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Offshore Banking 101: What You Stand To Gain (& What To Watch Out For)

Scott Smith
5 min read
Offshore Banking 101: What You Stand To Gain (& What To Watch Out For)

The average person’s knowledge of an offshore bank account typically comes from a television crime drama. If you know a little more than the average person, you may have gotten some details from an “info dump” or scandal or a scandalous “leak” like the Panama Papers.

With the drama and intrigue, it’s no surprise that offshore bank accounts have a bad rap. But I’m here to tell you this: ordinary real estate investors can open perfectly legal offshore accounts as part of an airtight asset protection strategy.

I should know—I help them do it all the time!

Let’s be clear: There are no laws on the books in America preventing a citizen from owning an offshore bank account. A citizen (with the help of their attorney who should always be consulted for these matters), is able to open an overseas account without any explanation. You can use these accounts to hold assets, take advantage of foreign banking privacy laws, protect yourself from legal liability, or even prevent a lawsuit altogether.

But what about those stories about criminals trying to hide shady dealings, launder money, or commit fraud? Yes, shady people can absolutely use an offshore account to disguise or commit their crimes. That’s on them, though—not the account. Many countries have adjusted their local laws to curtail this kind of abuse and to protect their reputations.

Related: Considering Moving Abroad? Here’s How Taxes Work

So repeat after me: There’s nothing inherently wrong or illegal about an American real estate investor with an offshore account!

Now that we have that out of the way, let’s talk about how you might go about setting up an offshore banking account the right way.

As you might expect, there are legal considerations to take engaging in major financial transactions of any sort, especially international ones, so having a trusted legal professional who can assist you is key. Our job is to help you avoid those hidden pitfalls with banking or financial regulations. And those pitfalls can be hard to see if you aren’t careful!

4 Benefits of Offshore Banking

Because every country and its financial regulations are different, you’ll find that privacy and other perks of an offshore account vary by country. That said,  there are some common threads. It’s important to evaluate your specific needs before selecting a country to host your account so you can be sure they are able to meet them.

  1. Stability

Currency fluctuations and destabilization happens much more often than you think. Much was made in the late 2000s about the wild swings Zimbabweans were seeing in the value of their money. It got so bad their government was simply changing the written value of their paper money, even printing multi-trillion dollar notes, to combat rapid hyperinflation!

Many Americans think we are immune to this situation, but our banks have been overleveraged and in crisis multiple times in just the past two decades. In fact, in a 2018 analysis of bank stability ranked U.S. institutions in the bottom of the top 50 in the world, with just five American banks making the list.

An offshore account at one of these more stable institutions, or in a country with tighter banking regulations, can protect your financial assets from civil conflict, creditors, and worldwide uncertainties.

  1. Currency Diversification

In addition to stability, having a financial portfolio with a diversity of currencies can insulate you further from fluctuations. This kind of diversity appeals to many real estate investors, but insufficient research can end up costing you a lot of lost income. Always consult a pro on these matters.

Related: Don’t Get Conned! 11 Crucial Questions to Ask About New Investments

  1. Asset Protection

Americans file one lawsuit for every dozen adults every single year. The more successful you become as a real estate investor, the more like you are to be on the receiving end of one of these lawsuits. In light of that, it’s no wonder many investors are stashing their assets in an offshore account to protect them from potential litigation. Rather than just hiding your assets within another entity structure, this literally moves it out of reach to another country. (Foreign-held assets are much more difficult to “go after” than domestic assets.)

  1. High-Yield Interest

Rather than banking with the same dozen or so institutions as everyone else in the states and seeing the same interest rate as everyone else, an offshore account lets you choose from the entire world of finance for the best return. A qualified financial advisor can assist in helping you find the high-interest savings account you’ve been looking for, especially in a country with a lower rate of inflation than your home country.

Ready To Learn More? Scammers Are There To ‘Help’

Start researching offshore banking options and you’ll very quickly see that there are scammers looking to take advantage of Americans who don’t know the law or regulations. These scammers will reach out with the promise of “direct banking services,” meaning via email, personal message, or something you click on or download to access.

There’s a zero percent chance these offers are legit. Rather, these are phishing/spearphishing messages targeted at real estate investors to collect your personal, sensitive information. The easiest way to handle an unsolicited offer like this is to Google the company and, if your suspicions are indeed correct and they are phishing, report them as spam within your email client and move on.

Before ever opening an account, it’s absolutely vital that you research the legitimacy of your overseas bank. Read reviews—especially from other foreigners—about their services and determine if they can actually meet your needs.

FATCA and Your Offshore Account

The Federal American Tax Compliance Act (FATCA) of 2010 is the law you should know inside and out before you begin your journey into offshore banking.

I’ve broken down the basics for you:

  • For the sake of FATCA, American citizens are separated into those living abroad, earning abroad, or remaining at home. Noncitizens and green card holders are not part of this.
  • The law primarily covers how to report your taxes and income, not how your offshore account is to be used. The “how” is dictated by your account’s home country, not your own, so always review the host country’s regulations as well.
  • An IRS Form 8938 is required to report assets totaling $50,000 or more for unmarried or single-filers. Some people are able to get by without reporting, but you should always verify that rather than assuming.
  • FinCEN’s website explains very clearly who must file and the requirements for doing so.

If you’re a glutton for punishment and want to read into the U.S. laws straight from the source, the IRS has a comprehensive explanatory article on all FATCA reporting requirements on their website.

Is This Tax Evasion?

Absolutely not! Having an offshore account might lead to some suspicions though because of the way other Americans have mismanaged their own accounts into illegality.

The Department of Justice’s Tax Division recently investigated and prosecuted a number of large institutions, including two of Switzerland’s largest, for advertising their offshore accounts as a method of tax evasion. This action was prior to FATCA’s passing, so account holders following the letter of the law nowadays should be protected from this sort of sweep in the future.

Some banks will let you start an account with as little as $500. As long as you, your attorney, and your CPA are playing by Uncle Sam’s rules, your offshore assets will be just fine.

Offshore Banking Can Be For Everyone

No one-size-fits-all asset protection plan fits every investor. There are many things to consider before opening an offshore account.  Still, reaping the benefits of an offshore account is relatively easy. The biggest benefit? The peace of mind that comes with knowing you have a high-earning account that shields your assets from many of the risks you would face by keeping your money at home.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.