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Keeping the small investor off the net

Keeping the small investor off the net

From time to time we get inquiries from people about how to hide their money so it is not visible to the government. These people are not criminals and are not trying to evade paying taxes. Rather, they are distrustful of government, and wish to hide their money from everyone.

In the past, hiding your money was possible, albeit onerous. You could take your money, in cash, abroad, and open an account in one of the many places that tended to be a bit chary about sharing information. For good or ill, the ability to do this pretty much ended fairly soon after 9/11. Now, you have a limit on the amount of cash that can be taken abroad ($10,000.00 per family member), and if you are caught taking more you will have a lot of explaining to do, and will likely forfeit ALL the money. In addition, information is largely shared among banks internationally on government demand, and you can no longer walk into a public bank in Europe and open an account without scrutiny: The EU Revised Money Laundering Directive of 2001 is no more casual than our own International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. Under present IRS rules, if you have a non-interest-bearing account with less than $10,000 offshore, there is no reporting requirement to the government. So, while it is true that your account overseas might not be noticed because nobody cares, it will be available when somebody does care!

You can still move money offshore via electronic funds transfer, but that will create the immediate permanent electronic record that you were trying to avoid. For some – mostly businesses or the very wealthy – the advantages of doing active business offshore may make sense in terms of when and where taxes are paid. However, for those without a lot of money to move, and who will not be overseeing their investment on a daily basis, it is likely to be a losing proposition. This is particularly true regarding Americans, for whom income is taxable independent of the jurisdiction in which it is earned.

Let us imagine that you had $100,000 to invest, and you gave it to a reliable broker like Stewart Singer of Janney Montgomery Scott (+1-800-567-8044) – a plug for a broker used successfully by a number of people we know – to invest in what we might describe as a portfolio of watched and diversified mutual funds (a particularly good strategy for those without enough money for a real funds manager, and who will not themselves keep careful watch on their investments). And say that by mid-year you had earned $6,000 for re- investment, on which you would have to pay taxes at the end of the year.

Now assume that you had an account containing $100,000 overseas on which, what with finance charges and lower revenues, you earned less. You are, of course, still obligated to declare this income, and must pay taxes on the earnings. Is the illusion of obscurity worth the loss of revenue? And is the lack of account insurance and protections often seen in offshore venues that cater to small investors worth the risk? We don’t think so.

What about other benefits that a small investor might see? For most, the benefits are illusory. Most folks don’t do anything that would lead them to expect that someone would try to seize their assets. This means that the cost of having funds abroad and less accessible is not worth the price. But if you do suspect your assets might be seized, it might be worthwhile, keeping in mind that courts have cheerfully tossed folks into jail until their “safe” funds were repatriated (ÆGIS September 1999).

We don’t expect that the American economy is going to collapse in our lifetime. But if you believe it will, and that the collapse of the dollar will not affect other currencies not linked too directly to the dollar (which, in practical terms, really means you will be investing in euros or Swiss francs), an offshore account is the only way to have funds invested in these currencies.

What about offshore asset protection trusts, where the income is kept in the trust, and not distributed? U.S. taxes are not deferred. You will have to speak with your tax accountant about this, but our take is that for the small non-corporate player who will not be watching the investments carefully, setting up a trust overseas will probably have no tax advantage over doing it here at home.

Two remaining strategies have survived 9/11. Offshore private annuities and offshore life insurance give the medium-to-high net worth person asset protection for part of their U.S. wealth. Although the money is not truly hidden, it is nonetheless well protected by the laws of the offshore country as long as no fraud was involved. Both offshore annuities and offshore life insurance, like offshore trusts, are tax neutral, so the IRS likes them, and they remain excellent estate planning tools. You need a pro to guide you, since, like trusts, they are not do-it-yourself projects.

The bottom line is that offshore accounts are an extremely valuable tool, but, as with most tools, they are not for everyone in every situation.

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