Asset Protection BLOG - Mark Nestmann

Switzerland: Universal Wealth Tax Could Save Bank Secrecy

As the global economic debacle continues to escalate, more and more frankly whacked out ideas are coming to the forefront.  I wrote about one of these ideas—a "tiny tax" on all foreign exchange transactions—a few weeks ago.

Now, the Swiss Bankers Association —an organization that should frankly, know better—has come up with an even more revolutionary proposal.  It's for a universal withholding tax to begin in Switzerland, but that could gradually be expanded to other international financial centers.

Here's how it would work.  When opening an account, a depositor would present the Swiss bank proof of residence in a specific country.  (Banks in virtually all countries already require such proof.)  Then, the Swiss bank would levy a withholding tax equivalent to whatever tax is in effect in the client's home country.  The tax would apply to all types of income and cover both individuals and legal entities. 

Once levied, the bank would transfer the money to the tax authorities in the client's home country.  However, the bank would not identify the client, unless home country tax authorities made an inquiry complying with Swiss law.  In this manner, the Swiss claim, the system would preserve bank secrecy, yet eliminate the tax evasion many high-tax countries claim is pervasive among Swiss bank depositors.

I can understand why the Swiss Bankers Association made this proposal.  But, I believe they fail to understand the actual motivations of high-tax countries to eliminate bank secrecy in Switzerland and other offshore jurisdictions.

It's true that the OECD, the Obama administration and other global busybodies claim that wealthy taxpayers use offshore jurisdictions with bank secrecy to evade hundreds of billions of dollars in taxes each year.  The problem is that that the politicians who repeat this allegation don't have a shred of evidence to prove it.  No less an authority than IRS Commissioner Douglas Shulman calls these estimates "wildly overstated."

No, this effort has very little to do with reclaiming revenues from abroad—although I'm sure high-tax countries won't send it back .  They're much more interested in automatically obtaining detailed account information of individuals who invest abroad.  Once this is in place, OECD country tax administrations can then demand provisions that make it just as easy to levy against assets in a foreign account as in a domestic account. 

The Swiss Bankers Association proposal plays into the hands of high-tax governments and the OECD.  In the unlikely event the OECD accepts it, it won't be the end of demands for enhanced information exchange provisions.  Instead, it will be one more nail in the coffin for bank secrecy.

Copyright © 2009 by Mark Nestmann

Should You Plan on Dying in 2010?

You might, if you're a U.S. citizen or permanent resident, and want to spare your heirs from paying estate tax at a rate as high as 55%.  But don't make your funeral arrangements just yet.  Congress might change the law before the estate tax temporarily expires in 2010.

In 2001, Congress radically retooled federal wealth transfer tax laws. The amendments raised the estate tax and lifetime gift exemption amounts, lowered the top estate tax rate and eliminated the estate tax all together for 2010. But in 2011, estate tax rates will return with a vengeance.  Instead of the current US$3.5 million threshold, they’ll revert back to the 2002 threshold of US$1 million.  And should your estate exceed US$1 million, it will be taxed at a maximum rate of 55%--up from today's 45%.

Congress has dithered for nearly a decade without dealing with the ridiculous uncertainty it's caused more than three million wealthy American families.  Yes, Congress still has a little more than two months to enact corrective legislation.  But if your estate exceeds US$1 million, you'll want to consider some ways to reduce your estate tax liability.

More about that in a moment.  But first, let's consider how Congress might amend the wealth transfer tax laws, should they decide to act.  It's quite clear that both the Obama administration and congressional leaders don't want the estate tax to "sunset" in 2010.  The path of least resistance to achieve this goal would be to amend the law to keep federal wealth transfer tax rules the same as they are for 2009.  Congress could then re-address these laws at a later date.

Here is a summary of other proposed modifications to federal wealth transfer tax rules currently before Congress:

• Decrease the federal estate tax exemption to US$2 million for 2010 and index it for inflation thereafter.
• Increase the federal estate tax exemption to US$4 million or more for 2010 with or without indexing it for inflation thereafter.
• Impose the federal estate tax at a rate from 35%-55%
• Permit a widowed spouse to utilize the unused federal estate tax exemption of his or her predeceased spouse.
• Eliminate or at least restrict the ability to obtain valuation discounts for gift and estate tax purposes in entities such as limited partnerships.

So, dying in 2010 doesn't seem like it's such a good strategy to avoid estate tax after all.  But what options do you have to deal with this congressional uncertainty?  Here are some ideas to consider that should remain effective to reduce estate tax no matter what Congress decides:

• Marital bypass trust.  If you're married, this simple trust (sometimes referred to as an "A-B trust") can double your estate tax exemption.  While this kind of trust often stands alone, you can also incorporate it into an offshore trust formed in any suitable offshore jurisdiction.  That way, you'll obtain state-of-the-art asset protection for your wealth, and also double your estate tax threshold.
• Lifetime gifts.  You have a US$1 million lifetime gift tax exemption.  If you own assets that have substantially fallen in value in the last year or two, why not gift them to your loved ones now, before values recover?  And don't forget that you can give anyone a gift valued up to US$13,000 annually without reducing your lifetime exemption. 
• Life insurance.  Insurance enjoys uniquely preferential tax treatment under U.S. law. With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes. Essentially, you avoid tax on portfolio income and transactions in exchange for the cost of insurance.  Again, you can use a tax-qualified offshore life insurance policy for enhanced investment choices and asset protection.

One final note: Proper structuring of your estate plan requires substantial legal expertise. There are many potential pitfalls. Be certain to retain a qualified attorney before you put any of these strategies into place.

Copyright © 2009 by Mark Nestmann

Offshore Centers Teeter on Brink of Financial Collapse

The mainstream media often paints a picture of offshore centers as outposts of unimaginable wealth, with their economies fueled by the proceeds of money laundering, tax fraud, and other illegal activities.

The truth, as is often the case, is very different from the news reports.  Some offshore centers—think Switzerland, Singapore, and Hong Kong—are in relatively good shape financially.  Their governments can pay bills coming due.  Business continues in a relatively "normal" fashion, or as normal as is possible in the grip of the most serious financial meltdown in nearly a century. 

Numerous offshore centers now face a perfect financial storm.  Their governments spent heavily to beef up infrastructure.  But, they also borrowed heavily to finance these expenditures.   So long as the global economy continued to grow, it was reasonable to believe they could pay the money back.  But in the midst of a global financial collapse, they can no longer afford to do so.

In addition, just as the global economy tanked, the Organization for Economic Cooperation and Development launched a renewed campaign against "harmful tax competition."  The targets, as always, were offshore financial centers.  So at the same time that offshore centers saw revenues shrinking from due to the economic downturn, the OECD forced them to eliminate bank secrecy with respect to inquiries from tax authorities in high-tax countries.  

The British overseas territory of the Cayman Islands, the world's fifth largest banking center, is a case in point.  Facing a US$82 million budget deficit, the Caymans last month appealed to its colonial masters in London for permission to borrow US$310 million from banks.  And despite the fact that banks had already approved the loans, the British Foreign Office said "no." 

The Caymans weren't asking for direct government aid from the British government.  But, because the size of the loans would result in a deficit in the government's operating budget, the Caymans had to ask for London's permission to borrow the money. 

In response to the request, Foreign Office minister Chris Bryant suggested that Cayman introduce—gasp—new taxes.  "I fear you will have no choice but to consider new taxes – perhaps payroll and property taxes," Bryant wrote to McKeeva Bush, head of the Cayman government. 

For the moment, the Caymans have rejected the idea of direct taxes.  Instead, the government will raise customs duties, licensing fees, and other indirect taxes.  It also plans to sharply cut spending.

However, the global financial crisis isn't going away.  Neither is the OECD.  That means the Caymans and other offshore centers will come under increasing pressure to balance revenues and expenditures.  For now, direct taxes on income or property are off the table.  But there's zero assurance that the governments of offshore centers may impose them in the future. 

Copyright © 2009 by Mark Nestmann

Is Expatriation for You?

The United States is one of only two countries that imposes tax on a citizen's worldwide income, no matter where that citizen lives.  (The other country is, of all places, Eritrea.)

For citizens of most high-tax countries, it's easy to legally avoid the obligation to pay tax on your worldwide income.  You simply relocate to a lower-tax jurisdiction, or one that only taxes local income.  After an extended period—normally 1-2 years—you become "non-resident" for tax purposes.  You no longer have the obligation to pay tax on your worldwide income to the country that issued your passport.  You may, however, still be subject to gift and estate taxes. 

But not the USA.  To permanently disconnect from the obligation to pay U.S. income tax, U.S. citizens must not only leave the United States.  They must also take the radical step of giving up U.S. citizenship and passport.  This process (from a U.S. standpoint) is called expatriation.  Before giving up U.S. citizenship, they must acquire citizenship and a passport from another country. 

If you're wealthy, expatriating could result in big tax savings.  The total combined state-federal income tax burden for most high earners is close to 50%.  And President Obama promises to hike that burden to pay for his spending plans.  If you anticipate earning US$2 million over the next five years, expatriation could save you a cool US$1 million in income tax during that period.  Not to mention millions more in the years ahead, and millions more again in estate tax savings. 

Expatriation also eliminates the increasing difficulties that U.S. citizens face when they invest or do business overseas.  Most non-U.S. banks and brokers now prohibit anyone with any connection to the United States from opening an account.  This is a result of the U.S. government's intensifying crackdown against anything "offshore."  Foreign entrepreneurs may avoid joint ventures with U.S. citizens, for fear of U.S. tax or regulatory entanglements.  If you give up your U.S. citizenship and passport, you eliminate these problems.

Only a few hundred people, many of whom are not wealthy, give up their U.S. citizenship annually.  But despite this reality, expatriates remain vulnerable to political bombast.  The image of wealthy former U.S. citizens living tax-free in tropical paradises is an irresistible populist target.  Former Congressman Sam Gibbons, a Florida Democrat, once spoke of  "the despicable act of renouncing allegiance to the United States."  Former Congressman Martin Frost, a Texas Democrat, supported tax penalties on expatriates on the basis of "basic patriotism and basic fairness."  The result has been a series of increasingly stringent laws penalizing expatriate Americans. 

Until 2008, it was relatively easy to circumvent these anti-expatriation rules.  But last June, Congress replaced the existing law in its entirety with an "exit tax."  The exit tax establishes a legal fiction that you sell all your worldwide property the day before expatriation.  If you're a "covered expatriate" (which I'll define momentarily), you must then pay tax on this fictional gain.  Unrealized gains in non-grantor trusts and some retirement and pension plans are exempt from the exit tax.  Instead, payouts that would taxable to a U.S. person are subject to a 30% withholding tax. 

Only certain dual citizens and minors with few ties to the United States are exempted from these requirements.  Long-term green-card holders must also pay the exit tax, if they've lived in the United States for at least eight of the 15 years preceding expatriation. 

How are you supposed to pay the tax without selling your assets?  That's your problem!  However, the law permits deferral by posting acceptable security with the U.S. Treasury and paying an interest charge on the amount deferred.

Fortunately, the first US$600,000 of unrealized gain isn't subject to the exit tax.  This amount is adjusted annually for inflation, and for 2009 the exemption is US$626,000.  The exemption doubles for a married couple, both of whom expatriate. In addition, even if your unrealized gains exceed US$626,000, the exit tax only applies to you if you're a "covered expatriate."  This means you:

• Have a global net worth exceeding US$2 million (US$4 million for a married couple); and/or
• An average annual net income tax liability for the five preceding years ending before the date of expatriation the loss of U.S. citizenship or residence exceeding US$124,000 (adjusted for inflation, US$136,000); and/or
• Fail to certify under penalties of perjury that they have complied with all U.S. federal tax obligations for the preceding five years or fail to submit evidence of compliance as required by regulation.

There's also a very sneaky substitute estate tax provision in the exit tax law.  Let's say you expatriate, and then 20 years in the future make a gift to family members remaining in the United States.  If you're a "covered expatriate" at the time you make the gift, U.S. recipients must pay a tax when they receive it.  And not at ordinary income tax rates, but on the highest estate tax rate existing at the time!  However, a covered expatriate can make annual gifts up to US$13,000 to any U.S. person without a tax consequence to the recipient.  The US$13,000 exclusion is adjusted annually for inflation. 

The best that can be said about the exit tax is that it offers a relatively clean break with the U.S. tax system as of the date of expatriation.  Unlike prior law, there is no longer a 10-year period after expatriation during which punitive tax and immigration rules apply. 

Is expatriation for you?  The decision to give up U.S. citizenship is a serious one.  It also requires substantial advance planning, including the acquisition of a second passport, if you don't already have one.  It's a step you should take only after consulting with your family and professional advisors.  But it's the only way that U.S. citizens and long-term residents can eliminate U.S. tax liability on their non-U.S. income, wherever they live.  And it's a tax avoidance option that Congress may eventually eliminate altogether.

(The Nestmann Group can provide consultation on every aspect of expatriation, from acquisition of a second passport to the actual loss of U.S. nationality.  For more information, contact Mark Nestmann at info@nestmann.com.)

Copyright © 2009 by Mark Nestmann

Global Tax Wackos at it Again

You have to admit they never give up.  Even if the ideas they're pushing have been thoroughly discredited for decades.

I'm speaking of an idea that even the economist who originally proposed the idea now rejects: a global tax on foreign exchange transactions.

Last week, The New York Times published an article by former French foreign minister Dr. Philippe Douste-Blazy.  It proposes a "tiny levy" of 0.005% on transactions involving the world’s most traded currencies: the dollar, euro, pound sterling and yen.  This tax, Douste-Blazy says, will raise US$33 billion annually to fight poverty and disease in the world's poorest countries.

Imposing tax on forex transactions isn't a new idea.  Back in 1978, economics professor (and Nobel Laureate) Dr. James Tobin suggested that such a tax could potentially help curb volatility in emerging market economies.  This type of tax has come to be called a "Tobin Tax"—over Dr. Tobin's objections.

Dr. Tobin proposed the tax to inhibit speculation in third-world countries, allowing them to pursue more independent economic policies.  But the United Nations hijacked his idea, primarily because the tax offered the agency a funding source independent of individual donor governments.

So beginning in the mid-1990s, the UN made the Tobin Tax the centerpiece of its funding proposals to redistribute wealth and income.  Only it would be imposed at 0.05%, a rate 10 times higher than Douste-Blazy now proposes.   According to a 2001 report from the UN's "High-Level Panel on Financing for Development," such a tax would generate up US$400 billion annually. 

(And just to prove there's nothing new in current efforts by global tax authorities to end bank secrecy in tax matters…there's not.  The same 2001 report proposed that all governments collect private financial data on individual taxpayers and share it with other governments.  It also suggested that governments should have the permanent right to tax individuals who exercise their right to emigrate from their homeland. An "International Tax Organization" would oversee these efforts and "take a lead role in restraining tax competition.") 

It remains to be seen if the countries issuing the currencies Douste-Blazy wants to tax will go along with this idea.  If they do, it will be one more blow against freedom of movement, tax competition, and financial privacy.  But a Tobin Tax, if imposed, will not have the effect its proponents claim.

To understand why, consider how forex markets operate.  Investors risk trillions of dollars in these markets daily, but someone has to take the other side of every trade.  The broker-dealers that do so immediate try to off-load the risks they've assumed to other brokers.  If speculators are short U.S. dollars, brokers may have an oversupply of yen.  The brokers try to sell the excess yen to other dealers.  This practice encourages hedging, increases liquidity, and helps reduce currency volatility. 

Now it's time for a little Economics 101, directed to our former French foreign minister.  Anytime the cost of something increases, people tend to buy less of it.  So if governments impose a tax on foreign exchange, even a tiny one, transaction costs will increase.  That will discourage trading, decrease liquidity, and increase volatility.  It will also lead to a much smaller revenues than Douste-Blazy —much less the United Nations—suggests.

So what's the real purpose of his suggestion?  The only reason I can come up with to resurrect this thoroughly discredited idea is because it presents an opportunity to impose a truly global tax.  And to construct a foundation over which to enforce other global tax initiatives.

Are you ready for a global tax agency that can levy tax payments anywhere in the world?  For global restrictions on emigration?  Or for globally enforced capital controls? 

If you are, then you should love the idea of the Tobin Tax.  But if not, you at least have some intellectual ammunition to take on your friends, business associates, and family members when they suggest that it might be a good idea.  It's not. 

Copyright © 2009 by Mark Nestmann

IRS Extends Deadline for Reporting Unacknowledged Offshore Accounts

It couldn't have happened at a better time.  The IRS today announced an extension of time for "voluntary disclosures" by taxpayers with unreported offshore accounts.  It extended the previous Sept. 23 deadline three weeks, until Oct. 15, 2009.   (I've written previously about this program here.)

Given the overwhelming response to this initiative, the extension couldn't come at a better time.  The IRS has already processed more than 3,000 applications under the program, with many coming in just the last few days, compared to 88 for all of 2008. 

If you're a U.S. taxpayer with unreported offshore income and/or accounts, I highly recommend you consider enrolling in the program.  But speak to a tax advisor first, because there are numerous issues to consider before putting yourself at the mercy of the IRS. 

Copyright © 2009 by Mark Nestmann

Austria Capitulates on Banking Secrecy

For a little while, it looked as if little Austria would be the mouse that roared.

As I previously reported, on July 9, Austria's Parliament failed to approve a resolution relaxing the country's strict banking secrecy laws as the OECD demands.

But yesterday, September 1, the parliament approved a law to ease banking secrecy in the last EU country on the Organization for Economic Co-operation and Development's (OECD) "gray list" of tax havens.  It was a challenge to assemble a two-thirds majority necessary to weaken the law, but Austria's leaders persuaded legislators of the importance for Austria to get off the OECD's odious list.

Under current law, Austrian authorities will only release account data to foreign authorities if a criminal proceeding is underway in that country against a named individual.  In addition, authorities must convince an Austrian court to order the data to be released. 

This simple and common sense system will be replaced with a network of new tax treaties and tax information exchange agreements.  The agreements will call for Austria to release information on financial accounts held by a foreign investor at the request of foreign tax authorities.  The request may be in regard to any tax inquiry—civil, criminal, or administrative.  However—and this is very important—the inquiry must be about a specific investor.  Austria is under no obligation to comply with wholesale "fishing expeditions," such as the infamous "John Doe subpoenas" invoked by the U.S. Internal Revenue Service against banking giant UBS.

Even so, this is a significant setback for banking secrecy.  Nearly a decade ago, the OECD's bastard stepchild, the Financial Action Task Force (FATF), issued a "money-laundering blacklist." The countries on this list, in the FATF's opinion, weren't doing enough to prevent their financial system from being used by money launderers.  Among other requirements, the FATF demanded that these countries (Austria among them) eliminate all opportunities for anonymity in the banking system. 

However, the new anti-laundering rules mainly inconvenience legitimate customers.  Money launderers long ago began using less traceable methods to move money.  It's almost certain the OECD's new rules for greater transparency in tax investigations will have the same effect. 

Copyright © 2009 by Mark Nestmann

Barney Frank Wants to Block "Poorly Regulated" Countries from U.S. Markets

When one of the most powerful people in Congress says, "There ought to be a law," you might want to duck for cover.  That's especially true when that person is Barney Frank (D-Mass.), chairman of the House financial services committee.

According to Barney, it's not enough to pass laws that effectively block access by U.S. citizens and residents to offshore banks and brokerages.  Nor is it enough to interpret existing laws to make it very difficult for U.S. citizens to purchase many foreign securities. 

Now, Barney wants to forbid U.S. banks from doing business with countries that are, in Barney's opinion, poorly regulated.  Otherwise, says Barney, they should "forfeit your right to participate in the American system."  Further, “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation."

Talk about the pot calling the kettle black!  While I can't blame Barney for single-handedly causing the economic crisis in which we're enmeshed, he played a major role in bringing about this fiasco.  That's because time and again, Barney prevented Congress and government regulators from investigating mortgage giants Fannie Mae and Freddie Mac. 

For instance, in 2003, when the Bush administration tried to thwart some of the more questionable lending activities of these quasi-government entities, Barney said, "Fannie Mae and Freddie Mac are not facing any kind of financial crisis."  After the Bush White House warned that the collapse of these mortgage giants could cause "systemic risk for our financial system," Barney complained that the administration was more concerned about financial safety than housing.  According to Barney, "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

We all know the rest of the story.  In July 2008, Congress enacted a law permitting the federal government to nationalize Fannie Mae and Freddie Mac.  Two months later, the feds did exactly that.  The Congressional Budget Office estimated last year that the bailout would cost US$25 billion.  However, economists outside the beltway have estimated the real cost is likely to exceed US$1 trillion once all the sub-prime mortgages these entities issued are written down to their real value.  Thanks, Barney!

Now, Barney wants to export his vision of regulation globally.  And he says the way to do it is to use the same kind of financial sanctions that the United States currently uses against North Korea and Iran. 

Here's how it worked in the case of North Korea.  In September 2005, the Treasury's super-secret intelligence unit, the Financial Crimes Enforcement Network (FinCEN) issued a “finding” that North Korea was an imminent threat to the global financial system. 

This put the world on notice that the U.S. Treasury would be looking to grab assets from the U.S. correspondent accounts North Korean banks, or from any bank doing business with North Korea. All the Treasury needs to do to begin this process is to conduct a secret civil forfeiture hearing, where the targeted bank has no right to participate.  This draconian sanction is authorized in Section 311 of the USA PATRIOT Act.  It essentially prevents blacklisted banks (or entire countries) from dealing in U.S. dollars.

If Barney gets his way, and extends this draconian regime to the entire world, how do you think other countries will react?  Their response is likely to be the same as when Congress enacted the Sarbanes-Oxley Act in 2002.  (This law imposed extremely burdensome accounting and disclosure regulations on publicly traded companies.)  According to a study by Wharton Business School, the number of companies delisting themselves from U.S. stock exchanges nearly tripled the year after Sarbanes-Oxley became law.

Only this time, with the sanctions much more severe than those prescribed by Sarbanes-Oxley, foreign investors from targeted countries will withdraw assets from U.S. banks and U.S. dollars in droves.  And they'll likely terminate all relationships with U.S. banks, insurance companies, and other financial institutions. 

What do you think that might do to the long-term value of the U.S. dollar?  Barney doesn't apparently have a clue.  But if Barney succeeds in exporting heavy-handed U.S. regulation to other countries, the prospects for the dollar aren't good.  Invest accordingly! 

Copyright © 2009 by Mark Nestmann

"Disqualified Transactions" in Your IRA Can End Asset Protection--and Tax Deferral, too

For U.S. persons, retirement accounts not only offer tax deferral, but protection from seizure in a lawsuit.  Self-directed accounts, especially self-directed IRAs, also let you invest in assets not easily accessible through ordinary IRAs, such as offshore real estate or offshore bank accounts. 

However, to obtain tax deferral and creditor protection for your IRA, you must avoid "prohibited transactions."  A prohibited transaction terminates the IRA and ends all tax deferral.  You must pay income tax on most tax-deferred gains at your marginal tax, rate plus a 10% early distribution penalty if you're under 59-1/2.  Ouch! 

(Thank Congress for this absolute disqualification rule, which applies only to IRAs.  Other types of pension and retirement plans can often recover from a prohibited transaction by undoing it and paying a 15% excise tax.) 

Most (but not all) states protect the value of retirement plans (including  IRAs) that meet the rules for tax deferral.  If you live in a state with such laws in effect, a creditor generally can't seize your retirement plan to satisfy a judgment.  Most states exempt 100% of the assets from attachment. But there are important variations, including the rights of ex-spouses in community property states, and whether protection extends to Roth IRAs, to distributions from the plan, and to inherited IRAs.

The federal ERISA law protects assets in an employer-sponsored retirement plan, but only in bankruptcy. Not all retirement plans are ERISA-qualified, including IRAs and simplified employee pension (SEP) plans.  However, in 2005, the Supreme Court ruled these plans are protected as well.  The 2005 Bankruptcy Reform Act also exempts IRAs and other non-ERISA-qualified retirement plans or similar contracts from creditor attachment.  IRAs are protected up to maximum value of US$1 million. But again, no protection exists if the bankruptcy trustee discovers you've engaged in a disqualified transaction.

In a recent case, a Florida bankruptcy court ruled that creditors could seize all funds in two of an individual's IRAs, and $60,000 in a third.   The first account became vulnerable when the IRA owner borrowed funds from his IRA and used the assets to pay off a mortgage.  He then acquired the property and subsequently sold it. This was one of several prohibited transactions in the owner's account.  As a result, the IRA was terminated and lost its exempt status.  The second and third IRAs were terminated because they contained funds rolled over from the first IRA.

The result would have probably been the same if the IRA owner relied on state-law exemptions.  The bankruptcy trustee could again have sought to terminate the IRAs due to the prohibited transactions.  This would have ended all asset protection and tax deferral.  

The bottom line: If you have substantial assets in a retirement plan, avoid prohibited transactions.  If you're not sure what's prohibited, start educating yourself by reviewing this advice from the IRS.  Otherwise, you may not just lose the assets to creditors, but also face a hefty tax bill.

Copyright © 2009 by Mark Nestmann

Austria Stands Firm on Bank Secrecy—for Now

The last 18 months have brought unprecedented pressures on offshore centers to relax bank secrecy laws, particularly in relation to tax investigations.

While Switzerland has been the centerpiece in the global campaign against bank secrecy laws, it's hardly been the only jurisdiction targeted in this regard.  Another of our favorite offshore centers—Austria—has also been targeted.

Austria, along with Switzerland and numerous other countries with bank secrecy laws, wants to be removed from the OECD's "grey list" of countries that are allegedly not in full compliance with international tax cooperation rules—set, naturally enough, by the OECD. 

This "international standard" requires Austria (or any other country on the grey list) to release information on financial accounts held by a foreign investor at the request of foreign tax authorities.  The request may be in regard to any tax inquiry—civil, criminal, or administrative.  The country receiving the request may not invoke a domestic bank secrecy law to block it.  Further, the OECD has demanded that grey-listed countries ratify at least 12 "tax information exchange agreements" with other countries.  Only after all these demands are met will a country be removed from the grey list.

However, on July 9, Austria's Parliament failed to approve a resolution relaxing the country's strict banking secrecy laws as the OECD demands.  Because these laws are of "constitutional rank" in Austria, the amendment needed two-thirds approval to be adopted. 

For the moment, Austria's non-OECD-compliant bank secrecy law remains intact.  Austrian authorities will only release account data to foreign authorities if a criminal proceeding is underway in that country against a named individual.  In addition, authorities must convince an Austrian court to order the data to be released. 

Continued OECD saber rattling will likely force the Austrian government to re-introduce the amendment later this year.  For instance, the OECD could move Austria to a "blacklist" of uncooperative tax havens, which could have the effect of isolating the country from the global financial system.  Austria was removed from this blacklist in March 2009, when it agreed to accept the OECD’s standards on information exchange.

Blacklisting would likely make it more difficult for Austrian companies and the Austrian government to borrow money from international sources.  It would also mean that individuals and companies doing business in Austria face greater scrutiny from their domestic tax authorities.

Notwithstanding these threats, without a great deal more support from ordinary Austrian citizens for weakening secrecy laws, they're likely to remain intact. 

Could little Austria be the "test case" for the OECD's anti-bank secrecy campaign?  It may well be if the Austrian Parliament fails to deliver the reforms the OECD demands.

(The Austrian bank secrecy law is only one of dozens of "Austrian money secrets" I reveal in my book, Austria Money Secrets.  To learn how you can obtain your own copy of this book, click here.)

Copyright © 2009 by Mark Nestmann