Offshore Investing – Legal or Not

Ever since I became interested in the offshore world, I have had a devil of a time trying to explain to people what it is.  The most common response to any conversation about offshore investing are the raised eyebrows followed by the comment “but isn’t that illegal?”  It seems that for most people, the image of the swashbuckling international playboy with the numbered Swiss bank account holds true. 

Of course, the reality is so much more prosaic then that above – I myself am surely no international playboy, as my wife could well attest to! – but this seems to be the dominant image in our popular culture.  I have, however, always assumed that people in the financial world surely understood the reality versus the image. Tthis assumption has now been completely swept away after reading this utterly simplistic and ill-informed article in the Wall Street Journal by the well-known financial columnist James Stewart:  Read his column here  I have regularly read Stewart’s monthly columns in Smart Money and the WSJ, and for the most part he has written about investment strategies and specific stocks, and he always struck me as a level-headed enough fellow; indeed, during the recent market meltdown, he was actually kind of a voice of reason.  However, with his latest piece he seems to have gone off the deep-end, as it is chock full of inaccuracies and innuendo about the reality behind offshore bank accounts and offshore investing. 

Anyone reading Stewart’s piece would surely be left with the strong impression that offshore investing is indeed illegal, and is a tact taken only by rich American tax-evaders or other nefarious individuals.  Stewart’s piece struck us as the perfect opportunity to take a step back from talking about the trees – the various specific structures strategies for asset protection and offshore investing – and instead focus on the broader forest by highlighting and answering couple of very basic questions, namely: 

1) IS offshore investing legal?; and
2) Are there legitimate reasons for an individual to conduct their financial affairs offshore?

The answer to the first question is, in a word, YES.  Offshore bank accounts and investing are perfectly legal, and millions of Americans – not all of them wealthy tax-evading millionaires like Igor Olenicoff -do have offshore financial accounts of one kind or another.  Now, what is true is that the IRS and Treasury Department require any American with any offshore accounts or combination of accounts of any kind (bank, LLC, Trust etc.) that exceeds $10,000 at any time during the calendar year to report it by filling out a simple one page form TD F 90-22.1 called the FBAR, short for Foreign Bank and Financial Accounts.  Other offshore structures, such as a Trust or LLC or the like, may require additional short forms, but for the basic foreign bank account of the type Stewart impugns in his article the one-page FBAR is it.  Do that by June 30th of the following year, and your offshore bank account is perfectly legal!  I will say it again, with emphasis this time:  THERE IS NOTHING ILLEGAL ABOUT OFFSHORE BANK ACCOUNTS OR OTHER FINANCIAL STRUCTURES AS LONG AS YOU PROPERLY REPORT THEM AND PAY ALL TAXES.  We strongly emphasize the basic reporting  requirement in all our communications, and continue to strongly encourage anyone with any kind of offshore financial structure to err on the side of caution and report it!

Now let’s address the second issue of why would someone want to have an offshore financial structure of any kind.  There are a number of reasons, none of which receive any mention whatsoever in Stewart’s article:

1)    EXPAT LIVING:  First, and most obvious, several million Americans live and work abroad, whether for corporations, international organizations, or even just as entrepreneurs.  It seems quite obvious that many of these Americans would have foreign bank accounts or investments, indeed it seems only natural that if one lived and worked overseas one would naturally bank overseas as well.  Duh….

2)    ASSET PROTECTION:  Many Americans, wealthy or not, are worried about the threat of lawsuits in our overly litigious society.  If you are perceived as having wealth, especially in an economic downturn, you will be a target.  Last year, a friend of mine was sued over a car accident, an accident in which he was the one rear-ended!  It was an obvious ploy for money – my friend is a successful entrepreneur, was driving a Mercedes S-Class and had noticed a car tailing him unnervingly closely for several blocks – and that day he was the “winner” in the ever-present “lawsuit lottery.”  Even apart from basic traffic accidents, there can also be all kinds of business or even personal disputes one may be concerned with, and asset protection is a perfectly legitimate way to protect one’s family from these risks.  Asset Protection is a whole giant subject in-and-of itself, with countless strategies and structures, some offshore and some onshore, but the basic point is that it is perfectly legal to set-up an offshore asset protection structure, just so long as you properly report it to the IRS and do not use it to illegally evade taxes.  Indeed, everything we structure for our clients is FULLY tax-compliant and uses legitimate and time-tested business structures that you will never have to lie or conceal because they are all perfectly legal.  Indeed, we would have no desire to work with any client who is interested in the offshore world from a tax-evasion perspective. 

3)    INVESTING:   Many of the best and most innovative investing opportunities are outside of the United States.  I would like to give a more specific example of why an American  - or more specifically a law-abiding middle-class American concerned about retirement - might want to invest offshore.  Many of the best US hedge funds, those with long track records of success, are either closed or require obscene minimums to get in.  By contrast, offshore hedge funds, many of which are simply feeder funds to successful US hedge funds, frequently are still open and have minimum investment requirements a fraction of the main US fund.  Indeed, I recently suggested to someone I knew - a teacher concerned with supplementing his traditional stock/bond 401(k) plan with an alternative investment component – that he take a look at an offshore feeder fund of hedge funds with several extremely successful US managers in it that were either closed on the US side and/or required a $25 million dollar initial investment.  The minimum requirement for the offshore version?  $100,000 – not chump change but certainly doable for a middle class guy with a couple million dollar retirement portfolio he wanted to diversify.  Last I checked, I am pretty sure he is not looking to evade taxes……

4)    ESTATE PLANNING:  Finally, last but not least, there are also quite legitimate estate planning reasons for which one may go offshore.  One particular estate planning tool that is particularly attractive is a life insurance strategy called PPLI, or Private Placement Life Insurance.  I do not want to get into the details of this here – although this is certainly something we point our clients in the direction of sometimes – but suffice it to say that it is a perfectly legal strategy for using life insurance to pass assets to one’s heirs while minimizing taxes.  For a whole variety of reasons related to how US Government entities and life insurance companies charge for and regulate life insurance, it is generally substantially cheaper to set-up a PPLI structure with offshore life insurance companies then American ones.  That is just a fact.  Many offshore life insurance companies also operate under what’s called a “Separate Account’’ regulatory regime, where the insurance company is required to segregate the assets in each individual policy from the remainder of the assets and policies the company holds.  This adds an extra layer of security and safety for the investor.  By contrast, imagine the US investor who sets up, say, a lifetime annuity with an American life insurance company that becomes insolvent  - she may be partially covered by a state insurance fund, but otherwise she is out of luck.


Of course, Mr. Stewart’s article covered none of these issues, and one is left with the distinct impression that only wealthy, tax-evading miscreants would ever have legitimate reasons for having an offshore financial structure.  While we doubt this letter will be read by quite the same number of readers that Stewart’s WSJ piece will be, we hope it has at least managed to separate fact from fiction in anyone who does peruse it.  Just remember, report everything and you are fine.

As always, we stand ready to assist with any of your asset protection needs and inquiries.

Josh