US Losing its Way

A wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. ~ Thomas Jefferson

Every time you think the US establishment can do no more to threaten the freedom and livelihood of the very Americans who contribute the most to the prosperity of the country, they increase the heat in the furnace by a notch with more cheap money and debt, additional laws and higher taxes. America, the land of the free, as it was rightfully referred to in the past, and certainly a beautiful place in so many ways, is in the process of destroying the very foundation it was built on.

It truly appears to have lost its way. The size of debt and unfunded liabilities in America is higher than in any other country in the world. No other country is plagued with the level of litigation that America faces. Nine out of ten lawsuits filed worldwide are filed in the US. The US tax code is so convoluted and extensive that even the highest paid and most qualified tax attorney in America can hardly ever give you a straight yes or no answer when asked for tax advice. Frankly, I sometimes wonder how even the most honest American taxpayer can stay out of jail.

Global relative litigation index, via cyberrisknetwork.com

It should not come as a surprise that wealthy Americans have learned to protect their wealth from this concentration of risk by jurisdictionally diversifying their assets. In other words, they set up offshore trusts, companies, foundations or insurance structures to legally protect and grow what is rightfully theirs elsewhere. However, in consideration of all the recent IRS scare tactics and the hype in the media, it may come as a surprise that the number of Americans looking offshore is on the rise.

The Government’s Desperate Drive for Tax Collection

The US government and its various agencies – with the IRS certainly in the lead – are desperately trying to keep their wealthy taxpayers in check, putting offshore constructions under their regulatory microscope in hope of maximizing tax revenues. This hunt for tax cheats has been loudly publicized and employed to create the impression that every offshore account must be a scam.

The spin is simple: According to the IRS, Americans with assets offshore are trying to dodge taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others employ foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. The IRS, in its battle for justice, is committed to do whatever it takes to hunt them down.

The IRS even goes so far as to list “offshore tax avoidance” as one of its “Dirty Dozen” tax scams for 2015. Clearly, by doing so, it is lying to the American people. Tax avoidance, contrary to tax evasion, is completely legal. And offshore tax avoidance is as legal as onshore tax avoidance.

FATCA, the ominous Foreign Account Tax Compliance Act, for instance, has been successfully deployed. In essence, it forces financial institutions around the world to become agents of the IRS (and without compensation, by the way). In fact, fiscally challenged states around the world are now more than happy to sign up on the principle and follow America’s lead. In the context of GATCA, which is the next level up from FATCA and where the ‘G’ stands for ”Global”, automatic exchange of taxpayer information between governments is on its way.

Citizen transparency is certainly en vogue, and not just in America. So far, outright capital controls have not been levied and don’t appear to be visible on the horizon. However, watching all this, one wonders how far governments are willing to go.

Relative to the total US population the number is small, but expatriation has nevertheless been in a steep uptrend for a while now

Jurisdictional Diversification – Looking for Safety, not Tax Evasion

In view of all the hype and pressure, one might expect wealthy Americans to be frightened and keep their assets in the US. However, that is not the case. Not at all. A rapidly growing number of Americans are trying to protect and invest their wealth outside of US territories. More and more Americans are looking for second passports and are renouncing their US citizenship.

Clearly, the stark increase of financial repression is recognized as such. Contrary to the outcome that authorities wish to achieve, Americans who have the possibility to do so, continue to look for good alternatives to protect and grow their possessions offshore.

This is nicely summarized in a research report by Wealth-X, which explains how the US government’s combat against offshore tax havens has actually led to an increase in demand by America’s Ultra High Net Worth Individuals (UHNWIs) for avenues that afford higher wealth protection and reduced tax exposure. So, while the masses might be bamboozled into fearing offshore, rich American families look for safety abroad.

It is hard to obtain firm statistics on this. These matters are typically, and should be, handled in a very private manner. However, based on a variety of surveys conducted by leading legal, accounting and consultancy firms such as the Boston Consulting Group (BCG), the interest for offshore wealth management is growing. According to a US attorney I work with regularly, the demand for offshore asset protection solutions has quintupled over the past ten years. The most recent BCG Wealth Report projects annual growth of 6.8% until the end of 2018.

Financial wealth held offshore

Offshore wealth diversification, defined as assets deposited somewhere other than the investor’s home country, keeps rising, with Switzerland the most popular destination. BCG expects Switzerland to remain the largest single offshore center globally, with about 25% of total offshore wealth by the end of 2017. In particular, institutional investors and family offices look for the solidity of Switzerland. At BFI, we too have noticed an increase in demand, despite (or possibly because of) the IRS’ dogged determination to avert Americans from sending any of their wealth to a foreign jurisdiction.

The primary reason to go offshore is SAFETY. The clients and families I work with, almost entirely, are focused on mitigating US-centric litigation risk and political risk. That is where jurisdictional diversification can make a huge difference. The benefits of offshore diversification are substantial. There are many legitimate reasons for maintaining a portion of one’s wealth abroad. And contrary to popular opinion, the primary reason is not to save on taxes. In fact, there are plenty of tax shelters available in the US.

Beware of US Advisors Without a Passport

A few days ago, I received a call from a client who lives in Boise, Idaho. I will call him George for our purposes here. He was very concerned and informed me that he wanted to immediately undo the offshore trust structure and managed account he had set up with us only in 2013. In fact, he was quite upset with me and questioned whether my team and the legal counsel we had involved had given him ill advice.

I was surprised. The offshore plan implemented for George is solid. It was formulated and implemented carefully. It achieves several objectives. The structure – and I won’t bore you here with the details – affords strong asset protection, global investment flexibility and the legal avoidance of estate taxes upon the passing of George and his wife.

When I asked George why he changed his mind, I quickly understood the context. He had been given the (supposedly) professional advice by his local accountant to unravel his offshore structure. The accountant has been doing corporate accounting work for George for over a decade and has earned George’s trust with his good work. However, in this instance the trusted accountant told George that “it is that kind of offshore structure that gets people into trouble with the IRS”, and that he (the accountant) would not be willing to work with George anymore “unless he resolved this issue promptly”.

It is not the first time I run into this kind of nonsense. I’ve heard many similar stories over the years. It is, unfortunately, not uncommon for local attorneys, accountants and other so-called advisors to shy away from anything that does not originate in the United States of America. This is, of course, a direct result of the IRS’ propaganda and often times unqualified media coverage.

In George’s case, we were able to resolve the confusion and alleviate his – and his “advisor’s” – concerns promptly. No damage was done. George will, from now on, keep his local accountant focused on local matters, while coordinating his international accounting needs with a more knowledgeable professional. Nevertheless, this kind of professional ignorance is frustrating and even somewhat disgusting.

My piece of advice here: Make sure the advisors you let in on the details of your offshore planning have a passport, have left the boundaries of the US and, ideally, speak a second language. Yes, these are possibly not the most reliable indicators. But, seriously, it is paramount that you work with advisors that understand the rules of onshore AND offshore, and that they are active and experienced in the international sphere of wealth management. As Martin Luther King once said: “Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity”.

Granted, offshore planning may entail a few extra nuances and angles. And being compliant with the rules of reporting is paramount. But it is not rocket science. And it is certainly not illegal. Don’t allow ignorant professionals and the overzealous IRS to tell you otherwise!

For Americans looking for improved asset protection and interested in learning about solid and compliant planning options offshore, BFI is organizing an Inner Circle Wealth Forum.

Charts and tables by: Gabriel Zucman, Patrick W. Martin, Cyberrisknetwork

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