Asset protection planning will almost never save you any taxes. If you use an asset protection trust, you can count on NO material income tax savings and probably an increase in compliance costs. If somebody advises you that an offshore trust (or indeed most offshore structures to protect assets) will save you tax – walk away... you are almost certainly in the hands of a scammer.
How do you know if promises people make to you about saving on taxes is fraud? SIMPLE...US Citizens are taxed “on their worldwide income from whatever source derived.” Anytime ANYBODY says an offshore trust or an offshore bank will save you any taxes, they are advising you to commit a crime: RUN. Offshore trusts and offshore accounts alone will not save taxes.
In a like matter, asset protection is tax neutral; alone it will NEVER ever save you taxes. In fact, any offshore account needs to be specifically reported to the IRS (and if you have unreported accounts please remedy this before the IRS does it for you). Remember, abuse of foreign trusts has become a major focus of the IRS. The IRS has the personnel (often ex-CIA), the computers, the data, and other necessary resources to catch this brand of tax cheater.
Today, I take on the fourth rule of asset protection. Taxation. This is simple. I’m going to skip over a lot of the complexities. I taught this for seven years at USC Law and Business School. I taught in many other universities and law schools on the issues of international taxation and offshore trusts. If you take the complete course on this site, you get all the details, all the forms but for now I’ll cover a few of the basics in three minutes.
First, any offshore asset protection plan is ideally structured to be tax neutral. It should neither increase nor decrease your taxation. It should also allow you to engage in any acceptable domestic or offshore tax planning.
The reason I point that out is there’s literally thousands of people, who tout asset protection planning as a way to save you taxes or even eliminate taxes. They think that because you can put money offshore in a “secret bank account” that it's not taxable. Well a lot of people are rooming with Bubba because they bought into that garbage.
All offshore income whether it's in an asset protection trust or not is taxable to the U.S. beneficiary, the U.S. grantor of this trust. There are some good offshore and onshore tax planning we can do. Sometimes we can almost eliminate the tax but it's not because of the asset protection planning. It's because the structures allow traditional tax planning to be used at the same time.
I want you to avoid anyone who promises to save you taxes. I want you to run like hell because you're about to be scammed and where do I want you to run? I want you to run to your CPA and your tax advisor. They will help you smell through the garbage. They all know the stink. If it's too good to be true, it is.
A normal offshore asset protection trust if done correctly should be structured to be domestic for tax purposes. I know that doesn’t make any sense. I will explain this in later lessons. But it should be structured to be for domestic for tax purposes. This means there's no additional forms required. No additional compliance. It won't save you any income tax. You're going to pay tax on every dollar you make unless you’ve done something else.
The truth is since 9/11 there is no such thing as a secret bank account anymore. To the government, IRS, FTC, SEC, all offshore accounts are transparent. Any bank that doesn’t tell the government information on an account faces losing their correspondent banking privileges.
That means an offshore bank that tells the United States to go take a flying leap at the moon risk being cut off from being to do business in the United States. What do they always do? They turn over the information. If you got a secret bank account, you come clean with it. You straighten yourself out. That’s the only way you're going to save yourself horrible civil and criminal penalties.
There’s no amount of money that makes it worthwhile to spend time in prison. It simply doesn’t work. For now just remember all good asset protection planning is tax neutral. If someone promises you the moon, check them out, because you're probably about to be conned or scammed. So take the time to learn the rules. The United States almost has the lowest tax rates in the world for a civilized country. If you really know the rules, you can make huge differences. You can cut your taxes down to a fraction of what the normal person pays. While also doing it legally, ethically without hiding or relying upon illegal decisions to not report income.
Be straight. We can always eliminate or reduce taxes a bit but never push the envelope. Asset protection’s purpose is to protect your assets. Not to get you into trouble with old Uncle Sam.