First, let's define a "last plane out" account -- an offshore stash that would allow its owner to catch the last plane out of an imploding country and still be able to live well in exile.

Americans have joined Europeans worried about everything from rising taxes to hyperinflation to capital controls. Such similar experiences come from our ancestors who fled 19th and 20th century chaos and came to America in search of opportunity for a better life.

Now, many investors are concerned that they need advice on how to protect their money from what they fear is another approaching storm. People sense their country (wherever they may live) is headed in the wrong direction, that the financial and monetary policies being followed are unsustainable.

A glance at the headlines is all one needs to understand the growing angst: The Congressional Budget Office (CBO) projects US federal deficits totaling $9 trillion in the coming decade, and that's on top of a projected budget deficit for 2009 that will top $1.6 trillion, or 11.2% of GDP. That's a massive jump over 3.2% of GDP in 2008 and the highest level since World War II.

Outside the US, there are similar concerns from investors about their country’s “distressed” economic and monetary policies and the recessionary forces at work. Spain’s unemployment rate now exceeds 17%. The latest UK budget calls for a deficit of 12% of GDP. Japan’s exports plunged 49% in the first quarter of 2009, and its sovereign debt is projected to reach 200% of GDP in 2010. And virtually every major government is printing new currency at unprecedented rates.

These are the kinds of imbalances that in the past have led to inflation, civil unrest, martial law, and various forms of capital controls and confiscation. In the meantime, a growing number of investors are moving their money overseas, and the type of client is changing. Historically, offshore solutions have been reserved for very high net-worth individuals. But that has changed over the past several years as those with assets values of $ 1 million plus have started to ask for solutions so that they protect their hard-earned money and all of their assets aren’t at risk. Going offshore used to be primarily about taxes, but now it’s asset safety. Investors who place more of their assets offshore are only going to increase in the coming years and decades.

Offshore Options

For those with an interest in how to grab the “last plane out,” there is bad news and good news. The bad news is that the archetypical numbered Swiss bank account, impervious to all prying eyes, no longer exists. Tax evasion through offshore personal bank accounts is a thing of the past. It’s been that way for years. It’s not a particularly attractive business for any tax-haven bank because it has the potential to cause lots of problems for relatively little reward.

The good news is that tax evasion and asset protection are separate objectives, and the latter remains both legal and relatively easy to achieve. Simply move some capital overseas, and once there, it’s relatively safe from home-country depredations. Short of sending in the Marines, a government can’t go into another country and confiscate its citizens’ assets. 

As for where to put a last plane account, the following are among the most popular vehicles.

• Safer Offshore Banks

As UBS clients recently discovered, a foreign bank with a significant presence in high-tax countries isn’t really foreign at all. But smaller banks without a presence in the United States are less easily intimidated. Savvy advisors now counsel their clients to avoid the multinationals and instead seek out smaller banks without branches in high-tax countries.

• Trusts and LLCs

Wealth ownership can be transferred from a person to a different legal entity, such as a trust, foundation, LLC, or corporation created in a hospitable country (Panama, Liechtenstein, or Nevis, for example). These legal entities are not invisible to the world’s tax authorities – they generally must be disclosed on tax forms – but they offer rock-solid protection against private claims. And for US citizens with an offshore entity operating the account you have a larger selection of offshore banks willing to deal with you because the account is not in the name of an American but the international entity. The offshore entity managing the account deals with all that, sending a fax from Nevis or wherever.

• Insurance Policies

Some offshore financial centers, such as Switzerland and Liechtenstein, specialize in variable annuities and other kinds of insurance policies that allow foreign investors to contribute funds that (1) grow tax free until they’re withdrawn and (2) are immune from the claims of most creditors. Insurance companies are generally subject to the same secrecy laws as local banks, which means they’re private unless the owner is the target of a tax-evasion case. Another advantage of using an insurance policy for asset protection is that it’s relatively uncontroversial. In all countries, the purchase of an insurance policy is an ordinary and common transaction.

• Foreign Brokerage Accounts

Many Thai and other Asian brokerage houses welcome foreign clients. Opening an account frequently requires showing up in person to sign the papers, but for investors with a valid passport and a notarized signature, several solid Thai brokers will open an online trading account through email, fax and normal registered mail. Besides the obvious offshore advantages, a foreign brokerage account gives access to the thousands of stocks that don’t trade on US or European exchanges.

• Precious Metal Storage

Physical assets, such as gold and silver bullion, don’t appear to trigger US reporting requirements when stored abroad in a bank vault. The storage requirements have to be “allocated,” meaning that specific bars or coins are owned. And while the holding itself appears to be private; the movement of funds into and out of the storage facility is reportable – although this is up to the owner. Offshore bullion storage services stress that their customers are required to follow the laws of their respective countries, but the services themselves don’t report customer data to the tax authorities.

• Foreign Real Estate

Direct ownership of land and buildings in a foreign country must generally be reported, but real estate is less vulnerable to forced repatriation because it’s physical rather than financial. When rented out, it generates cash flow, and in the extreme, it can serve as a shelter from a home-country storm. In short, a vacation/rental house on some gorgeous Latin American or Asian beach is attractive on many levels.

Buying real estate in Latin America, for example, is generally done with cash, because financing is scarce. Other than that, it works pretty much as in most other parts of the word. A foreign citizen can own property with the same rights and responsibilities as a local. It’s also possible to buy and hold real estate in some types of retirement accounts, such as IRAs. This kind of arrangement can make the rental and capital gain income tax-free.

• Expatriation

The surest way to avoid the depredations of a government gone wild is to pack up and leave. This is known as expatriation. At its most basic, expatriation involves exchanging citizenship of one country for that of another. For a US citizen, taking this step is the only way to end the obligation to pay taxes on worldwide income, because moving to a new country without renouncing citizenship won’t work. But it also means paying an “exit tax” on unrealized gains in excess of US $600,000.

Expatriation is easier for citizens of most other countries. All you need to do to avoid the obligation to pay tax on your worldwide income is to leave. After an extended period, normally one year or longer, you no longer have any obligation to pay taxes on your income outside that country (although you may continue to be subject to gift and estate taxes). For example, a UK citizen can leave for two years and no longer be subject to income tax. Moreover, moving to a non-UK domicile means no longer being subject to UK inheritance taxes.

Of course, the world is a crowded place, and not every country is open -- even to well-off newcomers -- but a few are. Several countries have economic citizenship programs. You get checked out and make a contribution and get a new passport. St. Kitts and Nevis work that way. Austria requires a big contribution to a local business, and then they decide if it’s sufficient. Singapore and Hong Kong have programs to attract high net-worth individuals, but the bar is set rather high. In Hong Kong you need to contribute nearly a million dollars to be considered.

Background

Until recently, moving money offshore was no big deal for a person of means. Simply wire funds to a Swiss bank or Cayman trust and watch your money disappear into the black hole of state-sanctioned bank confidentiality. But those days are over.

Offshore banking centers and bank privacy laws, while offering a range of legitimate benefits to honest investors, have been exploited by dictators, drug lords, and terrorists, along with run-of-the-mill super-rich tax evaders. According to the World Bank, more than half of the world’s personal wealth, over $40 trillion, currently resides in about 60 “tax havens” worldwide. More than a third of that is thought to be in Switzerland, with the rest in such places as Hong Kong, the Cayman Islands, Panama, Bermuda, and the Isle of Man.

Much of this wealth is allegedly unreported and untaxed. The UK claims to lose out of US $31 billion annually in taxes on profits earned in tax havens. Germany’s DSTG tax union estimates that ~ US $437 billion has been transferred illegally from that country over the past decade. The US claims that its citizens use offshore accounts to evade $100 billion in taxes annually.

Not surprisingly, high tax governments hate tax havens with a vengeance and have been trying for decades to get at these hidden accounts. It’s been a cat-and-mouse game for the past 30 years in which US or European citizens find some loophole, and as soon as word gets out, the authorities change the rules. So these laws are constantly changing every time there’s a chink in the wall.

Lately, the game has become far more serious. To discover who has what where, the US government has transformed it Internal Revenue Service into an External Revenue Service, taxing its citizens on their worldwide income and requiring them to report all offshore financial accounts to the IRS. As a result, investors who use offshore entities to avoid US federal income taxes – or who simply fail to report accounts – can be prosecuted for tax evasion.

The US now requires foreign banks to give their US clients a choice of filling out and filing tax forms with the IRS or having 30% of the proceeds (no just the profit) from the sale of stocks or other securities withheld. Any bank taking deposits from US clients must submit to an audit by a US-based accountant. And under the Patriot Act, the government can seize money in the bank’s US branch (via a secret civil procedure in which the foreign bank does not participate). The US has not done this with European banks but have done it with banks from Belize and Latvia so this is a real threat.

In 2008, the US charged Swiss banking giant UBS with helping US citizens evade taxes, indicted a UBS executive, and fined the bank $789 million. This move was a direct challenge to Switzerland’s banking industry. Because UBS is, in effect, a global bank that does considerable business in the US, it caved, closing the accounts in question, disclosing the names of 300 clients, and paying the fine. The US upped the ante, demanding access to 52,000 more accounts belonging to US clients.

One effect of Washington’s aggressiveness, perhaps intentional, is that many foreign banks have simply stopped accepting accounts from US customers. A good number of these banks have stopped accepting US clients if it meant that the IRS had the ability to come in and look into their client base.

With bank privacy laws becoming watered down, how will such openness affect offshore investing – both practically and conceptually? We would caution against reading too much into recent events. The main change is that an increasing number of governments insist on the cooperation by offshore centers when it comes to sharing information on individuals who are being investigated for tax evasion. Most of the offshore jurisdictions, including Switzerland and Singapore, have already announced that they are willing to endorse a standard for the exchange of information. But calling this the end of banking secrecy is going too far. Banking secrecy as such is not at stake; the fact that offshore jurisdictions will cooperate (with strict conditions set) in sharing information with foreign authorities does not represent the end of banking secrecy or the end of offshore banking. Banking secrecy will continue to protect the legitimate right for confidentiality, and offshore banking will continue to serve its purposes.  (Oct. 13, 2009)

Thanks to John Rubino, author and former financial analyst, for the subject matter. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.