October 15, 2009

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Risky Business

The Dark Side of Offshore Trusts and Tax Havens

By Gretta Spendlove and Katie Peterson

October 15, 2009

“Click here!” exclaims an offshore banking Website, secretoffshorebanking.com. “Instant accounts. Secure your offshore account in 8 minutes,” it also displays. Accompanying that ad is an announcement from the Internal Revenue Service (IRS) about a deadline for taxpayers to disclose foreign bank accounts and non-U.S. assets. In return for paying back taxes on foreign assets for the past six years, plus interest and a set of stiff penalties, the IRS promises not to bring criminal charges or the 75 percent fraud penalty. Sweet deal, right? What is the truth about the risks and benefits of offshore trusts and tax havens? Are they a dangerous rip-off or a legitimate business and estate planning tool? Even the experts disagree. Greg Barrick, a Salt Lake City attorney specializing in business and estate planning, has handled many offshore and tax haven transactions. “They work well in certain situations, but you have to do them right,” he says. The Basics Barrick explains that offshore trusts and tax havens serve different purposes. “If I have one client who is American and another who’s British, and they’ll be doing business all over the world, it may not make sense to create the business in either the U.S. or Britain. We can choose a tax haven, like the Isle of Man or British Virgin Islands. The partnership pays no income taxes until profits are ‘repatriated,’ or paid out to partners in their home countries.” As long as Americans own 50 percent or less of foreign corporations, they are not subject to the draconian provisions of the Controlled Foreign Corporations Act. By contrast, offshore trusts are tax-neutral, but good at keeping assets away from creditors. “In the U.S., there were traditionally no statutes of limitations on setting aside transfers into ‘self-settled trusts,’” Barrick says. “Those are trusts into which an individual puts money for his own benefit. In offshore sites like the Cayman or Cook islands, the statute of limitations may be as short as a few months. That means that once someone puts money into the trust, the creditors can’t get it out.” Barrick describes a debtor’s dream scenario: “If the owner of an offshore trust is asked at a deposition what he owns, he can say ‘Nothing.’ If the creditor’s attorney asks him, ‘What about that trust in the Cook Islands?’ he can say, ‘I don’t own it.’ And the courts in the Cook Islands will back him up.” Changing U.S. Laws The pendulum swings back and forth as to how valuable offshore trusts are, depending on how laws in the U.S. change. “As more and more U.S. states, including Utah, enact shorter statutes of limitations on self-settled trusts, offshore trusts are less enticing. But then the bankruptcy laws change, making it easier for creditors to attack trusts, and offshore trusts look more appealing again,” Barrick says. Barrick emphasizes that tax havens and offshore trusts must be used with utmost care as to the quality of attorneys, trustees and banks involved in the transaction. “I work with two attorneys who are experienced, careful and expensive,” Barrick says. Experienced attorneys may charge from $25,000 to $50,000 to set up an offshore trust. “It doesn’t make sense to do an offshore trust unless you have a couple of million dollars to invest in it,” Barrick says, noting the importance of doing a solvency review before putting money into an offshore trust, and of meticulously making all IRS filings relating to foreign assets. “If you set the offshore trust or foreign corporation up right, it’s legitimate and you shouldn’t fear letting the IRS know about it.” IRS Targets Laurie Hart, another Salt Lake City attorney specializing in business and estate planning, advises individuals to move cautiously when considering offshore entities. “There are good, legitimate ways to do offshore planning,” she says. “But you are still taking the risk of doing something that the IRS is heavily targeting. For years, the IRS went after offshore schemes but didn’t have the expertise to catch anyone. The IRS has become more focused and effective, in the last five to seven years, in going after both onshore and offshore schemes that are illegal or walk the fine line between being legal or not.” Hart suggests laymen get familiar with the IRS Website, irs.gov, which is user-friendly and lists recent tax scams, also known as “listed transactions.” Hart emphasizes other risks of offshore transactions: “Once you are offshore, you are under the jurisdiction of a foreign country, relying on a lawyer or trustee whom you don’t know. Your assets are subject to the laws of a foreign country. Most Caribbean islands are stable now, but things can change. Nobody can say for sure what will withstand IRS scrutiny or a creditor who is coming after you.” Even Barrick, who has become comfortable with the quality of some offshore professionals, describes waking up at 2 a.m. after wiring $5 million to a bank in the British Virgin Islands and asking himself, “I wonder if our trustee is really OK?” Travis Bowen, also a Salt Lake City attorney doing tax and asset protection planning, believes that “in some instances, offshore trusts and foreign incorporations create more risk than that which they were trying to avoid.” Bowen prefers using domestic asset protection systems that are “designed, built and maintained properly.” Fear, Loathing and Disaster “The average American has such a fear and loathing of the IRS and paying taxes,” Hart says. “It is such a rabid illness with most people that they are willing to believe almost anything anyone tells them if they will save taxes. They will even believe something like, ‘If you set up this type of trust and put all your assets into it, you will never have to pay income taxes again. And they will pay $20,000 to buy that worthless trust.” Hart says lawyers face a catch-22 when warning friends and clients about tax scams. “We try to tell people these things never work and you’ll go to jail if you do it, but then they hear from the scammer, ‘Your lawyer will tell you this doesn’t work because we’re taking work away from them.’ It never ceases to amaze me how gullible people are. We hear it all the time, but it’s true—If it sounds too good to be true, 99.9 percent of the time it’s a scam.”
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