounts.  This reporting requirement clearly overlaps with the FBAR report.  But filing one of them does not excuse filing the other one when required.

Tax preparers are becoming increasingly familiar with these forms.  But if you have offshore accounts, you should confirm with your accountant or tax preparer that you are filing all reports that a U.S. person would be required to file to reflect ownership in those accounts.

Opening Offshore Accounts Has Become More Burdensome

The recent scandals involving tax evasion by some Americans (who had assets in secret Swiss bank accounts) are still playing out.  The Swiss Cabinet recently announced a new program that would allow about a dozen Swiss banks to provide the United States Department of Justice with information on bank accounts held by Americans.  The Justice Department continues to pursue financial institutions involved in facilitating unlawful tax evasion by U.S. citizens. 

Needless to say, these abuses will now adversely affect many Americans who legitimately hold funds overseas.  There is now more effort in opening overseas accounts; and some Swiss banks will not even accept American clients.  This is not a new story:  abuses by a few often ruin things for everyone.  There are very legitimate reasons for an American to invest funds overseas.  It is unfortunate that this is becoming more difficult.

Further Erosion of Swiss Banking Secrecy

A front page article in today’s Wall Street Journal as well as an article by Lynnley Browning and Julia Werdigier in today’s New York Times report that Swiss officials have agreed to let banks release more information on the holdings of their American clients. 

This most recent development is yet another step in a process that is making it increasingly difficult for Americans hide assets in Swiss accounts and unlawfully evade taxes on those assets.

As I frequently explain to clients, there is absolutely nothing wrong with having a Swiss bank account or other offshore account. But you have to comply with all applicable reporting requirements.

Trusts Require Flexibility

Asset protection planning (and estate planning) frequently involves the use of one or more trusts. Possibilities include an offshore trust, Domestic Asset Protection Trust, irrevocable life insurance trust and various other kinds of trusts. 

Most of these trusts are designed to last for many years. It is therefore important to give the trustee the flexibility to adjust to changing circumstances. Many things can change during the life of a trust. Among the many changes that a trustee may be faced with are:

·         Beneficiary’s creditor problems

·         Changes in family circumstances (including divorce)

·         Cost of living

·         Legal changes

A person setting up a trust is often inclined to impose very specific requirements on the trustee (for example, making specific distributions to beneficiaries each year). But one or more of the changes mentioned above could make a particular distribution problematic. Giving your trustee flexibility and discretion often makes the most sense. This is why I frequently remind my clients that who you choose as trustee of a trust can be just as important as the trust documentation.

In any event, it is important to keep in mind that no matter what kind of trust you establish, you are going to have to give your trustee a certain amount of flexibility to react to future changes.

Tax Season Reminder: Reporting Requirements for Offshore Accounts

Offshore accounts  - - whether in trusts, LLCs or just in your own name - - can have a variety of financial, business and asset protection advantages.  But they will generally be subject to U.S. tax.  And they have special reporting requirements.  See for example my post from last year about IRS Form 8938.  So make sure your tax preparer knows about the applicable filing requirements.

The IRS and the United States Justice Department are relentlessly pursuing wealthy Americans with secret offshore assets.  U.S. authorities seemed to initially target accounts at banks in Switzerland.  But the Wall Street Journal recently reported that there are also actions by U.S. officials involving accounts in numerous other offshore locations - - including India, Israel, Hong Kong and Singapore

So make sure your tax preparer is aware of your offshore accounts - - and comply with the U.S. reporting requirements applicable to those accounts. 

Another Reminder That Asset Protection ≠ Hiding Your Assets


Avoiding U.S. taxes by hiding your assets is illegal.  Last month, Switzerland’s oldest bank pled guilty to a criminal conspiracy charge for helping wealthy Americans avoid taxes by hiding their assets in secret accounts. 

Wegelin & Co., founded in 1741, is the first Swiss bank to plead guilty to a criminal charge in the on-going U.S. investigation of secret offshore accounts.  The bank plans to close once this criminal case wraps up. 

Asset protection essentially involves protecting your assets while keeping them in plain sight.  There may be privacy considerations; but asset protection should never be designed to unlawfully avoid taxes.  Offshore accounts can be appropriate and very beneficial for many Americans - - if they are opened, operated and titled properly.


What Are The Best Asset Protection Jurisdictions?

There are many factors to consider in deciding whether a particular jurisdiction is or is not favorable from an asset protection standpoint.  Certain states and foreign countries are clearly better than others.  There is a constant tension between the legal rights of creditors and debtors; and each jurisdiction is to some extent more or less favorable to one or the other.

States like Florida and Texas have virtually unlimited homestead exemptions for principal residences.  Other states have surprisingly low exemptions.

States like Nevada, South Dakota, Delaware and Alaska have had favorable domestic asset protection trust (DAPT) statutes for some time now.  Only about 15 states allow DAPTs.  While these statutes have still not been tested in the courts, they are worth considering as part of an overall asset protection plan.

For non-U.S. jurisdictions, the Cook Islands has been increasingly recognized as a favorable jurisdiction for an offshore trust.  Despite some recent negative publicity, the Swiss banking system provides many advantages for offshore accounts.  Various other foreign jurisdictions have laws that can be utilized for asset protection planning.

You always need to consider your own state’s law no matter what other jurisdictions you utilize for asset protection planning purposes.  But asset protection planning clearly requires a multi-jurisdictional analysis.  There may be significant advantages to setting up a trust, LLC or other entity in a state other than your own.

The key point is that each state and foreign jurisdiction has many laws that affect asset protection planning.  One size does not fit all; and each situation should be looked at individually. 

Mitt Romney Keeps Funds in Cayman Islands and Switzerland

As I have mentioned in many other posts, there is nothing wrong with using Swiss bank accounts or offshore entities.  A recent front page article in the New York Times noted that Mitt Romney and his wife hold millions of dollars in a Swiss bank account and millions more in partnerships in the Cayman Islands.  Their attorney, R. Bradford Malt, said that the Swiss bank account complied with all Internal Revenue Service reporting requirements, and that the family had paid all applicable taxes.

This is simply another reminder that it is perfectly appropriate for a U.S. citizen to hold funds outside the United States -- as long as applicable U.S. taxes are paid in full.  Even though holding assets offshore may sometimes be tax neutral, those assets can frequently be much better protected from U.S. creditors.

IRS Form 8938 -- Another Reporting Requirement for Offshore Assets

The IRS is continuing its efforts to identify sources of offshore taxable income of U.S. taxpayers.  This has lead to a new reporting requirement.  Many U.S. taxpayers with foreign assets must now file IRS Form 8938 - Statement of Specified Foreign Financial Assets.  This new requirement is applicable to the 2011 tax year, and must be filed with an individual's annual federal tax return.  The IRS has issued instructions for the new form.

This new requirement does not replace the annual FBAR report, which is due by June 30 of the applicable filing year.

Some, but not all, U.S. taxpayers are subject to the new requirement.  For instance, it applies to married taxpayers filing a joint income tax return if the total value of your specified foreign financial assets is more than $100,000 on the last day of the year or more than $150,000 at any time during the tax year. 

There are failure-to-file and accuracy-related penalities relating to Form 8938, and these penalties can be severe.  It is therefore very important for anyone with funds in offshore accounts to have a tax preparer who is familiar with all of the applicable reporting requirements.

Offshore Bank Accounts Are Still Advisable for Many Americans

Offshore bank accounts have been getting more and more scrutiny in recent years.  An article in last week's Bloomberg News by David Voreacos outlines yet another U.S. investigation relating to foreign banks.  Eight offshore banks are now under a federal grand jury investigation -- for facilitating tax evasion by U.S. citizens.

But none of this means there is anything inherently wrong with having offshore accounts.

There are many good business and financial strategies that utilize offshore investments.

Investing has obviously gone global, and offshore accounts are perfectly legitimate and advisable for many U.S. citizens.  Holding funds offshore can also have asset protection advantages by making those funds more difficult for creditors to reach.

Asset protection planning is not centered on hiding assets; and it certainly does not involve unlawful tax evasion.  It does involve using lawful means to make assets more difficult for creditors to reach.  Under the right circumstances, offshore accounts can be advisable from both a financial and an asset protection standpoint.

Reporting Rules for Offshore Trusts

Offshore trusts have very stringent reporting requirements.  Some of the major filing requirements are the following:

  • IRS Form 1040 NR -- while a domestic trust files an IRS Form 1041, a foreign trust must file a Form 1040 NR.
  • IRS Forms 3520 and 3520-A. 
  • TD F 90-22.1 (FBAR) if their are foreign accounts.  This is required for any foreign account over which you have any direct or indirect interest or signature authority.

You are obviously not going to handle foreign trust reporting requirements on your own.  The point here is that it is critical to have an accountant who is familiar with all these requirements.  There are severe penalties for non-compliance.

As I have mentioned in other posts, a foreign asset protection trust may be perfectly appropriate under many circumstances.  It is important to keep in mind, however, that there are very stringent annual maintenance requirements for these trusts -- particularly the required tax filings.  If you set up a foreign asset protection trust but subsequently fail to meet reporting requirements, the effects can be disastrous.  Again, the key is to have the proper professional advice to make sure all major reporting rules are complied with.


Revocable versus Irrevocable Trusts

Following up on my posts of January 26, 2011 and July 21, 2010 -- I want to emphasize again that not all trusts provide asset protection.

A so-called revocable "living trust" (often designed for probate avoidance) can protect beneficiaries of that trust from claims of creditors.  For example, you can protect assets that you place in trust for the benefit of your children from claims of their creditors.

But in order to protect your own assets from your own creditors -- the trust you set up has to be irrevocable.  You have to give up a certain amount of control over the assets you place in such a trust or they will simply be deemed the equivalent of your own personal assets.  As common sense would indicate -- if a trust you set up is completely revocable, a court could simply order you to revoke it.  And your judgment creditors could then take steps to seize those assets.

So the bottom line is what common sense would indicate:  if you retain complete control over assets in a trust, then the assets are not going to be insulated from claims of your creditors.

Nevis Is A Good Choice For An Offshore LLC

In the United States, forming an LLC in a particular state (such as Delaware) can provide significantly better asset protection advantages than forming that LLC in certain other states.  The same holds true for offshore LLCs.  Nevis is currently one of the best offshore jurisdictions for a limited liability company.

Forming a limited liability company in Nevis (a small island in the Caribbean) is relatively easy and can generally be done fairly quickly (usually within 4 to 5 working days).  The Nevis Limited Liability Company Ordinance of 1995 makes the structure of a Nevis LLC extremely flexible.  It is essentially a matter of contract among the members.  Nevis LLCs offer their members full privacy, as there is no public filing requirement regarding the identity of members.

Legal judgments obtained against a Nevis LLC in any foreign jurisdiction must be domesticated in Nevis.  This can prove to be expensive and time consuming; and Nevis attorneys are not allowed to work on a contingency basis.  A member's interest in a Nevis LLC has "charging order" protection similar to that offered by many states in the United States.  Currently, no taxes are imposed on assets or income of a Nevis LLC as long as those assets and income originate outside of Nevis.

Many considerations are involved in a decision to form an offshore limited liability company.  If a decision is made that an offshore LLC is appropriate, Nevis is currently a good location to form such an entity.

Texas Billionaire Fights S.E.C. Allegations Regarding Offshore Trusts

The United States Securities and Exchange Commission recently filed suit against two Texas brothers (Sam and Charles Wyly) alleging an elaborate securities sham to fraudulently sell offshore assets.  Sam Wyly is on the Forbes list of billionaires.  According to a front page article by David Segal in the August 23, 2010 New York Times, Sam and his brother Charles had a maze of 58 trusts and shell corporations in two well-known tax havens-- the Isle of Man and the Cayman Islands.  Sam and Charles Wyly have denied the charges filed by the S.E.C. in a 78 page Complaint.

The New York Times article about the Wyly brothers is definitely worth reading.  The story provides some valuable lessons for those interested in asset protection planning.  One lesson is to choose your professional advisors carefully.  According to the New York Times, in 1991 the Wyly's attended a seminar on overseas trusts taught by a lawyer named David Tedder, who boasted that no creditor had ever pierced the asset protections his firm had established for clients.  Mr. Tedder would later, in an unrelated matter, be convicted of money laundering and conspiracy; and he was sentenced to 5 years in prison.  Charles Wyly is quoted in the New York Times article as saying "We relied on people we thought were fine attorneys and accountants."

A second lesson from the Wyly's situation is that careful attention is needed not only when offshore entities are established, but also after they are operating.  That is, formation of one or more entities could be perfectly legitimate; but movement of funds and other assets may have tax and other implications that have to be addressed.

The Wyly brothers clearly seem intent on fighting the S.E.C. allegations. But no matter what the outcome of this particular case, it holds some useful lessons for anyone interested in asset protection.

Domestic Asset Protection Trust Versus Offshore Asset Protection Trust

Alaska was the first state in the United States to pass a domestic asset protection trust statute.  Prior to 1997, this type of protection could only be obtained in offshore jurisdictions such as the Isle of Man.  A number of other states -- including Delaware -- have subsequently enacted similar statutes.  There is now an ongoing debate about the advantages and disadvantages of offshore versus domestic APT's.

I recently came across a good summary of these issues by Jeffrey T. Getty and Kalimah Z. White.  Their article is several years old, but I recommend this link for what I think is a good general discussion of domestic asset protection trusts and their pluses and minuses compared to offshore trusts.

Keep in mind that so-called asset protection trusts (APT's) are a possible alternative -- but certainly not the only alternative -- to shield you assets from creditors.  Whether or not such an arrangement is right for you depends on a number of factors, including your willingness to surrender some degree of control over the assets placed in such a trust.

Surrendering Some Control of Your Assets Required for Asset Protection Trust

Any trust that can help protect your assets from creditors requires that you surrender at least some control over those assets. This goes for an offshore trust; a so-called "domestic asset protection trust"; an irrevocable life insurance trust; and any other trust that gives you creditor protection. If you think about it, this is just common sense. If you retain full control over the assets in a trust, than a judge could order you to hand those assets over to a creditor who has a judgment against you. This is why a revocable grantor trust (frequently used for probate avoidance) provides no creditor protection. Such a trust may be useful to avoid probate, provide asset management, and for other purposes. But it is not going to protect your assets from a judgment creditor.

Surrendering some control of your assets is not necessarily bad, as long as you are willing to do so. But each situation has to be analyzed separately. And, you must be very careful about who you are giving some control to. While this is a broad generalization, it should come as no surprise that the more control you give up, the better creditor protection you get. But surrendering control has its own risks, which should be considered very carefully.

Legitimate asset protection includes a balancing of risks and possible rewards. Always keep in mind that if a particular arrangement looks too good to be true, it probably is. 

Best jurisdiction for an offshore trust?

More than 30 foreign jurisdictions now have asset protection trust statutes.  The Cook Islands was the first to adopt an International Trust Act for asset protection purposes in 1989, and many other jurisdictions have based their statutes in whole or in part on Cook Islands' law.  A number of other jurisdictions have traditionally relied on court cases (rather than a statute) to provide asset protection for trust beneficiaries.  The leading example is the Isle of Man (used by many wealthy individuals long before any offshore asset protection statutes were enacted).

Offshore laws vary widely, and there is no one jurisdiction that will automatically meet the needs of all clients.  There are varying statutes of limitations relating to fraudulent conveyances; differences in whether a U.S. judgment will be recognized or whether a new trial will be required; differences whether contingent legal fees will be permitted; and a variety of other variations.

Beware of anyone who is simply trying to sell a particular kind of trust, like a "Cook Islands Trust", or a "Cayman Islands trust".  There is no way someone can know the best choice for you without a careful analysis of your particular situation.  Whether an offshore trust is even a good idea for you in the first place requires careful analysis.

The bottom line is that there is no foreign or domestic asset protection trust that automatically meets the needs of all individuals.  Each situation must be analyzed on its own.

Crackdown Continues On Offshore Tax Schemes

UBS (the giant Swiss financial institution) has received a lot of bad press recently in connection with offshore tax evasion schemes.  More UBS clients were indicted earlier this month, but federal authorities are focusing on other financial institutions as well.  Lynnley Browning reported last week in the New York Times that arrests have now been made in connection with an international tax evasion scheme said to involve HSBC.

The latest case involves real estate developers who sold a hotel in New York City and allegedly routed the proceeds through sham accounts in Panama, the Virgin Islands, Liechtenstein, Switzerland and the Bahamas to evade taxes.  The complaint against the real estate developers (filed in federal court in Fort Lauderdale, Florida) describes how federal agents used wire taps in 2007 to record various phone conversations.  This shows that authorities are using more aggressive techniques in fighting offshore schemes.

I was setting up companies in Panama for clients more than thirty years ago.  These entities, however, were used for very legitimate business, tax, and asset protection purposes.  Using offshore companies or trusts to unlawfully evade U.S. taxes or for other unlawful purposes is becoming more and more difficult -- as it should be.

Congress Continues to Close Tax Loopholes in Offshore Accounts

A new law signed by President Obama last month makes it much harder for U.S. citizens to evade taxes by hiding money in offshore accounts.  Foreign financial institutions will now face a 30% tax on their U.S. investments if they refuse to provide information about accounts held by U.S. citizens.

None of this is a surprise.  With huge budgets deficits, Congress is closing offshore tax loopholes and making it harder for U.S. citizens to shelter money in foreign jurisdictions.  You can read about the new law in the March 28, 2010 New York Times article by Gretchen Morgenson titled "Death of a Loophole, and Swiss Banks Will Mourn".

As I have mentioned many times before... This does not mean there is anything inherently wrong with offshore trusts-- as long as they are not used for unlawful tax evasion.

New York Times Article Puts Spotlight on Cook Island Trusts

Offshore trusts are receiving far more media attention than they did in the past.  And much of the media attention is negative.  Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands.  The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City).  The islands are known mostly for tourism.  They contract their national defense to New Zealand, which is four hours away by plane.  Yet the Cook Islands have a thriving international trust business.

Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection.  He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors.  There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.

Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law.  He explains that the latest among them is Jamie L. Solow.  Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud.  U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust.  This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection.  Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust.  It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit.  Many of the asset transfers occurred after the jury rendered its verdict.  As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.

An offshore trust can be an appropriate part of an asset protection plan.  But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.


IRS Recieved a Flood of Foreign Account Disclosures as Amnesty Deadline Approached

I reported in a post earlier this month that as an IRS amnesty deadline approached, more than 7,500 U.S. taxpayers had voluntarily disclosed their secret offshore accounts.  Lynnley Browning reports in a November 18, 2009 New York Times article that the IRS received a flood of additional disclosures just before the deadline expired.  The final number of U.S. taxpayers disclosing secret offshore accounts almost doubled as the deadline approached-- from 7,500 to 14,700.  IRS commissioner Douglas H. Shulman has indicated that billions of additional dollars will come into the U.S. treasury as a result of this IRS program. 

It is important to realize that U.S. taxpayers who use legitimate asset protection techniques should have no concern whatsoever about the recent IRS actions.  The IRS is simply aggresively going after U.S. taxpayers who are not reporting income as required by applicable law.  Offshore accounts can have numerous advantages (both from a financial perspective and from an asset protection standpoint).  You should not be afraid of using offshore accounts or offshort trusts, as long as they are being properly reported and administered.

A big lesson from the recent IRS actions is to carefully choose your financial and legal advisers.  Americans who opened secret offshore accounts and then failed to report income taxes were foolish and/or got very poor advice.  A reputable asset protection attorney would have never recommended the course of action that has now landed many Americans in deep trouble with the IRS.

IRS Likely to Continue its Assault on Offshore Accounts

It seems that U.S. lawmakers are likely to give the IRS increasing support in its recent assault on offshore accounts.
More than 7,500 U.S. taxpayers have voluntarily disclosed secret offshore accounts to the Internal Revenue Service in connection with a recent amnesty program. The program did not provide any forgiveness for tax evasion. It simply provided possible leniency with respect to penalties for those who voluntarily came forward and disclosed secret offshore accounts. IRS Commissioner Doug Shulman says that the IRS will be scouring the 7,500 disclosures to identify financial institutions, advisors and others who helped taxpayers avoid obligations. 
According to an article by Ryan J. Dommoyer of Bloomberg News (published in The Cleveland Plain Dealer), U.S. lawmakers have praised the recent developments and are calling for stronger laws to help the IRS. Senator Carl Levin heads the Permanent Subcommittee on Investigations. That Committee has held hearings on how UBS solicited Americans to put assets in Swiss banks. Senator Levin has stated that he will keep pushing legislation to give the IRS more tools to fight tax evasion through offshore accounts.
As I have repeatedly stated in posts on this blog, there is nothing inherently wrong with offshore accounts. When such accounts are maintained in a proper and lawful manner, account holders should have no significant concerns about increased IRS scrutiny.

Luxembourg Says Delaware and Wyoming are Tax Havens

Brazil has been claiming that Delaware and Wyoming are tax havens -- because they have low costs and minimal disclosure requirements for business entities.  The New York Times reports that Luxembourg's prime minister has now joined in this claim.  He has called for both Delaware and Wyoming to be put on the tax black list of the Organization for Economic Cooperation and Development!

These kinds of allegations are likely the result of recent U.S. efforts to increase tax revenue from U.S. citizens who live, work or simply hold assets outside the United States.  Some foreign jurisdictions resent the U.S. callng them "tax havens" when certain states in the United States seem to have "tax haven" characteristics.

The U.S. is unusual in that it taxes its citizens on income no matter where it is earned.  Tax treaties may reduce the burden, but the general rule is that a United States citizen must pay tax on income earned anywhere in the world.  And the U.S. is increasing its efforts to collect taxes on assets held abroad.

We could certainly debate whether Delaware or Wyoming (or any other U.S. jurisdiction) is a "tax haven."  But it is true that disclosure requirements in many states for corporations and other business entities are less than they would be in many other countries.  For example, a limited liability company can be formed in Delaware, Ohio and many other states without publicly disclosing the names of any of the owners or managers.  This is not the case in many other countries.  If nothing else, this is a good reminder to first consider asset protection strategies that are closer to home before considering offshore options.

Trouble In Paradise: A Leading Offshore Tax Haven Might Have to Increase Taxes

One of the best known international tax havens -- the Cayman Islands -- is being forced to consider something that would have been unthinkable only a couple years ago: raising taxes.  This may be yet another blow to Americans who hold assets in offshore accounts.  As reported in a recent New York Times article by Landon Thomas, Jr., there is "no getting around the fact that the balmy days for exotic offshore financial centers like the Caymans could be coming to an end." 

The Cayman Islands appear to be considering raising the $3,000 annual fee that hedge funds pay to register in this jurisdiction.  The New York Times also reports that the Caymans are considering a small tax on the trillions of dollars that flow in and out of the island on a daily basis.  Many financial firms (particularly hedge funds) are registered in the Cayman Islands because of favorable tax treatment.

I personally doubt that the Cayman Islands will suddenly cease to be a tax haven.  But as noted in The New York Times article, there is a clear trend of greater scrutiny of offshore jurisdictions like the Cayman Islands.  During his campaign, President Obama referred to Ugland House in George Town (where about 19,000 companies are registered) as "the biggest tax scam on record".  Statements like this inevitably bring higher scrutiny.

Assets may be held by U.S. citizens and entities in offshore jurisdictions for a variety of reasons.  Some jurisdictions provide asset protection advantages; some (like the Cayman Islands) provide tax advantages; some have simply provided stable financial banking and financial services; and some (including Switzerland) have provided varying degrees of confidentiality.

As I have mentioned before, there is nothing inherently wrong with U.S. citizens or entities holding assets outside of the United States.  Almost all major U.S. corporations now operate internationally in one way or another, and they generally have some portion of their assets outside of the United States.  But assets held outside of the U.S. are sometimes used as part of a scheme to unlawfully evade U.S. taxes.  There is clearly an increased interest by U.S. authorities in reducing tax advantages for U.S. corporations and individuals who hold assets outside the United States.

IRS Extends Amnesty Program For Those Who Have Been Unlawfully Hiding Assets

In March of 2009 the IRS began a six month amnesty program with reduced penalties for those who come forward and acknowledge they been have unlawfully hiding assets-- and failing to pay applicable taxes on those assets.  The amnesty program is part of a broader effort by the IRS to crack down on U.S. citizens who are illegally hiding assets overseas.  While the IRS has refused to say how many Americans have applied for the program, the number appears to be more than 3,000.  Offenders still face penalties.  But they can probably avoid jail time, and possibly avoid some penalties.

The IRS announced this week that it will extend the amnesty program until October 15.  There will be no additional extensions.

If you are interested, you can read more about the amnesty program in an article by Stephen Ohlemacher (Associated Press) in the Tuesday, September 22 Cleveland Plain Dealer Business Section.

Disclosure of Secret Offshore Accounts May Have Caused Suicide of Prominent Philanthropist

Finn M. W. Caspersen, heir to the Beneficial Corporation fortune, was a patron of Harvard and Princeton and gave away tens of millions of dollars to charity.  He was active in New Jersey politics.  Mr. Caspersen served on the Dean's Advisory Council at Harvard Law School.  As Lynnley Browning wrote in the New York Times on September 16, 2009:

"He seemed, in many ways, like a man from another time, a Gatsbyesque figure who glided through a world of old money, private clubs and pedigree horses, his family name emblazoned on Ivy League halls."

Mr. Caspersen's life ended tragically on Labor Day when he shot himself in the head at Shelter Harbor Golf Club in Westerly, Rhode Island.   

No one can be sure why Finn Caspersen ended his life.  He had been suffering from kidney cancer.  But the New York Times reports that at the time of his death, Mr. Caspersen may have been using secret offshore bank accounts to evade taxes.  Investigators were apparently building a case against him.  It is reported that he may have owed as much as $100 million in back taxes and penalties, and may have faced prison.  The Caspersen case apparently involves accounts in Liechtenstein, a leading offshore tax haven.  According to the New York Times, federal authorities recently placed liens on the personal trusts of Mr. Caspersen's four sons.

In any event, it never ceases to amaze me how many super-wealthy Americans have tried to unlawfully evade U.S. income taxes by using "secret" offshore accounts.  Recent IRS actions are making these accounts less and less secret.  As I have said in a number of other posts, there is nothing inherently wrong with offshore accounts.  They can be valuable for a variety of reasons.  But they cannot be used for tax evasion.  Failing to report income and paying the appropriate tax can have disastrous consequences -- both professionally and personally.

I highly recommend the full article by Lynnley Browning in the Business section of the September 16, 2009 New York Times.  It is a fascinating story about a real tragedy.


Justice Department Widens its Attack on Swiss Banking Secrecy

Last week, the Swiss banking giant UBS agreed to turn over information on American clients suspected by the IRS of using Swiss accounts for tax evasion.  On Wednesday, August 19, IRS Commissioner Douglas Shulman said that the agency is looking at other banks and intermediaries in Switzerland in addition to UBS. 

The IRS Commissioner was not kidding.  Last Thursday the Justice Department indicted a Swiss banking executive and a Swiss lawyer for selling tax evasion services to wealthy clients.  The services allegedly involved the use of Swiss accounts as part of an unlawful scheme to disguise and hide assets.  The indictment, filed in the United States District Court in Ft. Lauderdale, Florida, accuses a director of a Swiss bank as well as a Swiss lawyer with conspiracy to defraud the United States.  The men are accused of helping clients hide assets by creating the appearance that certain assets of U.S. clients belong to Swiss citizens.  The men were also accused of falsifying documents to disguise interests of United States citizens in certain offshore funds.  It appears that the Justice Department established a special task force in 2007 to focus on Swiss banks that help Americans evade taxes.  Recent actions seem to be the result of some of these investigations. 

The message from the indictments is very clear:  not only will the IRS and the Justice Department investigate large financial institutions like UBS -- but they will also be looking at smaller banks and financial institutions who may be helping U.S. citizens to unlawfully hide assets.  Lawyers who facilitate these unlawful schemes may also become targets of the IRS and the Justice Department.

Only fools and criminals participate in offshore schemes that are designed to evade U.S. income tax obligations.  Legitimate asset protection planning does not involve unlawful tax evasion.  It involves keeping assets essentially in plain sight, while lawfully minimizing taxes and taking advantages of laws that allow you to make assets more difficult for creditors to reach.

You can read more about the recent indictments as well as the Justice Department's on-going attack on Swiss banking secrecy in an August 21, 2009 article in The New York Times

Swiss Bank Accounts May Not Be Secret Anymore

On Wednesday, August 19, UBS (one of Switzerland's largest banks) agreed to turn over information on more than 4,450 American clients suspected by the IRS of using Swiss accounts for tax evasion.  Due to provisions of a new tax treaty between the U.S. and Switzerland, it could be more than a year before the IRS has all the information it wants.  It is clear, however, that the IRS is stepping up its efforts against tax evaders who are using Swiss accounts in an attempt to hide assets.  You can read more about these IRS efforts in an August 20, 2009 New York Times article.

In February of 2009, UBS paid $780 million and admitted to criminal wrongdoing in selling offshore banking services that contributed to tax evasion by U.S. citizens.  And the U.S. Department of Justice has a number of criminal investigations pending against UBS clients.  Swiss bank accounts are not going to remain as secret as they once were. 

There are still valid reasons to have Swiss bank accounts.  Switzerland has traditionally provided a very stable political and economic climate.  Many of its banks have provided a very high level of personal client services and good money management.  Swiss accounts (like other offshore accounts) can certainly be part of a legitimate, lawful asset protection plan.  It may be more difficult for a creditor to reach assets in a Swiss account than in a U.S. bank account.

Recent enforcement actions by the IRS, however, are a clear reminder that you cannot use Swiss accounts (or any other offshore accounts) in order to evade U.S. tax obligations.  United States citizens are required to pay tax on income whether that income is received in the United States or abroad.  As I have discussed in other posts -- and as I will continue to emphasize -- legitimate asset protection does not involve unlawfully hiding assets in order to evade taxes.  In fact, the best asset protection plans essentially leave assets in relatively plain sight, and simply take advantage of applicable laws in order to make it more difficult for creditors to reach those assets.

Lawyer Accused of Hiding Assets Serves 14 Years in Jail

A lawyer accused of hiding assets was released from prison last week -- after serving 14 years in jail.  H. Beatty Chadwick was sent to prison in 1995 for allegedly hiding $2.5 milion in assets in connection with his divorce.  By the time he was released last week from a county prison in suburban Philadelphia, Chadwick had been in prison for 14 years.

The Chadwick case is an important reminder that judges throughout the United States have broad civil contempt powers.  Judges can jail debtors who appear to be unlawfully hiding assets.  You can read more about Chadwick's case in a number of recent articles including The Philadelphia Inquirer and the July 12, 2009 New York Times

While the Chadwick case seems to have set a record, many other courts have imposed what asset protection attorneys call "Anderson relief".  That term comes from Michael and Denyse Anderson, who were jailed in the 1990s for refusing to return funds from their Cook Islands trust (after they had been caught by the Federal Trade Commission in an apparent telemarketing scheme).  A federal judge in Nevada imprisoned the Andersons for 6 months for contempt of court when they refused to take steps to return funds from their offshore trust.  The United States Court of Appeals for the Ninth Circuit affirmed the finding of contempt and affirmed the jailing of the couple as an appropriate way to coerce certain debtors to turn over assets from offshore trusts.  This has become known as "Anderson relief."

The Anderson case and the recent Chadwich case are important reminders that certain asset protection strategies can land you in jail.  There are many reasonable, lawful asset protection alternatives; but crossing certain lines can have disastrous effects.

Offshore Trusts

A number of offshore jurisdictions have enacted trust laws that provide significant protection for debtors.  One example is St. Vincent in the West Indies.  Its trust laws have a number of separate provisions that make assets held in a St. Vincent trust very difficult for a U.S. creditor to reach.  One such provision is that St. Vincent simply does not recognize foreign judgments with respect to trusts.  If a U.S. creditor has a judgment against a debtor in the United States, the creditor cannot collect assets of that debtor held in a St. Vincent trust without filing a new action in St. Vincent.  That new action will be subject to numerous requirements that put obstacles in the creditor’s path.  Legal proceedings in jurisdictions like St. Vincent often move very slowly.  Several years ago one of my clients was involved in a real estate transaction in St. Vincent.  I learned that navigating various St. Vincent legal requirements was difficult and very time consuming.  Jurisdictions such as St. Vincent also provide very short statutes of limitations for fraudulent transfers, which favor debtors over creditors. 

There are many other choices for offshore trust arrangements including the Isle of Man, the Cook Islands and the Cayman Islands.

While offshore trust can provide valuable asset protection, they are expensive to set up; there will be annual maintenance fees; they all involve loss of control of your assets to some degree; and they have various other risks.  They can also sometimes do more harm than good because many judges are naturally skeptical of entities formed in places most Americans have never heard of.

The bottom line is that an offshore trust arrangement may be an appropriate part of an asset protection plan, especially for certain high net worth individuals.  Generally, however, there will be simpler and less expensive alternatives available. 

Finally, it is important to note that offshore trusts cannot be used to avoid U.S. income taxes.  This continues to be a big misconception that many Americans have about offshore trusts.