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Regaining The Lost Confidentiality of Off-Shore Trusts
By: Lance Wallach
Trusts have been with us forever. In fact, the first trusts date back from England
during the time of the Crusades.
Off-shore Trusts are as the name implies, a trust established in a country other than
where you are domiciled. They are established for many reasons, including
investment confidentiality and asset protection. However, whatever the reasons,
without confidentiality their value is negligible. In addition, the Internal Revenue Service is
continually scrutinizing offshore trusts as they are often considered a means to avoiding or
In establishing an off-shore trust, the client's attorney prepares a trust document,
generally tailored to a specific off-shore jurisdiction. Next, a trust company is hired to
administer the trust. The trust company then opens up a custodial account at a bank
which is then notified that the owner of the account is the trust.
That was how it used to work. Today, in jurisdiction after jurisdiction, the
custodial bank is required to know who the beneficial owner of the trust is. That's
right! Banks are no longer satisfied with the name of the trust but need a written
statement from the trustee as to who is behind the trust and who in fact is the
Why is this happening? It is a combination of pressure from the United States, the
European Union and the general war on terrorism.
Some people think they can string one off-shore corporation owning another and
owning another and so on, thinking they have achieved confidentiality. Actually, they
have achieved nothing of the kind. At the end of the line of corporations, the bank
must know who is the ultimate beneficial owner.
Having the bank know who the beneficial owner is opens up a whole new avenue of
attack for creditors. If they can follow funds to the bank and get a court order to find
out who the beneficial owner is, all of one's asset protection strategies may well be
for naught. Americans are especially vulnerable as the Federal Courts have shown
an increasing hostility to off-shore trusts when used as asset protection devices.
The Swiss Annuity Solution
Trust settlers and trust companies along with their advisors are turning increasingly
to Swiss private placement annuities as a solution to the issue of just who is the
beneficial owner of assets but such trusts are becoming less trustworthy than they were in the
The Swiss annuity becomes the beneficial owner of the assets. The annuity policy then gives the
policy owner the right of significant control without ownership. Here is how it works:
* An application is submitted to the Swiss insurer (or
its Liechtenstein subsidiary).
* The insurer conducts its due diligence on the
* The applicant is accepted
* The client transfers the assets into the annuity.
* The funds, while an asset of the insurer, are placed
in a separate account and held by a custodian bank.
* The client requests the insurer to appoint an investment
manager to manage the funds.
Who is the beneficial owner of these assets? The answer again is simple: the
insurance company, because there has been a separation of ownership and control.
By transferring the assets to the insurer, the client is paying a premium. In exchange
for the premium the insurer gives the client an annuity policy, which in turn gives the
client certain rights of control to the assets held by the insurer. For example, the
client can make withdrawals at any time he chooses.
To be qualified for IRS purposes, there are certain specific rules that must be
followed. The client cannot directly manage the assets. They must be managed by an
investment manager. The most that the client can do is meet with the investment
manager and establish the basic strategy for the portfolio. In addition, there are
diversification rules that must be followed. While almost any asset can be placed
inside a Swiss private placement annuity, there are however certain limitations. For
example, one cannot place within the annuity, a business where one works or the
home in which one lives.
On account of the Swiss insurers not being licensed in the U.S., clients need travel
outside of the country to sign the application. Of course, it is perfectly legal for
Americans to purchase annuities or insurance anywhere in the world.
Swiss Annuities and Asset Protection
Swiss annuities contain, as a matter of Swiss law, significant asset protection
After the policy has been in force for one year, it is virtually impossible for a creditor
to prove fraudulent conveyance, because to do so, the creditor would need to prove
fraudulent intent on the part of both the policy owner and the primary beneficiary.
If a policy owner is adjudged bankrupt, under Swiss law he or she looses all control
over the policy. These rights devolve to the primary beneficiary. The only condition
is that the primary beneficiary must be either the spouse, child(ren) or grandchild
(ren) of the policy owner. As soon as the insurer has knowledge that the policy owner
is bankrupt, they are prohibited under Swiss law from accepting any instructions from
him. Once released from bankruptcy, the policy owner's full rights under the policy
In addition, it is important to note that with regard to lawsuits, Switzerland is a looser
pays jurisdiction. If someone brings a suit against your policy, not only will the
insurer be responsible for its legal defense, but the loosing party must pay the
winner's legal fees.
In this article I have given only a broad brush treatment to Swiss private placement
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and
writes extensively about retirement plans, Circular 230 problems and tax reduction
strategies. He speaks at more than 40 conventions annually, writes for over 50
publications and has written numerous best-selling AICPA books, including Avoiding
Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him
at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
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Regaining The Lost Confidentiality
of Off-Shore Trusts?
The Lance Wallach Network