Up until a decade ago, one of the industry's most influential planners, Ron Carson, held about 20% of his assets in an offshore trust based in Canada.
The idea was to shield those funds from creditors, but after maintaining it for about 10 years, Carson shuttered it. Two IRS audits convinced him the offshore strategy was attracting heightened scrutiny. "Your risk of being audited goes up" with offshore assets, says Carson.
If the new global revelations from the Paradise Papers about offshore tax evaders have made one thing clear to the investing world, it's that holding assets offshore no longer provides a guaranteed shelter from public scrutiny, among other risks. And many advisors now eschew them entirely.
"We used to get all kinds of requests for that stuff," Carson says. Today, by contrast, "we don't deal with them at all."
The papers refer to a leak of 13.4 million documents that have revealed the tax-sheltered holdings of more than 120 politicians and world leaders, ranging from the Queen of England to Trump administration officials Wilbur Ross and Gary Cohn. For the past two weeks, teams of journalists led by the International Consortium of Investigative Journalists have been publishing investigations based on the documents.
RISKS TO FIRMS
None of the planners reached for this story say their clients have been impacted. Moreover, it's rare these days for clients or prospects to ask questions about offshore investing, many said.
Advisors tend to stay away from these strategies not only because of the risk to their clients, but also due to the risks to their own practices. The recent indictment of President Donald Trump's former campaign manager Paul Manafort provides another good illustration as to why, says Megan Gorman, a CPA and managing partner of Chequers Financial Management in San Francisco.
Part of Special Counsel Robert Mueller III's ongoing investigation into Russian interference in the U.S. presidential elections, the indictment claims Manafort "represented falsely" that he did not have authority over foreign bank accounts.
Some of the evidence for this assertion came from Manafort's emails with his CPA and, Gorman says, other advisors to the political consultant have been drawn into the federal investigation. The case shows why planners need to ask what role they are willing to play if a client falls under regulatory or legal scrutiny for their offshore holdings, Gorman says.
"You really have to think about, 'What if it goes to hell in a handbasket?'" she adds. "Are you going to be helping the client or will they be on their own?"
In working with new clients in her own practice, Gorman says she explains her approach of being both transparent and fully compliant with tax and other authorities, which tends to foreclose on any discussion of moving assets offshore.
SOLUTIONS FOR FOREIGN CLIENTS
Seth Streeter, CEO of Mission Wealth Management in Santa Barbara, California, says he takes the same approach with U.S. investors. But, helping international investors with offshore investments does not necessarily come with the same risks, he says.
While U.S. investors have been under heightened reporting requirements from the IRS for any offshore holdings for nearly a decade, the same restrictions for foreign investors don't apply, Streeter says.
"Any time a domestic-based client has come to us and said, 'I am interested in offshore strategies,' we have steered them away," he says.
But ever since foreign prospects began to express interest in retaining Mission Wealth to help them invest in the more stable U.S. financial markets, while legally placing those assets in other jurisdictions — Streeter says he has been investigating how to do so.
Recently, he says, a prospect from Panama wanted the firm to manage $18 million for him, but Mission has held off on taking the money. For the moment, Streeter is working with him on a consulting basis and talking to various offshore investment managers about devising a workable strategy.
"I'm kind of using this Panamanian client as a beta," he says, to see "if we can get him an offshore solution to address his investment need."
Some international investors have an understandable — if unfortunate — need to conceal their ownership of the assets by placing them offshore.
"There are some people who live in countries where the government knowing things about your families' wealth can be really problematic," says lawyer Rachel Harris, chair of the law firm Loeb & Loeb's international trust and estate planning practice, who advises high-net-worth families from around the world. "So, if heaven forbid, [a client's holdings] were just posted on the Internet, that could lead to your getting kidnapped. That's a reality for some people. It's very scary."
BREACHES, REGULATORY MOVE
The Paradise Papers isn't the first international development to raise these kind of concerns. The journalism consortium revealed secretive offshore holdings of many world leaders in its worldwide Panama Papers investigation two years ago. About a decade ago, several roughly concurrent events began putting new pressure on the secret holdings of offshore investors.
The Obama Administration's far-reaching Foreign Account Tax Compliance Act or FATCA, enacted in 2010, began requiring banks in other countries to report on the holdings of many U.S. citizens, at the risk of facing penalties of up to 30% on the banks' transactions in the U.S.
Two years earlier, whistleblower Bradley Birkenfeld then with the large Swiss bank UBS revealed how his employer was helping U.S. investors hide assets offshore. The following year, UBS agreed to pay a $780 million fine to the U.S. government, dealing a historic blow to perhaps the world's best-known tax haven, Switzerland.
Also in 2008, in an attempt to track down its own tax scofflaws, German authorities bought stolen client data from an employee of a bank in another tax haven, the small European country of Liechtenstein.
This confluence of events "sparked, in my mind, the beginning of the end, the radical change of this offshore investment world," says Andrew Fisher, founder of Worldview Wealth Advisors in Lake Oswego, Oregon, and author of "The Cross-Border Family Wealth Guide" (foreword by Tim Kochis).
Although he doesn't put clients into offshore investments, Fisher says he sometimes helps extricate them from ill-advised ones others have sold to them.
EARLY STAGES OF IMPACT
The Paradise Papers revelations, which are still only in the early stages of their likely impact, stand to put more pressure on all investors with assets to hide, according to Fisher.
That said, offshore investing is not likely to go away quickly, he predicts.
"It's going to happen slowly because it's so embedded," he says, adding that stashing money offshore has been a foundational strategy for the wealthiest of the wealthy for at least 100 years and probably longer.
The new momentum against hiding assets offshore, he says, has "sparked a wave that is not going to stop, which is this move toward more international information sharing and a crackdown on offshore tax havens."