In last week’s newsletter titled “Are We Slaves to the State”, I discussed the morality of taxation and a very short window of opportunity to save yourself an enormous amount of money on estate taxes. At the same time you can allow your heirs to opt out of the US tax trap with your estate.
I received several emails and calls in regards to this newsletter with questions and concerns about what was outlined. One email in particular summed up the majority of the questions so I will post it here;
Lamar said (I have posted the exact email),
Very interesting although many of the tax savings tips are valid right now there are a few concerns that investors need to be aware of with an offshore trust or account.
Many of the mega millionaires, Trump, Huizenger, use these strategies as part of their tax and estate plans however they will usually put their excess assets in these type of risky situations.
1) The money or asset is located and subject to the rules of the country in which it is located. Recently many investors in an offshore trust lost all of their money when the bank which held their trust money located in the country where the trust was located closed its doors. The bank was owned by the dictator of the country. He emptied the accounts for his own personal use. Investors had no recourse because many of these countries do not have a regulatory agency they can go.
2) As you have seen the IRS and federal government are closing many of the free tax haven doors of these offshore countries. There is no guarantee that when you are ready to give this money to your heirs that the US will not be able to tax it.
3) You need to have $5 to $10 million for this to really be beneficial and be willing to take a risk of losing it. Buyers beware, you have no control of the assets in this trust, the trustee’s do and no control over the going on’s in the country in which it is located. No recourse.
As with any investment you need to fully understand the risks and opportunities associated with it. Every investment has a place and time and is fit for an individual. You just need to make sure it fits your needs.
I need to keep this newsletter short and sweet, so I will address these concerns directly.
First of all, I want to note that with any type of offshore planning, thorough care is necessary as mistakes are easy to be made. Lamar is not completely incorrect with his concerns. If the planning is done incorrectly, these things can be handled improperly and expose you to risks.
1- It is not necessary for your trust and your assets to be held in the same country. For example, you could establish a trust in the Cook Islands that owns your business in Monaco and your bank account in Luxembourg. This minimizes your country risk by segregating the asset with its country of ownership. Our firm also has a hybrid trust that gives you the best of both worlds – offshore asset protection and estate planning benefits without the initial reporting requirements of offshore assets. I am a firm believer in internationalizing yourself and your assets. Don’t put all your eggs in one basket, no matter if that basket is in the Cayman Islands or the United States.
2- There is one thing I know about predicting the future – 50% of the time I am wrong. Of course there is no way for us to tell the future and what happens with tax policy in years to come, but I do know that if you move ownership of your assets to an offshore trust which now owns assets in various other safe countries, it significantly reduces the ability of the IRS to attach your heirs’ future assets. From the last newsletter, keep in mind that your heirs were not grantors of the assets held in trust; they are merely beneficiaries. As such, these assets would never be in their taxable estate, only any income that is repatriated.
3- This $5-10m number is completely false. Based on Lamar’s concerns, I can see where he would see this to be a minimum threshold; however I have clients with significantly less than that amount who have found offshore estate planning to be very beneficial. The control issue is the one I hear most often when dealing with trusts. It is a valid concern because the trustee now has title to the property held in trust. We use large professional trust companies in various countries for this task. They earn their living off of their fees generated from thousands of clients. It is not in their best interest to try to ‘steal’ your stock portfolio or your apartment building in Phoenix when that would destroy their reputation and crush their business. Not to mention the legal hurdles they would encounter trying to take possession of your property. It’s much simpler for them to just take your fees year after year along with their thousands of other clients. Another way we eliminate the control issue is by having each asset owned by a separate entity – like an LLC or IBC. With you as the LLC or IBC manager, you retain managerial control of the asset, while the trust owns the equity in the LLC or IBC. By injecting this additional layer in your estate plan, you retain all control of your assets while still getting the asset protection and estate planning benefits offered.