Achieving invulnerability here in the world’s most litigious country is no easy task. However, individuals who move their assets overseas can significantly reduce their exposure. The simple offshore bank account is perhaps the most well-known tool for doing this, but there are other effective strategies, suitable for a range of objectives and circumstances. These include establishing offshore trusts, setting up a company abroad or obtaining insurance from a foreign company. While these approaches no longer provide the level of safety and anonymity they did as recently as 15 years ago, they can still make it much more difficult, and expensive, for our legal adversaries to obtain the type of financial information they need to press their claims.

By domiciling assets in foreign locales, far from attorneys and their investigators, individuals can lower their risk of a lawsuit, according to Michael Chatzky, an attorney in La Jolla, Calif., who specializes in international wealth protection. Certain offshore strategies, he explains, “move the assets off the radar screen, so a private investigator trying to find out what kind of assets I have would not come across them, unless he finds a financial statement somewhere.”

For nearly two decades, the U.S. government has attempted to discourage people from hiding assets offshore, and the Treasury Department requires that offshore asset protection strategies be as transparent as possible. (See “Overseen Overseas,” page 60.) Despite the government’s efforts, there are still ways to place assets beyond the reach of investigators and creditors, while complying with U.S. tax and reporting laws. In general, as long those who shelter their assets report the offshore holdings to the Internal Revenue Service (and to the Treasury, depending on the type of investment) several options remain available.

TOP VIEW Depositing assets in offshore accounts is legal under U.S. law, offering investors some degree of protection. Overseas bank accounts, trusts, businesses and life insurance products are the most common methods of shielding wealth from U.S. litigants, but investors must be wary of violating strict IRS regulations.

The primary benefit of offshoring derives from jurisdictional immunity. This means, essentially, that courts in other countries do not recognize U.S. legal judgments. Those trying to seize an individual’s offshore assets must re-litigate in the country where their target has his or her money. They must hire a legal team in that country and navigate the entire administrative process of presenting a case from scratch. “By the time they litigate their claim in the other jurisdiction, they will have wasted all the money they might have gotten,” says Robert Bauman, a member of the executive committee and legal counsel for the Sovereign Society, an organization that advises wealthy individuals on investing overseas. “Instead they may say, ‘Why don’t we settle at 10 cents on the dollar?’”

If the cost of an offshore legal fight does not dissuade a creditor or plaintiff, then roadblocks built into the actual legal system of the jurisdiction in which the assets reside may do so. The legal codes of popular offshore asset shelters such as Switzerland or Panama favor asset protectors. For example, the country may simply not recognize a case brought by a foreign person trying to get at assets domiciled there, or it may have a short statute of limitation period. In the Cook Islands, for example, a plaintiff must initiate a claim within one year.

Offshore Bank Accounts
The offshore bank account is the first tool Bauman recommends to people seeking to protect their assets. “With that you can use your bank as an investment service,” he says. “The bank can buy in your name, and you get around all the SEC rules that restrict Americans’ rights to buy foreign stocks directly, or mutual funds or bonds.”

The Swiss bank account remains the classic offshore device. Switzerland has a long history of respecting individual financial privacy, and its legal and financial systems are renowned for their stability. “No one can just go snooping around and ask a bank for information and expect it to comply,” says private banker Robert Vrijhof, of Weber Hartmann Vrijhof & Partners in Zurich.

“The cheapest way of protecting yourself as a U.S. citizen is to have an offshore account,” adds Thomas Fischer, head of international client relations at Jyske Bank Private Banking in Copenhagen. While Denmark does not have the stringent banking secrecy laws in place that Switzerland and other countries can boast, investors can gain a degree of asset protection simply by placing their wealth in such a jurisdiction outside the United States. “We wouldn’t even respond if a [U.S.] lawyer wrote to us asking to freeze an account,” Fischer admits. “It would have to go through the Danish legal system. It would be a very lengthy and expensive process for an American lawyer to get a Danish lawyer to get an injunction.”

Individuals can also glean other advantages by depositing funds in foreign banks. “The dollar has been falling for the last two or three years, so U.S.-based clients have made a lot of money just being outside of it,” Fischer explains. “Meanwhile, they also have access to bonds throughout Europe, Eastern Europe and Asia with higher yields than they would get in the U.S.”

While opening an offshore bank account is relatively easy, Americans must still clear certain hurdles. Vrijhof says his bank likes to meet all of its potential clients in person. “They have to convince me that the way they made their monies was done in a decent manner and fashion.” But larger private banks may not require face time. “An account can be set up in a matter of a couple of days,” Fischer says. “The client doesn’t have to come to the country. They can do it all by mail or email via an opening application form. We require a certified copy of the passport and a utility bill verifying the residential address.” He adds that Jyske Bank’s entry level is just $35,000, “and with that you get an account manager.”

As with other offshore protection tools, U.S. citizens must still pay taxes on any income that is derived from their offshore-based investments.

Offshore Trusts
Offshore trusts do not completely protect assets from creditors, but they do shield money from the gaze of perfunctory investigations while providing jurisdictional immunity. “The offshore trust is the [investment vehicle] that the fewest number of creditors are going to go after because they know it’s going to cost time and money,” says Vernon Jacobs, a Prairie Village, Kan.-based advisor and publisher of the newsletter International Wealth Protection Monitor.

With these instruments, a grantor directs a trustee based in an offshore haven to take legal control of his assets and manage them for the good of his beneficiaries. “With a trust,” Bauman points out, “you really do have to surrender control of your assets to the trust and the trustee, but it is a very good offshore asset protection tool.”

Superlative Sanctuaries According to the Sovereign Society, an organization based in Waterford, Ireland, that collects and disseminates information on offshore asset protection, the world’s best asset havens are those that offer an attractive combination of legal, political and financial stability, a favorable economic climate and taxes, and privacy. Switzerland Despite a slow erosion of its once impenetrable banking privacy laws, Switzerland still ranks as the world’s top asset haven. With its world-class banking system and fabled political stability, investors can house their assets in Swiss banks and still expect high degrees of privacy.   Panama According to the Sovereign Society, Panama “combines maximum financial privacy, a long history of judicial enforcement of asset-protection-friendly laws, strong anti-money-laundering laws, tax exemptions for foreigners . . . and a high degree of independence from outside pressures.” Unlike Switzerland, however, Panama is liable to the socioeconomic swings of a developing nation, and has a history of political instability. Liechtenstein With 32,000 residents, this European principality offers a no-tax environment and long-standing banking privacy laws. While in 2000 Liechtenstein came under criticism for dragging its feet in a global war against money laundering, its financial institutions and policies remain highly reputable. Hong Kong What this former British colony lacks in political stability it makes up for in sheer financial sophistication. Furthermore, while its secrecy laws may not be as unassailable as those of Switzerland or Liechtenstein, China has been traditionally unreceptive to foreign demands for investor information.

While investors might be reluctant to pass control of their wealth to a foreign trustee, advisors claim that safeguards are available. “If I have a client who is concerned about relinquishing title to his assets, I tell him he can’t legally own the assets anymore,” says Derek Sambrook, managing director of Panama-based Trust Services. “However, we can put in place certain breaks that will let him have checks made on the trustee to ensure that the assets are managed in the way he wishes.” The best-known strategy is to appoint a protector, whom the grantor assigns to oversee the trust. The protector must approve any important changes to the trust and has the power to replace the trustee if necessary. “It can be set up so that a custodian bank in the States holds all the shares of the trust’s portfolio, and there is a requirement that the joint signatures of a third party and a trustee are required for any of those shares to be removed,” Sambrook explains.

Investors who establish an offshore trust must report it to the IRS using Form 3520. “In recent years, this has evolved to an extensive form that requires the submission of very detailed information,” Chatzky notes. It includes, for example, details on any memoranda of wishes, and even oral understandings with the trustee.

Offshore trusts offer no significant tax benefits, because the IRS treats all trust income as the grantor’s personal income. Bauman, however, suggests that there is one potential tax advantage. “The trust can be set up in such a way as to escape American federal and estate taxes,” he says. Bauman advises that assets placed in a foreign trust under the terms of a will are counted once for estate tax purposes as part of the grantor’s estate. Other than that, the trust and its assets may be exempt from most U.S. taxes. However, he cautions that taking advantage of this exemption requires very careful estate planning.

Businesses Registered Offshore
By creating a business outside of the United States, investors can achieve some degree of asset protection through a mixture of financial privacy and legal immunity. Anyone setting up a business in the United States must make certain information public, such as the names and addresses of the company’s owners and directors. In contrast, those establishing businesses in certain foreign locales (which are known as international business companies, or IBCs) can keep this type of information confidential. The Cayman Islands, for example, offers secrecy of ownership.

“A U.S. citizen can start up a foreign corporation as long as it is lawful to do so in the country in which the corporation is established,” Chatzky explains. But, as with offshore trusts, income from the business must still be reported and is taxed in the United States. “The general rule is that if the foreign corporation is actively conducting its business in the country in which the corporation is formed, then the income from that corporation is not taxable in the United States until it is distributed to a U.S. owner, through, for example, dividends,” Chatzky says.

Local attorneys or trust advisors can assist in setting up an IBC quickly and easily. But Bauman warns that IBCs can be cumbersome. “The problem is that the American tax code has a very long and convoluted series of tests on whether or not an offshore corporation is controlled by a U.S. person, what percentage is American owned, whether it’s passive or active income, and so on,” he explains. “If it’s just investment that you want, then use a bank account.”

One offshoot of the IBC is the international limited liability company. LLCs first emerged as legal entities in the United States in the 1970s; some offshore asset refuges subsequently copied their structure. An LLC owner is not liable for any of the company’s debts. This adds an additional layer of protection from creditors on top of those provided by a traditional IBC. An LLC offers more flexibility than a trust. “I still have control of my assets in the foreign jurisdiction, and it appears that if I got sued, then a creditor would literally have to go to [the country where the LLC is registered] to get a judgment against me there,” Jacobs says.

Annuities and Life Insurance
Investors can also acquire privacy and legal immunity via offshore annuities and life insurance policies. Again, these are just like their domestic counterparts, with offshore life insurance policies paying out to U.S.-based beneficiaries upon death. With annuities, offshore insurance companies invest the premiums to create a string of payments to designated beneficiaries for either a predetermined period or for the life of the client.

Vrijhof helps clients set up annuities in Liechtenstein, Switzerland’s tiny neighbor, whose insurance laws, he says, offer the highest level of asset protection and privacy in the world. “Most annuities are done out of Liechtenstein,” Vrijhof explains, adding that they can be set up as easily as a trust.

Like their domestic counterparts, offshore annuities can be fixed or variable. With a fixed annuity, the insurance company agrees to make payments of a set amount for the contract period. With variable annuities, payouts depend on the performance of the investment strategy. “The only major attractiveness to American investors of offshore life insurance and annuities is that they allow deferred taxation,” Bauman explains. Income earned from an annuity is tax-deferred until the contract is liquidated or payments begin. So if the annuity pays out at death, then tax on the income earned is not paid until that point.

John Ferry is an Edinburgh, Scotland-based financial journalist and a senior correspondent for Worth. john.ferry@blueyonder.co.uk

Illustration by Stephen Webster