One of the more exotic planning opportunities for owners of private business is to establish asset protection strategies that are based in jurisdictions out of the United States. When we first bring this subject up, we often are met with resistance for this sort of planning.

When we ask our Clients why they don’t want to learn more, we are often told that you can’t do this because it’s illegal. The fact is offshore planning is not illegal, just a little complicated. In fact, there are sections of the tax code that spell out what specifically has to be done for offshore accounts and trusts to be legal.

Ok, it might be legal, but why would I want to do this?

You may have read about various tax advantages that may or may not be available with offshore planning. However, most of the people we’ve talked to that have actually done offshore planning do it for two reasons.

The first is asset protection. If you own a business, there is a very good chance that you’ve had some sort of frivolous law suit filed against you. The plain problem is that every year there are more and more of these suits. Having significant assets offshore well before these problems appear can make it very difficult on those who would sue you for frivolous reasons.

In addition, the government is passing more and more onerous laws. This is especially true in labor relations. For example, in California if you don’t document breaks and lunch period for all your employees you could be subject to huge fines and penalties. These fines can and are being levied not for your employees not taking breaks. The fines are being used against those that don’t have the proper documentation.

The second reason you might want to consider off shore planning is what’s called the business protection policy. This insurance policy helps you self fund for potential losses your business could face.

For example, if you have a high concentration of business with one Client there is a risk that this client could leave your company. You might save money for an emergency fund should this happen. If you put a side fund together for the instance that your Client might leave, you have to do this with after tax dollars. The Government won’t let you deduct the contingency fund for this risk.

However, in the offshore world, there is part of the US Tax Code which allows just these actions. To take this deduction you must set up a company called a captive insurance company . A captive is a company that is set up to insure risk of one or more companies. Typically, multiple companies will pool their risks or seek reinsurance.

When set up properly and legally, you can start to fund for a possible contingency with pre-tax dollars. If the contingency never happens, you get to keep the money and the earnings on that money. This is how all insurance companies work.

If it’s so good, why isn’t everyone doing this?

Not everyone does this, we believe for two reasons. One is the complication and the second is the amount of money needed for these strategies. For most people, setting up an offshore captive insurance company doesn’t make sense. They don’t have the $300,000 per year in excess revenue which is the minimum for this program.

The second reason is to set up an offshore company, you actually have to go offshore to do so and many people are not willing to jump through the hoops to keep the entire transaction legal. For those who are willing to go through these processes, the advantages and benefits can be large.

We recommend strongly that if you own a business that you at least have a conversation about asset protection and setting up a captive company that can help control risks you might have in the future. We would be glad to schedule some free time with you at your convenience.

This is a complicated subject and there are promoters who may break the law due to not being properly informed. Those are the people we see in the headlines. There are also over one million offshore trusts set up right now. For those who set them up properly, the value can make a difference. We strongly recommend that you start educating yourself about the rules and see how this strategy can fit in for you.

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1.) California Labor Code Sections 1174-1175.
2.) Captives can be either onshore or offshore. Onshore captives have many but not all of the benefits of offshore captives.
3.) Foster & Dunhill, Ltd.

With warm regards,

Stage 2 Planning Partners

Josh Patrick © 2006

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