Beyond the Palm Trees
Tax Havens and Estate Planning
Vaughn W. Henry
Off-shore trusts have an undeserved reputation as a vehicle used by criminals to squirrel away ill-gotten gains. In reality, both domestic and international trusts have a long history of safekeeping assets and enforcing the wishes of the trust creator. Additionally, they offer a wide range of legitimate protections. This appeal to a broad based need makes the off-shore trust an especially effective tool in controlling property. Usually viewed as a means of illegally evading taxes, the reality is much different. The IRS agent handbook defines a tax haven as "a term that generally connotes any foreign country that has either a very low tax or no tax at all on certain categories of income." The IRS guide goes on to state "U.S. taxpayers may also use tax havens for tax-planning reasons. Some transactions conducted through tax havens have a beneficial tax result ... that is completely within the letter of the U.S. tax law."
If tax reduction is not the primary objective, what are the advantages to an off-shore trust?
Combined with asset protection features, these structures can effectively shield the creator from frivolous lawsuits. This ability makes them ideal for professionals concerned about malpractice exposure or business owners worried about excessive liability for the actions of their employees. Contrary to popular belief, this is not a means of fraudulently hiding assets from legitimate creditors. However, it can be a speed bump and barrier to creative personal injury attorneys looking for deep pockets.
Properly done, a trust insulates the beneficiaries from the actions of others. Although control is an important part of any structure used for financial or estate planning, sometimes too much control is an issue. Unfortunately, many foreign trusts are established incorrectly and can create more problems than they were supposed to solve. All too often, tourists visiting a tax-haven country decide on a whim to set up a trust or foreign corporation, not realizing U.S. laws could be violated. The local off-shore advisors may be technically correct in stating that their foreign laws are not being broken, but they may not address the more worrisome U.S. regulations. Generally, first time trust creators fret about assets disappearing from their accounts, but typically far more damage is done through incompetence than by misappropriating assets.
Good trust sites operate under very strict laws and in many cases, their obligations and standards exceed those of U.S. trust companies. For that reason, the selection of the jurisdiction and specific trustee is very important. Competent trust companies with U.S. tax law experience, operating in English speaking countries, are critical to success. These locations should have good accessibility, long standing laws and modern telecommunications for these trusts to work properly. The second major concern is the investment used within the trust portfolio, but diversification generally offsets that worry. These issues are especially important as investors seek higher returns on their assets. The services of a private banking firm allow clients the opportunity to structure business and personal finances in ways that are especially beneficial in multi-generational planning. There is also a wider selection of investment options offered through international trusts. The ability to work in more than one currency, use unregistered mutual funds or purchase both domestic and foreign securities is a powerful and unique feature of international trusts. Additionally, since many off-shore banks operate under different regulations, they can pay more generous interest rates on funds invested with them. Some investors are initially uncomfortable investing outside the U.S., so off-shore mutual funds and investment companies now offer popular fund managers and familiar U.S. stocks to overcome that obstacle.
In recent developments (June, 2000), six countries have essentially renounced their tax haven status, and have pledged to take a variety of steps to help
investigate tax evasion, and take prevent tax evasion from taking place. They are:
The ability to rearrange the chess pieces on your financial game board allows for improved returns and better management. U.S. trusts are prohibited from acting in perpetuity. However, many families need a structure that will safeguard grandchildren and great-grandchildren, so foreign trusts may be designed for much longer periods of activity. Besides protecting estates from forced heirships, a well-designed plan allows for tax deferred earnings and may eliminate some income and estate taxes. It's not so much what you earn, as what you keep is their final measure of success. As with any sophisticated planning tool, a competent and experienced team of advisors should be consulted. This is not a do it yourself project.
Vaughn Henry deals with planned giving programs and estate conservation.
Henry & Associates, 1995, 2000
Springfield, Illinois 62703-5314 - U.S.A.
(217)529-1958 or toll-free 1(800)879-2098
e-mail VWHenry@aol.com