Going Offshore to Avoid U.S. Taxes Leads to Tax Evasion
Americans are liable for taxes on all income earned offshore. However, it is true that many international banks, mutual funds, and other financial institutions will not report earnings/interest to the IRS. This is the chasm where many greedy clients – or unscrupulous advisors – operate. This is also where tax evasion – a federal crime – is committed.
While the client is required under U.S. law to make the necessary tax reporting on income earned internationally (and advisors should instruct their clients to do so), many clients may keep quiet and hope that they are never caught. This “hide the ball” strategy is used not only by knowing clients, but also by shady advisors who concoct ever more sophisticated schemes like… moving money from one Trust to another company to a third foundation … and so on in hopes of avoiding detection.
Although the pitch may seem complex and impressive, astute doctors know to always ask the following question: If the income will eventually accrue to my benefit, how come I don’t have to report it to the IRS? They know that they must steer clear of these schemes unless they want the cloud of a possible tax evasion indictment hanging over them for years to come.
The bottom line: going offshore to save taxes has rarely been tax compliant and many tax evaders are now “coming clean.”
Going Offshore to Get Rich Quick Leads to Scams & Frauds
The desire to get rich quick leads many clients into problems most pervasive in the investment arena. Here, scam artists and fraudsters abound, poised to take advantage of the next client who wants to “get rich offshore.” The savvy doctor understands that any investment that offers truly outstanding returns is on the radar screen of the world’s most sophisticated financial institutions and their super affluent clientele. Then, the investment is reserved for the financial institution’s billionaire clients. They know that the only thing that can be achieved from chasing fantastic returns in international markets is a significant, if not complete, loss of principal.
International LLCs & Trusts Can Be Part of a Client’s Plan
Done right, these tools can be used to achieve a high (+4/+5) level of protection. Compared to state (+5) exempt assets (discussed in other articles), which do not have professional, government or accounting fees, these tools are expensive – but they may be the best non-exempt options for doctor clients who must have the top level of protection.
A number of jurisdictions have adopted LLC legislation over the last decade, most notably Nevis. Also, many jurisdictions have international Trust (IT) laws as well. Common uses of these tools include:
1. Owning foreign insurance policies: One of the leading international financial planning strategies today is purchasing a permanent (cash value) life insurance policy offshore. In terms of tax planning, if the policy is U.S. tax-compliant, then all of the growth within the policy will accumulate tax-free. Further, the proceeds will pay out to the beneficiary income tax free and the client can take loans against the accumulated cash values during his life tax-free. This is similar to the benefits of a domestic cash value life insurance policy.
2. Multi-generational planning for an international family: Let’s say the goal of a client is to create a nest egg for future generations like children, grandchildren and beyond. And let’s say it is important that the nest egg be asset-protected in an ironclad way. In this circumstance, an international Trust would be an ideal tool. This would be especially appropriate if the trust was created in a country where the law does not limit the duration of Trusts under the “law against perpetuities,” found in many of the states. By using an IT, the client from an international family could literally secure the family’s ability to enjoy the fruits of the gift for hundreds of years, as long as other tax issues were addressed by an experienced tax expert.
Conclusion
The benefits of international planning can be significant. However, the international tax and reporting laws are highly complex. There are many areas where an individual or advisor could make a mistake. Though all areas of planning require the assistance of advisors, no area of planning requires greater expertise than international planning. Make sure your team of advisors has an asset protection expert who can help you navigate the tricky waters of international planning. The authors welcome your questions. You can contact them at (877) 656-4362 or through their website, www.ojmgroup.com
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About the Authors
David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, including FOR DOCTORS Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) along with Jason M. O'Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or This email address is being protected from spambots. You need JavaScript enabled to view it..
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
