|Unfortunately, it is usually not
possible for U.S. persons to purchase offshore funds directly from the
fund promoter. Most fund promoters prohibit direct investment from the
United States to avoid regulatory hassles with the U.S. Securities &
Avoiding Tax Traps in Offshore
Offshore funds present some of the
most profitable investment opportunities internationally. However, there
are certain "tax traps" for unwary U.S. investors who purchase offshore
funds without considering the tax consequences. These tax traps are designed
to prevent U.S. investors in offshore funds from deferring payment of taxes
on their profits. Iíll explain how they operate in a moment.
Under U.S. law, U.S. mutual funds
are required to distribute all income or gain to their shareholders each
year. Offshore funds are obviously not subject to these rules, and indeed
many of them provide the opportunity to defer income or gain indefinitely.
The U.S. 1986 tax reform act contains a provision that imposes steep taxes
on deferred gains in offshore funds organized as foreign corporations.
The law also taxes the income allocated each year at the highest tax bracket
that existed that year. Then, the tax for each prior year is subject to
compound interest at the prevailing rate for an underpayment of tax.
There are four practical ways
to avoid these traps:
1. Purchase the funds through your
Individual Retirement Account or pension plan. That way, all gains are
legally tax deferred until you begin receiving distributions from the plan.
There are no restrictions on offshore investments in retirement plans,
although it is often difficult to find a U.S. custodian who will consent
to having the funds placed offshore. However, the Council of Experts members
listed as contacts in this article can assist in finding cooperative trustees.
2. Purchase the funds through an
offshore life insurance policy or variable annuity. Such structures require
expert tax advice to construct, but again, the Council of Experts members
listed as contacts can provide assistance in this regard.
3. Create a structure involving an
offshore trust and a charitable remainder trust to purchase the funds.
Again, this requires expert tax advice and you need an independent trustee
to administer those investments
4. Purchase only offshore funds organized
as "partnerships" for U.S. tax purposes. This insures that all income or
gain from your investment flows directly through to you, with no opportunity
for tax deferral. Just be careful to avoid situations where a foreign partnership
makes an investment in a foreign mutual fund.
The best way for typical investors
to purchase offshore funds is using the strategies I just described. If
your situation is unusual, there are two more complex procedures by which
you can avoid the high tax on distributions of accumulated earnings charges,
according to Sovereign Society Tax Advisor Vernon Jacobs.
Our Five Top Offshore Funds
I promised you that we would reveal
the names of our top recommended funds in this article. Here they are:
Fund #1 (up +21.5% per annum since
1996) is Man-AHL Diversified PLC. Link: http://www.maninvestmentproducts.com.
No front-end load; declining redemption fees starting at 3% for the first
two years following purchase declining to zero after seven years. Note:
This has been an extremely profitable fund, but unlike the remaining four
picks, is not designed to minimize risk through hedging strategies.
Fund #2 (up +13.2% per annum since
1989) is GAM Diversity. The euro share class (offering currency
diversification) is GAM Diversity Euro Class. Link: http://www.gam.com.
5% front-end load, 0% redemption fee.
Fund # 3 (up +9.3% per annum since
1995) is Pioneer-Momentum All-Weather Fund. Link: http://www.momentumuk.com.
5% front-end load, 0% redemption fee.
Fund #4 (up +12% per annum since
1997) is SocGen International Sicav. Link: http://www.sgam.fr. Front-end
load up to 3%.
Fund #5 (up 15% since its formation
in November 2001) is Trafalgar Hedge Fund LP. This fund is organized
as a partnership for U.S. tax efficiency. Shares in U.S. dollars, euros
and British pounds are available. There is no front-end load; management
reserves the right to charge a fee for redemptions that occur less than
a year after your initial investment.
For more information on investing
in the lucrative offshore fund market, contact any of the following members
of The Sovereign Societyís Council of Experts:
|Managing Director, Sovereign International
Asset Management, LLC. WATS: (888) 609-7425. Fax: +1 (727) 784-6181. E-mail:firstname.lastname@example.org.
Grossman is a Certified Financial Planner and a Certified Investment Management
Analyst. He was one of the first financial advisors to develop a tax-compliant
method for taking IRAs and pension funds offshore.
|President, ENR Asset Management,
Inc. Toll-free (U.S.A./Canada): +1 (877) 989-8027. Tel.: +1 (514) 989-8027.
Fax: +1 (514) 989-7060. E-mail: email@example.com.
Rosemanís firm specializes in customizing multi-manager mutual fund portfolios
for high net-worth investors by blending different fund strategies with
the objective of increasing returns while reducing overall risk.
|Dr. Erich Stöger
|President, EurAxxess, Ltd. WATS
(USA): 1 (800) 331-0996. Tel.: +(41) 1 980-4281. Fax: +(41) 1 980-4255.
With over 30 years experience in private banking, Dr. Stöger has wide
experience in selection of offshore funds and in taking U.S.-qualified
retirement plans offshore.
|Tax Advisor to The Sovereign Society.
Jacobs is a CPA and has substantial experience assisting U.S. investors
in offshore funds with tax compliance issues.
|(The Sovereign Society, its principals
and the advisors listed in this article may have positions in the securities
recommended herein and may hold and or dispose of the same.)