Offshore Tax Planning: How the Wealthy Save On Taxes
Offshore tax planning is a useful tool if done appropriately can save you millions in taxes. One of the latest strategies for tax minimization is depicted in the Sam Wyly famous case and how a combination of U.S. corporations, offshore companies and offshore trusts, coupled with stock options switching to annuities, allowed him and his family to enjoy a life of luxury, charity giving and philanthropy. Click here to see the full article about Wyly’s case posted on Marketwatch.com website.
The use of offshore structures is not new to minimize taxes. But you need to pay attention to the details or you will find yourself navigating in hot waters. Wyly’s strategy is summarized like this, considering he and his brother owned two public companies and they received stock options as compensation from such public companies:
- Create a U.S. Corporation.
- U.S. Corporation went public.
- U.S. Corporation issued stock options.
- Create an Offshore Company.
- Offshore Company issued annuity obligations.
- Create an Offshore Trust designed as non-grantor.
- Transfer to the Offshore Trust the stock from Offshore Company.
- Transfer to the Offshore Trust the stock options in exchange for the annuity obligations.
- Have the Offshore Trust buy property such as art, jewelry, and real estate
- Use the property from the Offshore Trust rent-free.
By doing this, income in the form of stock options was changed into annuities that are only taxable when distributed. But unfortunately, they were never distributed and never taxed. The Offshore Trust never paid the annuities.
The tax consequences that ultimately led them to be indicted for tax fraud in addition to securities fraud are recognized as:
- Avoid Income Tax: By receiving stock options as compensation and switching them into annuities, they deferred the income to a future that never happened because the Offshore Trust never paid such annuities and consequently they didn’t report income to and paid no taxes.
- Reduce Estate Tax: Cash inflows to Offshore Trust were not reported to tax authorities making it difficult to determine the value of the assets in the Offshore Trusts to calculate Estate tax. Also, the Offshore Trust did not charge rent to the Wylys for the use of the assets, giving them tax-free income.
- Avoid Gift Tax: Buying gift for their relatives, such as jewelry and real estate, typically triggers gift tax if it’s over $14K. Doing such purchases from the Offshore Trust the Wylys saved big on gift tax.
The criteria the Court used to find the Wylys guilty of fraud involved several elements:
- Understatement of income
- Inadequate maintenance of records
- Failure to file tax returns or make estimated tax payments
- Offering implausible or inconsistent explanations of behavior
- Concealment of income or assets
- Failure to cooperate with tax authorities
- Engaging in illegal activities
- Dealing in cash
- Offering false or incredible testimony
- Filing false documents
The Wylys could have done it better, maybe following these legal strategies:
- Borrowing against stock options: Instead of turning the stock options into the trusts, turn them into an investment bank and borrow money tax-free.
- Not retain control of the Offshore Trust: The trustee was just a symbolic person. The ultimate authority was the Wylys to decide on expenses and investments.
- Use a deferred compensation plan: receiving income into a deferred compensation plan and deferred for over 10 years to defer income tax.
There are other strategies, such as:
- Equity swap: By executing an official agreement with another party to exchange the gain and loss of the asset but keeping the ownership.
- Borrowing against a large life insurance policy: Taking a large insurance policy and borrowing from the cash surrender value, makes the loan proceeds tax-free because it’s not income.
- Borrowing against investment properties: Taking a mortgage against a rental property also gives you tax-free cash.
- The above-mentioned strategies, without being offshore, they are completely legal to minimize your taxes.
Fulton Abraham Sanchez, the founder of FAS CPA & Consultants of Miami, FL, is a Certified Public Accountant specialized in Offshore Banking Consulting. You can email him to email@example.com.
Contact us firstname.lastname@example.org or call us 786-462-7899 to schedule a confidential consultation.
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