QUESTION: I've been reading a lot of the material on your web site and
a number of other web sites. And I've asked for advice from a variety
of professionals who mostly disagree with each other. I just want to
move some assets offshore for asset protection and privacy. And my
question is, what kind of entity is best? Should I use an IBC, a
foreign corporation, a foreign partnership or a disregarded entity?
And do I really need a foreign trust for asset protection? I'd also
like to be able to save some taxes, but that's not my primary goal.

REPLY: There's an old expression that "The devil is in the details"
and it's very appropriate in responding to your questions. But here
are eight suggestions for some very brief and very general rules of
thumb, with which a number of advisors may disagree.

Rule # 1. Don't expect agreement from everyone.

Different advisors have different points of view and in many cases,
their opinions are effected by their own financial self-interest. Most
U.S. advisors will tell Americans to just put their assets in a
domestic LLC for asset protection and minimum taxes. But that doesn't
always provide access to foreign investments that are not registered
with the SEC. A lot of foreign advisors tell Americans that they have
to have an International Business Company (IBC) -- but the advisors
usually aren't familiar with the U.S. tax rules that treat the IBC as
a controlled foreign corporation or the rules that treat a foreign
investment holding company as a passive foreign investment company
(PFIC) with it's very harsh tax rules.

Rule # 2. The maximum asset protection is with a foreign trust

When someone really wants the maximum possible creditor protection for
some assets, a trust in a foreign jurisdiction with desireable asset
protection laws will usually be the strongest form of protection, but
at a price many people can't accept. The price is that the trust
grantor must relinquish control over the assets and not retain control
over the trustee. This is something most people are not willing to do,
so they look for advisors who will tell them that there is a "little
known" way to have the appearance of giving up control without
actually doing so. In addition, the foreign trust is a tax neutral
entity, which means that the trust grantor will continue to be taxed
on any income earned by the trust from investing the trust assets.

Rule # 3. Use a foreign LLC for asset protection with access

For those who want to have access to their offshore assets and want to
manage their offshore portfolio, the maximum asset protection is
provided with a foreign limited liability company (LLC) in a country
(like Nevis) where the laws provide maximum protection from creditors.
The tax treatment of a foreign LLC used for holding investments is
that it will be treated as foreign corporation and PFIC -- unless the
owner(s) make an election to have the LLC treated as either a foreign
partnership or a foreign disregarded entity. The best tax treatment
will usually result from making that election, but it must be made
within 75 days after the entity is formed. (See IRS Form 8832)

Rule # 4. Transparent tax treatment is usually the best alternative

Tax haven countries are very appealing to those who are not familiar
with the U.S. tax laws. Tax avoidance with tax havens is legal in many
other countries, but not for U.S. citizens or green card holders
(residents). The U.S. imposes an income tax on the world-wide income
of its citizens and residents. Therefore, income earned from
investments in a tax haven is still subject to U.S. taxes -- even if
the citizen or green card holder lives offshore. Using a foreign
corporation or IBC to own assets in a tax haven merely makes the tax
situation a lot worse. Tax favored long term capital gains and
dividends that are eligible for the maximum 15% tax rate become
converted into ordinary income in a foreign corporation and are
usually taxable to U.S. shareholders of the foreign corporation or
IBC. But net investment losses inside a corporation are not
deductible.

Rule # 5. All of these "rules" depend on the specific details

Different facts and details will usually result in different
recommendations from professional advisors who are familiar with these
issues. Recently, I was working on the preparation of a tax return for
a foreign corporation based on the understanding that the taxpayer
owned 60% of the stock. But then I was advised that this was in the
current year and that the taxpayer owned exactly 50% of the stock in
2006. Based on that new information, it was not necessary for this
taxpayer to file the Form 5471 for that tax year. In another case I
was informed that the majority owner of a foreign corporation was a
citizen of Switzerland so I concluded that the foreign corporation
Form 5471 was not required. But then I discovered that the Swiss
citizen was also a U.S. green card holder -- and is subject to the
same tax rules as a U.S. citizen.

Rule # 6. The government equates privacy with tax evasion

It's my opinion that the IRS and many members of the U.S. Congress
view any concern for privacy as being the same as an intent to evade
taxes. And I've observed that a lot of U.S. tax lawyers and tax
accountants share that bias. Today, there is probably more privacy in
keeping assets in a U.S. LLC than in keeping assets offshore.
Virtually every form of offshore entity is required to disclose
extensive details about the entity. And it is very difficult to
legally avoid having to report any kind of foreign financial account
to the government on the Form TD F 90-22.1. However, a single owner
U.S. LLC does not also offer as much asset protection as a foreign
trust or foreign LLC so there is a conflict between those two goals.

Rule # 7. The U.S. tax law has conscripted U.S. tax professionals

Not too many years ago, tax advisors were able to function as
advocates of their clients, without any conflicting duty to the
government. But because of the recent changes in IRS regulations of
tax advisors, most U.S. tax lawyers and accountants have become very
reluctant to provide any specific advice and have become far more
cautious about encouraging Americans to venture offshore or to give
opinions on the choice of an entity to own investment assets.

Rule # 8. These "rules" are not intended as personal advice

These "rules" are offered only as general information and opinions but
are not intended to constitute advice for any particular taxpayer.
This is not what the IRS calls a "covered opinion" and can't be relied
on to avoid certain types of penalties. For more information on that
subject see my article on "Tax Advisors vs. Taxpayers" at
http://www.offshorepress.com/vkjcpa/disclosurerules.htm and the
various articles about Circular 230 at
http://www.offshorepress.com/circular_230.htm

Note to Readers and Advisors:

I prepared this summary as the first step in preparing a seminar
presentation on the subject of choice of entities and intend to expand
on it over the next month or two. I welcome questions about these
suggested "rules" and suggestions from various advisors involved in
offshore planning for asset protection, privacy and tax benefits. I
may not agree with your views, and you may not agree with mine, but
I'm still interested in hearing your views on the matter.

Vern Jacobs
http://www.offshorepress.com
http://www.vernonjacobs.com
(c) 2007