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Asset Protection Blog

Offshore Update: The Door to Foreign Account Amnesty Can Close at Any Time

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My new article,  “The Door to Foreign Account Amnesty Can Close at Any Time” discusses current developments in the crackdown on undeclared offshore assets.  This article will be published in a forthcoming edition of Tax Notes International.

Recent developments regarding foreign accounts include:

  • Settlement between Swiss banks and the U.S. whereby DOJ and IRS will end their investigations of Swiss banks, in return for the banks paying fines and handing over formerly “secret” account data on U.S. taxpayers with undeclared accounts.
  • U.S. requests for banking information from Swiss bank Julius Baer, from Liechtenstein foundations (stiftungs) and CIBC First Caribbean bank.  It is expected that information will soon be disclosed to the IRS.
  • Many foreign countries have agreed to provide banking information to the IRS under the Foreign Account Tax Compliance Act (FATCA), and many more countries are in discussions with the IRS regarding adopting FATCA or FATCA-like agreements.

In light of the above, there can be no expectation of banking secrecy, and U.S. taxpayers with non-compliant foreign assets must take steps to come into compliance.  Importantly, the IRS can revoke the 2012 Offshore Voluntary Disclosure Program (OVDP) at any time.  Further, the IRS can announce at any time that US taxpayers with accounts at a certain bank or banks are no longer eligible to participate in the OVDP.  Outside the OVDP, penalties for undeclared foreign assets and foreign income can be severe, including criminal prosecution.  US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.

 

Offshore Accounts Update: IRS Foreign Account Amnesty Can Close at Any Time

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There have been a number of noteworthy developments recently regarding the IRS crackdown on unreported foreign bank accounts.  The overwhelming theme to the recent developments is the continued erosion of offshore banking secrecy throughout the world.  This is not new a development, but rather the continuance of a trend over the past five years, resulting from the IRS and Department of Justice (DOJ) success against UBS.  What is new, however, is that the open door to IRS amnesty for an unreported foreign account can close at any time, with little or no warning.  It should also be noted that the IRS is offering a partial amnesty, meaning that back taxes, interest and penalties would be imposed on the foreign assets and foreign income.  These amounts would be much less than the penalties, and potential criminal sentences, that would be imposed outside the amnesty, if the IRS learns of the foreign assets.

Continued US Government Investigations and Prosecutions of U.S. Taxpayers with Undeclared Foreign Accounts

Over the last few weeks, the following events have transpired:

  • The US has issued a treaty request to Bank Julius Baer in Switzerland for information regarding bank accounts utilized by American taxpayers to hide income from the IRS.  A “treaty request” refers to the U.S.-Switzerland tax treaty, which allows for information requests without the necessity of a court order.  Bankers are advising their US clients that Julius Baer expects to comply with the request and turn over banking information to the US.   US clients of Julius Baer have been rushing to voluntarily disclose their accounts to the IRS before Baer reveals their names and account data to the US.
  • The US has also issued a treaty request to the Liechtenstein Foundation Supervisory Authority for similar information; namely, foundations (stiftungs) and bank accounts utilized by American taxpayers to hide income from the IRS.  Foundations are legal entities, like corporations, set up in order to obscure the true beneficial ownership of foreign accounts.  As we’ve written before, Liechtenstein was quick to amend its internal law to allow for a similar treaty request in 2012 for account records of Liechtensteinische Landesbank (LLB).  It is expected that soon, records of Liechtenstein foundations and their bank accounts will be provided to the IRS on a large scale.
  • A US court has approved a “John Doe Summons” for records of CIBC FirstCaribbean International Bank regarding Americans with undeclared accounts.  In this case, even though CIBC FirstCaribbean has no branches or offices in the US, it does maintain a U.S. correspondent account at Wells Fargo.  Thus, the court approved service of the summons upon Wells Fargo for records of transactions through CIBC’s correspondent account.  This is reminiscent of the seizure by a US court of Swiss bank Wegelin’s correspondent account at a US bank.  The fact that a foreign bank lacks a US presence is no longer a bar to US enforcement efforts against the foreign bank.  In Wegelin’s case, Switzerland’s oldest private bank was put out of business in January 2013 by the US enforcement action.
  • DOJ and IRS investigations of foreign accounts have resulted in criminal charges against the account owners who failed to report.  To date, there have been dozens of criminal prosecutions of US taxpayers with non compliant foreign accounts.  Most recently in 2013, taxpayers with accounts at Swiss banks UBS and Pictet, and Israeli bank Leumi have faced criminal charges.  More charges and criminal sentences will be forthcoming; the IRS and DOJ continually bring (and publicize) charges to incentivize others to come forward with voluntary disclosures.  Every taxpayer who comes forward means one less taxpayer for whom the government has to allocate resources to investigation and prosecution.  In this light, voluntary disclosures can be a win-win for both the taxpayer and the government.  The US taxpayer pays back taxes and penalties, avoids criminal prosecution and can now have access to and repatriate the foreign funds if desired.  The government gets revenue, brings foreign assets into the US tax system and avoids the resources of investigation and prosecution.

The lessons to be learned from the above are:

1.  The US is not stopping in its investigation of banks around the world that facilitated the hiding of assets and income from the IRS.  The investigation of CIBC is noteworthy because it indicates that the IRS and DOJ have added the Caribbean to their focus.  Previously, banks in Switzerland, Liechtenstein, Israel and India have been named.  CIBC is the first Caribbean bank to be added to this list.  The IRS recently opened an office in Panama City.  We expect other Caribbean jurisdictions to be added.

2.  The information request to the Liechtenstein Foundation Supervisory Authority is significant because rather than going bank by bank, the US went to the Liechtenstein governmental authority for information from all Liechtenstein banks.  We have previously written about Liechtenstein, formerly the most secretive of tax havens, altering its internal laws in order to allow cooperation with the US.  Although the Liechtenstein foundation boards and banks will provide the information to the Liechtenstein government for review, and this procedure may be subject to legal challenges within Liechtenstein, Liechtenstein foundations and their bank accounts are no longer secret vis-a-vis the IRS.

3.  US taxpayers with undeclared financial assets, whether at Credit Suisse, Julius Baer, CIBC, HSBC, Leumi, Pictet, or anywhere else, must act swiftly to come into tax compliance.  It is no longer a question of whether the foreign banks might comply with IRS or DOJ information requests; compliance must be expected.

However, the additional constraint is that now, the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset.  Under the most recent terms of the IRS Voluntary Disclosure Program (OVDP), the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure.  The significance is that US clients can no longer wait for an announcement of a John Doe Summons or a treaty request before they decide to come forward.  The door to come forward can be closed by the IRS much earlier and without warning.  That is a new variable in the opportunity to make a voluntary disclosure.  It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance.  Timing, once again, is everything, and the IRS can close the door at any time.

Continuing Erosion of Offshore Banking Secrecy

To use a cliché, “it’s a whole new world”.  Not that long ago, many foreign banks in many foreign jurisdictions offered confidential and even “secret” banking.  That is no longer the case.  All the former tax havens have agreed to banking transparency and exchange of information with foreign governments.  The following recent developments further illustrate this trend:

  • Switzerland and the US have agreed to a settlement in the US investigation of multiple Swiss banks.  Under the agreement, the Swiss government will allow each bank to settle charges individually, pay a large fine and reveal the identities of Americans with undisclosed accounts.  While many Swiss citizens will protest what they view as another infringement on Swiss sovereignty and capitulation to the US, many Swiss banks welcome the opportunity to end the US investigations, pay a fine, reveal their US clients to the IRS, and focus on future, tax-compliant business.  Some foreign banks have already announced that they have allocated substantial amounts of money in anticipation of paying a fine to settle US charges of tax fraud.  Credit Suisse, Julius Baer and Zurcher Kantonalbank in Switzerland have made such announcements, as have Bank Leumi in Israel and HSBC in India.  Such settlements will include not only fines, but also the transmission of account details to the US Government.  It has been reported that the settling banks will have a short window to report names to the US and negotiate fines, as soon as one hundred and twenty days.  We can anticipate that thousands of additional US taxpayers will now be racing to make voluntary disclosures to the IRS, before the IRS gets their names from the settling banks.
  • More countries have agreed to implement the Foreign Account Tax Compliance Act (FATCA).  FATCA is a US law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts.  Essentially, every foreign bank becomes an agent for the IRS.  If a foreign bank or financial institution does not agree to FATCA reporting, then the US will penalize it by withholding significant amounts of US-source income.  Recently, many countries have signed on to FATCA, including: Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland.  Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the US, including South Africa and Singapore.

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center.  The flow of        funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial.  According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ.  Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely.  Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for non-compliant accounts.  Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago.  To this end, Singapore has recently announced that it is in talks with the US on a FATCA-type of agreement.  In addition, a new regulation requires Singapore banks to identify all accounts that may harbor the proceeds of tax evasion, and close them.  Failure to abide by this new law will result in criminal charges for the Singaporean bankers under Singapore law.

Virtually all financial institutions around the world – – at a minimum, credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS.  Nations “off the grid” may welcome dollars, but one must ask whether depositing assets  in a  lesser, unsafe or unstable jurisdiction is a prudent move.  Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?

  • Some countries are developing their own FATCA-like laws to discover their own citizens evading taxes.  These countries include France, Germany, Italy, the UK and Spain.  Germany in particular has been as aggressive as the U.S. against undeclared Swiss and Liechtenstein bank accounts, going so far as to pay bounties for secret bank information stolen by bank employee “whistleblowers”.  Germany then shared the information with other governments.
  • Additional countries are agreeing to the exchange of information and banking transparency.  Most recently, in 2013 Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015.  Likewise, Austria, the last remaining EU member holdout, agreed in May 2013 to share banking data.
  • England and its former colonies and territories have agreed to exchange of bank information.  Many such colonies and territories are known as tax havens, including the Cayman Islands, Bermuda, British Virgin Islands, Guernsey, Jersey and the Isle of Man.  While this would not appear to impact US taxpayers, note that the exchange of information among friendly Western powers including the UK and US is already routine.  Recall, for example, that when Germany paid millions of Euros for stolen banking information on “secret” accounts at Liechtensteinische Landesbank, it then shared that information with France, England, Canada and the U.S.  Thus, information on an account in BVI or Cayman can easily make its way to the IRS, even without a John Doe summons.
  • Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations.  In its press release announcing this agreement, the IRS specifically noted that the three countries have already “acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”
  • Breaches of banking secrecy have not been limited to governments.  Also in 2013, the International Consortium of Investigative Journalists publicly released a very large cache of offshore banking information that has exposed accounts and their owners, along with details regarding many offshore trusts and corporations, from the British Virgin Islands to the Cook Islands.  The amount of information is massive, some 260 gigabytes containing 1.2 million files on 120,000 offshore companies and trusts.  According to one report, some 4,000 Americans are included in this information release.

In light of the above, there can be no expectation or even hope of banking secrecy.  US taxpayers with undisclosed foreign assets have little choice but to voluntarily come into tax compliance, before the IRS comes to them.

Merely closing a foreign account is not an alternative, because DOJ and IRS never limit their investigations to only current accounts.  In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000.  In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004.  In the case of Julius Baer, the investigation goes back to 2002.  In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance.  In addition, a wire transfer or bank check from the foreign account to a US account (or account elsewhere) creates an easy trail back to the foreign account, and would also give rise to due diligence, “know your client” and source of funds inquiries by the recipient bank.  Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.

Moreover, the IRS has taken a particular interest in the transfer of funds from a non-compliant account as an attempt to continue to avoid or keep a step ahead of the IRS.  For instance, once UBS cooperated with the IRS, the IRS followed the flow of funds from UBS to banks such as Wegelin in Switzerland and Leumi in Israel.  Wegelin was criminally indicted for its acceptance of funds from UBS, and Leumi is under investigation for the same reason.  In fact, evidence of such transfers could be used by DOJ prosecutors in building a case that a taxpayer willfully evaded the IRS and, rather than bringing a foreign account into tax compliance, proactively took steps to continue the hiding of assets and income from the IRS.  Such facts would have profound consequences in a criminal tax fraud prosecution, settlement possibilities and punishment.

In most cases, the only viable path forward is to take advantage of the current IRS amnesty program and bring the foreign account into tax compliance.  The IRS 2012 Offshore Voluntary Disclosure Program remains open, although the IRS can end the program at any time.  Equally important, the IRS can announce at any time that US clients of a specific foreign bank or banks under investigation are no longer eligible to participate in the OVDP.  Thus, US taxpayers who still own foreign accounts that are not tax compliant must not take a “wait and see” attitude because it might be too late, as the door to amnesty – – and lower penalties – – could be abruptly closed.

Asher Rubinstein Interviewed in European Media – Agreement Between US & Switzerland on Undeclared Swiss Bank Accounts

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On May 29, 2013, Switzerland announced that it reached an agreement with US negotiators regarding US Department of Justice (DOJ) and IRS investigations of multiple Swiss banks alleged to have facilitated US tax fraud by providing “secret” bank accounts used by US taxpayers to hide assets and income from the IRS.  The agreement is further evidence of the erosion of Swiss banking secrecy, and the power of the US Government to obtain information regarding undeclared foreign bank accounts owned by US taxpayers.  It is anticipated that many such account owners will now be rushing to voluntarily disclose their offshore accounts to the IRS before the foreign banks reveal their identities and bank data to DOJ and the IRS.  In addition to racing to the IRS before the banks reveal the information, US taxpayers must also keep in mind that the IRS can terminate the current Offshore Voluntary Disclosure Program (OVDP) at any time.  In addition, the IRS can also announce, at any time, that US clients of a certain bank or banks under investigation are no longer eligible to enter the OVDP.  If US taxpayers with undeclared foreign assets are ineligible to make a voluntary disclosure, the taxpayers will likely face IRS audit, investigation and charges of criminal tax fraud.

Asher’s comments appear in the following media, and are translated below.

Bluewin (in French)

Cash (in German)

Corriere del Ticino (in Italian)

ArcInfo (in French) 

 

Tax dispute – U.S. Reactions to the Tax Dispute-Deal 

Banking Secrecy is Over

by Roman Elsener, SDA

In the U.S., the Swiss tax law template for solving the dispute is seen by experts as the end of banking secrecy.  In the media, this view is shared.

The New York Times calls the template a turning point in the previously escalated conflict between Switzerland and the U.S.  The CNN headline on Wednesday: “Switzerland Lifts Bank Secrecy.”

Asher Rubinstein, a tax attorney in New York, who advises U.S. clients with Swiss accounts, is convinced that banking secrecy is over. “The resolution of banking secrecy is not new, it has been running for five years,” Rubinstein told the SDA on Wednesday in New York.

“New World Order”

American tax evaders have to be aware of “a new world order” under which the IRS can identify their account data.  Not only in Switzerland, international tax cooperation steadily strides ahead.

Rubinstein says in the interview with the SDA that tax authorities have the opportunity to end the voluntary disclosure program for repentant tax sinners towards certain banks, as the U.S. Justice can get the banks themselves to provide the data in the future.

“U.S. customers can not wait until their bank is sued and then decide to pursue a voluntary disclosure.  The door to come to terms with the tax authorities will close for these customers,” says Rubinstein.

 

FBAR Form is Due June 30, 2013 to Report Foreign Bank and Financial Accounts

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We remind readers that the 2012 Report of Foreign Bank and Financial Accounts (the “FBAR”), Form T.D. 90-22.1, is due by June 30, 2013.

The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

If you participated in the 2009, 2011 or 2012 IRS Offshore Voluntary Disclosure Program (OVDI or OVDP), you still must file an FBAR if you had a foreign financial account subject to the reporting threshold at any time during 2012.  Having participated in the voluntary disclosure program, you must ensure ongoing tax compliance regarding foreign assets.

The FBAR applies whether or not you participated in a voluntary disclosure.  If you have an interest in a foreign financial account (whether as owner, co-owner, signatory or power of authority), foreign mutual fund, foreign annuity policy, foreign life insurance policy or have a beneficial interest in a foreign trust, you may have an FBAR reporting requirement.

Please note the following additional points:

  • A new FBAR form was introduced by the IRS in January 2012.  Even though the new FBAR form is substantively similar to the prior version, you should use the new form.
  • Recently enacted Treasury Regulations now include foreign annuities and foreign life insurance policies owned by U.S. persons which have a cash surrender value, foreign mutual funds and foreign trusts as reportable via the FBAR.  Please see our article here.  Contact us if you have any questions about whether you are subject to the new FBAR rules.
  • The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Foreign Financial Assets.  We have written about new Form 8938 here.  Call us if you have any questions about new Form 8938.
  • The June 30, 2013 deadline is the deadline for receipt of the FBAR by the Treasury Department (unlike IRS Forms which must be postmarked by, e.g., April 15).
  • Even if you have an extension for filing your tax returns, the 2012 FBAR is still due by June 30, 2013.  There are no extensions for the FBAR deadline.
  • Even if you closed a foreign account during 2012, an FBAR may still be due if your interest in the account (or annuity policy, mutual fund, etc.) existed at any time during 2012.

We can advise you regarding whether you are required to file an FBAR, and we can prepare the FBAR for you.  In light of the June 30, 2013 deadline, please contact us immediately.

The Party Boat Blues

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From a young age, Kostas Pappas felt comfortable on water, and spent his childhood fishing and sailing.  Now in his 40’s, Kostas owned a successful party boat business, including several large yachts and other boats.  His party boats were docked around Manhattan island, and he launched cruises for celebrations, tourist outings and fancy corporate affairs.

One day, while supervising his crew loading cases of Champagne for a wedding cruise on his yacht “Tiger”, he noticed City Sheriffs seize the boat in the next slip, a party cruiser like Kostas’, owned by his competitor Aristotle. Aristotle explained that on a “Sweet Sixteen” cruise, a teenager snuck some alcohol onto the boat, got drunk and fell overboard. Although she was rescued, suffered no physical injury and was, in fact, responsible for her own underage drinking, her parents sued Aristotle for negligence, alleging that he failed to properly supervise the teenagers on board, and for violation of the “Dram Shop” law. He lost the lawsuit and was ordered to pay $3 million to the plaintiffs, yet his insurance coverage was only $2 million, and the insurance company was challenging paying even that. To satisfy their judgment, the plaintiffs then went after Aristotle’s personal assets. Aristotle’s boat was owned by an S-Corporation, which he thought would limit his liability.  But the plaintiff’s lawyers attached his shares of the S-Corp, thereby now owning his company and the boat.

Kostas was stunned by Aristotle’s horrible turn of events.  He came to see us because he understood that the same thing could happen to him, and he wanted to protect himself ahead of time.

First, we addressed the boats themselves, Kostas’ main assets and the sources of any primary liability.  We noted that all of the boats were personally owned by Kostas.  Therefore, he could expect to be personally named on a lawsuit arising from an accident on any of the boats.  We set up a new Limited Liability Company (LLC) to own each boat.  Thus, the yacht known as “Tiger” was now owned by the Tiger LLC.  Kostas would own most of the membership interests in Tiger LLC, with smaller LLC interests owned by Kostas’ children.  We specifically did not make Kostas the sole owner of each LLC because single-member LLCs are “disregarded entities”, often ignored by courts.  By placing each boat into a separate LLC, we severed Kostas’ personal liability from an accident arising on any boat.  By placing each boat in its own LLC, we segregated the boats from each other; thus, litigation and possible judgments concerning the boat “Tiger” would be contained to the Tiger LLC only, and would not endanger any other assets.

For an additional layer of asset protection, we then transferred all of Kostas’ LLC membership interests into one Family Limited Partnership (FLP).  The FLP acted as a “holding company”, owning all of Kostas’ various LLC interests in the LLCs which owned the boats.  Pursuant to state statute, the assets owned by the FLP cannot be attacked by Kostas’ personal creditors.

In addition to asset protection, the FLP also gave Kostas significant tax benefits.  Over time, Kostas would gift limited FLP interests to his children, ultimately lowering the taxable value of his estate.  He would always keep the general FLP interests, thereby always controlling the FLP and the assets owned by the FLP.  Since his children were in lower income tax brackets, the income earned from the boats would be spread among them in proportion to their limited FLP interests and would thus be taxed at their lower income tax rates.

Next, we addressed all of Kostas’ other personal assets.  We placed his home into another FLP.  We transferred his bank and brokerage accounts into yet another FLP.  Kostas owned several valuable collectible cars and motorcycles, and we also placed them into a separate FLP.  In the event of a lawsuit against Kostas, each asset was now protected.  In the event of a lawsuit in connection with his party boat business, his personal assets were safe and each boat was protected from a lawsuit against any of the other boats.  If he were to be sued personally, all of his business interests were likewise separate and secure.

We then examined how his business operates, from the captain and crew of each boat, to the catering and concessions for party cruises, to the contracts signed by the clients who charter each boat.  We understood that liability might arise at each point, and we addressed each potential threat.

Having already placed each boat into its own LLC, we created a new LLC, Cruiseline Charters LLC, which would be the business entity that charters the boats to the customers.  We drafted a master vessel lease agreement between each boat owner  (LLC) as lessor, and Cruiseline Charters LLC, as leasee.  We replaced Kostas’ old customer agreements with new charter contracts between the customer and Cruiseline Charters LLC.  Thus, Cruiseline received all charter fees from customers and paid almost all of that income to the LLCs.  Cruiseline had no other assets.  If a cruise passenger was to get injured, her recourse would be against Cruiseline Charters LLC, and not any of the LLCs, nor Kostas personally.

Recognizing that the provision of food and beverages, especially alcohol, might give rise to yet more liability, we separated the concession and catering part of Kostas’ business by creating a new entity, Cruiseline Concessions LLC.  We required all charter customers to sign a separate catering agreement with Cruiseline Concessions LLC.  Thus, if a passenger drank too much alcohol, slipped and fell, she could try to sue Cruiseline Concessions LLC, but Cruiseline Charters LLC (the boat charterer), Tiger LLC (the boat owner), and Kostas Pappas (the secure and protected business owner) would be in a very strong position to have any lawsuit against them dismissed.

We even anticipated the drunk passenger attempting to sue the captain and crew of the boat.  We therefore created a new entity, Yacht Personnel LLC, the business entity that would provide personnel services directly to the charter customer, not to any LLC, Cruiseline Concessions LLC or Kostas.  Thus, all potential threats were isolated and contained.

Business was good and Kostas bought a Rolls Royce to pick up important clients and bring them to the dock.  We created yet another LLC to own the car and further limit any liability, and we put the membership interests of that LLC into Kostas’ holding company FLP.

A month later, Kostas watched the crew load more Champagne onto “Tiger” for an upcoming Bachelorette party.  Kostas decided to keep a bottle of 2002 Krug Champagne for himself, to drink that night and toast his business success, confident that his business and personal assets were completely protected.

Murder On Fifth Avenue

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Almost one hundred years ago, an immigrant family bought two adjacent brownstone buildings on Fifth Avenue in Manhattan.  The family lived upstairs, and rented space to residential and commercial tenants.  For many decades, Humphrey, the son of the immigrants, lived in the buildings and acted as caretaker.  Today, the brownstones are on the most valuable street in the world.  The buildings remained in the family for decades, but not without conflict.  One particular tenant harassed Humphrey for many years, and they both grew old and cantankerous together.  One night, Humphrey snapped and shot six bullets into the tenant.  Humphrey was tried, convicted of manslaughter and sent to prison for the rest of his life.  Humphrey’s criminal lawyer referred the family to us to protect the buildings from the wrongful death lawsuit that was expected from the family of the tenant.

The family’s goal was to keep the real estate within the family, where it had been for close to a century.  For this reason, the family was adamantly against a sale of the buildings, even though their location would command a sales price in the tens of millions of dollars, which we might then protect in an offshore trust.  Obtaining a mortgage on the buildings so that we might protect the mortgage proceeds proved impossible because of Humphrey’s criminal conviction.  Instead, we arranged for a major real estate developer to lease the buildings for forty-nine years on a “net lease” basis, with an upfront, lump-sum payment of tens of millions of dollars.

With the lease proceeds, Humphrey purchased a foreign annuity policy for the benefit of his family. The lump-sum lease payment was wired offshore to the annuity company.  The annuity company then created an offshore trust to act as custodian of the funds, and Humphrey’s family members were the beneficiaries of that trust.  The trustee safeguarding the funds was a well-credentialed, licensed, bonded trust department of a large and well-respected foreign bank.  The trust assets were protected in a stable, secure foreign jurisdiction that did not recognize judgments from American courts.

The tenant’s family eventually obtained a $10 million civil judgment against Humphrey, which included $9 million in punitive damages, and then searched for Humphrey’s assets to satisfy their judgment.  But, they soon learned that the man sitting in jail had no attachable assets.  The prized family assets, the two Fifth Avenue brownstones, had been leased for forty nine years and the judgment creditors would have to wait until then.  The judgment creditors then pursued post-judgment discovery to locate additional assets, whereupon Humphrey disclosed the foreign annuity and foreign trust.  The judgment creditors soon realized that those assets were protected under the law of the foreign jurisdiction.  The judgment creditors would have to re-litigate their claims in a foreign court, with a very short statute of limitations, no contingency fees, and they would probably lose.  The judgment creditors had no choice but to accept our settlement offer of less than ten cents on the dollar.

Humphrey committed murder, and he is serving a life sentence in jail to pay for that crime.  But our clients, his family members, were entitled to protect the family assets for themselves; they were not responsible for the criminality of one member of their family.  Our strategy accomplished the following for our clients:

  1. It protected and kept ownership of the buildings within the family, their foremost goal, rather than a sale to strangers and loss of ownership of the family asset.  Further, it protected the lease proceeds from the judgment creditor, and it provided the family with a secure, steady stream of annuity payments for many, many years.
  2. It caused the judgment creditors to accept a reasonable settlement amount, rather than target the family asset and punish our clients for the misdeed of one family member.
  3. It provided for management and control of the two brownstones by the net lease tenant for the next forty nine years, rather than requiring the family to act as building caretakers, collect rent and manage tenants.

Epilogue:  One year later, the City of New York Tax Department attempted to tax the upfront, lump-sum lease payment, claiming it was really a “disguised sale” subject to Real Property Transfer Tax (RPTT).  We won that case as well, which we’ve written about here.

Meanwhile, Humphrey’s story formed the basis for a TV episode of “Law and Order”.  (The show made no mention that the brownstone buildings were protected and kept safe for the family that owned them for almost one hundred years.)

Epilogue: Complacency Is The Enemy of Good Asset Protection Planning

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For the prior history of the court case United States v. Grant, please see our article here.

After beating the IRS, Arline Grant became careless and sloppy.  In 2011, she ordered the foreign trustees to make periodic cash transfers to her totaling more than $500,000.  These transfers were made to various accounts in her children’s names that she controlled, as well as to an account in her name in Bermuda.  In addition, the trusts now provided for mandatory quarterly distributions to her.  The IRS discovered the transfers and brought Ms. Grant before a new federal judge who held her in contempt for violation the repatriation order that was issued in 2008 and was still in effect.  (Remember, in 2008 the federal court ordered Arline to repatriate trust funds and pay the proceeds to the IRS, but then refused to hold her in contempt for failing to do so because the court determined that she tried to comply but had no control over the trustees.)Continue Reading

Advantages Of Having An Offshore Annuity

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There are many advantages to purchasing an annuity from a foreign annuity company. One advantage of a foreign annuity is the asset protection it provides. Once funds are sent to the annuity company, those funds are not subject to U.S. jurisdiction. This means that funds held in the foreign annuity will be inaccessible to a U.S. court and to U.S. creditors seeking to enforce a judgment. The process of reaching the assets in the foreign jurisdiction is extremely difficult. Various foreign jurisdictions do not recognize judgments issued by U.S. courts. Moreover, various foreign jurisdictions statutorily exempt annuity policies from attachment or restraint. Thus, creditors are deterred and assets are protected by the foreign annuity.

Secondly, the foreign annuity company, having no U.S. shareholders, is exempt from tax on capital appreciation of U.S. investments and is also exempt from tax on all non-U.S. income. In other words, accruals on the funds within the annuity policy can be tax-free.

A third advantage of an offshore annuity is investment flexibility and diversification. Foreign annuities have access to investments not available to U.S. investors. By purchasing an offshore annuity, a U.S. investor broadens his or her investment portfolio and is exposed to earnings previously unavailable. Furthermore, the purchaser of a foreign annuity may determine the annuity terms which best fit his or her needs, such as whether annuity payments should be deferred until retirement (thus prolonging tax-free accruals).

Lastly, the purchase of an offshore annuity is neither taxable nor reportable to the I.R.S., unlike the opening of an offshore bank account. Moreover, the earnings generated by an offshore annuity are not reportable to the I.R.S. Clearly, purchasing a foreign annuity has many benefits: asset protection, investment diversification, and tax minimization.