Offshore Banking Strategies
We generally leave the offshore banking business and questions about potential uses to our offshore partner banks; however, we often field questions regarding these issues and find it necessary to explain a few simple strategies often utilised. None of the information in this section and indeed in this website should be construed as tax advice in your home country. These strategies may or may not be legal in your home country. We can only advise on legal uses in the countries where we establish corporations and bank accounts on behalf of our clients.
For clients looking to repatriate funds from an offshore account without having to “cash out”, a back to back loan may be an option. We work with several banks that are able to provide this service.
Back to Back Loan
Back to back loans are generally intended to hedge against changes in currency valuations. The concept is relatively simple. You deposit funds with the bank in one currency and the bank issues a loan in another currency using your deposit as collateral. With the continuously deteriorating US Dollar, this has been a great tool for many people in recent years. In practice, these loans have several uses which have contributed to their popularity.
Scenario #1 (Business Loan)
You have an offshore company and bank account with funds you have been accumulating over time. A situation arises and you find your onshore business is in need of a cash infusion. You may be able to structure a “back to back” loan with your offshore bank. It is generally a simple concept. You deposit funds at the bank and using your deposit as security they draft a loan agreement at an interest rate and term decided by you. The bank loans the funds to you solving your cash flow problem and allowing you to show the cash as a liability on your books. This may be an instance when you actually prefer to pay a higher rate of interest. Your interest payments may be tax deductible expenses allowing you to save taxes in future years.
Scenario #2 (Property Mortgage)
You are building a new house or buying a piece of property and need cash. Your offshore bank can draft a back to back loan as a mortgage at an interest rate and term of your choosing (usually at a fairly high rate) allowing you to purchase the property and maintain a “lien” on the property by filing the mortgage. Many high net worth individuals prefer not to own property and investments in their own names and seek arrangements which make their assets more difficult to locate for potential adversaries. This is a popular strategy in these cases. Any searches for assets would turn up a fully mortgaged home rather than one owned free and clear. These loans may be kept “topped up” to 100% of the value of the home as well. As with the business loan, interest payments are often tax deductible providing future income tax savings which may come in handy, especially if you have the good fortune of being in the highest tax brackets.
Private Annuity Contract
Private annuities can be used for a variety of purposes in estate planning. Although commonly used as a tool in transferring ownership of appreciated assets to family members, private annuities can also serve estate planners as a device for transferring cash from cash-rich estates. Additionally, these contracts can be used to guarantee income and to minimize estate tax liabilities.
A private annuity is an annuity contract issued by an individual rather than a commercial insurance company. In the past, it was used most often to transfer appreciated property to family members. There is every reason to suggest it may be as effective for transferring cash from a cash rich estate, to assure income and for saving on estate taxes.
As a contract, a private annuity is quite simple. The issuer of the contract agrees to pay the annuitant a periodic payment for the annuitant's life in exchange for a payment of cash or for the transfer of property. The annuitant cannot be in imminent danger of death, nor can the annuity contract be collateralized or otherwise secured. If it is known on the valuation date that the annuitant will die from an illness in a very short time, the value of the annuity is based on that fact.
Private annuities may be regulated differently depending where you live so be sure to check with a local tax advisor regarding permissible uses.