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The Panama Papers

04/11/2016

The mysterious release of 11.5 million pages of confidential documents from a Panama-based law firm specializing in offshore trusts has, once again, focused attention of this murky world of money-on-the-run.  The popular image of such offshore trusts is disloyal Americans hiding money from the IRS.  That is seldom the case anymore, as the IRS requires disclosure of all such interests and imposes draconian criminal offenses for violations.  But, that was never the primary reason for offshore trusts.

Avoiding public scrutiny is important for offshore trusts.  Investors who want to take a major position in a stock might use it, although they would have to disclose it once they own 10% of the stock.  Investors who use a proprietary trading strategy might need a secret trust, but those are exceedingly rare.

But, secrecy is often necessary — from governments in unstable countries — from family, especially in anticipation of divorces — and from creditors.  Setting up a trust to defraud creditors is illegal, but often done.  When offshore trusts are owned by other offshore trusts in other jurisdictions, then there are multiple “corporate veils to pierce,” which can take many years.

In the world of financial planning, the vast majority of planners are decent and honest, although a small number will always be dishonest.  (A slightly larger number are “merely” unethical.)  My guess is that half of them operate Ponzi-schemes or commit outright fraud.  But, the other half sell “asset protection trusts” — a type of offshore trust to both hide assets from everybody in general and to  defraud creditors in particular.  They cheat clients by taking both title and ownership of assets before disappearing or, even more galling, simply ignoring the previous owner, who no longer owns anything.  Anytime an advisor tells you that you need an asset-protection trust . . . RUN!

Offshore trusts will be with us forever, which may not be all bad, especially if they are bait for dishonest politicians.

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