Yes, your self-directed IRA or 401k can own a private LLC or corporation. No doubt about it. But should you use an OFFSHORE LLC or Corporation in your retirement account rather than a domestic one? Will it make your money safer… or at far greater risk? I’m Bryan Ellis. I’ll tell you right now in Episode 92.
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Wow! Based on the response to yesterday’s episode, there’s clearly a HUGE amount of interest in offshore investing with your retirement account. So thank you for that!
Let’s dig a little deeper today. Yesterday, we touched on the most fundamental of questions – is it even possible for YOUR retirement account to buy offshore assets. The answer isn’t a straightforward YES or NO… and if you don’t know for SURE about your account, then listen to yesterday’s episode #91 to find out. You can hear that at SDIRadio.com/91.
Today… I’m going to assume that you’ve determined that it is POSSIBLE for your account to invest in offshore assets. So we’re going to delve into one of the most common ideas about what it means to be an offshore investor: To use FOREIGN business entities instead of domestic ones.
As many of you know, it can be very advantageous to own a private LLC or corporation in your self directed retirement IRA. One of the fundamental weaknesses of a self-directed IRA is that it’s merely self-directed… but not actually directly controlled by you. So for every transaction, you must make requests of and wait for permission from your custodian before performing the transaction.
But by setting up a wholly-owned entity within your Self-Directed IRA, this problem is largely overcome and gives you very direct control over your funds, which can be a very good thing. And when most people set up such a wholly-owned legal entity, they generally use what’s called a home-state entity. So, for example, if you live in California, you’d likely set up a California LLC in your self-directed IRA. But what if, instead of setting up a CALIFORNIA LLC, you set up an LLC organized in some other jurisdiction… a FOREIGN country… such as the Cayman Islands, Antigua or Nevis?
You’ve heard about this before. When they talk about it in the movies, you hear words like “shell corporation” and “offshore company” and you’re led to believe that all of the action is in the Caribbean, particularly the Cayman Islands. It’s also suggested that the only people who use offshore entities are drug dealers and money launderers… basically, the miscreants of society.
Frankly, that’s what the US government wants you to believe, because some of what you hear about using offshore entities is true: To a large extent, going offshore puts your assets outside the reach of Uncle Sam. And good ole Uncle Sam is power-hungry. He wants you to have the illusion of control of your assets, while having the ability to take them from you at any time. But shifting your assets offshore, well… that’s not a good thing for our greedy uncle, because in many cases, doing so transforms the “illusion” of control you currently have into actual control… at least, control enough where Uncle Sam can’t confiscate it just because he decides to.
But why would you ever consider using a legal jurisdiction outside the United States?
The reasons are many. Some are good, some are questionable. Here are the top 3:
Far and away, the top reason is to minimize or avoid taxes. The logic – which, I’ll warn you, is flawed – goes like this: I’ll set up my LLC in Nevis, where there is no tax liability for LLC’s.
The second BIG REASON people consider using offshore entities is for asset protection. If you have a properly structured entity in certain offshore jurisdictions, those jurisdictions make it very, very hard for anyone – sometimes even the US government – to take your assets, even if a lawsuit has been filed against you, you lost, and a judgment has been entered. That’s because those jurisdictions have made their name – and make significant revenue – by being legally friendly to debtors and very hostile to creditors.
And the final BIG REASON that people go “offshore” is to achieve a large degree of financial privacy. The more financially successful you become, the more likely you are to value your privacy… unless, of course, your last name is Trump.
There are all noble and worthy ends. Saving on taxes is a wonderful thing. Protecting your assets is a wonderful thing. Financial privacy is a wonderful thing.
So, should you take the plunge and set up shop in your Self Directed IRA as an offshore company?
Honestly, my friends, I think not. Here’s why:
First, in the context of your Self Directed IRA, you already have the ultimate tax benefit – you don’t have to pay them on your investment profits, by and large. So there’s no reason to go offshore for that benefit. Furthermore, it’s fallacy to think that merely by using a foreign entity rather than a domestic one, that you automatically save taxes. It just doesn’t work that way, so the “I’ll save taxes” argument is absolutely worthless here.
Where asset protection and privacy are concerned… well, those arguments are much stronger than the tax argument. I’ll admit it: asset protection is something that ALL self directed investors must think about quite seriously. And with the incredible degree to which the asset protection advantages of IRA’s is shrinking, it may be very tempting to go the offshore route. Particularly since… and I hate to say this, but… the biggest asset protection challenge you’ll ever face would likely come from Uncle Sam. There have been SO MANY recent stories about the federal government outright STEALING money from individuals and businesses for no legitimate reason whatsoever. Recently, the IRS swooped in and stole $107,000 from a North Carolina store owner. Why? They accused him of a STUPID, IDIOTIC, RIDICULOUS crime called “structuring” in which he was guilty of depositing amounts of under $10,000 in cash into his bank account on a frequent basis.
Yep, you got it right… by depositing money into your bank account… money you legally obtained… into your own bank account… the IRS can steal everything you’ve got. That’s what happened to the guy in North Carolina. And there are MANY other stories just like his. So, I’ve got to admit… there’s some real appeal to the asset protection rationale for taking your investment account “offshore”.
But I’ve got to tell you… it makes me nervous. I haven’t moved my retirement account offshore nor do I have any other assets offshore. I don’t plan to change that, either. But if I did, I’ll tell you this much: I wouldn’t consider doing it without getting advice from a VERY EXPERIENCED lawyer. And you’d want to check it out from both an asset protection point of view and from a tax point of view, which would likely require multiple sources of legal counsel. So, clearly, to do this is going to cost some money… but it would be well worth the effort, because:
I don’t know if it’s true, folks, but here’s what one attorney told me: Where the IRS is concerned, when they see the use of offshore entities, well… they’re far more likely to LEAD the investigation of you and your assets through their CRIMINAL investigation division rather than as a civil matter. So it’s a very big deal.
One thing you could do to lessen that risk is to have your attorney submit your plan to the IRS in advance to get a private letter ruling, which is essentially a blessing from the IRS that your plan is tax compliant. Frankly, that’s really the ONLY way I’d ever consider doing anything offshore.
Oh, and be aware of one more thing: The Feds passed a law not long ago that’s called the Foreign Account Tax Compliance Act, or FATCA for short. It’s basically a huge bureaucratic mess that has created, as a primary result, a situation in which MOST offshore banks and financial institutions are refusing to accept Americans and American-owned entities as clients. And don’t think you can set up an offshore LLC and then use an American bank… that’s no safer than never going offshore to begin with.
So, bottom line, my friends: Going offshore is probably overkill for most of us, and I personally won’t go that direction. But if you do, take it very seriously. Respect the law and get good advice. It’s absolutely NOT true that the offshore world is strictly the domain of criminals and miscreants. But what it certainly is is the target of Uncle Sam’s ire, so you’ve got to be prepared to face that if you jump offshore.
My friends, I promised you another case study from my flipping team in Phoenix today, because we’re putting up some huge numbers that may be a good match for you. But we’re out of time now… I’ll try to publish a special episode later today with that information. In the mean time, go over to S3Flip.com for more information!
Have a great day, my friends, and remember: Invest Wisely Today… and live well forever!
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