Abusive trusts

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Abusive Trust Organization

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See Pure Trust.

Adhesion contract

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Can be thought of as a contract that one signs without an equal bargaining position with the other person to the contact. An illustration might be an insurance policy contract. Some of these have been found to be "adhesion" contracts in that the person who wants to obtain insurance must sign the "standard form" contract of the insurance company without any changes to it. You either agree to the terms of the contract or you don't get insurance. Also, the terms and complexity of the contract may be way over the heads of the person signing; thus, they don't know exactly to what they are agreeing (their obligations under the contract).

Adjusted basis

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The cost of property after adjustment for certain deductions or additions as permitted or prescribed by the U.S. tax laws. In some instances, the basis of property is derived from the basis of other parties - such as a donor or an estate.

Administrative Offices

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An administrative office is frequently located in a different jurisdiction other than that of the headquarters office, the parent company or a country of operation. Administrative offices may be used to co-ordinate international or regional activities, to provide particular services such as management analysis, financial or other related services or to perform a given function such as marketing.

Advisory Board of Directors

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The board is comprised of individuals appointed to advise the elected board of directors. An advisory board is not bound by the duties imposed upon elected board members, and the corporation is not required to follow the recommendations of the advisory board.

Agent

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Anyone who is authorized to act on behalf of another. A corporation can only act through its agents; therefore, it is important to define what actions an agent is authorized to perform.

Akte Van Opricht

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Statutes of a Dutch company.

Aktiengesellschaft (AG)

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1) A German limited liability company. 2) German company limited by shares.

Alaska trust

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Alderney

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Alderney is situated in the Channel Island (such as Jersey and Guernsey). They are not "really" independent but run by one of the few remaining "monsieurs" (private land owners who act as "local" kings). The tax legislation is compatible with that of Guernsey. Users complain that using the jurisdiction is too complicated, too close to Guernsey and Jersey (both being under attack by OECD AND FATF) and too much bureaucracy (such as their complicated company structures, conditions to profit from tax advantages, etc.)

The American Association of Attorney-CPAs

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It is an organization composed of people who have been qualified as a CPA and as an attorney, not necessarily in the same state. The qualification does not have to be kept active, as some members let their licenses lapse due to continuing education requirements of their jurisdictions. Associate membership is open to persons who have qualified in one of the professions and are working on completing the requirements for the other.

Anderson case

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Failure to prove impossibility of compliance with a court order to repatriate concealed funds offshore. Read the court's finding that the Andersons remained in control of their trust. The Andersons' trust created the circumstances in which a foreign trustee would refuse to repatriate assets to the United States by means of so-called duress provisions. FEDERAL TRADE COMMISSION v. AFFORDABLE MEDIA, LLC and DENYSE LINDAALYCE ANDERSON; MICHAEL K. ANDERSON, [Go to the Website]. On August 10, 1999, the Cook Islands High Court refused to allow the U.S. Federal Trade Commission (FTC) to substitute the FTC as the Andersons' trustee. The Cook Islands High Court upheld the sanctity of the trust and would allow no changes which would benefit the FTC in their recovery of money. Parenthetically, the Court ordered the FTC to pay the court costs of the Cook Islands trustee. Although the Andersons' trust was very poorly designed and the Andersons made some very stupid mistakes to attempt to frustrate the ordinary administration of the Courts, the trust, the trustee and the offshore country still survived the legal attack.

Annuity

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1) Generally, any series of payments. In the context of a private annuity, it’s a series of payments for the life of the annuitant or annuitants, which is also known as a life income annuity. 2) A variable annuity issued by a foreign life insurance company is treated the same as one issued by a U.S. life insurance company except that there may be a 1% excise tax on the premiums paid to the foreign insurer. However, some reports indicate that a new U.S.-Swiss treaty that was renegotiated in 1999 that purports to exclude Swiss insurance and annuity contracts from this U.S. excise tax.

Annuitant

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The person who receives an annuity, usually as payment for cash or other property, also known as the settlor or transferor.

Anstalt

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1) A legal entity without shares established in Liechtenstein. The Anstalt has some of the features of a trust but with corporate personality. Shares are not issued. IRS Rev. Rul. 79-116 holds that an Anstalt is a grantor trust. 2) Liechtenstein offers a number of structures, which are unique and versatile. Foundations [the Stiftung] and Establishments [the Anstalt] are perhaps the most valuable for a U.S. or Commonwealth citizen regarding privacy and control. These are both separate legal entities, but without traditional share or equity holders. This lack of direct ownership provides for their special stand-alone structure. And once properly funded, there is no trace back to its creator.

Anti-avoidance rules

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1) Tax laws intended to curtail what is perceived by the tax collector as being done by the taxpayer purely for tax avoidance --- to counter these perceived abuses. 2) To prevent the avoidance or reduction of tax through the displacement of one or more connecting factors (i.e. the basis of tax liability) from the taxing jurisdiction concerned to a tax haven jurisdiction. Anti-avoidance measures may be of general application or may refer to specific tax havens. Any measures usually appear in domestic tax systems; they may however be imposed by tax treaties.

Anti-deferral regime

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1) Almost 10 years ago, the Italian government enacted a law to curb the misuse of tax havens. Unfortunately, the statute has generally been viewed as ineffective. Luca Dell'Anese with the Institute of Tax Research in Milan writes that the Italian Parliament has adopted a much stricter anti-deferral regime to remedy the problem. The new law features a controlled foreign corporation (CFC) section, analogous to the CFC provisions in subpart F of the U.S. Internal Revenue Code. Italian lawmakers were influenced by the OECD's 1998 report on harmful tax cooperation. 2) Almost 10 years ago, the Italian government enacted a law to curb the misuse of tax havens. Unfortunately, the statute has generally been viewed as ineffective. Luca Dell'Anese with the Institute of Tax Research in Milan writes that the Italian Parliament has adopted a much stricter anti-deferral regime to remedy the problem. The new law features a controlled foreign corporation (CFC) section, analogous to the CFC provisions in subpart F of the U.S. Internal Revenue Code. Italian lawmakers were influenced by the OECD's 1998 report on harmful tax cooperation.

Apostille

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1) Certificate of Good Standing in connection with corporations according to the Convention of the Hague of October 05, 1961. 2) An apostille is a certification that the notary taking the acknowledgment is authorized to do so. It is given by the agency of the jurisdiction which empowers the notary (e.g., in the US it would be the Secretary of State of the notary's state).

Appreciated property

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Property with a fair market value greater than it’s initial cost without regard to its tax basis.

Arm's Length Relationship

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A term used to describe a type of business relationship a corporation should have with a close associate to avoid a conflict of interest. For example, when you negotiate with your banker or your supplier, any agreement which results will likely reflect market value and commercially reasonable terms and conditions.

Armstrong, Martin

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In late 1999, the SEC claimed that this renowned market forcaster was concealing $16 million dollars of assets belonging to defrauded investors. Armstrong, the founder of Princeton Economics International Ltd., Tokyo, Japan, was charged in Sep. of 1999 with bilking Japanese investors and companies of $1 billion. How much is hidden offshore is yet to be determined.

Articles of Association

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Usually used in an IBC or exempt company. Regulations for governing the rights and duties of the members of a company among themselves. Articles deal with internal matters such as general meetings, appointment of directors, issue and transfer of shares, dividends, accounts and audits.

Asset forfeiture

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1) The idea that inanimate objects (property) can commit a crime is a medieval concept that should have no place in modern jurisprudence. Unfortunately, it is the basis of modern civil forfeiture and is a perfect vehicle for government to easily confiscate private property almost completely unhindered. [attribution: Harris Publishing] 2) Upon forfeitures to the US pursuant to provisions of Title 18, US Code Section 982(a)(1), a conviction is required. Upon conviction, all name assets are forfeited to the US and may include real and/or personal property involved in the criminal offenses. In addition, all property traceable to such property is forfeited. A forfeiture list might look as follows: a. real property commonly known as 9047 Lakeshore Drive, West Olive, Michigan 49460 b. one 1997 gold Chrysler Sebring vehicle, Vehicle Identification Number 3C3EL45H5VT523614

Asset manager

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A person appointed by a written contract between a company or trust to direct the investment program of the company or trust. It can be a fully discretionary account or limitations can be imposed by the contract. Fees to the asset manager can be based on performance achieved, trading commissions or a percentage of the valuation of the estate under his or her management.

Asset protection

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1) The concept of legally transferring your assets into a legal structure. The structure is generally partially or entirely offshore. It is done with the intent to protect the assets from attack by frivolous litigation. It is a tax neutral entity such that taxes must be paid on earnings or profits made on assets by the grantor--- the person who established the entity. For more info, click here. 2) There is no entity, or even combination of entities (a structure), domestic and/or offshore, that is completely foolproof against creditor attacks any longer because of the use of threats of contempt by U.S. courts. Generally, the best you can do is to create a workable system for a client which will create so much doubt in the mind of the creditor's counsel as to whether the judgment is collectable (or whether hidden tax traps such as "phantom income" to a charging order holder exist) that the creditor's counsel recommends an early settlement favorable to your client. Secondary goals include protecting assets against court-ordered freezes, and creating a system so that if the creditor does not accept a reasonable settlement that you can frustrate the creditor by multiple lines of defense until the creditor loses interest, is out of time or money for collection costs. [attribution: ABA-TAX list] 3) Asset protection planning is a process that includes reorganizing how assets are held so as to make them less vulnerable should a claim be made against a person. It should be designed and implemented before there is a claim pending. An analogy would be having casualty insurance. You need to buy it before the incident occurs. Asset protection is not done in a vacuum but must be part of an overall integrated estate plan. 4) The "old and cold" philosophy would apply here.

Asset protection trust (APT)

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1) A trust established offshore to protect settlor's assets against those who may attempt to make claims against them: creditors, former spouses and dependents on death. Some offshore jurisdictions provide protection from creditor claims against persons who have guaranteed bank loans. Section 679 of the Internal Revenue Code Regulations controls U.S. persons setting up foreign trusts or trusts with U.S. benfeficiaries. The IRS has yet to issue "regulations" regarding foreign trusts. Foreign trusts (and partnerships and corporations) may be used to hold assets. Foreign jurisdictions often provide a protective legal regime that can thwart actions by potential litigants and creditors. The income tax consequences of asset protection trusts are generally neutral although additional tax return disclosures may be required. 2) Section 679 of the 1996 Small Business Job Protection Act referred to "out-going trust" regulations to be promulgated. As of December 1999, regulations were never promulgated under the section as enacted in 1976; and regulations have not been promulgated under the 1996 Act amendments to this section. Regulations on this subject will probably issued in the near future. "Near future" can mean next week or 6 months from today. The most recent IRS regulations status report said that regulations were being worked on. The drafting attorney is Mary Beth Collins; the reviewing attorney is Jeff Erickson; and the Treasury Attorney is Beth Kaufman. 3) The trust grantor will be required to file the form 3520 to report transfers to the foreign trust and form 3520-A to report the annual income and assets of the trust. Form TD F 90-22.1 will have to be filed by June 30 of each year and the grantor will be required to answer the questions on Schedule B, Part III of the Form 1040. If the non US trust invests in a foreign mutual fund, the trust grantor will be required to file a form 8621 for each such foreign fund. If the foreign trust is a substantial shareholder of a non US corporation, the US grantor will be required to file form 5471 for a controlled foreign corporation. These are just the highlights of the typical reporting obligations of a US grantor of a non US trust. [attribution: Vernon Jacobs, rpi@sky.net] 4) To be U.S. tax compliant, you are required to file a Form 3520 for establishing and funding a foreign trust (and to report the earnings from the trust); a Form 3520-A for the operations of the trust; a TD F19.22-1 for having a financial interest in foreign account(s); and check "Yes" on question 11a, Schedule. B, Part III, of your Form 1040 that you have an interest in a foreign account, then list the country where the foreign account is at question 11b; then answer "Yes" on question 12 to question Schedule. B, Part III, of your Form 1040 which asks whether you were a grantor (creator) or transferor of a foreign trust and whether you have a beneficial interest in the trust. [attribution: apf list, rpi@sky.net] 5) A person who makes a nongratuitous transfer to an APT he or she created is not treated as the owner of any portion of the trust under Internal Revenue Code. 6) Remember that in legal terms, when you vest ownership of an asset into a trust, you are in fact giving away that asset. You no longer legally own it, and you should not be seen to control and directly benefit from it any longer. 7) There are legal and tax compliant methods to defer income taxes on the earnings of a foreign trust in which the grantor has given up all rights to the assets and in which there is no U.S. beneficiary during the lifetime of the grantor or the spouse of the grantor.

Aussensteuergesetz

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Anti-avoidance German law whereby German citizens remain subject to the principal German taxes for a period of ten years if they emigrate to a country designated in the legislation as a low or no tax country.

B-1 status

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Defined as: “An alien . . . having a residence in a foreign country which he has no intention of abandoning and who is visiting the United States temporarily for business.”

Bahamas Financial Services Board (BFSB)

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This board has established a committee to develop a set of standards and practices intended to ensure self-oversight of the financial services industry.

Bank debenture or medium term note

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1) An unsecured bond issued against a bank. Bank debentures cannot be publicly traded and even in jurisdictions where a letter of credit can also be called a "bank guarantee", such guarantees cannot be traded or sold publicly on a market. Unrealizable rates of return promised and the principal disappears. Avoid such programs since they are scams. "If it's too good to be true, it probably is." For the official SEC position on this consumer fraud, go to the SEC’s Website at www.sec.gov under the non-Edgar database, and type in “prime bank”. 2) Promoters promise investors unrealistic returns in a European "bank debenture trading program." They are told huge returns would result from the reselling of unsecured bonds in a clandestine trading market. Bank debentures are a type of unsecured bond. All recognized authorities say the market does not exist.

Bank debenture trading programs

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Bank debenture programs are also called forfeiting. They do not actually exist. They are simply a non-existent product that is used to con people out of their money. It is not a case of them existing, money going into them and that money being lost through the incompetence of the program organizers/traders. Rather, all money invested in 'bank debenture trading programs' goes straight into the pockets of the organizers who typically spend it on expensive vacations, maybe a new car or house, some new clothes for the wife, their children's education, etc. As time passes by and investors have still not received any return on their funds, they are usually told that there are delays in the pay-out of the program due to red-tape. They can be strung along for several months until being given the inevitable news that 'the offshore program manager' (who, in reality, does not exist) has run off with everyone's money. [attribution: David Marchant]

Bank for International Settlements (BIS)

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Created as a new "central bank" to the central banks of each nation. It was organized along the lines of the U.S. Federal Reserve System and it's principally responsible for the orderly settlement of transactions among the central banks of individual countries. In addition, it sets standards for capital adequacy among the central banks and coordinates the orderly distribution of a sufficient supply of currency in circulation necessary to support international trade and commerce.

Bank of Bermuda

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Phone: 441-295-4000. Very stable, it's only been around for 112 years and is the largest offshore bank. In 3rd qtr. 2000 it reported an annual profit of $100 million.

Banking Passport

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A banking passport is simply that you create a "new person" with another nationality and a full set of ID, separate "legal entity" through a second passport (or third) in a name of your choice.

Bankruptcy

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The term "Bankruptcy" comes from the practice of artisan guilds to break the work bench of a craftsman who didn't pay his debts.

Bare trusts

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Also known as dry, formal, naked, passive or simple trusts. These are trusts where the trustees have no duties to perform other than to convey the trust property to the beneficiary(s) when called upon to do so.

Barings Bank

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See Leeson, Nick.

Basle Principles of Consolidated Supervision

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Referred to as the Basle principles. They are the international standards for banking supervision. In 1999, the Cayman Islands Monetary Authority adopted these principles and now supervises offshore subsidiaries of 110 Cayman Islands' home-office banks.

Basis

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See adjusted basis.

Bearer Share Certificate

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A negotiable share certificate made out in the name of the bearer and not in the name of a particular person or organization.

Bearer Stocks/Shares

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Securities for which no register of ownership is kept by the company. Dividends are not received automatically from the company and must be claimed.

Beneficial Owner

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The actual or economic owner of an offshore company, as distinct from the registered (or nominal) owner.

Bermuda

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"Tax Shelter Bermuda". In March 2000, the "New York Times" reported certain initiatives by four U.S.-based insurance companies to go to Congress to close a tax loophole which allows their Bermuda-based competitors to avoid paying U.S. taxes. The U.S. insurers want Congress to pass laws which will stop companies based in Bermuda, but actually operating in the States, to avoid paying certain taxes in the U.S. The four U.S. carriers are Chubb, Hartford, Kemper, and Liberty Mutual. The Times article singled out ACE and XL as "thorns in the side of American insurers." However both companies reacted strongly to the accusations. The complaining companies allege that the Bermuda based companies are tax free, therefore making greater profits or imply that they can be more competitive and this is unfair U.S.-based competition.

Big Brother

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The first reference to "Big Brother" was in the novel "1984" by George Orwell.

“Blank check” companies

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Blank check, or shell companies, are publicly held companies with few if any assets, little activity, no business plan or experienced management. They are created and designed to be used by private companies intending to go public through “reverse mergers” without the high expenses of making their own initial public offering.

Blind Trust

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1) A trust in which the trustees are not allowed to provide any information to the beneficiaries about the administration of the assets of the trust. 2) The requirements for Qualifying Blind Trust agreements, those required for certain Federal governmental officials, are set out in the regulations beginning at 5 CFR Secs 2634.101. The Office of Government Ethics (OGE) has approved forms for the two types of qualified blind trust agreements. The OGE office phone number for these is (202) 523-5757. [attribution: ABA-PTL Digest]

Blocked Funds

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Term for "reserving" funds by one bank for the benefit of another bank. Blocking of funds is an often used banking procedure to ensure that the same funds are not used twice. Often more beneficial to an investor than a bank guarantee.

Blocked Funds letter

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It is an hypothecation of funds that are on deposit. That in turn means that the funds are pledged as security for a transaction. The funds are used as the collateral.

Bond

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Any interest-bearing government or corporate security that requires that the issuer will pay the holder of the bond a specified sum of money, usually at fixed intervals, and will repay the principal amount of the loan at maturity. A secured bond is backed by collateral, whereas as an unsecured bond or debenture is backed by the full faith and credit of the issuer, not by any specified collateral.

Brennan, Robert E.

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SEC vs. Brennan. The case cited is mostly a procedural case. That is, the central holding was that the New York court did not have jurisdiction/power to grant the requested relief to the SEC and that the SEC, if it wanted a court's help, should have asked the New Jersey bankruptcy court (or the appellate federal courts in New Jersey) for the requested relief. The more interesting opinions in this case - as to the substantive issues -would be: (i) the bankruptcy court judge's decision in New Jersey denying the request for a repatriation order and (ii) the decision in the High Court of Nevis denying fraudulent conveyance relief against the trust.

Brunei

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The Sultanate of Brunei, a tiny country on the west coast of the Malaysian island of Borneo, has enacted several new laws intended to make Brunei an offshore international financial center and to reduce the economy’s dependence on oil and natural gas exports. The new laws cover trusts, partnerships, licensing, and money laundering prevention measures. Brunei is responding to the 1997 Asian economic crisis and the recent long period of low oil prices. Brunei was particularly hard hit because during the same period of the recent economic difficulty, Prince Jefri Bolkiah, brother of Sultan Hassanal Bolkiah, depleted the state treasury of about $16,000,000,000 while mismanaging the country’s investments. [attribution: The Riser Report, www.riserreport.com]

Bribery Of Public Official

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In order for someone to be found guilty of Bribery of a Public Official, the government must prove that the person gave, offered or promised something of value to a public official - e.g., an agent of the Internal Revenue Service; and that the person acted corruptly, that is, with the intent to influence an official act by the agent or to persuade the agent to omit to do an act in violation of the agent's lawful duty. [attribution: The 'Lectric Law Library's Lexicon]

Business & Industry Advisory Committee (BIAC)

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The BIAC is the business committee of the OECD. In Oct. 1999, BIAC issued a position contrary to the OECD 1998 report which stated, in part: "We interpret the OECD "Harmful Tax Competition--An Emerging Global Issue" report is an attempt to mobilise the OECD nations to adopt a strategy designed to make low tax countries abandon the activities upon which their livelihood has been based for many years and in which they have developed recognized expertise. A result of such a strategy could make these countries economically dependers and in which they have developed recognized expertise. A result of such ant on other countries." The BIAC report continues: "The theme underlying the report [OECD], which involves taking proposed actions in a concerted way, runs counter to notions of free and unrestricted cross border business activities. It would, if adopted and acted upon, create a cartel-like atmosphere which is in clear conflict with the concept of free trade and investment across national frontiers, and which has never proved successful over a long period of time to the countries involved." ... [attribution: The Asset Protection and Offshore Forum]

Business trust

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1) This is generally another variation of an abusive trust. Let us take the example of the family residence. The parents convey the house to the business trust. The parents are appointed the property manager by the trustee and are provided living accommodations in the house for the benefit of the employer, the trust. The trust issues "certificates" of beneficial interest to the children, the beneficiaries. The trust pays the parents their "salary" and since they operate a contracting business, it permits diverting the "profit" to the "beneficiaries" who pay tax at a lower bracket and then the children gift (return) the money to the parents, tax free. Gifting is ignored and generally gift tax returns are not filed for the transaction. The IRS is attacking this structure whenever detected. 2) There are legitimate uses for a business trust though, for example, for a REIT. These type of trusts are frequently used in securitizations, when the sponsor wants the underlying assets held in a custodial capacity to support certificates of beneficial interest. Often, even thought the entity is formed as a trust, it will be a partnership for federal income tax purposes. Yet another case where form doesn't control substance.

Buyer

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See obligor and transferee.

Bypass Trust

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Used when a married couple has combined assets over the lifetime exemption (currently $675,000). Assets equal to the maximum exemption of the first spouse to die are transferred to a bypass trust in order to fully utilize the decedent's exemption. If a bypass trust is not used and the assets of the decedent all revert to the surviving spouse (tax-free as a result of the marital deduction), the decedent's exemption is lost, thus resulting in additional estate taxes of $298,750..

Call account/Deposit account

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The balance of these accounts can be "called" or withdrawn by the depositor up to midday of any working day.

Camouflage passports

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Certain companies offer over the Internet or through mail order what are known as "Camouflage Passports." These are often supplied as part of a package which may also include a driving license, membership cards of societies or professional associations, or identity cards for national schemes such as health services, all of which are bogus. Camouflage passports, although generally marketed as novelty items, are generally professionally produced using sophisticated printing and laminating techniques, bearing photographs, registration numbers and even entry and exit stamps of other countries. Therefore, in terms of quality, there is often no reason to believe that the passport is not genuine. The aim of camouflage passports is to provide a seemingly genuine document from a seemingly genuine country. However, the "country" supposedly issuing the passport does not exist or does not issue passports, although to the casual observer they may seem plausible, and in many cases will sound familiar: Camouflage name Real name British Guiana Guyana British Honduras Belize British West Indies Does not exist Burma Myanmar - Ceylon (Republic of) Sri Lanka Dutch Guiana Surinam Eastern Samoa American Samoa Netherlands Antilles Collection of islands e.g. Aruba, Curacao, etc., that do not issue passports. Citizens of the islands have full Dutch passports. Netherlands East Indies Indonesia Newfoundland and Labrador Canada New Grenada Does not exist, although Grenada does. New Hebrides Vanuatu - Rhodesia (Republic of) Zimbabwe South Vietnam Vietnam Spanish Guinea Equatorial Guinea Upper Volta Burkina Faso Zanzibar Amalgamated with Tanganyika to become Tanzania. Exists but does not issue passports.

Capital Contributions

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Defined as the sum of the total amount of cash and the total value of property contributed or services rendered, or a promissory note or other binding obligation to contribute cash or other property or to perform services contributed to the Company.

Capital flight

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The movement of money (a verb) from country to country. May be for legitimate concerns such as political instability, war or high rate of inflation. Some capital flight results from illicit means such as criminal activity, political graft or corporate embezzlement.

Capital gains

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1) For tax purposes, this is a gain on an asset (such as appreciated stock or real estate) that may be subject to special tax treatment if the asset has been owned for more than a year by the seller. 2) Foreign non-resident alien individuals, offshore companies, offshore trusts and offshore banks avoid all U.S. capital gains taxes on their stock market trades because the U.S. has never taxed the capital gains of non-resident entities that do not have an office or are "doing business inside the United States".

Captive insurance company

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1) A company owned by the parent which predominantly insures interests of other closely-held subsidiaries. Captives provide strategies that assist international companies in utilizing offshore insurance companies for tax efficient investment growth and insurance savings. 2) A captive insurance company is one whose charter (license) permits it to offer insurance to unrelated third parties as well as its parent or sister/brother subsidiaries in return for premium income. The premium income is a deductible expense to the insured. Usually, this company is formed in an offshore tax haven for tax reasons as well as lower formation and operating cost. Some captives are formed as a U.S. tax exempt company under the IRC§ 501(c) 15. Other than tax benefits, in almost every case, the primary reasons captives are formed are because of an unavailability of certain types of insurance or dissatisfaction with existing insurance coverage costs. 3) A captive can provide insurance for risks that may not be normally insurable. For example, there is limited insurance available in the areas of damages due to strikes, product recalls, patent defense litigation, etc. Loss experience is based on the company's actual history rather than being historically averaged with others that have less stringent controls and more prone to claims. Reduction of insurance costs is available as there is no sales force to pay commissions to or overhead to pay for, generally lower claims administration costs, etc. Insurance company direct costs run around 20-50% compared to 5% for captives. Insurance income is earned on premiums, that is, ceding commissions from reinsurance companies, inure to the captive rather than an outside insurance company. The prime commercial advantage is the ability to earn interest on capital and reserves, thus turning a cost center into one of an offshore profit centre. Attribution, in part from Harris Publishing. PS: As of September 13, 1999, the Cayman Islands had 493 captive companies on its' register. 4) Some reasons for setting up captive insurance include: unavailability of required coverage; insuring risks which are uninsurable; premium cost reductions; risk management and loss control; cash flow benefits, access to the reinsurance market; reduced government interference; and tax minimization or deferral.

Caribbean Common Market (CARICOM)

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1) Regulates trade in the Caribbean region. The Market has a substantial Web site at www.caricom.org/expframes.htm. 2) Consists of 14 sister-member countries of the Caribbean community. Members include: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent, Surinam, Trinidad and Tobago. Conspicuous by their absence are the Cayman Islands and the British Virgin Islands, two major players in international banking and finance.

Caribbean Financial Action Task Force (CFATF)

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The "little brother" to "Big Brother" OECD's Financial Action Task Force (FATF).

CARNIVORE

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An e-mail monitoring system developed by the U.S. government (FBI) to allow scanning of ALL e-mail messages for various "suspect" words and phrases, allowing a database of potential "enemies of the state" (political, economic and/or financial) to be compiled. The government plans to force Internet Service Providers (ISP) to install the system (hardware and/or software) to monitor ALL e-mail that an ISP processes. In the United States, this broad monitoring, as opposed to obtaining a warrant to monitor specific e-mail, violates the fourth amendment to the U.S. Constitution. However, since the U.S. government routinely violates its mandate, the Constitution, this latest scheme is of course no problem for it.

Cedula

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This is a credit card-sized national ID issued to residents and citizens of Spanish speaking countries. You'll be issued one when you're an official resident of such countries as Costa Rica or the Dominican Republic.

Cell company

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The first use of cells was within an offshore insurance company that were permitted under the insurance act of the jurisdiction. Each cell's exposure to creditor's claims was limited to its own assets. The other cells were exempt from claims. Recently we have heard of offshore LLC cell companies using the same theory, but we haven't researched the point to date.

Charging order

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1) This area is rapidly changing. If you have a Limited Partnership or so-called Family Limited Partnership (FLP) for asset protection purposes, you may want to convert it to something else. The new Revision of the Uniform Limited Partnership Act will, in Section 703, essentially allow any U.S. court to foreclose a limited partnership interest as necessary to assist a creditor in getting assets out of the limited partnership. This will effectively gut the charging order feature of the Limited Partnership (which creates the asset protection for these entities), and make it suitable only to help immunize assets against pre-judgment seizures. Notably, Limited Liability Companies (LLC's) are controlled by a different statute, and for the foreseeable future will still benefit from charging order protection. Also, this will not significantly affect offshore limited partnerships, since the offshore courts would only snicker at the attempts of a U.S. court to liquidate a foreign limited partnership. But if you have a domestic Limited Partnership, and you are expecting it to protect your assets, you had better get out of it; and the quicker the better (because if you get sued now, it may be difficult to transfer your assets out of the partnership, and the new statute will probably apply by the time the claim is reduced to judgment). [Attribution: www.falc.com.] 2) Before relying on the charging order defense you should review the California Hellman case at 233 Cal App 3d 840; 284 Cal Rptr 830 (Aug 20, 1991). Although this is a California case you will want to ensure that it has not been relied on in your state. Even if it has not, the argument used in Hellman is a good one which an enterprising attorney in your state may add to his/her arsenal. The charging order should not be relied on where many dollars are involved. A creditor may not chase far and long for a few thousand dollars, but when the stakes get bigger creditors tend to get more aggressive. [attribution: APF list, rpi@sky.net]

Charitable Lead Trust

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A charitable lead trust involves a current gift of assets and a future distribution of the assets to beneficiaries of the grantor. This removes the asset from the donor's estate and ultimately transfers ownership to the next generation. Caution, look for proposed regulations related to the definitions of a guaranteed annuity interest and a unitrust interest for purposes of the income, gift, and estate tax charitable deductions. The proposed regulations will affect taxpayers who make transfers to charitable lead trusts. The purpose of these proposed regulations is to restrict the permissible terms for charitable lead trusts in order to eliminate the potential for abuse.

Charitable Limited Partnership (CLIP)

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The CLIP is structured as follows: Initially you create a standard FLP, and fund it with $1 million (for example) in appreciated stock (essentially zero-basis). Grantor retains a GP interest. You then gift 98% of the LP interests to a public charity with whom you have a good relationship, and take a charitable deduction for the fair market value (i.e., the net asset value of the FLP, discounted for lack of marketability and lack of control ¯ say about a $500,000 deduction). You then gift the other 2% to a trust for your beneficiaries. Set up correctly, this might be a self-settled trust of which the grantor is a permissible beneficiary (although that would be introducing more risk in to the transaction). Then, you sell the stock. The charity absorbs 98% of the gain. The partners who are not tax-exempt pay a 20% tax on their 2% interest of the gain (or about $4,000 in tax on a $1 million gain). Later, ask the charity if they would like to be bought out (some people have put options in their agreements). The charity will likely say yes, because there has been essentially no cash flow from the LP interests. However, the charity will be cashed-out at a discount, because you will pay fair market value (again, NAV discounted for lack of marketability and control). Charity receives about $500,000 (ignoring appreciation, etc.). After this last transaction, the remaining LPs have all of interests in the FLP.

Charitable Purpose Trust

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The "charitable purpose trust" has been around for centuries, usually created to benefit a religious, educational or other non-profit objective. In such case, while no specific persons are named as beneficiaries, courts enforce the trust terms so that its benefits are distributed to promote the stated purpose.

Charitable remainder trust (CRT)

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1) Offshore planning tip: If a charitable remainder trust is funded with cash, investing in PFICs (see this Lexicon) that roll up their income (i.e., no dividends) can improve the income beneficiary's tax treatment. The CRT, being tax-exempt, will be unaffected by the PFIC interest charge. The CRT's only income from such investments will be capital gain on redemptions. During the early years of the CRT, the income beneficiary will receive payments that are mostly a return of capital and only partly capital gain; during later years, the payments will be mostly capital gain and only partly return of capital. At no point will any part of the payments be ordinary income. [attribution: Terry Coxon] 2) This is a capital gains elimination trust. Since ten (10%) percent of the money must be left to charity, that is the rationale for calling it a charitable remainder trust. The CRT allows you to sell the asset (stocks, real estate, etc.), pay no capital gains tax, reinvest the proceeds for higher income, and receive that income. As long as the calculations indicate that 10% of the balance will remain for charity, the income and the original capital can all be paid out over time. 3) If a CRT is funded with cash, investing in PFICs that roll up their income, for example, no payment of dividends can improve the income beneficiaries of the CRT's tax treatment. [attribution: OS Tax Angles, rpi@sky.net] 4) Appreciated assets can be given to a charity. The Charitable Remainder Trust ("CRT") can then dispose of the assets and provide lifetime income to the donor from the untaxed proceeds. Income tax deductions in the year the CRT is established can also increase the current benefit to the donor.

Chartered Financial Analyst (CFA)

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A globally recognized standard for measuring the competence and integrity of financial analysts.

Check the box

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1) In the U.S., we have what is referred to as "check-the-box" regulations where, for most entities, the U.S. person can select how the entity is taxed. One of the exceptions is the formation of a corporation under state law in the U.S. Under the U.S. tax laws, a corporation formed in the U.S. will be treated both for legal purposes and tax purposes as a corporation. When forming a partnership under state law, however, an election can be made to treat the partnership, for tax purposes, as either a partnership (flow-through entity) or an association taxable as a corporation (corporation). 2) Applies to the LLC where an IRS tax election is made as to tax treatment, as a corporation or a partnership. If the LLC is to be taxed as a corporation, it files an Entity Classification Election with the IRS (Form 8832). If an LLC elects to be taxed as an S- corporation, it must file an S election. The LLC is deemed a corporation by the IRS. LLC members are treated as shareholders for tax purposes and membership interests in the LLC are treated stock, for tax purposes. 3) Under the check-the-box regulations, if a foreign corporation is formed under the laws of some eighty currently listed foreign jurisdictions, that entity will be treated also as a corporation for tax purposes. 4) Check the box when you wish to have the LLC treated as a disregarded entity for U.S. tax purposes. 5) The current US thinking on the situs of a foreign partnership under sections 2104 and 2105, if the foreign partnership has elected to be treated as a corporation under the "check the box" regulations appears that "for all tax purposes" the partnership is taxed as a corporation and therefore the situs question is determined under Reg 20.2105-1(f) ("shares of stock issued by a corporation which is not a domestic corporation" is "property without the United States"). If not treated as a corporation, the ambiguous partnership situs rules would apply.

Chutzpah trust

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Chutzpah (noun), rhymes with "foot spa", gall, brazen, incredible "guts". A Yiddish word where no other language can do it justice. [attribution: Joys of Yiddish by Rosten]. Modernly, a chutzpah trust is a new variation on the accelerated charitable remainder trust (CRT) being quietly promoted by at least two of the Big Five CPA firms. Perhaps, a "bit" too aggressive according to some. [attribution: The Estate Planner's and Administrator's List [ABA-PTL@HOME.EASE.LSOFT.COM], [Forbes, 9/20/99, www.forbes.com/forbes/99/0920/6407180a.htm.]

Civil forfeitures

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1) Under US law, the government can legally seize your personal property even though you are in no way involved in any criminal activity in what is called civil forfeiture. The US Federal Court of Appeals in 1987 found that in such a confiscation, "the innocence of the owner is irrelevant." See US v. Sandini, 816 F.2d 869 (3rd Cir. 1987). In other words, guilt or innocence is irrelevant. 2) One of the most thorough investigators and reporters on the subject of civil forfeitures is Mark Nestmann, former editor of "Low Profile" and author of "Asset Protection 2000". His book provides a chilling description of the history of the forfeiture laws, how they were reinstated to fight the "war on drugs" and how they are seriously abused by government officials at all levels from the DEA to the sheriff in your home town. The most insidious aspect of the forfeiture laws is that ownership of the property doesn't matter. The concept was revised in the U.S. with the notion that we should use the proceeds of selling drugs to help finance the agencies that are involved in trying to put the drug dealers in jail. Before long, the law was modified to include any property that is associated with any crime. Eventually, the law became so lax that the slightest connection between any asset and any crime was sufficient to confiscate the asset. Oh yes! I forgot to mention that the government only needs to allege that there is a connection with the property and with an alleged (albeit unproven) crime. You therefore can't protect any asset from this kind of seizure by changing the ownership. You have to physically move it out of "harm's way". "Harms way" may be in your car, in your office or in your home, depending on where an alleged crime took place. The safest place is offshore, although having assets spread around in different locations in the U.S. provides some protection. [attribution: asset protection strategies, rpi@sky.net]

Civil law

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Jurisdictions not following a common law structure use a codified civil law system.

Closer connection exception

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A US resident (but not a US citizen) could claim a "closer connection" to another country so as to stay a non-resident in the US despite long physical presence here. With a "tax home" outside the US, they would claim they are entitled to "away from home" business expenses for lodging and meals just like any US person does when they go away on a business trip. However, the "closer connection exception" is not available to US citizens, only to aliens.

Colato

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An acronym for common law trust organization, which is an abusive tax structure. Don Turner is credited with developing the colato and promoting it as author of the a book "Tax Free, How the Super Rich Do It". Turner has served 18 months in prison for income tax related violations related to the colato. The book advocates the use of "colatos", and advises how to convert earned income in the United States to tax free foreign source income.

Comity, judicial

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The recognition of a foreign judgment in the local jurisdiction. Tax liabilities, even if reduced to judgment, are not afforded judicial "comity" recognition except for a tax protocol between the U.S. and Canada.

Commercial annuity

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Generally an annuity issued by an insurance company. An annuity that is not a private annuity.

Commercial activity

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This term has been interpreted to extend beyond the mere exchange of goods and services. For example, Department of State (DOS) regulations contemplate among the list of acceptable B-1 conduct, “activities of a commercial or professional nature.” Moreover, the BIA has stated that appropriate B-1 activities include functions that are a “necessary incident to international trade or commerce.”

Common law trusts

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Another tax protest scam. The unsupportable theory used is based on the trust being established under the so called "common law right to contract" and therefore the trust does not have to file tax returns or pay taxes as it would have to do if it were a traditional entity, such as a corporation or a trust. Promoters also claim that once an individual's assets are transferred to one or more of the various abusive trusts, the trusts can pay personal "expenses" for individuals and that these expenses do not constitute taxable income. (See Abusive Trusts).

Commonwealth, British

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Commonwealth members in descending order of their dates of independence: United Kingdom - Canada - Australia - New Zealand - Jamaica - Barbados - The Bahamas - Grenada - Papua, New Guinea - Solomon Islands - Tuvalu - Saint Lucia - Saint Vincent & the Grenadines - Belize - Antigua & Barbuda - St. Kitts & Nevis

Company limited by guarantee

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A corporation whose liabilites are limited by a guarantee certain by an equity holder (usually $100). In the Isle of Man, this is also referred to as a "Hybrid Company". Also see the Contract Hybrid.

Company Property

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Defined as all property owned, leased, or acquired by the Company from time to time.

Compensatory stock

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It is the situation where there is the transferor assigning a value to his or her services based on what one would have been paid had they worked for a third party; we then have what would be a compensatory transfer of stock. In the context of a start-up situation, the transferors at a minimum will transfer some property to the new corporation, including the corporate charter, so stock could be issued for both property and services.

Competent Authority

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Competent authority provisions are found in tax treaties whereby the Government of another country would attempt to collect the federal taxes owed by a resident of that country on behalf of the IRS. As a practical matter, this provision in the treaty is very rarely used and usually done only in very high profile cases.

Constitutional Trust

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See Pure Trust.

Consumer Price Index (CPI)

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A U.S. price indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Does not include taxes, license fees and the costs of regulation. Often also called (erroneously) Cost-of-Living Index (COLI).

Contract Hybrid

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An Isle of Man entity. It is a variant of the "hybrid company" with claims of unique features which render it capable of holding assets for U.S. persons without being characterized as a Personal Holding Company (PHC), a Foreign Personal Holding Company (FPHC), a Controlled Foreign Corporation (CFC), or a Passive Foreign Investment Company (PFIC).

Controlled foreign corporation (CFC)

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1) If 50% or more of a foreign company is owned by U.S. persons, it is considered a CFC. The definition is lower for an offshore insurance company - the threshold is 25% or more. 2) The general rule is that the investment income of a Controlled Foreign Corporation (CFC) is taxed currently to the US shareholders where the CFC is controlled by the US shareholders. This would include any long term gains received by the CFC, but those gains would be treated as ordinary income to the CFC shareholders. 3) Most high-tax countries have legislation which compels the repatriation (or equivalent taxation) of the profits of companies in offshore jurisdictions if they are substantially owned by shareholders in the high-tax jurisdiction.

Corporate Sole

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Offshore promoters in Costa Rica and elsewhere make claims for the corporate sole (CS) entity. For US persons, the IRS doesn't recognize such an entity and will likely disregard it. It is claimed that by establishing yourself as a CS, that any money you deposit offshore cannot be taxed in the US and that you can take out certain amounts of money via ATM withdrawals without the IRS tax obligations. It is also claimed that money wired from a Costa Rican bank to the US would not be taxed as well. Such representations are incorrect and US persons should avoid using the CS structure.

Cosmetic changes

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Once a particular tax avoidance scheme gets on the so-called IRS "hit list", minor changes are deemed by the IRS to be merely cosmetic. Such minor changes, such as relocating to another jurisdiction, will not remedy the problem with the scheme.

Cost of Living Adjustment (COLA)

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An annual adjustment of wages to offset a change (usually a loss) in the purchasing power of the fiat U.S. dollar, as measured by the Consumer Price Index (CPI).

Cost of Living Index (COLI)

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A term used to indicate changes (usually increases) in the Cost of Living. The Consumer Price Index (CPI) is often (erroneously) considered the same.

Criminal Investigation Division (CID)

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...of the IRS. Whenever greed leads to crime; from income tax evasion to international money laundering, you will find an INTERNAL REVENUE SERVICE SPECIAL AGENT following the financial trail. IRS Criminal Investigation special agents are duly sworn law enforcement officers, with accounting expertise. Financial investigations, following the paper trail, is what IRS special agents do! The CID Website, www.treas.gov/irs/ci/, advises that "Criminal Investigation serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.".

Cross-border

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Used more in the context of activities between companies located in two different countries. for example, in December 1999 we had cross-border mergers of major significance. Canadian National Railway is merging with Burlington Northern Santa Fe Corp. to form the largest railroad system in North America. Indicative of the corporate trend away from nationalistic considerations, the new company's board will have 15 directors -- six each from Canadian National and Burlington Northern, plus three new Canadian directors.

Crummey powers

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Crummey powers are used in U.S. trusts to avoid using up the various individuals' unified tax credits for their contributions to the trust.

Cuba

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Cuba is a highly illustrative case of an emerging market fund with great potential. Until the fall of the ex-Soviet Bloc, Cuban foreign trade and for that matter much of the national economy, was subsidized by the Soviet Union. When Communism fell in Eastern Europe and in the former Soviet Union, Cuba lost its subsides and entered into recession. The country's GDP fell by some 34% from 1990 to 1993. To survive on its own, major economic policy changes were initiated. The government successfully stabilized the economy during 1994-1995 and economic recovery and growth has continued steadily to the present. The government has fostered steady economic growth, based on internal adjustments to the economic, legal and fiscal structure of the Cuban state. One particular bright spot is the booming tourism sector. Cuba has realized how important it is to attract foreign investors to provide it with the necessary capital to make its economy function and grow and so it introduced its Foreign Investment law in 1995. In other areas, the government has broadened the scope of legal markets, therefore steadily increasing their role in the national economy. Since the early 1990s, the fastest growing sector of the economy has been tourism. Income from this highly lucrative sector has risen from under US$250 million in 1990 to over US$1.8 billion today and this trend continues in a steady fashion. Two million tourist arrivals are expected in 2000 and 7 million in 2010. All observers of the Cuban situation agree that the island's economic potential will not be fully realized until the trade embargo and other punitive sanctions imposed by the United States, Cuba's closest neighbor and largest natural trading partner, are lifted. A full trade and investment embargo was in place by 1962, in reaction to the Cuban government's nationalization of American owned assets on the island. During the 1970s, elements of the embargo were gradually relaxed so that by the early 1990s, the US was Cuba's largest trading partner, after the Soviet bloc countries of Eastern Europe. In reaction to this trend, the US Congress approved the 1992 Torricelli Act, banning trade with Cuba by subsidiaries of US companies. In spite of government action to the contrary, public support to abolish trade sanctions and normalize both economic and political relations with Cuba is growing from many influential sectors of the US. [attribution: www.harris-publishing.com]

Currency exchange

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A domestic bank can undertake such transactions but usually for more nominal sums of monies. Offshore banks maintain their own trading teams which are able to offer a comprehensive and competitive in-house service. Rates are usually superior and service is normally faster.

Current account/Checking account

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1) This is the most common type of offshore bank account, quite similar to a checking account. Rarely do the offshore banks actually provide check books. In most cases you would not expect to earn interest on such an account, but there are exceptions. 2) These are the standard day to day accounts. Having a checkbook for an offshore account is not recommended if your goal is privacy as it is a document with your signature and so there is a red flag that leads directly to your front door. For the privacy minded individual, payments made from any offshore account are best conducted by either a bank draft or by instructions to the bank to effect a transfer from your account to another one.

Custodian

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A bank, financial institution, or other entity that has the responsibility to manage or administer the custody or other safekeeping of assets for other persons or institutions. Typically, custodians are not active, aggressive managers of the assets in question, but instead passively preserve the assets.

Cybersquatter

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Those who reserve domain names and then seek to profit by selling the domains to companies that have a need for the name. In late 1999, the U.S. Congress passed legislation aimed at preventing cybersquatting. A court finding of cybersquatting is punishable with damage awards of up to US$100,000. The new law encourages squatters to relinquish domains to avoid the costs of defending indefensible litigation.