Risk: The Best Offshore Asset Protection You’ve Probably Never Heard About [Part II] by Capitalist Exploits
Risk, as I mentioned on Tuesday, is not only integral to any healthy functioning economy. It’s a simple fact of life which often goes unnoticed; until it is forced on you like a Watchtower pamphlet from a Jehovah’s Witness.
In response to my earlier post on risk I received a couple of emails asking me about how “oligarchs shouldn’t be applauded for risk taking” and how “Obama never risks anything yet there he is, leader of the United States”.
Those readers completely missed the point. I wasn’t talking about Obama, oligarchs or any such parasites but let’s deal with the issue quickly since it applies to so many things.
Risk is like a tube of toothpaste. You can use it wisely to clean your teeth or you can make a complete mess of your friend’s sandwich with it. Don’t blame the toothpaste – there’re always going to be morons out there!
Now that I’ve gotten that out of my system I wanted to provide two case studies which highlight risk and then a structure which is probably the best I’ve found for protecting one’s assets.
I was recently talking with a man who I’ll call Steve. I bumped into Steve at a social gathering.
Steve is a 69-year-old grandfather and as far as I could tell a relatively risk averse guy. He always worked a job, never invested in the stock market, didn’t trust or know anything about financial instruments, and had invested in real estate because in his words “he could see it and he knew it was there”.
Over the course of his working life he’d managed to buy 4 rental properties and had brought gearing down to 20% LVR. Cash flows generated from the properties had taken over both principal and interest payments and within 3 years he’d have been debt free on about $2.5M of real estate including his own personal home. The income, while modest, would support Steve and his wife’s retirement while retaining his asset base.
Then disaster struck. Steve got cancer. His treatments over the last 3 years would have been state funded if he didn’t have the means. He figured that this is what he’d been paying taxes for all those years, right?
Not so fast. Means testing, which is simply the state reneging on their previous promises made, meant that because he owned all these assets he no longer was entitled to have the state care promised. It’s ironic that those who’ve not prudently saved for retirement are in fact receiving free care while those who’ve sacrificed and been prudent are punished.
Naturally, all of this came as a nasty shock to Steve and it’s such a shame since it’s something which could have so easily been avoided. He told me that he has subsequently sold one of his properties in order to pay for his care and will have to keep selling down assets. Once they’re exhausted then his care will be paid for by the state. Now, I don’t want to get into whether the state should be involved in any of this (in my opinion, they shouldn’t) but we all live in an imperfect world and have to play the cards which are dealt.
These are risks which Steve quite simply never considered, and like an unwelcome Watchtower wielding messenger from God, have come knocking on his door.
On the further end of the risk spectrum lies investing in early stage private companies and I’ll give you a case study of our own.
When Mark and I invested in our first private equity deal together we knew going in that there was a very real risk to our capital since we were investing at a very early stage. The particular company wasn’t much more than an idea, had no revenues, no assets, no staff and was attempting to operate in a frontier market few dared to venture into.
That particular deal ran 20x in 18 months and provided us liquidity. Happy days! Not all of them work like that. The important thing is, if we’d lost our investment on the deal we’d have been OK with it. The risk was evident going in and while we mitigated as much of it as possible, there was a lot which we simply could never de-risk.
These two examples mentioned are in stark contrast. Steve never expected to lose his investments, and Mark and I, while optimistic, realised that we could easily have lost our investment yet the outcomes couldn’t be more different.
Losing money due to some event which wasn’t ever perceived to have been risky is what really hurts. It’s like declining a wrestling match with the muscly thuggish neighbour, opting instead to play ping pong with his cute sister and then coming out with a black eye and broken arm anyway.
Anyone that has assets worth protecting should do just that – protect them.
Trusts are a great means of achieving that protection. A Trust is a widely recognized legal structure that puts just a bit of formal distance between you and your assets by effectively conveying ownership and management to distinct parties.
Steve should absolutely have secured his assets in a Trust and would never have had to deal with the stress of losing his assets unexpectedly while dealing with cancer which is bad enough.
There are many great low-tax and no-tax jurisdictions out there but not all are equal. Many of them are on OECD black or gray lists and the legal environment and enforceability of contracts is often questionable.
Finding good banking operations for Trusts in these jurisdictions is becoming increasingly difficult meaning you may get stuck with banking operations for your Trust which are less than perfect. It makes little sense to have a Trust owning a bank account only to end up losing your cash to a banking crisis since you were forced to use a bank which wasn’t sound and you in turn chose that bank simply because all the others refused to deal with your offshore Trust.
A New Zealand Trust offers arguably the best structure I’ve come across. Below are some compelling reasons to consider it for your asset protection.
- A safe location offering long-term security, with a stable political and economic environment;
- New Zealand’s legal system originates from British law and has a long established Trust law regime, both legislative as well as case law are well developed;
- Income which is sourced offshore (not in New Zealand) is totally tax-free. New Zealand has no capital gains tax, inheritance or forced heirship;
- New Zealand Trusts are globally recognized and can make use of 37 current, double taxation agreements;
- Minimal compliance and reporting requirements. No audit is required and no annual tax returns need to be filed;
- Privacy. ?The only details made public in New Zealand would be the details of the directors and shareholders of the Trustee company;
- Cost?. The costs of forming and administering New Zealand foreign Trusts are reasonable when compared to other entities and jurisdictions.
As an example, the Trust can own property in New Zealand and pay no capital gains tax on increases in the value of that property.
We’ve put together a complimentary report on New Zealand Trusts with much more detail which you can access here.