In a recent Federal court case (in the Southern District of Florida), a North Carolina bank attempted to reach the assets sequestered by a debtor in an offshore trust.  The bank’s attempt was thwarted by the District Court.

A limited liability company borrowed money from the bank, and the loan was guaranteed by the LLC’s members.  The bank obtained a judgment against one of the members, Bellinger, for defaulting on the personal guaranty, to the tune of almost $5 million.  After the lawsuit was filed against Bellinger, but before the judgment was entered, Bellinger moved $1.7 million to a newly-created Cook Islands trust to “protect his future financial security.”

Bellinger then testified that he had no ability to comply with the judgment entered against him.  When the bank moved to hold Bellinger in contempt of court, Bellinger argued that he had no control over the trust.  He apparently tried to have the trustee to release the funds from the trust to pay the judgment but the trustee refused.

If Bellinger’s argument works, then he cannot be held in contempt of court for failure to repatriate the funds.  When a court-ordered action is an impossibility, there is no contempt.

The bank’s follow-up argument was that Bellinger’s impossibility was self-created and could not be used as a defense against contempt.  This is an argument that has been successfully used by creditors in several other cases.

The court noted that civil contempt is a “drastic remedy” and the burden of proof lies heavily on the plaintiff.  The bank was unable to prove that Bellinger had control over the trust, that the impossibility was self-created, or that Bellinger created the trust to protect his assets.  Consequently, the bank’s motion for contempt failed.

While this case is a good result for all debtors who have established offshore asset protection trusts, its facts are somewhat troubling.  The bank did not attempt to argue that the funding of the trust was a fraudulent transfer.  The bank also did not attempt to argue that the trust is Bellinger’s alter ego.  It is likely that the bank saw the last-minute transfer of assets to a Cook’s trust as an obvious fraudulent transfer and assumed that the court would see it the same way.

We advise all clients to set up their asset protection structures not only before there is a lawsuit, but even before there is an existing claim.  However, the Bellinger case is a good illustration that from a practical standpoint, even last minute asset protection planning may achieve a good result.  We know with certainty that if Bellinger attempted to do nothing to protect his $1.7 million, he would have lost all of it to the bank’s judgment.

Here is the full citation for the Bellinger decision if you would like to read the full case: Branch Banking & Trust Co. v. Hamilton Greens, LLC, 2014 WL 1493086 (S.D. Fla. Mar. 24, 2014).

Marriage is entered into with optimism and good faith, but it is almost careless not to prepare for the possibility of a marriage breakdown. Anyone who has acquired or built assets, such as a business, should seriously consider protecting them prior to marriage.

Community Property v. Separate Property: Assets or debts acquired during a marriage are considered community property (except for inheritances or gifts from a third party) and both parties are equally entitled to and responsible for them. California is one of nine states that recognize property acquired during a marriage as belonging to both parties. However, any assets or debts acquired prior to marriage (or after a marriage ends) are considered separate property.

In the likelihood of a divorce the use of a trust in protecting assets is a popular and recommended tool. A Domestic Asset Protection Trust (DAPT) or a Foreign Asset Protection Trust (FAPT) is a good option because these are irrevocable trusts. This means that the settlor (the person who creates the trust) does not have control over the trust or its assets (and neither does an ex-spouse or a creditor).

A DAPT or FAPT protects assets because ownership of the assets is transferred from the individual to a trust, establishing that trust as owner of the assets. In the event of a divorce, the assets should be out of reach of the spouse because the trust will effectively be treated as a separate entity.

Unfortunately, divorce is not always cut and dry and sometimes, any loopholes in a trust are sought out and exploited. Further, family judges are notorious for ignoring the law in the interests of equity. But even if the assets of the trust are reachable in a divorce, the trust helps to establish the character of its assets. For example, a trust funded prior to marriage makes “tracing” easier, allowing us to argue that even if trust assets are reachable, they are the separate property of the settlor.

Klueger & Stein, LLP stresses the importance of working with an experienced and meticulous attorney who can draft a trust that eliminates any weak points, and ultimately protects the client’s assets from unintended recipients.

With state income taxes on a constant increase, many taxpayers are looking for ways to protect themselves from double (federal and state) taxation. With the combination of federal and state income taxes, in states like California and New York, individuals could be subject to taxes as high as 50% to 60%.  The same rates would apply to trusts and beneficiaries of trusts. One of the options gaining popularity is creating trusts in states that do not impose an income tax.

In a grantor trust, the individual who creates the trust maintains certain powers over the trust and continues to pay income tax on the assets of the trust. In the event that the trust becomes a non-grantor trust, i.e. the grantor relinquishes power over the trust, the tax responsibility will shift to the beneficiaries of the trust.

However, another option is available for grantors who wish to maintain some power and responsibility over the trust yet reduce or eliminate the burden of double taxation.  The No State Income Tax trust (NSIT) offers the grantor the opportunity to maintain some power over the trust, which prevents the transfer to the trust from being treated like a completed gift, yet relieves the grantor of complete control, which changes the income tax treatment of the trust to non-grantor.  (As an aside, don’t get bogged down with the name of this trust.  We are simply using a descriptive name, and others have slapped various marketing terms on this type of trust.  Names carry no substance.)

With an NSIT, the state income tax on the trust, especially for high tax states, can be reduced or completely avoided by establishing the trust as a separate taxpayer and moving the trust to a no-income-tax state such as Delaware, Florida, or Nevada.

By establishing the trust as a separate taxpayer in a no or low income-tax state, the grantor is no longer viewed as the owner of the trust and is no longer liable for the state income tax on the trust.

However, for this strategy to work, the grantor must make sure that the trust is recognized not only as a separate taxpayer but also as a resident of the desired state, and not a resident of the grantor’s home state. There are several factors that affect the recognition of a trust as a resident in the desired state.

-          The residence of the grantor/trustee when the trust was created or became irrevocable

-          Where the trust was administered

-          Where the trust or the assets associated with the trust operate

Here is a common example of how the trusts may be used.

Jones is planning on selling his business in a few years for $20 million. Jones is a California taxpayer and has zero basis in the business.  On the sale, he will have a California income tax liability of approximately $2.5 million.  Assume that today, when the business is worth only $10 million, Jones sells the business to a non-grantor trust established by a family member in Delaware.  The sale is for a promissory note and a down-payment, so the vast majority of the tax liability is deferred.  The California tax liability on this sale is approximately $1.25 million and will be due when the promissory note is paid off. In a couple of years the business is sold for $20 million.  The Delaware trust, as the new owner of the business, will be taxed on the gain on the sale (the difference between $20 million sale price and the trust’s purchase price of $10 million).  No state income tax is due when the business is sold.  Jones saved himself $1.25 million in state income taxes.  As the assets of the trust continue to generate taxable income, that income will only be subject to the federal income tax, and not the state income tax.

Like most structures of this kind there are lots of nuances, and this type of planning does not work for everyone.  If you are interested, call us and we can explore whether you too can be like Jones and avoid state income taxes.

China, the world’s second largest economy, has taken several steps to battle the issue of cross-border tax evasion. As of 2013, China formed agreements with 46 nations to share tax information.

Leading the efforts is tax Commissioner Zhang Zhiyong, who said that China has a responsibility to strengthen its international tax collection efforts.

As of 2011, China was losing approximately US$134billion each year in tax revenue, making it the world’s 8^th largest tax loser, only 7 steps ahead of number 1, the United States, who reported approximately US$billion in lost taxes.

China along with the rest of the G20 nations signed an agreement to increase efforts to prevent tax evasion through fraudulent conveyance.

The agreement stipulated that the 20 strongest economies including the United States, will maintain a collaborative sharing relationship in order to fight international tax crime. The efforts will focus not only on foreign investment in China (companies/multinationals) but also, Chinese citizens living overseas. Like the U.S., China taxes its citizens on worldwide income.

China in general has been a preferred spot for foreign investors due its economic stability, good infrastructure, skilled workforce, and of course, a very large population.

Since joining the World Trade Organization (WTO) in 2001, China has steadily seen an increase in foreign direct investment. Foreign investment rose by 5% in 2013 from the previous year, netting a total of almost US$billion.

However, with the renewed focus on international taxation by the Chinese government, the questions that come up are: will the new tax efforts on cross-border transactions be enough to discourage multinationals from investing in the China? And what will this mean for Chinese nationals living and working abroad?

U.S. citizens are currently experiencing the effects of FATCA (Foreign Account Tax Compliance Act). FATCA, implemented to discourage tax dodging by U.S. citizens living abroad, requires foreign banks and financial institutions to report information of all U.S. account holders (individuals and businesses) to the United States treasury. To read more about FATCA, view our previous blog, F-Day Confirmed. 

Chinese nationals and permanent (long-term) residents are liable to be taxed on income earned outside the country. For Chinese nationals living in the U.S., double taxation of income will be avoided through the U.S. – China income tax treaty.

Non-permanent residents (non-domiciles) who reside in China for a full year within a calendar year are also liable for taxation on income earned outside the country provided that the income is paid by a Chinese entity.

As 46 countries continue to share banking information of Chinese individuals and businesses, China’s enforcement of cross-border tax laws are yielding strong results. In 2013, the country recovered US$899M in lost taxes, 37% more than was recovered in 2008.

The Internal Revenue Service (IRS) has finally weighed in on the topic of the taxation of Bitcoin.  Below is a list of questions and answers provided by the IRS.

Q-1:  How is virtual currency treated for federal tax purposes?

A-1:  For federal tax purposes, virtual currency is treated as property.  General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2:  Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2:  No.  Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

Q-3:  Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A-3:  Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.  See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

Q-4:  What is the basis of virtual currency received as payment for goods or services in Q&A-3?

A-4:  The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.  See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.

Q-5:  How is the fair market value of virtual currency determined?

A-5:  For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars.  Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt.  If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Q-6:  Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A-6:  Yes.  If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain.  The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.  See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

Q-7:  What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

A-7:  The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.  A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.  For example, stocks, bonds, and other investment property are generally capital assets.  A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer.  Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.  See Publication 544 for more information about capital assets and the character of gain or loss.

Q-8:  Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?

A-8:  Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.  See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.

Q-9:  Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?

A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.  See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self-employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.

Q-10:  Does virtual currency received by an independent contractor for performing services constitute self‑employment income?

A-10:  Yes.  Generally, self‑employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee.  Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self‑employment income and is subject to the self-employment tax.  See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby.

Q-11:  Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?

A-11:  Yes.  Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.  Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.  See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.

Q-12:  Is a payment made using virtual currency subject to information reporting?

A-12:  A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.  For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee.  Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.

Q-13:  Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?

A-13:  Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income.  Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment.  The payment recipient may have income even if the recipient does not receive a Form 1099-MISC.  See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information.  For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Q-14:  Are payments made using virtual currency subject to backup withholding?

A-14:  Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property.  Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee.  The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required.  See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.

Q-15:  Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?

A-15:  Yes, if certain requirements are met.  In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO).  A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.  When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where  the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes.  When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.  See The Third Party Information Reporting Center, http://www.irs.gov/Tax-Professionals/Third-Party-Reporting-Information-Center, for more information on reporting transactions on Form 1099-K.

Q-16:  Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014?

A-16:  Taxpayers may be subject to penalties for failure to comply with tax laws.  For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662.  In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722.  However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.

Read the full article in the Business Insider

You can read our earlier blog on Bitcoin and Taxation titled A Primer on Bitcoin

Bitcoin is a digital or virtual currency that uses peer-to-peer technology for the payment of goods and services. It is an internet-based currency that was established in 2009, and has experienced such exponential growth that companies such as eBay and Overstock now accept it as a form of payment. Bitcoin operates in a decentralized system and does not have any central governing authority.  Instead, it is governed/maintained by an online community. Further, it is a peer-to -peer based system which eliminates any middlemen. The absence of ‘middlemen’ eliminates many transaction costs associated with credit card fees, exchange rates and others. Although many cryptocurrencies have come out of the woodwork, Bitcoin remains the most popular and accepted. Cryptocurrencies are currencies based on cryptography, which is a security information technology also used in banking to protect information in chip-based credit card. Naturally, this new form of payment for goods and services has been compared to traditional fiat money (money which has been established by a government as legal tender). The value of traditional fiat money, such as the US dollar, is based on its market value. That is, the acceptance of the public to use it as a legal tender. However, the government’s power and ability to assign that currency as the jurisdiction’s legal tender, is the major factor in its acceptance as a currency.  Historically, currencies were backed by gold reserves of the sovereign states, but today they are backed by the “full faith and credit” of the issuing state. The value of a digital currency such as Bitcoin is derived from its acceptance and use, with no sovereign state backing the “currency.” The difference between fiat money and digital currency is that there is no governing body vouching for its value or legitimizing its use. Rather, it garners its value from collective acceptance and use.   Money was not always “money,” i.e., coins or state issued notes.  In ancient times humans used beads, eggs, feathers, rice, salt and many other goods and commodities that had an accepted and commonly known value.  Bitcoins are similar to such pre-coin moneys, but without an intrinsic value.   The absence of a governing body is noted by Bitcoin supporters as one of the advantages of digital currency, because, they claim, it takes the power away from any one entity to control the production of, or manipulation of the currency. Also, because Bitcoin is not tendered by any one governing entity; it is truly a global currency that removes the cost of international transaction costs and foreign exchange rates.  Inflation or counterfeiting can be curtailed with this new digital currency, because the whole system is based off maintaining a fixed amount of bitcoins in circulation. There are currently 12million Bitcoins in circulation, and the total bitcoins to be allowed into circulation by or before the year 2140, is 21million. The release of new bitcoins into circulation, and all transactions using bitcoins, is publicly recorded. However, any personal information of those involved in Bitcoin transactions is kept private and secure. This maintains the transparency of the digital currency and eliminates the possibility of double spending or counterfeiting, while protecting the identities of those who use it. Bitcoin may offer many advantages; however, there are some noted drawbacks to this alternative currency.

Acceptance and Volatility

Although Bitcoin’s following is growing daily, this new payment method still causes uncertainty among majority of the public. This results in a lack of acceptance of Bitcoin as a legitimate currency, but more importantly, it makes the system prone to volatility. Economically, it is also a concept that is difficult to grasp.  There is no intrinsic value to Bitcoins and no “full faith and credit” of a sovereign state.  Consequently, value is determined solely based on supply and demand.  If tomorrow our society switches to the use of one-pint containers of low-fat cottage cheese as a value exchange mechanism, Bitcoins will become worthless.

Asset Protection and Privacy

For our clients, the advantage of Bitcoins may come from their use to gain asset protection and privacy.  There is no public registry of Bitcoin ownership, no visible chain of title and no easy way to discover their existence.  Even if a third-party discovers the existence of Bitcoins and demands that a debtor in possession of Bitcoins turns them over, what happens if the debtor is unable to retrieve his password?  There is no physical asset that a court can force the debtor to turn over to a creditor.  It is purely information that exists in debtor’s head.  Very “James Bond”!

Taxation

For U.S. federal income tax purposes, assets are divided into capital assets and inventory.  A sale of a capital asset is subject to the capital gain/loss rules and sale of inventory is subject to ordinary income/loss rules.  Thus, Bitcoin investors would be treated as holding a capital asset and Bitcoin dealers as holding inventory.  Bitcoin investors holding Bitcoins for over a year will be subject to the 20% capital gain tax rate, and possibly and additional 3.8% surtax on passive net investment income. It is important, for tax purposes, not to think of Bitcoins as a fiat currency.  We refer to Bitcoins as a digital, virtual or crypto- currency, but they are really just capital assets that can appreciate or depreciate in value.  Consequently, Bitcoins are not taxed as currency (until and unless Congress says otherwise). The tax realization event takes place each time a Bitcoin miner disposes of his Bitcoin.  The gain is simply the difference between sale price and purchase price.  Similar to other capital assets, Bitcoins would not be subject to the mark-to-market regime that dealers in Bitcoins would be subject to. For U.S. taxpayers, Bitcoins offer no tax planning potential.  U.S. taxpayers are taxed on their world-wide income from whatever source derived.  Tax planning may be possible for taxpayers in some of the countries that do not tax their residents on extra-territorial income. For FATCA purposes Bitcoins should not be treated as a “specified foreign financial assets” if they are not held at a financial institution.  When Bitcoins are held at a foreign brokerage account, they will be an asset of such an account and FATCA compliance (including FBAR disclosure) would apply. – See more at: http://ksilaw.com/blog/view/a-primer-on-bitcoin#sthash.ihQi9NIZ.dpuf

In international tax, the ongoing news has been the sweeping impact of the Foreign Account Tax Compliance Act (FATCA). FATCA is a law that was passed to curb illegal tax evasion by United States citizens (and green card holders), and businesses. However, critics propose that the revenue brought in by FATCA is trivial compared to the damage the legislation will cause to foreign investment to the U.S. and law-abiding Americans living and doing business overseas.

FATCA requires foreign financial institutions to report all account activity of U.S. persons and businesses in an effort to target those who are non-compliant with U.S. tax law.
Although FATCA was signed into law in 2010, it will go into effect this year. Following two 6-month delays, many institutions, businesses and individuals have hoped for a rumored third postponement. However, according to a statement made on January 28th, 2014, by the Internal Revenue Service’s Deputy Commissioner, Michael Danilack, to the New York Bar Association’s Tax Section, FATCA will go into effect on July 1, 2014 as planned. There will be no more delays.

The news buzz generated by FATCA’s fast approaching certainty is eclipsed only by the negative backlash the legislation is receiving. According to critics of FATCA, the legislation has already begun to have some very negative repercussions for U.S. businesses and individuals operating and residing on foreign land.
Many countries have voluntary signed up to report their U.S. account holders, most likely in an effort to avoid the 30% withholding tax penalty on U.S. accounts, enforced by the US Treasury.

As of January 2014, more than 20 countries and jurisdictions have signed a FATCA agreement with the United States, including Germany, France, Switzerland and the Cayman Islands, previously thought of as a tax haven.

However, Russia and China have been adamant in their refusal to divulge U.S. account holders’ information unless U.S. financial institutions report the banking activities of Russian and Chinese account holders. This addresses the hesitancy felt by many about how FATCA may put the privacy of individuals and businesses at risk.

The burden of cost associated with determining, and reporting all U.S. account holders to the IRS falls directly on the foreign financial institutions that have entered the FATCA agreement with the United States. Experts predict that foreign banks will refuse service to Americans in an effort to avoid the costs of complying with FATCA. It has been reported that major European banks, including HSBC, are already dropping U.S. clients. We have certainly experienced this with many of our clients. As banks bar their doors to U.S. account holders, individuals are left without any financial security, and businesses are taking their capital elsewhere.

The overall financial health of the nation can be greatly impacted if FATCA critics are right. The loss of foreign investment to the U.S. may be a potential disaster to our economy due to our dependence on foreign investment as capital.

As the July 1, FATCA deadline approaches, we continue to counsel our clients through the complex changes involved in staying compliant with FATCA while making sure that our clients’ foreign interests are protected.

Here is an interesting article from AP about citizenship for sale in the Caribbean. Most nations sell citizenship, or at least permanent residence with a path to citizenship (including the U.S. and many EU nations) – Caribbean nations make it very affordable. We have helped our clients obtain citizenship in various countries, mostly in East Caribbean. The need for a second citizenship is usually fueled by tax planning (i.e., the client is planning to surrender primary citizenship) or politics (if you may need to flee Russia or Saudi Arabia someday, you need a second passport). Costs and difficulty of obtaining second citizenship varies by country, but in all cases the most important consideration is the ability to travel using the second passport. For example, an individual holding a U.S. or a Schengen passport may travel most anywhere in the world without a visa. The same is not true for citizens of many Caribbean nations.

KINGSTON, Jamaica (AP) — Hadi Mezawi has never set foot on the Caribbean island of Dominica, has never seen its rainforests or black-sand beaches. But he’s one of its newest citizens. Without leaving his home in the United Arab Emirates, the Palestinian man recently received a brand new Dominican passport after sending a roughly $100,000 contribution to the tropical nation half a world away.

“At the start I was a little worried that it might be a fraud, but the process turned out to be quite smooth and simple. Now, I am a Dominican,” said Mezawi, who like many Palestinians had not been recognized as a citizen of any country. That passport will help with travel for his job with a Brazilian food processing company, he said by telephone from Dubai.

Turmoil in the Middle East and North Africa has led to a surge of interest in programs that let investors buy citizenship or residence in countries around the world in return for a healthy contribution or investment. Most are seeking a second passport for hassle-free travel or a ready escape hatch in case things get worse at home.

Nowhere is it easier or faster than in the minuscule Eastern Caribbean nations of Dominica and St. Kitts & Nevis.

It’s such a booming business that a Dubai-based company is building a 4-square-mile (10-square-kilometer) community in St. Kitts where investors can buy property and citizenship at the same time. In its first phase, some 375 shareholders will get citizenship by investing $400,000 each in the project, which is expected to include a 200-room hotel and a mega-yacht marina. Others will get passports for buying one of 50 condominium units.

“The more they fight over there, the more political problems there are, the more applications we get here,” said Victor Doche, managing director of another company that offers four condominium projects where approved buyers are granted citizenship in St. Kitts, which is less than twice the size of Washington D.C.

It’s impossible to say how many people have used the cash for citizenship programs. Officials in both countries declined to respond when asked by The Associated Press. “Why do I have to speak on that?” said Levi Peter, Dominica’s attorney general. “I have no explanation to give to AP.”

But Bernard Wiltshire, a former Dominica attorney general, said there were already around 3,000 economic citizens when he left government about a decade ago. The country now has roughly 73,000 inhabitants in all. “Investor visa” or citizenship programs are offered by many nations, including the United States, Canada, Britain and Austria. But the Caribbean countries offer a fast path to citizenship at a very low cost. The whole process, including background checks, can take as little as 90 days in St. Kitts. And there’s no need to ever live on the islands, or even visit. A foreigner can qualify for citizenship in St. Kitts with a $250,000 donation to a fund for retired sugar workers or with a minimum real estate investment of $400,000. The minimum contribution in Dominica is $100,000.

By contrast, a U.S. program allows visas for a $1 million investment in a U.S. business employing at least 10 people or $500,000 in designated economically depressed areas. The investor can apply for permanent residence in two years, and seek citizenship after five more. Demand in Canada is so great that the country stopped accepting new applications in July. A Dominica passport holder can travel without a visa to more than 50 countries, while a St. Kitts passport provides visa-free travel to 139 countries, including all of the European Union. That’s a big deal to people in countries from which travel is restricted or whose passports are treated with suspicion.

Critics say the programs undermine the integrity of national passports and have security risks. While there are no known cases of terrorists using the programs, experts say that’s a possibility with many visa arrangements anywhere. “No level of scrutiny can completely guarantee that terrorists will not make use of these programs, just as background checks cannot eliminate the risk that dangerous individuals will not enter the country (the U.S.) on tourist visas, as students or as refugees,” said Madeleine Sumption, a senior policy analyst at the Washington-based Migration Policy Institute.

Canada imposed visa requirements on Dominica citizens a decade ago after complaining that suspected criminals had used island passports. And in 2010, Britain said it was considering visa requirements for Dominicans, prompting the island to review its 20-year-old economic citizenship program. Dominica never publicly released the results of its review and Britain took no action.

St. Kitts closed its program to Iranians in December 2011, shortly after Iranian students stormed the British Embassy in Tehran. Iranians had formerly been a major source of applicants, according to Doche. Some locals worry the programs could get out of hand if conditions worsen abroad. “There could be a flood of people with our passports relocating here,” said Dominica’s Wiltshire. “What are we going to do then? Really, this program must be halted. It’s dangerous to us and dangerous for our neighbors.” St. Kitts opposition leader Mark Brantley said the citizenship program was bringing much needed revenue to the debt-swamped islands, but he said there should be better oversight and public accounting. “We do not see that sufficient controls are currently in place to ensure that bad people, for want of better language, do not get access to our citizenship,” he said.

It’s not just economic refugees who are interested in the programs. American Neil Strauss wrote of securing citizenship in St. Kitts in his 2009 book on survivalist preparedness, “Emergency: This Book Will Save Your Life.” “The same way we have a backup drive for our computer in case the hard drive explodes, I just felt like I wanted a backup citizenship in case the same thing happened to my country,” Strauss said during a phone call from his home in Los Angeles. Like most economic citizens of St. Kitts, he rents out his island property.

Some other struggling Eastern Caribbean islands are looking at adopting the St. Kitts model.