Offshore Accounts: Are They a Good Idea?

Arden Dale for the Wall St Journal writes: Wealthy investors might have heard they can reduce taxes or protect an estate from lawsuits by stashing money in offshore accounts in exotic locales, such as the Cayman Islands or the British Virgin Islands.

But while there is nothing illegal about properly reported offshore accounts, there often is no great advantage to them either, financial advisers say. Investors can accomplish the same goals and have fewer hassles with a domestic account or trust.

Lately, the federal government has cracked down on Americans who evaded taxes using undeclared bank accounts in Switzerland and elsewhere.

Switzerland, once the venue of choice to open a secret account, is now the place to avoid, after an ongoing Internal Revenue Service investigation forced many Americans to report previously secret Swiss accounts and pay back taxes and penalties.

Tax authorities have since eyed banks in Singapore and other Asian countries.

Wealth manager John Smith says he gets questions on offshore accounts about a half a dozen times a year, typically from investors worth $20 million or more.

"When they're socializing or networking, these sorts of conversations will start to come up," says Mr. Smith, who works at Balasa Dinverno Foltz in Itasca, Ill., which manages $2.5 billion.

Yet offshore accounts don't make sense for most investors, he says. For one thing, Americans now have to do more reporting on offshore assets, adding to the administrative headaches of owning them.

By the end of June, for example, those with accounts worth more than $10,000 must make a tax filing that repeats some information they already reported this year. Foreign banks also are under pressure to report on their American clients to the Internal Revenue Service.

Offshore accounts also tend to cost more to establish and maintain than domestic accounts, Mr. Smith says, and sometimes the accounts have fewer investment options.

To set up one, investors might need to enlist the help of a specialist, says Joan K. Crain, a senior director at BNY Mellon Wealth Management.

"I very quickly say, 'You need to talk to an attorney who is experienced in the area of international tax planning,' " says Ms. Crain, who typically doesn't broach the subject with U.S. citizens or permanent residents.

As an alternative, a domestic trust can be a better choice for someone who wants to protect assets from creditors, Mr. Smith says. For example, a doctor who wants to shield his home and other belongings from malpractice lawsuits can set up a domestic asset-protection trust in Delaware and a number of other states that allow them rather than something offshore.

Liability insurance also can be a better line of defense than offshore accounts, some advisers say.

Still, some investors insist on going offshore, though preferred locations for the accounts are constantly changing.

One client of Ms. Crain, for example, was worried about lawsuits and set up a trust several years ago to hold a U.S.-managed investment account.

At the time, the man's tax lawyer favored the British Virgin Islands as an offshore site. When Ms. Crain bumped into him recently, that had changed.

"He said, 'BVI is still good, but I'm using Nevis now,'" she says.