If you’re an American and have tried to open an offshore bank account in the last few years, you know how difficult it can be. About 85% of banks are closed to U.S. persons and, that who will let us in, charge higher fees and limit our investment choices. Here’s how to gain access to banks and investments that are closed to Americans using an offshore trust.
The primary reason most banks are closed to Americans is The Foreign Account Tax Compliance Act (FATCA). Since March of 2015, banks and brokerage firms have been required to report all offshore accounts owned by U.S. persons to the U.S. IRS. This effectively turned bank officers into unpaid IRS agents and placed an enormous compliance burden and cost on international banks.
Most banks found it more cost effective to dump Americans rather than build or buy a FATCA compliance system. And we’re not talking about small expenditures here… total implementation costs are thought to be $1 to $2 trillion dollars. According to the Financial Post, the Scotiabank in Canada alone spent almost $100 million.
Smaller offshore banks that couldn’t afford to kick out Americans spent millions of dollars to get into compliance, many of them losing money in 2015 because of the burden. Some have since gone into bankruptcy trying to keep up.
Then there are some large banks that have found a way to let in high net worth Americans through the back door. If you’re account is large enough, or inside the right structure, you can do business with banks in Switzerland, Germany, Austria, Andorra, and elsewhere.
The most effective method of gaining access to banks and investments closed to Americans is through an offshore trust. Form and fund an offshore trust in the Cook Islands or Belize with a foreign trustee. This trustee will be your entry ticket into offshore banks in Europe, Australia and New Zealand.
This offshore trust will also provide solid asset protection and privacy for you and your family. A properly structured foreign trust, which is funded prior to any problems arising, is the gold standard in asset protection. It places a barrier between a civil creditor and your cash that’s impossible to breach.
- I note that these trusts are tax neutral, which means they won’t increase or decrease your U.S. taxes. Gains earned within your trust are taxable to you, the settlor
If you would like the offshore assets to grow tax free, you can place them inside an insurance wrapper or single pay premium U.S. compliance life policy (which is inside the trust). All gains inside the policy will be tax free and distributions to your heirs will also be from income and estate tax are eliminated in this structure.
Should you need to use the money inside the policy for any reason, you can borrow against it tax free. You’ll need to repay the policy with interest, but no taxes will be due on a compliant loan. Distributions during the life of the settlor are taxable, but loans are not.
Note that offshore trusts take a great deal of time and effort to implement. Because of the costs involved, I generally recommend them for clients with $2 million or more in assets to protect. Insurance wrappers probably don’t make financial sense with less than $3 million.
For smaller accounts, consider a Panama Foundation. This structure provides many of the same asset protection benefits as an offshore trust at a quarter of the cost. Most Panama Foundations are managed by the founder (settlor) and are commonly used by those who wish to control their own portfolios or hold an active business.
Panama Foundations can open managed investment accounts in Europe and Germany if assets are $500,000 or $2 million, depending on the bank. Should you require a business account, then your Foundation should open its account in Panama. This country has become a major financial center with many large international banks.
An interesting option for the Panama Foundation is to open a bank account in the Cook Islands. This gets you some additional litigation protection and your bank will allow you to hold multiple currencies, physical gold, and other investments.
Another way to gain access to banks and investments closed to Americans is through your U.S. retirement account. Move your IRA or 401-K into an offshore IRA LLC and take control of your retirement account.
Your IRA account has fewer reporting requirements and will have an easier time accessing European and offshore banks through the managed account option. For example, you’ll find that an IRA setup offshore is exempted from FBAR reporting. For this reason, banks closed to individuals are open to retirement accounts.
This article is about how to get in the back door of large offshore banks as an American. There’s one way to go in through the front door of these institutions: buy a second passport and trade in your U.S. citizenship. Do this, and you’ll find that just about every bank and investment opportunity on the planet is available to you.
Let me be clear, all U.S. citizens are taxed on their worldwide income and all large banks are FATCA compliant. Also, all second passports now have your country of birth listed on them. There is no gaming the system and convincing the bank to open an account under only your Dominica passport so long as you also hold a U.S. passport.
What I am saying is that if you 1) buy a second passport, and 2) give up your U.S. citizenship, you can walk in through the front door of any major bank and open an account. So long as you have your expatriation letter in hand, you’ll be entered into the system as a non-U.S. person and FATCA will not apply to you.
For a list of second passport options, take a read through: 10 Best Second Passports for 2016
I hope you’ve found this article on how to gain access to banks and investments closed to Americans through an offshore trust and other strategies to be helpful. For more information on moving money offshore, or to setup an international asset protection trust, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.