Watch this Scam
There is a thriving industry of offshore practitioners advising U.S. citizens to set up offshore bank accounts. They persuade the U.S. person to trust the "iron clad" secrecy laws of the jurisdiction and to not report ownership of the funds to the Internal Revenue Service. This is pure and simple tax fraud and gets many people in trouble. Remember, U.S. people are required to report any financial interest in any offshore account (this is done by filing a form 90-22.1).
PROPER UTILIZATION OF OFFSHORE BANK ACCCOUNTS
A foreign bank account is a useful addition to many asset protection plans; although, protected funds often remain in the United States. The creator of the account must recognize that there are two ways any judgment creditor can discover an offshore account (and remember, an account must be discovered before it can be attacked). The main two ways are review of the client's financial statement and the client's tax returns (both of which are often open to discovery in litigation).
Care should be taken to structure the offshore account so that the assets are not included on the balance sheet of the protected client. A properly crafted asset protection trust should do this since the protected client is not treated as the owner of the account under traditional accounting rules provided the account is in the name of the trust (I have seen opinions on this from major accounting firms). Note, the offshore account should never be in the individual name of the client.
Care should also be taken to minimize the exposure to creditors from reporting the account to the IRS on the required Form 90-22.1 (note, even though the protected client is not treated as the owner of the assets from a debtor-creditor law point of view, he or she is still treated as the owner of the accounts for tax purposes if a typical asset protection trust (often a grantor trust) is utilized). There are several techniques to minimize the risk from the filing of the 90-22.1, although this risk is minimal if the trust is set up long before trouble arises.
TYPES OF OFFSHORE ACCOUNTS
Typical Passbook Accounts
Many European and Carribean jurisdictions offer highly confidential bank accounts. Please take care in selecting them and never ever put your money with a second rate bank or put yourself into a position where you are forced to trust the funds to another person (this is never ever necessary).
Secret Bank Accounts
Much has changed in international banking since the days of the infamous numbered and bearer Swiss bank accounts. Switzerland has come under much scrutiny through scandals relating to money laundering and holding assets belonging to Jewish families confiscated by the Nazis. Switzerland, therefore, is no longer a jurisdiction of choice. However, it is still possible to find bank accounts that have significant asset protection benefits in other European countries.
Privacy laws are still strong in these European jurisdictions. Despite efforts of the European Commission to eliminate such accounts, certain countries have been slow to respond and even if the EC succeeds, the accounts set up before time limits are set by the EC will almost certainly be "grandfathered".
Normally, a well connected facilitator is required to open a secret account. This person, (who basically functions on behalf of major law firms and banks), will thoroughly vet the client. The primary concern is to make sure that the money is clean and that all taxes due the United States will be properly paid (sensible offshore banks do not want to take on the U.S. Treasury and neither should you).
The facilitator will require a non-disclosure letter as well as suitable comfort from either an attorney or CPA that the money is clean and that all taxes have been and will be paid. Once these preliminary hurdles are cleared, the facilitator will proceed to open the account (which will be at a Fortune 500 level banking institution).
There are two types of accounts available: the numbered account and the bearer account.
The numbered account normally requires a minimum of USD 50,000 as the initial deposit plus facilitator fees. To open this type of account, the client must go to Europe, meet with the facilitator and together appear in the European bank to set the account up. On occasion, the services of a local attorney will be required. This account recognizes the beneficial owner of funds, but the identity of the person remains private under bank secrecy laws of the jurisdiction and is known only to three bank officers. There is no governmental reporting requirement, unless a criminal investigation arises. The income from the account is subject to tax (approx. 25%), but there is no tax reporting requirement in the foreign jurisdiction (U.S. reporting requirements are not waived although the specific identity of the account is not disclosed in the event a tax return is discovered in litigation).
The bearer account requires a minimum of USD 7,000 as the initial deposit plus facilitator fees. Funds can only be deposited or withdrawn upon presentation of both a password and a bearer bank account book. This type of account can be done without the client traveling abroad. This account has no name and requires a password to transact. However, local legal counsel (a major firm) is required to transact business on this account as it is not intended to be more than a place to park money, much like a CD in the U.S.. The interest rate on such an account is low, and there is tax on the interest. However, like the numbered account, there are no tax reporting requirements whatsoever. The password is known only to the bank, the attorney and the client (not the facilitator). The bearer bank account book can be retained by the attorney (who acts by virtue of a power of attorney and escrow agreement) or the book can be retained by the client.
The asset protection advantage of these accounts is the anonymity of the accounts. Using slightly more complex structures we have combined these secret accounts with traditional asset protection trusts. For example, it sometimes makes sense to form a tax exempt entity to hold the protected assets. The stock in this tax exempt entity can be held by an asset protection trust. As a result, the stock does not show up on the balance sheet of the taxpayer and the income from the assets is likewise off the tax return of the protected client. In addition, the tax exempt entity will normally pay no tax and should be virtually undiscoverable (although the entity will report the account). In addition, it is also possible to set up secret stock trading accounts whereby a major financial institution will effect trades as instructed by the trustee of a specially formulated trust (which can also interrelate with a traditional asset protection trust). A through discussion of these types of complex and expensive structures are beyond the appropriate scope of this site.
Finally, we must emphasize again that a secret bank account must not be utilized to hide money from the IRS. It is simply a good and effective tool to keep assets out of the hands of creditors.