Building a Legal Wall of Privacy in a Fully Transparent World

As originally published exclusively in “Escape Artist Insider Magazine – June 2023 edition”. 

In a world where technology and data sharing have blurred the boundaries of personal space, protecting your assets and private information has become increasingly crucial. Privacy is no longer a mere luxury; it’s a necessity, a cornerstone of personal freedom, and a critical component of any sound financial or lifestyle strategy. As an international lawyer and asset protection strategist, I’ve spent my career navigating the complex landscape of privacy laws and regulations, both onshore and offshore, as well as the various legal disclosure laws that cut into that privacy.

In this article, I’ll delve into the world of offshore legal structures as well as personal asset protection strategies and reveal how they can offer the highest level of privacy protection available. I have helped thousands of clients over the last 35 years establish all types of corporate entities and trusts, including asset protection, special purpose, health care, discretionary, fixed, hybrid, generation-skipping, estate planning and dynasty trusts, in 43 countries around the world.

I’ve encountered numerous people who have faced significant challenges in preserving their privacy without any structures or using only onshore structures. One of my clients, a successful high-profile entrepreneur, was constantly targeted by frivolous lawsuits before she came to see us because her assets were visible and accessible to the public. This is a common pitfall of onshore structures; they lack the robust privacy protections their offshore counterparts can provide. State and federal regulations require the public disclosure of the “UBO” (Ultimate Beneficial Owner) in nearly all types of domestic legal structures.

By contrast, offshore structures such as International Business Corporations (IBCs) and Limited Liability Companies (LLCs) can offer a more secure alternative. These entities, established under the laws of a foreign jurisdiction, are known for their strict privacy laws and robust asset protection features. In simple terms, an IBC is a type of corporation that can conduct its business anywhere in the world except in the country in which it is incorporated. Similarly, an offshore LLC is a company incorporated in an offshore jurisdiction but can conduct its business globally. 

The UBOs of these corporate legal entities may have to be disclosed to the companies’ bankers or local registered agents, but that is a far cry from the disclosure of the UBO to the whole world on a public registry. The bankers and agents have internal and legal prohibitions from disclosing this information to third parties, except in very narrow exceptions involving tax disclosures or when specific criminal activity occurs. But when it comes to plaintiff attorneys, ex-partners, ex-spouses, corporate competitors, journalists or curiosity seekers, the privacy door for the UBOs is still tightly locked.

When it comes to the best jurisdictions for these offshore structures, several places stand out, primarily former British colonies including Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, and Nevis. These jurisdictions offer a combination of strong privacy laws, stable political environments, and favorable business regulations that make them attractive options for establishing offshore structures and shielding the companies’ ownership from prying eyes.

Trusts, another popular offshore structure, provide an even greater level of privacy because the trust is a separate “juridical person” which, unlike share ownership in a company, is not considered to be “owned” by the trust grantor. A trust is a legal agreement whereby one party (the trustor) legally transfers assets to another party (the trustee) to manage on behalf of a third party or parties (the trust beneficiaries). The trust is legally separate and distinct from all the other parties involved. Asset protection trusts, established under the laws of an offshore jurisdiction, are known for their robust privacy and asset protection laws. The trust can utilize a fictitious name similar to a corporation and in most cases, only the legal trustee (generally a bank or professional trust company), is publicly linked to the trust and the trust’s assets. Neither the trust grantor nor trust beneficiaries are publicly disclosed (although that information may need to be disclosed to the relevant tax authorities).

Discretionary trusts offer the best asset protection and the most privacy with the trustee having full discretion over the trust assets and their distribution. Fixed trusts, on the other hand, have predetermined rules for asset distribution. Hybrid trusts combine elements of both. Belize, Cook Islands, and Nevis are known for their strong trust laws and are popular jurisdictions for setting up offshore trusts. Liechtenstein and Panama offer similar types of protections using “Foundations”, which are the civil law equivalence to common law trusts.

Shielding our clients’ assets from prying eyes and potential litigants can be a full-time effort, depending on the client and their wealth, business activity and notoriety. Navigating the complexities of offshore privacy laws and regulations requires a deep understanding of international law and the specific elements of many individual country laws. It is vital to select the right jurisdiction for your offshore structure, considering factors including the country’s privacy laws, political stability, and treaty agreements. Countries such as Belize, the Cook Islands, and Nevis are known for their stringent privacy laws and are popular choices for establishing offshore structures. 

In the case of my client mentioned above (the high-profile entrepreneur whose wealth is in the mid-nine figure range), a recent professional asset search will show now that she owns exactly nothing. That’s precisely what we want any plaintiff’s attorney to see should they ever target my client. The attorney will be much more reluctant to take on any case against my client on a contingency fee basis, which is what most plaintiffs want. They may suspect there’s a pot of gold somewhere at the end of the rainbow, but “suspecting” and “knowing” there are assets are two very different things when it comes to plaintiff attorneys. The fact that nothing appears on an asset search lets the plaintiff’s attorney know immediately that my client will not be the low-hanging fruit in the litigious U.S. legal system and the pot of gold as elusive as Leprechaun’s gold. Even if they can find any assets in the discovery process, those same assets will be locked up in the type of legal structures mentioned herein and still beyond their reach. Most plaintiffs’ lawyers will quickly back away from a long-drawn-out legal fight in multiple countries with no clear assets within view to actually “get”.

It’s important to mention that privacy laws cannot be used to hide from legal, tax, and a variety of specific reporting requirements. These obligations, which have been around for many years, were further quantified and updated under the Obama Administration in the Foreign Account Tax Compliance Act, or FATCA. Enacted in 2010 with an effective date in 2014, FATCA is aimed at combating tax evasion by U.S. persons holding accounts and other financial assets abroad. Under the FATCA law, U.S. taxpayers are required to report “certain” foreign financial accounts along with the account balances as well as “reportable” assets each year to the Internal Revenue Service (IRS). Additionally, the law requires foreign financial institutions to report the same information about accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. Essentially, it’s a dual reporting system similar to the domestic 1099 reporting system for banks and brokerage accounts in the United States. If the financial institution reports on the UBO’s activity and the individual fails to file a corresponding disclosure, then an IRS audit is almost certain to follow.

But offshore banking (with or without any legal structures) can certainly still serve as an effective privacy complement. By setting up an offshore bank account, individuals and businesses can benefit from greater privacy, stronger asset protection, and potentially favorable tax conditions. Jurisdictions like Switzerland, Singapore, and Luxembourg are renowned for their robust banking sectors and stringent privacy laws. The information flow is client-to-bank and bank-to-client with no third-party disclosures.

When used in conjunction with offshore structures, offshore bank accounts can offer an additional layer of both protection and flexibility. For example, an offshore trust or an IBC can open a bank account in its name, which can further enhance privacy and asset protection vis-à-vis the UBO.

As mentioned above, these laws require disclosure of “certain” financial accounts of “reportable” assets. It doesn’t say “all foreign financial accounts regarding all assets”. And while the regulatory trend has been to include more and more types of financial assets within the IRS’ disclosure requirements, including foreign banks, brokerage, hedge funds, mutual funds, and insurance products, other types of non-reportable offshore assets remain. While a detailed analysis of these exceptions is beyond the scope of this article, there are three non-reportable categories of foreign assets that I do briefly want to mention. 

FOREIGN REAL ESTATE

Real estate is not considered a foreign financial asset. If you rent, lease, or sell your property, then the income itself is reportable, but the mere existence or ownership of the property is not reportable. So, if you have a condo in San Pedro, Belize, or a teak parcel in Panama’s teak reforestation zone, the disclosure of those assets is not required by law. I can more/less understand why foreign real estate is exempted from the definition of a reportable foreign financial asset. It’s not immediately liquid and it’s also generally subject to different forms of taxation, both transfer taxes, property taxes and, of course, income taxes whenever income is generated.

PRECIOUS METALS

The second major exclusion from reportable foreign financial assets is precious metals. Gold, silver, platinum, and palladium, along with rare earths and other metals are not reportable if they are held in physical or bullion form. That means that metals in an overseas bank that show up on your bank statement (sometimes called electronic gold), certificates representing metals such as the Perth Mint Certificate or a metal ETF actually ARE reportable. But physical metal held in bullion form in vaults, safes, warehouse facilities or in a hole in your foreign home’s backyard is NOT reportable.

Why does the IRS make this physical versus non-physical distinction? I have no idea. Maybe a high-level IRS agent writing the disclosure regulations slipped in the exemption to protect his own financial privacy. The reality is that metals such as gold and silver are instantaneously convertible into virtually any fiat or cryptocurrency in the world. They are clearly a financial asset. But at present, they are not reportable.

CRYPTOCURRENCY 

Assets such as Bitcoin are also increasingly becoming part of the “privacy” dialogue. Crypto assets are reportable if the coins are held on a foreign exchange but to the extent the coins exist in what’s called “cold storage” on a physical wallet (such as Trezor), on an external hard drive or computer, let’s say in an overseas safety deposit box or even in your overseas home, those assets would be non-reportable under the current rules.

People looking to protect their privacy usually want to explore all the various options for holding non-reportable assets. Real estate, precious metals, and cryptocurrencies usually make up at least some of their overseas holdings, and the privacy these asset classes offer is at least one major factor in acquiring them.

I want to stress that offshore legal structures and the techniques described herein are not about evading lawful obligations like taxes or debts. They are about legally protecting your privacy and assets from undue scrutiny and all potential financial threats. Professionals specializing in offshore structures and the banking industry can help clients maintain compliance with laws like FATCA by ensuring that the necessary disclosures are made to the IRS without compromising the privacy benefits vis-a-vis third parties. Offshore structures can be fully compliant with international tax laws, offering legitimate ways to optimize tax efficiency while ensuring your privacy.  

This brings me to my final point. In an era where privacy is increasingly under threat, taking steps to safeguard your assets and information is not just wise; it’s essential. But navigating the world of offshore legal structures is not a journey you should undertake alone. Without professional guidance, you risk falling into legal pitfalls or missing out on the full benefits these structures can provide. 

If you value your privacy and want to learn more about how offshore legal structures can help protect it, I urge you to reach out to professionals who specialize in international law and asset protection strategies. My firm and I stand ready to guide you through the complexities of offshore privacy laws and help you secure your assets and privacy. Because when it comes to protecting what you’ve worked so hard to earn, you deserve the best advice, the best strategies, and the best outcomes. Don’t wait for privacy to become a crisis—act now and secure your future today. 

As an Escape Artist Insider subscriber, drop me a note at nagellaw@aol.com and request my free report, “15 Global Strategies to Protect your Wealth” to help you get started with your international asset protection and privacy planning process.

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