Robert J. Mintz, JD

Secret accounts in Switzerland or the Cayman Islands, invisible to the prying eyes of tax collectors, creditors and future ex-spouses have long been attractive cash magnets for the super rich and even the merely wealthy.

But now, for U.S. residents, these anonymous and private accounts have been closed down and probably shuttered for good as the U.S. government battles budget deficits and tax evasion with a renewed and vigorous attack against the bank secrecy havens.

During the past three years, a concerted and well-focused attack by the U.S. government against the offshore havens has effectively pierced the previously impenetrable shield of bank secrecy which surrounded and protected a sizable portion of worldwide surplus wealth for more than 200 years. Concerns about terrorism, money laundering and the estimated loss of more than $100 billion each year in tax revenue has spurred the drive to shut down the activities enabled by the bank secrecy havens.

Prior to these recent efforts, opening accounts in the European banking centers 

Switzerland, Lichtenstein and Luxembourg 

with long traditions of strict bank secrecy laws, was a fairly straightforward process.

Most banks adhered to at least a minimal “know your customer” standard. Typical due diligence efforts by the banks required proof of residence and citizenship, bank letters of reference and often an introduction from someone within the bank’s referral network of existing customers, attorneys and financial advisers. Beyond these relatively minor barriers to entry, most European banks maintained a minimum deposit requirement ranging from several hundred thousand dollars to well over a million.

Although most of the banks operating in the Caribbean and Central America, in countries such as the Cayman Islands, Bahamas, Bermuda and Panama, adhered to similar standards as their European counterparts, some applied substantially lower minimum deposit requirements. A few were known to be overly welcoming to new customers 

Common to all the tax haven countries is a low or no tax regime on investment income and income from sources outside the country. This attractive benefit is combined with strict bank secrecy laws, which prohibit disclosure by bank employees and government officials of customer names and account details. These secrecy laws are backed by strong criminal penalties.

Notably, the source of the funds for the account deposit and whether the new customer was “tax compliant” in his or her home country was rarely a matter of concern or discussion.

 with little or no due diligence inquiries to weed out money from a wide variety of illegal activity.

At least until recently, breaches were rare and exceptions to the rules were very narrowly proscribed. Sometimes the funds of a notorious thieving dictator were frozen to avoid a worldwide outcry. Former Egyptian President Hosni Mubarak and Haiti’s Baby “Doc” Duvalier reportedly had billions tucked away in accounts frozen by the Swiss government. But with these few exceptions the governments and the banks have stood firm.

To combat the lure of the bank secrecy countries as havens for tax evasion and money laundering 

 have applied increasing pressure on the bank secrecy countries over the last five years with some limited success. To avoid an international blacklist, most tax-haven countries agreed to a set of standards which provided at least limited cooperation with other governments.

Although requests for information about the accounts of particular individuals had been previously denied, faced with the possibility of being shut out of the worldwide banking system, the secrecy countries agreed to limited disclosure to assist in criminal investigations as well as enhanced due diligence in opening and maintaining customer accounts.

Since 2009, the United States has forcefully and aggressively expanded its fight against the tax haven countries with a double barrel attack directed at the offshore banks and their American customers. A string of criminal prosecutions together with tough new legislation may have changed the tax haven game forever.

Although previous efforts by the U.S. to obtain the names of offshore account holders had been largely futile, a potential criminal case against UBS AG, the largest Swiss bank, unveiled a treasure trove of previously inaccessible and detailed customer information.

In brief, the IRS victory was triggered when a UBS wealth manager, an American citizen based in Geneva and in charge of attracting wealthy U.S. customers for UBS, pled guilty to charges of tax evasion for assisting a U.S. billionaire client with avoiding millions in taxes.

In exchange for his guilty plea, he testified that UBS routinely encouraged its bankers to attract U.S. clients by promoting the many tax evasion opportunities available from UBS. According to the testimony, the bankers assisted thousands of customers in hiding and disguising transfers to their Swiss accounts, filing fraudulent tax returns and concealing investment gains and income through a variety of offshore companies and structures.

Based primarily on this testimony and mountains of corroborating evidence, UBS narrowly avoided criminal charges with a fine of $780 million and, most importantly, an agreement to hand over the names of 250 U.S. clients who had been holding secret accounts at UBS. In addition, as part of the settlement of the case and subsequent cases filed, the Swiss government, agreed to turn over more than 10,000 names of Americans with accounts in at least 11 of the country’s largest banks, including UBS, Credit Suisse and Bank Julius Baer.

At the same time as the final settlement was being negotiated, the IRS initiated a voluntary disclosure and amnesty program. Not knowing whether their names would be part of the account disclosure agreement and facing potential criminal prosecution for tax evasion, approximately 19,000 taxpayers came forward with undeclared offshore accounts.

Under the terms of the deal, taxpayers coming forward were able to avoid prosecution by paying taxes due and penalties, disclosing details of the offshore accounts as well as the names of bankers and advisers, and information about how they moved their money. Information obtained from these taxpayers is fueling ongoing IRS investigations into the offshore banking world with new charges and indictments occurring on a regular basis.

In February 2012, the U.S. filed criminal charges against Wegelin & Co, the oldest Swiss Bank, accusing it of helping Americans commit tax fraud

The second prong of the government’s attack came in 2010 when Congress passed The Foreign Account Tax Compliance Act (FATCA). The new rules, scheduled to take effect in 2013 require all foreign banks to report details of their U.S. client’s accounts directly to the IRS 

 regardless of whether such reporting would violate existing bank privacy laws in those jurisdictions.

Any foreign bank which refuses to comply will have a 30% withholding tax imposed on all payments received from the U.S. The effect of FATCA is that every foreign bank will have to report the names and account information of all U.S. customers to the IRS on an annual basis to avoid having their U.S. business effectively shut down.

n a positive note, the final rules under FATCA have not yet been issued and their legal impact and costs are still being studied. Negotiations between the foreign institutions and the IRS are ongoing and many are hopeful that the rules will ultimately undergo serious modification, easing the most objectionable aspects of the law.

The combined effect of the bank prosecutions and the FATCA legislation is that the offshore banks have severely limited their dealings with U.S. residents. The expense and administrative burdens involved in reporting names and account details to the IRS, together with the irresolvable tension which compliance would create with local bank secrecy laws, have caused many foreign banks to simply shut the door on all accounts by U.S. residents-even those who can demonstrate that they are fully tax compliant. At many banks, long-time depositors have been notified that their existing accounts are being closed and that new customer accounts cannot be opened.

Although the offshore world can still be successfully navigated, there is no question that even those individuals who fully report and pay all U.S. taxes will face greater scrutiny and at least some inconvenience in obtaining an offshore account for legitimate asset protection or investment purposes.

One question now being raised by a number of legal experts is whether an equal or greater level of asset protection and privacy can be obtained through domestic U.S. accounts in states with favorable laws designed to accomplish these particular goals.

Next article we’ll examine this issue to see what benefits can be offered by state asset protection laws and whether these alternatives can provide reasonable alternatives to traditional offshore planning.

Robert J. Mintz, JD, is an attorney and the author of the book 

. To receive a complimentary copy of the book visit 

Asset Protection for Physicians and High-Risk Business Owners

Articles

Secret accounts in Switzerland or the Cayman Islands are being closed down to U.S. residents because of some new attacks by the IRS.

Are Secret Accounts and Offshore Havens Gone for Good?

It seems like most of my physician clients were active real estate buyers and investors when times were good. Now, they’ve been hit hard by the market crash, with property values sinking below the amount of their loans. The real estate website Zillow.com, recently estimated that 28% of all mortgaged homes had a negative equity. And that number is substantially higher in the hardest hit regions of California, Florida and the Southwest.

Many of those with negative equity have and will continue to default on their loans out of economic necessity or as a planned “strategic default.” When a comparable property can be purchased or leased at a substantially lower monthly cost, it’s reasonable to expect that many or most property owners will choose to default on their loans and “walk away.”

The decision to avoid throwing good money after bad, with no end in sight, applies not only to personal residences, but also to investments in commercial property. The toxic combination of falling rents and rising vacancies has caused a collapse of cash flow and value and many investors are faced with the difficult decision of whether to continue to support an “underwater” property with a large monthly negative or whether to throw in the towel and take the consequences.

One of the factors making this such a tough decision is that the amount of these commercial loans are often in the millions of dollars and may have been personally guaranteed by a group of partners or members of a limited liability company which purchased the property. Since each partner or member who guarantees a loan has legal responsibility for the full amount of the loan 

 the resulting liability can be far beyond the amount that any single investor anticipated or intended.

For example, a client of ours invested $100,000 for a 10% share in a limited liability company formed to construct a medical office building in 2006. The LLC borrowed $8 million with each member signing a personal guarantee to the construction lender. By the time the construction was completed in late 2008, the market had plunged and the estimated value was less than $5 million. Because of low rents and vacancies there is a monthly shortfall of nearly $100,000 and our client has been paying his share, at the rate of $10,000 per month.

He is now facing the same decisions as millions of others in similar situations. What are the legal consequences if I default on my loan? Does a default put my other assets at risk? Is there any way to protect my other assets from a possible judgment?

The legal consequences of a loan default vary by the terms of the loan agreement as well as applicable federal and state laws. In general, we know by now that if you don’t pay your mortgage, at some point, the lender is likely to take back the property through a foreclosure or trustee sale.

The number of home foreclosures slowed measurably in the past year, due to litigation over improper foreclosure practices by the banks. However, the system is now back in high gear with lenders moving aggressively against borrowers who are behind on their payments.

For commercial loans, lenders are usually more hesitant about a foreclosure. Commercial properties are management intensive and the desire to avoid realizing losses on the loan may weigh heavily in the considerations and the negotiations. Alternatives to foreclosure may be explored, but if the negotiations are not successful then the foreclosure route is generally pursued.

The liability problem here is that, in most cases, the amount by which the loan exceeds the value of the property is known as a deficiency and the borrower will generally be legally responsible for the full amount of this deficiency together with penalty fees, costs of collection and associated legal fees.

In some states, a lender is not permitted to pursue your personal assets to satisfy a deficiency on a property. In those cases, the foreclosure is the end of the process and while your credit report may be impaired, there is no threat to future income of assets.

Unfortunately these protections are usually narrowly limited in their scope and application. For example, in California, the lender’s only remedy for loans made to purchase a residence is to foreclose on the property. Whatever it’s worth, that’s all the lender gets. But if the original loan was replaced in a refinancing or the loan was used to buy an investment property, rather than a home, then the lender has full access to all of the borrowers’ available assets to cover any shortfall in the value of the property. These restrictions on collection are known as anti-deficiency statutes and they vary according to the state law which applies.

If you are not protected by an anti-deficiency law, the lender has the right to obtain a court judgment against you and/or any loan guarantors for the amount of the deficiency. Once the judgment is final it acts as a lien against any property or other assets in the name of any defendant. Any property or other assets standing in your name at the time of the judgment or any later time, while it is in force, is subject to collection.

Until recently, the banks rarely pursued collection actions against foreclosed homeowners. To some extent, collection is a time-consuming and expensive process, and at the end of the day, the foreclosed homeowner rarely had much left to make it worthwhile. However, with the sharp rise in “strategic defaults” from borrowers who may have other assets available, currently or in the future, the number of deficiency judgments and collection actions has risen dramatically.

If collection is pursued, the lenders generally rely on your previous financial statements or a legal procedure known as a Debtor’s Examination, to determine the amount and location of your assets. For example, if you live in California and default on a property in Florida, the judgment will initially be entered in Florida and then subsequently in California to attach any assets held there.

The decision-making process about “strategic defaults” should take into account whether the anti-deficiency protection is available and what other assets or income you may have which is available in a collection action against you.

Certain types of assets are protected by state law from collection, and asset protection planning often involves maximizing the use of these exemptions. For example retirement plans are sometimes partially or fully protected depending on the structure of the plan. Also most states protect some or all of the equity in a home from a collection action. Again, depending on the state, life insurance policies and annuities may be exempt, as well as interests in a trust or other specified entities.

The key issue in protecting assets from collection is usually that of timing. All states have laws prohibiting many types of transfers that are intended strictly to avoid paying an obligation. If the goal is to shield or insulate assets from a future potential liability risk, sound planning should be undertaken at the earliest time, to provide the widest range of options and the greatest flexibility.

Anyone making a tough decision about a possible loan default should consider the risks associated with a deficiency judgment and the extent of personal assets which are legally exposed in the event of a claim. Certainly, any planning strategy must be discussed with your attorney who is familiar with your particular situation and after a thorough consideration of state and federal laws pertaining to fraudulent transfer rules and exemption laws applicable to your circumstances.

Robert J. Mintz, JD, is an attorney and the author of the book “

.” To receive a complimentary copy of the

 Physicians and High-Risk Business Owners

What happens when you don't pay your mortgage? There's been a sharp rise in "strategic defaults" from borrowers who may have other assets available. As a result, the number of deficiency judgments and collection actions has risen dramatically.

Legal Consequences of Strategic Default

	An LLC is designed to provide liability protection without the formalities and tax issues that often make corporations difficult and expensive to operate and maintain. An LLC can be a convenient and efficient vehicle for operating a business or holding investment real estate. It protects you from legal liability for any debts or obligations associated with the particular venture or property held by the LLC—if you operate a business in an LLC and the business goes broke, you’re not personally responsible for paying the outstanding bills. The same is true when you put an investment property into an LLC if a tenant gets hurt on the property, you cannot be held personally legally responsible. The risks that arise out of the operation of a business are known as “inside liabilities,” and the law is quite specific that you cannot be sued for any liability of your LLC. You may lose the business or the property in the LLC, but your personal loss is limited to the amount of your investment. Your other assets are not at risk for the debts of the company (unless you personally guarantee the obligation). Physicians cannot shield themselves from malpractice claims by operating as an LLC, but for related business activities, the LLC works very well.

	In addition to protection from inside liabilities, LLCs have been used to shield personal assets from other types of claims (“outside liabilities”) not associated with the particular business activity. For example, let’s say you own an investment property that represents a substantial portion of your savings and you would like to shield it from any future claims against you associated with your other business activities. To accomplish this sensible goal, you could transfer the property to a newly formed LLC, after which you would own a membership interest in the LLC rather than the property itself.

	LLCs are effective asset protection solutions in situations like this because membership interests are protected by a “charging order” in the same manner as partnership interests. The membership interests are protected from foreclosure by a creditor—a judgment creditor is not legally permitted to seize LLC interests as he or she could with shares of stock or other property. Creditors have no right to vote or control the LLC. The most a creditor is permitted to do is wait for any distribution of income or sales proceeds to come out of the LLC.

Olmstead v. FTC and future planning with LLCs

	In June 2010, the Florida Supreme Court ruled that an LLC membership interest is subject to seizure by a creditor in the same manner as corporate stock (http://hcp.lv/dB6sxU). As a result, a creditor of a member of an LLC is permitted to seize a membership interest under Florida law. Although this decision is consistent with recent court cases and the law in California and several other states, the Florida ruling was a surprise to observers in the so-called “asset protection—friendly” states such as Florida, Nevada, Delaware, and New Mexico, where it was believed that the charging order protection in state law formed a solid foundation for asset protection planning.

	The Florida Court’s decision did not impact the usefulness of LLCs as strong protectors against inside liability business risks and claims. If you are operating a business or holding risky assets such as investment property, the LLC will often be the most effective choice of business entity. If you create an LLC to hold assets, the Florida decision, as well as existing law in California and other states, means that your membership interests are vulnerable to seizure by a judgment creditor. This rule applies whether your LLC is a single-member or a multi-member company. Although Florida may now amend its LLC law to counter the impact of Olmstead, owning LLC membership interests in your name is unlikely to provide any significant asset protection for you.

	In order to avoid a potential foreclosure of the LLC interests and an outcome similar to the Olmstead case, many lawyers have been recommending that clients put their membership interests into a protective trust (

). My firm has been using a Family Savings Trust (http://hcp.lv/csD3xg) for this purpose for many years. Your lawyer should be able to help you with choosing the structure that most efficiently accomplishes your asset protection planning.

	Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners.

	To receive a complimentary copy of the book call 800-223-4291 or visit 

An LLC is designed to provide liability protection without the formalities and tax issues that often make corporations difficult and expensive to operate and maintain. An LLC can be a convenient and efficient vehicle for operating a business or holding investment real estate. It protects you from legal liability for any debts or obligations associated with the particular venture or property held by the LLC

Covering Your Assets - Florida Case Highlights LLC Dangers

	During the debate about tax cuts and the estate tax, a type of trust known as a “dynasty trust” has received a barrage of criticism from those who claim that the wealthy are not paying their fair share of taxes. A recent op-ed in The New York Times (

) complained that dynasty trusts create a powerful new aristocracy whose wealth is protected and untaxed for generations into the future. Sounds appealing right? A closer look at the available benefits of these trusts can help you determine whether they have a role to play within your overall estate plan.

	Many states have recently adopted legislation abolishing the “rule against perpetuities” (

) that eliminates legal restrictions on the period of years that a trust may last. In these states, a trust is now permitted to exist for whatever term is chosen, even if it reaches far-off generations many years in the future (in Nevada, a dynasty trust is permitted to last for up to 365 years).

	Estate plans often include some type of trust to take care of the needs of minor children upon the death of the parents%u2011%u2011usually lasting until the children reach age 20-25. It makes sense to limit the term to a relatively short period if the trust fund contains only enough money for the child’s basic living needs or for the expenses of college and higher education. If there is not going to be anything left over after covering the child’s basic needs, an extended term trust would not make sense.

	It is a different matter when family wealth consists of substantial accumulated savings, a valuable business, or a large insurance policy. In these cases, the issue of how long a trust should last assumes much greater significance, and specific questions must be addressed. At what age do we want a child to receive a full distribution of substantial trust funds? Should we make large sums of money available to the child when he or she is young, or do we want to control and limit the distributions based on whatever standards we define for need, responsibility, and maturity? These are not easy questions to answer, especially for children who are young when the trust is formed.

	The answer to the question of how long the trust should last is often based on two key considerations: the estate tax consequences of the plan and the possible need for asset protection.

	A dynasty trust can create substantial estate tax savings. Each time wealth is passed to a younger generation, a new estate tax is imposed. At a 50% estate tax rate, a dollar in wealth is reduced to 50 cents when you pass it on to your children. The remaining 50 cents is further taxed so that grandchildren would receive only 25 cents of the original dollar, and so on until there is nothing much left. This is not a problem for people whose total assets are under the estate tax exemption amount (currently scheduled at $1 million for 2011). Those who have accumulated assets in excess of the exemption amount, or who have large insurance policies and wish to maximize and preserve these funds for future generations, can significantly reduce estate taxes with a properly structured dynasty trust.

	The provisions in the tax law that allow these benefits are long standing and well established. Briefly stated, if assets are left to children or any younger generation and the beneficiary’s rights to the property are limited by certain defined standards, the trust property is not subject to estate tax as it passes to a younger generation of beneficiaries. For example, if you leave $1 million in a trust for your child, and he or she has the right to the income from the trust and also a right to principal for “health, education, maintenance and support,” the trust assets will not be included in your child’s estate on death and can then pass to your grandchildren free of estate taxes. The trust can continue, subject to these same provisions, and there will never be an estate tax imposed as it passes from children to grandchildren and so on. Depending on the amount of trust assets and whether income is accumulated or distributed, wealth that is not subject to estate tax can be maintained or even increased over time as succeeding generations of family members become beneficiaries. As with the estate tax itself, the total amount that can be passed through the generations is subject to a generation-skipping tax on amounts in excess of an exemption amount that has yet to be determined by Congress. Stand by for future developments.

Protecting your children from divorce and lawsuit risk

	Whether or not you have a need for estate tax savings, the dynasty trust is a popular strategy to help protect children from the risks of divorce and creditors’ claims that they may face in their personal life and business careers. Possible claims by a child’s current or future spouse is always a paramount concern in every estate-planning discussion. Facing hard facts, a 50% divorce rate means that there is a substantial financial risk of losing assets to a spouse at some point. Dynasty trusts are often designed to specifically address this issue to make sure that amounts intended to be the separate and protected property of a child are not available to a future claim by a divorcing spouse.

	The same logic applies to other potential creditors that may arise during a child’s lifetime. Some common examples of these risks include student loan debt that is almost impossible to discharge, personal guarantees on loans and debts from bad business decisions, or just plain bad luck that can cause lasting financial hardship and burdens. The point of the dynasty trust is to make sure that a nest egg is preserved for the child that is not subject to lawsuit and liability claims, no matter what happens in the future.

	Depending on the outcome of the estate tax legislation proposed in Congress, your estate may be subject to significant estate taxes as it is passed to your children or grandchildren. A dynasty trust may be useful in reducing or eliminating these taxes as well as preserving family assets from future claims and liabilities. These issues are complicated from a legal and tax perspective%u2011%u2011as always, you should discuss your personal situation and the possible benefits and drawbacks of this planning with your professional advisors.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners. To receive a complimentary copy of the book call 800-223-4291 or visit 

Depending on your financial situation, a dynasty trust may be a valuable part of your asset-protection strategy.

Author | Robert J. Mintz, JD

Articles