What to do (and what to avoid) in international planning, and the specific tools top attorneys use in their international planning to avoid pitfalls.
Over the last decade, an increasing number of doctors have looked internationally in their wealth planning. However, overall, it’s still a small minority, and that is not necessarily a bad thing as there are numerous pitfalls for using international planning. In this article, you’ll learn what to do (and what to avoid) in international planning, and about specific tools top attorneys use in their international planning.
Americans are liable for taxes on all income earned offshore, although 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 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.
Going offshore to avoid U.S. taxes leads to tax evasionThe 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 and frauds
Done right, these tools can be used to achieve a high (+4/+5) level of protection. Compared to state (+5) exempt assets, 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:
International LLCs and trusts
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 tax-free during his life. This is similar to the benefits of a domestic cash value life insurance policy.
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.
1. Owning foreign insurance policies Multi-generational planning for an international family
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.
David Mandell, JD, MBA is an attorney, lecturer, and author of five books for physicians. Jason O’Dell, CWM is a financial consultant, lecturer and author of two books for physicians. They have written
For Doctors Only: A Guide to Working Less and Building More, which you can get for free (plus S&H) by calling (877) 656-4362. You can visit their website at www.ojmgroup.com.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. U.S and International 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. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.