Should you go offshore?

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Even before the federal government’s crackdown on tax evaders with bank and investment accounts overseas, those accounts made little sense for most Americans, experts say.

And now they see even less reason for U.S. citizens to push their assets offshore.

“Typically this is an idea for people worth $5 million and up,” says Chris Geczy, director of the Wharton Wealth Management Initiative at the University of Pennsylvania.

“More generally, it’s for people worth tens of millions of dollars, and it’s not a no-brainer even if you have the right amount of wealth. There is anecdotal evidence that if you have foreign assets listed on your tax filing (which is required), that raises red flags for auditors.”

Not the answer for reducing taxes

And that stance on the part of the Internal Revenue Service certainly makes sense, he says. “There’s a temptation to evade taxes for investors and individuals. That’s the wrong reason to invest offshore,” Geczy says.

To learn about legitimate tax havens read this article.

“People can expect a greater compliance culture around tax dodges over the next three to seven years. That’s nothing to be trifled with. If you don’t know what you’re doing, you can easily make mistakes that put you outside compliance laws. So the basic rule is, seek professional advice.”

The issue of overseas accounts gained great notoriety in March 2009, when Swiss bank UBS forked over to the Feds the names of 250 American accountholders who failed to declare income from the accounts on their taxes. In August of that year, the U.S. and Swiss governments reached a comprehensive settlement requiring the Swiss to hand over the names of at least 4,450 more Americans with UBS accounts.

Richard Rampell, a Palm Beach, Fla., tax accountant, says the first rule of overseas accounts is “they aren’t appropriate for the purposes of evading U.S. income taxes.”

When offshore accounts make sense

So for whom are overseas accounts appropriate? “If you’re an international client, it makes some sense,” says Tony Decello, director of financial advising at Deloitte Tax in Cleveland.

Some overseas investments also are easier through an offshore account. “Many U.S. investors are woefully underdiversified,” Geczy says. “They fall prey to home bias. Going internationally physically facilitates international diversification. Think about getting a bond from Kazakhstan. It’s an exotic idea, but more difficult for a U.S. investor to do it through a U.S. financial intermediary than an international one.”

Protecting assets from claims

While an overseas account doesn’t reduce tax liabilities, an overseas trust can protect your assets from creditors. For example, if an American citizen has assets in a trust in the Cook Islands, which are located in the South Pacific Ocean, claims against the trust have to be executed within 30 days of judgment.

“Most of the time people are setting these trusts up to protect against the claims of creditors,” Rampell says. “I had a client who set one up in the Isle of Man (which sits between Ireland and Scotland). He had a nasty divorce about 20 years ago. His ex-wife kept coming after him for money.”

Thanks to the establishment of the trust, “he could truthfully say he had no assets in his name,” Rampell says. Of course, theoretically, he also had no control of his money. “You have to appoint a trustee to do what you want to do. Hopefully the trustee will do that for you. He/she is supposed to be independent.”

Plenty of other pitfalls present themselves as well. “There’s a risk in a tiny island country,” Rampell says. “Some of them aren’t stable politically, and there’s not legal due process. The government can come in and take your money.”

Even some developed countries aren’t always safe havens. “I have another client whose husband went bankrupt,” says Rampell. “She put money in Swiss bank accounts, trying to protect their assets.” The end result: She got put in jail for trying to hide the assets.

Who benefits the most?

At Deloitte Tax, “we’ve looked a lot at the idea of going offshore for asset protection,” Decello says. “At the end of the day, it’s not 100 percent failproof. It makes it more difficult for people to come after your assets, because they have to go to an offshore jurisdiction, so it slows them down.” But it doesn’t necessarily stop them, he points out.

Some people establish overseas trusts in which to park their assets to avoid estate taxes. “But they can just buy a liability insurance policy for their personal or business assets a lot more cheaply,” Decello says. “The offshore trusts often are sold by people looking to make money on selling and administering them.”

Indeed, any protection provided by offshore trusts or accounts won’t come cheap. The price can run into tens of thousands of dollars for the legal and accounting assistance required to set them up, says Peter Tedstrom, a partner at Brown & Tedstrom financial advisers in Denver. And annual maintenance costs can total several thousand dollars.

“Administrative costs are high in all the accounts I’ve seen,” Rampell says.