The Importance of Offshore Diversification: A Case Study

The Importance and Benefits of Offshore Diversification

We’ve long suggested that one of the key strategies you can use to gain resilience over your financial future is offshore diversification. Thanks to laws like the Foreign Account Tax Compliance Act (FATCA), it’s not as easy for Americans to invest offshore as it used to be. But there are still many options available.

Legal Offshore Investments

For instance, it’s 100% legal for an American to open a non-US bank account, buy precious metals outside the United States, or purchase real estate overseas. It’s also not a crime for an American to create an offshore trust or an international business.

Naturally, there are reporting obligations that accompany such investments or structures. And the penalties for failing to comply with them can be severe. But in our view, it’s worth taking the journey offshore, so long as you do it with the aid of a trusted partner who understands the rules.

And you don’t need to look far to see why you might want to offshore your investments. The United States is just a single country on a global map – one that is increasingly intrusive, economically volatile, and litigious.

Benefits of Offshore Asset Protection

One of the major benefits of investing offshore is asset protection.

Once your money leaves the United States, it virtually disappears from what we call the domestic “radar screen” – that network of financial data accessible by private investigators, data brokers, and law enforcement authorities.

The lack of ready access to data on your non-US assets is protective because it means if you have a legal dispute with someone, you could be perceived as a less attractive target.

A Case Study: Stephanie’s Asset Protection

Let’s use Stephanie, a retired woman from Texas, as an example. Her neighbor George is considering a lawsuit against her for damages and emotional distress after Stephanie altered her property to prevent flooding. During an especially heavy storm after the renovations were completed, water flowed from Stephanie’s property into George’s home and caused serious damage. The amount George seeks far exceeds the limits of Stephanie’s personal liability policy.

Domestic Asset Search

The equity in Stephanie’s home is protected from collection under Texas homestead law. She has a solo 401(k) that is also protected by federal law. Her Social Security payments are also exempt from levy or garnishment in this situation. Her US bank account holds just a few thousand dollars for emergencies, and she has no income that her neighbor can claim. But she does have a bank account in Switzerland holding most of her life savings.

George hires a lawyer who conducts a domestic asset search to see if Stephanie has assets to collect. The search finds almost no assets that can be attached. Certainly not enough for a lawyer being paid on contingency – i.e., out of the proceeds of any money they can collect – to work with. The lawyer suggests that George settle for $250,000 – the amount covered by Stephanie’s liability insurance policy.

Trial and Judgment

But George isn’t the type to give up. He’s furious. Eventually, he convinces the lawyer to take the case – paying by the hour rather than on contingency.

The case is taken to trial, and a jury returns a $500,000 award against Stephanie. The court orders her to submit to a debtor’s exam, where she is required to submit a list of assets under oath. At this point, Stephanie must reveal the existence of her account in Switzerland. It turns out that it holds about $1 million – more than enough money to pay off the balance of the judgment.

Challenges of Recovering Offshore Assets

But that doesn’t mean the funds within it are immediately recoverable. They may be if the judge issues a “turnover order” to Stephanie, requiring her to repatriate the funds in her Swiss account to the court’s custody. If Stephanie refuses to comply with the repatriation request, the court could issue a contempt citation, potentially landing her in jail until she complies.

Without a turnover order, the path for George to claim the assets is even more convoluted. For instance, if the court orders Stephanie’s bank to repatriate the assets, the bank has no obligation to obey the order.

The Complexity of International Legal Action

At this point, George is tearing his hair out because he has only been able to recover $250,000 from Stephanie’s insurance company. And he has paid a good portion of that money to his attorney. As you can see, the international strategy so far has been a successful web.

If George was particularly aggressive, he could hop on a plane to Switzerland and launch legal action there to access Stephanie’s account. But like most other countries, Switzerland doesn’t automatically recognize US civil judgments. George would need to petition a Swiss court to enforce his judgment. And a successful outcome isn’t guaranteed.

As well, since Swiss lawyers can’t take cases purely on contingency, George could spend a fortune in legal fees without any tangible results.

As you can see, offshore diversification can protect your assets by making it time-consuming and expensive to pursue them. But an aggressive creditor can obtain a turnover order and force you to repatriate your international assets, especially if a results-oriented judge takes their side.

Need Help?

We’ve been working with clients to help them internationalize their assets since 1984. We know the game well, what works, what doesn’t, and how to do it safely.

If you are interested in seeing if The Nestmann Group could be your partner in building your own international Plan B, please feel free to book an appointment with one of our Associates. You can do that here.