Asset Protection BLOG - Mark Nestmann

Yes, Dorothy… Taxes DO Matter

Both congressional leaders and President Obama have suggested that raising tax rates on wealthy Americans will result in a corresponding increase in tax revenues. 

If people were robots, that might work.  However, people subject to sharply higher taxes don't like having to pay them.  And they will act accordingly.

This phenomenon has been known for, well, centuries.  But its most famous exponent is probably economist Arthur Laffer.  In the 1980s, Laffer once again demonstrated with his famous "Laffer Curve" analysis that both a 0% income tax rate and a 100% tax rate would generate zero revenue.  The optimal tax rate—the rate that will generate the greatest revenue for the government—must therefore lie somewhere in between.  And, as tax rates rise beyond a certain threshold—whatever that may be—revenues will actually decrease.

Another, more colorful way of putting the same concept came from Jean Baptiste Colbert, the Minister of Finance under King Louis XIV of France in the 17th century.  Colbert wrote: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

But neither Laffer, nor Colbert, were the first economists to recognize the decreasing utility of increasing tax rates.  In 1377, the Islamic scholar Ibn Khaldun wrote:

"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...and sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For businessmen are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."

What's more, real world experience has demonstrated time and again the truth of the Khaldun's analysis.  Tax cuts in the 1920 and again during the Kennedy administration led to sharply increased revenues for the U.S. government.  The same phenomenon occurred in Eastern Europe when several countries in this region instituted a flat tax in the 1990s and early 2000s.

The opposite effect—that increasing tax rates too high lead to decreasing revenues—has also been repeatedly proven.  A recent example comes from the United Kingdom, where the government recently announced it would tax individuals earning more than £150,000 (about $250,000) annually at a 51% rate.  The unsurprising result?  Highly compensated U.K. residents are leaving the country in droves.  For instance, hedge funds managing an estimated $15 billion have already fled in response to the impending tax.  U.K. tax lawyers say that a large portion of their work is now devoted to counseling wealthy residents on how to leave the country.

What's the real reason, then, that Congress and Obama want higher tax rates?  To answer that question, you only need to recall Obama's campaign promises.  For instance, Obama promised to raise capital gains taxes, purportedly to lower the budget deficit.  But then, Obama made an incredible admission in response to a comment that increasing tax rates was likely to decrease revenues and make the deficit worse.  In that case, would Obama want to lower the rates? No, Obama answered, the real issue was fairness. Apart from revenue, apart from the deficit, he wanted to raise taxes because doing so would be "fair."

That, dear readers, is what we're dealing with here.  Barack Obama, now President of the United States, has no interest in reducing the budget deficit.  He only wants to do what he believes is "fair." 

And that means the budget deficit won't be reduced, unless investors stop buying Treasury debt.  It also means you can count on a continued erosion in the value of the U.S. dollar, and a corresponding increase in gold and other commodities. 

As an American, it pains me to see our currency devalued because of our reckless politicians.  But, since I can do nothing to stop Obama from increasing taxes in the name of "fairness," at least I can invest accordingly.  And so can you.

Copyright © 2009 by Mark Nestmann

If You Hire an Obese Worker, You May Have to Pay for Their Weight-Loss Surgery

Maybe it's the bad economy.  Or perhaps it's just bad karma.  But for whatever reason, there's been a huge spike recently in what I can only characterize as unbelievable lawsuits.

Let's say you operate a restaurant.  Now, restaurants fail at a high rate in even the best of times, but in an economic downturn, they fail in droves.  And if the following incident happened to your restaurant, I suspect you'd shut it down the next day.

A prospect applies for a job as a cook at your pizza shop.  Sure, he weighs 380 pounds, but since the Americans with Disabilities Act forbids discrimination against the "morbidly obese," you decide to hire him. 

All goes well for a time.  Then one day, a freezer door hits the cook in the back.  Your worker's compensation coverage is adequate to pay for the cook's back surgery.  But what happens next is classic American lawsuit mania. 

Naturally, the cook hires a lawyer.  A few days before the cook's surgery, his lawyer calls.  It seems the cook must undergo weight-loss surgery before the back surgery.  Doctors have advised him the weight-loss surgery is necessary to insure the success of the back operation.  And, the lawyer says, you must pay the $20,000 cost for the weight loss surgery, since it exceeds your worker's compensation insurance limits.

Now, you hire a lawyer.  Your lawyer tells you that you shouldn’t have to pay.  So the cook sues you and your business for $20,000.  You lose the case, but your lawyer tells you that you can appeal.  You appeal the decision, and lose again at the appellate court level.

In a nutshell, that's what's happened to an Indiana pizza shop earlier this year.  On August 6, the Indiana Court of Appeals ruled that a pizza shop must pay the cost of lap-band surgery for an obese cook injured at work.  And this trend isn't just occurring in Indiana.  Only three weeks later, the Oregon Supreme Court issued a similar ruling.

Advocates for the disabled—and especially their lawyers—are thrilled with these rulings.  But, in the real world, the results won't be so rosy.  Given court decisions like these, any rational employer will hesitate to hire any employee with a pre-existing health condition that may be aggravated in the workplace.  Assuming, of course, that the employer hasn't closed up shop already—and let all his employees go.

Copyright © 2009 by Mark Nestmann

You, Too, Can Sue Over Global Warming!

It’s time for another installment in my periodic postings on frivolous lawsuits.

This one comes from the U.S. Fifth Circuit Court of Appeals, which ruled last month that landowners in Mississippi have “standing” to sue oil and coal companies for emitting greenhouse gases.  In their class-action lawsuit, the landowners claim that these emissions contributed to global warming, which caused sea levels to rise.  That in turn, the lawsuit claims, exacerbated the damage caused by Hurricane Katrina.

If you think this is an isolated case—it’s not.  The U.S. Second Circuit Court of Appeals already reinstated a lawsuit against American Electric Power Co. based on similar claims.  That court ruled that since Congress hadn’t enacted legislation restricting greenhouse gas emissions, states, municipalities and certain private organizations can sue to force companies to cap emissions of greenhouse gas.

Two separate federal appeals courts—just one level below the U.S. Supreme Court—have now informed plaintiff’s attorneys throughout the United States that they now have “standing” to sue anyone that emits greenhouse gases.  Indeed, the Supreme Court in 2006 accepted "as plausible the link between greenhouse gas emissions and global warming" and that "rising ocean temperatures may contribute to the ferocity of hurricanes.”

These decisions are an open invitation to plaintiff’s attorneys to sue anyone who they allege contributed to global warming.  God forbid you own a business that emits greenhouse gases—the courthouse door is now wide open for enterprising attorneys to sue.  Indeed, if you’re wealthy and live in a home that is heated by fossil fuels (or by electricity produced by fossil fuels), or drive a fossil fuel powered vehicle, you just might have to defend yourself in court.  

Whether or not you believe global warming is real, and that if it is real, that it’s caused by human emissions of greenhouse gases, these cases cross an important legal threshold.  From the dawn of the republic to the present day, it’s perfectly legal to emit greenhouse gases.  For the courts to now declare that plaintiffs have standing to sue someone for doing something that is perfectly legal isn’t just unfair.  It could also turn our current economic debacle into the deepest depression in history.  Just wait until the United States completely de-industrializes due to attorneys suing every business in America that emits greenhouse gases. 

It’s possible, of course, that the plaintiffs in the cases before the Second and Fifth Circuit Courts of Appeal won’t be able to prove their case.  They’ve only been given the opportunity to do so.  Still, the defendants will have to spend money, time and effort defending themselves in what to me seems the penultimate of frivolous lawsuits.  And of course, every dollar they spend on legal fees won’t be invested in productive activity. 

I can only imagine that entrepreneurs in China, India and other countries that have so far rejected limits on greenhouse gas emissions are rejoicing over these decisions.  After all, the deindustrialization of America means more profits for them, and more jobs for the workers they employ. 

Is this insane, or what?  Am I missing something here? Please comment below!

Copyright © 2009 by Mark Nestmann

How to Stop Expatriation in its Tracks

My recent blog entry describing how easy it is to expatriate really hit a chord.  Most responses were very positive.  But a few were downright hostile.

“How can you in good conscience encourage someone to revoke all ties to the United States,?” one reader wrote.  “Don’t you have any patriotism?”  Another reader predicted, “I have no doubt that some people who take your advice to expatriate may come to regret it later.”

That may well be true.  But if these readers—or anyone else who thinks that expatriation is unpatriotic, unnecessary, or could lead to “buyer’s remorse"—really want to end expatriation, there’s something Congress to do, immediately, to shut it down.

I’m not talking about more stringent anti-expatriation laws, such as the “exit tax” Congress enacted last year.  Nor am I speaking of enforcement of  the arguably unconstitutional “Reed Amendment,” which purports to exclude persons who renounce their U.S. citizenship for “tax motivated” from ever returning to the United States.  (Fortunately, this law, enacted in 1996, has rarely, if ever, been enforced.)

No, I’m proposing something radically different: for Congress to stop taxing the approximately six million U.S. citizens and green card holders living outside the United States.  And it’s really not that radical, because the United States is one of only two countries that impose tax based on citizenship, rather than residence.  Millions of U.S. citizens, some of whom have never set foot in the United States, are subject to U.S. tax on their worldwide income.  These U.S. citizens not only must pay U.S. taxes, but also comply with U.S. offshore financial disclosure requirements.  If they’re wealthy, they must retain tax experts to avoid paying U.S. estate tax. 

America’s current tax policy also places its non-resident citizens at a disadvantage in the international marketplace.  A Canadian, British, or Japanese passport holder working in, say, Hong Kong, is only subject to Hong Kong tax on local income.  But the U.S. citizen competing for the same job must deal with U.S. tax as well. 

Congress could end this discrimination simply by amending the U.S. Tax Code.  For instance, it could stipulate that any U.S. citizen or green card holder who leaves the United States for at least one full year is no longer subject to tax on their non-U.S. income.  After a longer period—let’s say five years—they would no longer be subject to U.S. tax on capital gains.  And, should they establish a new domicile outside the United States, they would no longer be subject to U.S. gift and estate taxes.

Enacting these common sense reforms would eliminate the tax incentives for U.S. citizens to expatriate.  It would, quite literally, end expatriation overnight.  These reforms would also put U.S. tax policy back in the international mainstream.  Of course, when non-resident Americans returned to the United States under this plan, they’d have to start paying U.S. tax again on their worldwide income. 

President Obama campaigned on the promise of “Hope” and “Change.”  This simple change in U.S. tax policy would give hope to the more than five million Americans who live overseas. 

Obama, do you hear me?

Copyright © 2009 by Mark Nestmann

Feds: First, We Led Your Husband to Suicide. Now, We're Coming for Your Property

It's time for me to once again rail against the inhumane practice of civil forfeiture.  This time, the victim is a sympathetic one, and she may ultimately prevail.  But, the price she's already paid in her battle against Leviathan is heartbreaking.

Mara Lynn Williams is a 56-year-old cancer survivor.  She lost her husband, Royce, several months ago.  And now, she's battling to save her 40-acre hardscrabble farm in Chilton County, Alabama from seizure by government authorities.

You see, Royce smoked marijuana.  Not because he was trying to get high, but because it was the only substance that relieved his chronic pain after multiple surgeries.

However, in federal government's War on (Some) Drugs, persons who smoke marijuana for any reason are considered criminals.  And that's particularly true if they cultivate it, as Royce did on the couple's farm. 

Royce was growing an awfully large amount of pot for purely personal use.  When the feds raided the couple's property in 2008, they found 408 marijuana plants growing several hundred yards from the house.  Not surprisingly, they charged him with cultivating marijuana with the intent to sell it.

In May 2009, as a jury was deliberating the charges against Royce, he climbed into the family car and shot himself.  His death ended the criminal case, but prosecutors decided to try to seize the couple's property, even though they never accused Mara Lynn of any crime.  After all, as Asset Forfeiture Coordinator Tommie Brown Hardwick says, "The bottom line is, we don’t want people to benefit from criminal activity."

Let's count all the ways that Mara Lynn Williams has benefited—or not—from criminal activity. 

First, prosecutors never accused Royce—or Mara Lynn of actually selling marijuana.  They only accused Royce of cultivating it with the intent to sell it.  So, Mara Lynn didn't receive a penny in "criminal proceeds."

Second, during the raid on the couple's property, police seized firearms, $18,400 in cash, vehicles, computers and other personal belongings.  Mara Lynn got some of the vehicles back, but not the cash.  Far from benefiting from criminal activity, Mara Lynn is out $18,400.

Third, Mara Lynn has had to hire an attorney to represent her in the forfeiture case.  I'm not privy to the fee arrangements, but typically, attorneys defending civil forfeiture cases charge a retainer of $20,000 or more.

Thanks to a civil forfeiture reform law enacted in 2000, prosecutors will have to demonstrate that Mara Lynn knowingly participated in Royce's drug cultivation operation in order to seize her property.  Otherwise, she is considered an "innocent owner." 

In the meantime, Mara Lynn continues to work as a nurse at Jackson Hospital in Montgomery.  The government through its insane drug war has already taken her husband and $18,400 of the couple's savings.  Now it wants to make her homeless.  In the meantime, she's waiting for her cancer—now in remission—to return.

“It has been in remission before, so I know it will be back,“ she says.  And sadly, so will the forfeiture squads.

Copyright © 2009 by 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

What it's REALLY Like to Expatriate

There are a lot more former U.S. citizens than there once were.  Americans fed up with paying tax—and their government—are voting with their feet.  And they're doing it in much greater numbers than ever before.

Why might you wish to give up your U.S. citizenship? Primarily, because doing so is the only way that you can eliminate your lifetime obligation to pay U.S. taxes, no matter where you live. 

Expatriation is a major decision.  It means, for instance, that you no longer have the automatic right to enter or live in the United States.  You'll need to get a visa to do so, unless your non-U.S. passport qualifies you for visa-free entry.  In all cases, the Department of Homeland Security can deny you re-entry to the United States, and is under no obligation to tell you why.

However, the actual process of expatriation isn't as arduous as you might think.  You're likely to encounter bureaucratic incompetence, unexplained delays, and rampant stupidity.  But giving up your U.S. nationality is a legal right; one that even the inane employees of the Department of State understand. Here's one account my colleague Bob Bauman recently received from a now-former U.S. citizen on how the expatriation process really works:

As you wrote, the first step is to find alternative citizenship.  After attending a Sovereign Society meeting, I decided that my best bet was to gain citizenship in St. Kitts & Nevis by purchasing a property there for an amount over $350,000.  Then, I paid another $50,000 for two additional family members to apply for citizenship.  This whole process, including closing on the property, application, review of paperwork, citizenship, then waiting for issuance of the passport, took about nine months.

After moving all of my assets whose title I could change or move offshore, I purchased a home and moved to Panama.  Then it came time to surrender my citizenship.  From everything I could find on-line or in any books, I was expecting the surrender process to be rather grueling, including meeting one on one with a consular official sitting me under a bright light, interrogating me about reasons and taxes, then almost beating me with a rubber hose.  We are all aware of the onerous threats of what IRS can do if we have the nerve to try to escape the plantation.

Bob, I was absolutely dumbfounded at how EASY it really was.  No problems, no questions about anything, they were simply willing to cut me free.  I had thought I wanted an attorney with me, so I would have some idea which questions I legally had to answer and which I could refuse to answer.  It was just not necessary.  I believe IRS and the State Department tries to scare the hell out of us so we won't even try to surrender citizenship the process is far different than I envisioned.

There are a total of five forms needed.  All are available on-line on the State Department Web site.  The numbers for these forms are DS-4079 through DS-4083.  You complete these forms, and then take them along with your U.S. passport, birth certificate, Social Security card and new passport to the embassy.  If you are smart, you will also bring a typed letter explaining your reason for wanting to expatriate. 

Do not say ANYTHING about taxes.  My reasons were that I abhorred socialism, loved the Constitution, but was unbelievably sorry that we no longer followed it.  Then a clerk will re-type all the forms.  This took about two hours because of numerous typographical errors.  It is important to proofread every answer and every single line.  It took something like 10-12 different efforts to get all five forms finally completed correctly. 

A consular representative then came to the window, asked for my U.S. passport, asked me if I was really the person who wanted to expatriate, and whether I understood the consequences.  Then he signed a few papers, took my passport and said good-bye.  That was it!   Oh, he also told me I should contact the IRS to inform them of what I had done.  He said I would receive my certificate of loss of nationality in about four months.   He never asked me ANYTHING about taxes or finances.

After a follow-up call to the embassy four months later, I was told I could return and pick up my official certificate of loss of nationality.  They returned my U.S. passport with holes punched in it.  The next day I returned to the embassy to apply for a 10-year, unlimited visit VISA to come to the United States.  It was approved the same day.  I also applied for Social Security because I was now old enough to receive it.  You do NOT surrender your right to Social Security benefits by expatriating.

I thought it might be helpful to you to know what they ACTUALLY do to those who wish to surrender citizenship.  Regardless of how intimidating they want you to believe this process can be, at least in my case, NOTHING happened.

I am now a free, sovereign citizen of the world.  St. Kitts & Nevis charges me zero income tax, zero capital gains tax, and zero death tax.  I don't even have to file a tax return any longer for ANYONE.  Panama leaves me alone, so long as I pay my property tax and sales tax, and the U.S. no longer "owns" me. 

My St. Kitts & Nevis passport gets me almost anywhere in the world that I could have gone with my former U.S. passport.  With my 10-year visa, I can come back to visit the U.S. whenever I want.  Believe me, I don't want or need to come back very often, and there are lots of nice other places to see in this world.  And, if we are both on the same plane hijacked by terrorists, they'll kill you long before me. 

I have the very best of all worlds.  I live virtually tax-free in a beautiful country.  I actually have more freedom and liberty as a guest resident of Panama than I did as a citizen of the United States. 

I simply don't understand why there are not MILLIONS of Americans giving up their citizenship.  If only they knew how EASY it is, how practical it is and how much better for their financial health, there would be lines around the block at every U.S. embassy from those who realize there are better choices than remaining a U.S. citizen.

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

Don't Get Caught in This Estate Tax Trap

If you're not a U.S. citizen or resident, you might think you have no U.S. tax obligations.  But if you hold shares in any U.S. corporations, your heirs may face a huge tax bill when you die.

The culprit is an obscure provision (aren't they all?) in the Tax Code.  Section 2104 reads, in part:

“Shares of stock owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation.”

Section 2104 is a section of the Tax Code dealing with estate tax.  And this sentence means that even if you have no connection whatsoever to the United States, the IRS can still subject your holdings of U.S. stocks to estate tax.  Similar rules apply to real estate holdings. 

The rules exempt the first US$60,000 of U.S.-based real estate or securities from tax.  But if your worldwide estate exceeds US$3.5 million at your death, then it must pay tax on the U.S.-based portion.

That's what happened to one unfortunate couple living in Belgium.  The husband accumulated 250,000 shares of stock in banking giant Citicorp.  At the time he passed away in 2002, the stock was worth nearly US$12 million. 

If the couple had been U.S. citizens, the shares could have automatically conveyed to the surviving spouse free of gift or estate tax.  That's a consequence of a concept called the "unlimited marital deduction." However, if the surviving spouse isn't a U.S. citizen, no deduction is available.

The result in this case is that the husband's estate now owes over US$4 million in estate taxes and penalties.  And because the value of Citicorp shares fell more than 90% between 2002 and 2009, the shares are worth only about US$1 million today.   In other words, the estate must shell out four times the value of the shares in taxes and penalties.

This is an outrageous result, but it's the law.  Fortunately, there's an easy solution.  If you aren't a citizen or resident of the United States, and want to own U.S. shares, don't hold them in your own name.  Instead, take possession of the shares through an entity such as a trust.  This simple step would have saved the heirs of the deceased Belgian investor over US$4 million in unnecessary taxes. 

If you're a non-resident investor, be sure to obtain advice from a tax professional before investing in U.S. shares—or any U.S. property.  Don't make the same mistake as this unfortunate Belgian family. 

Copyright © 2009 by Mark Nestmann