Wealth Management, Wealth Protection, and Tax Planning

U.S. Supreme Justice Louis D. Brandeis

"I live in Alexandria Virginia. Near the Supreme Court Chambers is a toll bridge across the Potomac. When in a rush, I pay the dollar toll and get home early. However, I usually drive outside the downtown section of the city and cross the Potomac on a free bridge. This bridge was placed outside the downtown Washington, DC area to serve a useful social service, getting drivers to drive the extra mile and to help alleviate congestion during the rush hour.

If I went over the toll bridge and through the barrier without paying the toll, I would be committing tax evasion. If, however, I drive the extra mile and drive outside the city of Washington to the free bridge, I am using a legitimate, logical, and suitable method of tax avoidance, and I am performing a useful social service by doing so.

For my tax evasion, I should be punished. For my tax avoidance, I should be commended. The tragedy of life today is that so few people know that the free bridge even exists."

Our progressive tax system in the United States facilitates the redistribution of wealth from the more fortunate to the less fortunate. Now, the U.S. judicial system is also being used to redistribute wealth through litigation. Entrepreneurs, business owners, retirees and others who have accumulated any significant amount of wealth are often financially devastated by the U.S. judicial system.

With that in mind, it is easy to see why even a person of average wealth with assets at risk would benefit from implementing a wealth management plan to protect assets from the claims - especially the frivolous claims - of unknown future judgment creditors. Among many other exceptions to liability insurance coverage, most insurance policies do not cover punitive damages or employment-related claims.

Insurance against the most common source of judgments and settlements over $1 million, automobile accidents, is only very rarely maintained at the level necessary to cover such claims. In fact, it may be prohibitively expensive or impossible to insure at such a high level of coverage. While insurance is the first line of defense against legal claims for damages, it is impossible to insure against many sources of significant potential liability.

It is essential to implement an asset protection plan integrated with your estate plan. Your asset protection plan will greatly enhance your estate plan by providing additional assurance that you and your family will be able to reap the fruits of your labor, and often, by providing the means to make gifts of interests in protected assets to family members - gifts which are protected from your unknown future creditors and from all of the creditors of your family members. Simply put, the objective of legitimate offshore asset protection planning is to avoid litigation altogether by using a structure involving the prudent use of professional advice and foreign law; it is not intended to protect dishonest or incompetent persons from creditors. Legitimate tax-neutral, flexible offshore asset protection and investment vehicle are available.

International variable life insurance and international variable annuities with reputable companies in secure offshore jurisdictions can be attractive investment vehicles. In addition to being well protected, because they have different commission structures they are not subject to certain U.S. taxes, offshore life insurance policies and annuities can be significantly less expensive than comparable products offered in the United States.

►What Asset Protection Planning Is Not

Asset protection planning and proper tax planning do not involve tax evasion or anti-IRS theories. All solid well designed asset protection planning is done with full IRS compliance and disclosure.

Asset protection advice is not "cookie-cutter" planning. Avoid cheap asset protection "kits" promoted by dozens of providers via seminars or the Internet. Good asset protection advice is formulated on a case-by-case basis. Neither does legitimate asset protection planning does not involve hiding money offshore and using offshore credit card accounts. While it is a bit more difficult to track protected assets offshore than in the U.S., if you rely mainly on offshore secrecy to protect assets, you will likely soon find you and your assets parted.

►Offshore Planning

Offshore business structures and offshore estate planning structures, including offshore trusts and offshore insurance policies can often offer an excellent solution to asset protection problems. Variable life insurance policies and variable annuity contracts which are compliant with U.S. tax laws, offer a wider range of investment opportunities, and are often available at lower costs than comparable U.S. policies for policies with total aggregate premiums of over $100,000.

Be careful in choosing an Offshore Planning and Asset Protection Planning Consultant.

A Web search will reveal hundreds of offshore service providers offering various offshore tax planning and asset protection schemes, as well as company formation services. How do you choose one out of all of these?

First, look for a consultant with extensive tax experience who can provide competent and comprehensive U.S. tax advice. Most reputable offshore service providers specifically disclaim the U.S. tax consequences of their structures and suggest that you seek the advice of U.S. tax counsel. Less reputable offshore service providers will claim that their plans are set up in jurisdictions where there are no income taxes, no capital gains taxes and no death taxes. While true - for that jurisdiction - the U.S. tax consequences are entirely different.

There is no simple way to avoid taxes offshore that cannot be done onshore. There are sophisticated means that work for legitimate businesses, but there are not "offshore only" ways for the average investor, holding marketable securities and acting alone, to avoid income taxes on investment income. The most predatory offshore service providers will simply lie and tell you that for whatever reason, there are no U.S. taxes due on their preferred type of offshore vehicle ("you don't own the company - you're just the manager;" "you don't owe taxes on offshore trust income;" "the Panamanian foundation is a separate legal entity without any owners, so you don't pay taxes on its income," etc.). Bad tax advice can have grave consequences. Willful tax evasion and willful failure to file required information returns are, of course, serious crimes that can and do result in massive fines and imprisonment. Even worse, for some, may be the fact that relying on the tax advice of an incompetent advisor may not even keep you out of serious trouble - at best, it can result in the imposition of hundreds of thousands of dollars or more in fines and interest, and at worst, fines and imprisonment.

The hiring of a lawyer is an important decision that should not be based solely upon brochures, advertising or other promotional materials. Before you decide, ask for written information about qualifications and experience.

A sophisticated and creative tax planner can:

* Transform tax plans from methods of cost-containment to integrated systems of advanced tax risk management and value creation;

* Transform asset protection plans from ineffective collections of legal odds and ends to integrated systems of advanced legal risk management and security enhancement; and

* Transform individual financial plans and company treasuries from piecemeal jumbles to integrated systems of financial management and wealth preservation.

U.S. citizens should always consult a competent tax attorney or CPA before implementing any planning involving domestic or foreign structures. Windward Harbor's principals are experienced tax planning, wealth management, insurance, investment, tax, and asset protection professionals. We specialize in providing the most effective, legal tax planning available for entrepreneurs and high net worth clients. Windward Harbor will offer asset protection and offshore planning services only to clients who are committed to full U.S. tax compliance.

The materials found in this article, including these comments on asset protection planning and offshore planning, are for general informational purposes only. The information provided herein is not warranted to be accurate or current and must not be regarded as legal advice. All legal and tax planning is very fact- and circumstance-specific, asset protection planning and offshore planning, in particular. Internet subscribers and online readers should not act upon this information without seeking professional advice. You should consult a lawyer if you have a legal matter requiring attention.

© Windward Harbor LLC 2004

Wayne Walker & Christopher Riser, Esq.
Windward Harbor LLC