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Tax Havens

Forbes: The World’s Top Tax Havens
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Liz Moyer and Tatyana Shumsky 03.31.08, 12:00 PM ET

When people think of tax havens, they usually picture the Swiss Alps or Caribbean islands…but…are finding competition from the U.S., where lawyers in seven states, such as Nevada and Alaska, are muscling in, looking to grab business from the world’s wealthy.

They’re peddling the concept of a “self-settled spendthrift trust,” an irrevocable trust that is created by its beneficiary and is designed to preserve wealth. A consequence of that is that these trusts can help shield assets from lawsuits or creditors.

Sexy? Not so much. Surprised? Don’t be.

“Litigation is a much bigger threat than taxes because there’s an unlimited amount of assets at risk,” says California lawyer Jeffrey Verdon.

Of course there is the, ahem, possibility that the accounts are being used to avoid paying excessive taxes, even though U.S. taxpayers who have offshore accounts are required to file annual forms to the U.S. Internal Revenue Service detailing transfers and other trust activities–or face a penalty of 5% of the value of the assets. They are also supposed to file forms detailing distributions from their trust (or face a penalty of 35%).

Some countries don’t necessarily enforce the reporting requirements, and some, like Luxembourg, say it’s up to the trust owner to keep up with the paperwork.

“Offshore holdings continue to be viewed with skepticism and a presumption of impropriety by the IRS,” writes Jeffrey Morse, a Las Vegas lawyer.

Maybe that’s why there is a movement to put assets in U.S. accounts. U.S. trusts are less costly to set up and have less paperwork hassle than some offshore locations. They are available in Alaska, Delaware, Nevada, Oklahoma, South Dakota, Rhode Island and Utah.

Still, there is reason to pause before diving in. For starters, there isn’t enough case law in the U.S. to judge whether the onshore trust will shield assets for those who don’t actually live in the state where they were formed.

For another, there’s a reason why other states haven’t climbed on board. As a basic public policy, it makes little sense to encourage individuals to hide or keep out of reach assets from their creditors or others, such as angry ex-spouses.

And U.S. trusts don’t necessarily make it impossible for creditors to go after assets. Where a creditor might be deterred by the expense and hassle of pursuing assets held offshore, that isn’t necessarily the case at home.

In Nevada, for example, the law expressly forbids the funding of a trust to hinder, delay or defraud known creditors. If a creditor had a claim on the assets before they were transferred into the trust, the creditor has up to two and a half years to get a judgment in its favor. If the creditor’s claim comes after the transfer of assets, it’s out of luck after two years.

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