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Scams And Caveats In The Foreign Arena You probably don't need an attorney to tell you that there are operators out there on the internet who don't even have a good name to protect, much less a professional license. Nevertheless they are only too willing to separate you from your money; preying on your greed, your patriotism, your eagerness to avoid taxes, or all of the above. If you are a crook this article will not interest you. If you are interested in working within the law, this article will help you do so, while learning to recognize the scams and caveats that are becoming so prevalent on the Web. I will divide this discussion into four general areas: 1. Criminal, fraudulent and illegal acts. 2. Borderline fraudulent and illegal acts. 3. Legal acts which must be reported. 4. Legal acts which need not be reported, but which may have unintended or unexpected consequences. 1. Criminal, Fraudulent and Illegal Acts. I am less concerned with this category than with any other. It is not likely that many of you would be fooled by someone telling you that it is perfectly alright to lie, cheat, steal, forge signatures, back date documents, or launder money. Hopefully, you don't need much help in these areas. But there are actions that may seem perfectly legal in one context, which are strictly illegal in another. 2. Borderline Fraudulent and Illegal Acts. The most common borderline and illegal acts are fraudulent conveyances. After all, what could be more commendable than giving your mother a house and setting her up with a bank account, to insure her comfort for the rest of her life? Absolutely nothing; UNLESS you happen to have judgments against you, and your generosity will impede your creditors from collecting on your debts. As you will learn from my other articles, I make my living helping people protect their assets; but one must be very careful in doing so. It may, in the long run, be better to let your creditors have your assets, or a part of them, than it would be to cool your heels in the hoosegow for a period of time. This article is by no means intended as an exhaustive legal treatise on fraudulent conveyances; nevertheless, consideration of the concept of fraudulent conveyances in the context of asset protection, is absolutely crucial. In the most straight forward and simple terms, if you even suspect that you may have a problem in this area, consult an attorney. Generally speaking, the law will not allow one to give away his property, or sell it for less than full value, simply to prevent a creditor from seizing it. On the one extreme, would be the case of a man with a newly acquired judgment against him, who states in writing, that he is making a gift of all of his property to his wife, so that his judgment creditor won't get it. There is almost no question at all, that conveyance would be set aside as fraudulent. At the other extreme would be the person who, having no indication that anyone, anywhere, has any sort of claim against him, transfers his property to a Foreign Trust, for the purposes of estate planning, income tax savings, and of course protection of his assets. In the event that person later has a judgment rendered against him, in this writer's opinion, there would be almost no chance whatsoever that a court would find that the transfer to the trust was a fraudulent conveyance. Situations between these two extremes should be considered very carefully. Again, generally speaking, the critical issue is intent. If a creditor can prove that the debtor made a transfer of his property with the intent to frustrate the creditor, the transfer will be set aside. Moreover, the courts recognize that it is often impossible to establish intent one way or the other. Accordingly, the courts may still set aside a conveyance, even where intent to defraud cannot be established, if there are certain "badges of fraud" present. In other words, if the "circumstances" indicate that the transfer was made to frustrate a creditor, the transfer may be set aside. For example, if a debtor transfers his property to his children for less than fair market value, thus rendering himself insolvent, or nearly so, and especially if he continues to exercise complete control over the property, chances are very good that the conveyance will be set aside. It is important to recognize that making a transfer before a judgment is rendered will not remove the concern about fraudulent conveyances. Even if a lawsuit has yet to be filed, if you know or should know, that a claim or lawsuit is coming, any transfers may be set aside. On the other hand, some practitioners take the position that almost no transfer to an entity such as a limited partnership would be fraudulent. This position is supported by pointing out that the transfer does nothing more than alter the form of the property; it is made for full value, and therefore does not render the transferor insolvent. Frankly, this writer does not join in that position. It is true that transfer to a Family Limited Partnership might discourage a lawsuit in the first place. It is also true that if a creditor exhausts all his resources obtaining a judgment against his debtor, the prospect of beginning a new lawsuit to set aside what the creditor might consider to be a fraudulent conveyance, would be very discouraging and might prompt a favorable settlement. However, if the matter did come to trial, it is this writer's opinion, that especially where a claim was pending when the transfer was made, the court would set the transfer aside. If a fraudulent conveyance is proven, the transfer will be set aside, as a matter of course. But there may also be other penalties, as well. There could also be recovery of costs involved, punitive damages, and in many states, under flagrant circumstances, there may even be criminal sanctions. As is almost always the case, "an ounce of prevention is worth a pound of cure." Have your house in order before any claim arises! 3. Legal acts which must be reported. There are many, many actions which may be taken that are perfectly legal; but if those actions are not reported, the law is broken. For example, it is perfectly legal to carry suitcases full of cash (unless of course, that cash was illegally obtained; but that is a different issue) out of the country, to be deposited in a foreign bank, or for foreign purchases. BUT, the fact that you are doing so, if the amount is more than $10,000, must be reported. If you do not, and you are caught, your cash is subject to seizure, and you are subject to civil and criminal sanctions. Moreover, if you have $36,000 to take out, and you do it at $9,000 per day in four days, the amounts will be added together and you will have broken the law. It is also perfectly legal to have a foreign bank account, or to have a foreign corporation. But if you do, and you fail to report it on Schedule B of your IRS 1040 form you are breaking the law. The point is, that it is not enough, to act morally and to keep your business within the law. You must know when your actions are reportable, when to report, and how to report. Be careful. 4. Legal acts which need not be reported, but which may have unintended or unexpected consequences. This is the area where most problems arise. The net is saturated with promoters praising the United States Constitution and pointing out our rights under that Constitution. The scams in this area are too numerous and varied to deal with individually. Many times it is years before the victim of a scam, or misinformation, learns through an audit or by other means that he has been scammed, or given misinformation. By that time the promoter has moved on, and is nowhere to be found. Suffice it to say that while we do have a Constitutionally protected right to enter into contracts, and while those contracts that we enter into may be perfectly legal; third parties, most notably the Internal Revenue Service, are not bound by our contracts and most likely will not pay any attention to them. For example, if you exercise your right to contract, and agree to lend money to someone at the rate of 2% per annum, you will receive only 2%, but you will be taxed according to the IRS imputed rate. I have recently learned of a web site promoting deferred private annuities. I promote private annuities, and consider them to be the single best means for transferring funds offshore. But they must strictly comply with the law. Commercial insurance companies routinely write deferred annuities and no one questions them. Not so with private annuities. This is another case of it being perfectly legal for a person to purchase a private annuity from a foreign corporation; and for that foreign corporation to defer payment for ten, twenty or even fifty years. However, if you are audited and questioned about the annuity, it is my opinion, and fear that the transaction will not be recognized as an annuity, but will be characterized as either a gift to the corporation, or worse, as an equity investment in the corporation. This, of course, would result in the corporation being characterized as a controlled foreign corporation, if it wasn't already. This is a good place to point out the fact, that as long as our legislative bodies and judges are compensated from taxes, they cannot be relied on to be too aggressive in protecting our right to contract. Even our juries are composed primarily of school teachers, postal workers and other public servants, who rely on the tax for their weekly paycheck. Don't be surprised if they don't show you very much sympathy. Most of the problems related to the ignoring of contracts, arise from the issue of control. If, for example, a single individual sets up several corporations, over all of which he has absolute control, and then tries to reduce taxes, or avoid financial liability, by having the corporations deal with each other, most likely the contractual fiction will be ignored. If one or more of these corporations is a foreign corporation he will have other problems, as well. Many a person, thinking himself very clever, has set up a foreign corporation, only to slam face first into the Controlled Foreign Corporation (CFC) rules. At the risk of oversimplification, these rules provide that a CFC is a foreign corporation in which a U.S. Shareholder(s) own more than fifty percent of voting stock or more than fifty percent of the corporation's value. If the corporation is determined to be a CFC, its U.S. Shareholder(s) will be taxed on their proportional share of the corporation's income, even if that income is not distributed. Many people don't realize that assets held offshore, if they are held in
your name or the name of your nominee, or in the form of bearer shares, are
still part of your taxable estate and are subject to creditors= claims. Of
course, it is true that if you are willing and able to lie on Schedule B of
your 1040 Income Tax return, and on your estate tax return, then chances are,
offshore assets will not be included in your estate and will not be taxed.
Further, if you are willing and able to lie to a creditor, and tell him that
you have no offshore assets, then chances are the creditor will not find
those assets and they will be safe. Moreover, even if a creditor did find the
offshore assets, neither a bank nor a Swiss Annuity company, which has become
a popular vehicle for investments, would respond to a Many promoters include in their documents, what they call an "anti duress clause." This provision provides that if the holder of property believes that a request to hand over property is made under duress, the holder is to refuse. Sounds great. However, in this writer's opinion, if the stakes are high enough, an aggressive judge will hold you in contempt and keep you in jail until you can convince the offshore bank or insurance company that you are not under duress in making your request. Peace of mind is one of the foremost reasons for developing a plan. For most people, to lie, cheat and play games would defeat that purpose and should be avoided. If you have a foreign bank account or a foreign corporation, it should be reported on your 1040 Form. Moreover, if you have any foreign assets, including bank accounts, annuities, or a corporation, and you are called into court for a Judgment Debtor's Examination, you should not perjure yourself, just to save yourself some money. If your offshore holdings are small, they aren't worth risking jail over. If your offshore holdings, or potential offshore holdings are significant, you should consider the ultimate asset protection and estate planning tool. Copyright ©1998 |
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