THE CASEY REPORT NOVEMBER 2011
The Ladder of International Protection
By Terry Coxon
By keeping all your assets in the country where you live, you commit, ahead of time, to ratify whatever
policy your home government might adopt, no matter how objectionable, unreasonable or pernicious that
policy happens to be. If the next new mandate is “Register today to get a nail pounded into your head,”
you’re already signed up.
Americans, by and large, run all their affairs within the confines of the US. The US economy is so large
and so varied that it’s easy to assume that everything you want to do with your wealth can be done without
crossing any borders. And people in the US, like people anywhere, live with the habits and attitudes
developed over generations. They’re only human. In the case of Americans, those habits grew out of long
experience with a government that was small and that generally practiced the rare virtue of following its
own laws. In a happy exception to mankind’s experience with rulers, there was little to fear from it.
Stay at home is still the norm for Americans, but it’s a norm that is slowly fading. Every billion-dollar
tick of the government debt clock, every expansion of the government’s regulatory apparatus, every
overreaching judicial decision made in the name of a compelling public need, every inversion of protection
for citizens into license for the state and every intellectually tortured discovery of a new meaning in the
Constitution’s 4,400 old words leaves a few thousand more people wondering how prudent it is to consign
all their eggs to a single national basket. Encounters with high-handed IRS agents and eager TSA gropers
do nothing to ease that concern. And for those who listen thoughtfully, the messages from our designated
leaders and their would-be replacements only hurry the dawning sense of unease.
Specific worries include exposure to predatory lawsuits, especially claims that could draw extra go-power
by association with politically favored causes or legally favored groups; fear of where income tax rates
might climb; the prospect of losing a family business in a regulatory battle or simply through estate tax;
the fragility of financial institutions that have operated for forty years with the assurance that the Federal
Reserve would rescue them from any folly; the possibility that a government desperate to protect the dollar
from collapse might impose foreign exchange controls or capital controls; the memory and precedent of the
forced gold sales of 1933; and the thought that a government floundering in deficits might start pilfering
from IRAs and other pension plans.
But beyond those particular worries and perhaps more important than any of them is the sense that from
here on, anything goes. The politicians will do whatever they find convenient, because there is no longer
anything to stop them – not an electorate that is jealous of its freedoms and certainly not the Constitution,
which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the
government and the financial system it has fostered, but for many of us there is an awful suspicion that we
are not going to like it.
Most Americans still have yet to stick a single financial toe across the border, but more and more are
considering it. Many, perhaps millions of toes are now twitching at the thought. Their owners want to end
their absolute dependence on what happens in the US. They want to prepare for whatever is coming down
the road, even though they don’t know what it will be. They want to be as ready as possible, even though
their worries can only guess at what’s ahead.
Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more
complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t
give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will
make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb,
at your own speed, to reach the right level of protection.
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Gold coins that you've stored personally give you something whose value doesn’t depend on the health
of the US economy, doesn’t depend on any financial institution in the US and doesn’t depend on any US
government policy. Gold coins are portable and hold their value no matter where in the world you might
take them. They’re internationalization in a wafer. Safety cookies.
It’s best to buy the coins for cash, for maximum privacy. And there is a good reason to favor one-tenth-
ounce gold Eagles. Gold coins mean readiness for troubled times; if you ever need to dispose of the gold in
an informal market, it will be easier to do so with small-denomination coins that are widely recognizable
and whose value matches the scale on which large numbers of people normally trade.
The premium on one-tenth-ounce coins (the price compared with the value of the gold content) is higher
than on the larger coins – usually about 15% for the small coins vs. 5% for one-ounce Eagles. But the
premium isn’t a dead cost, like a commission or bid-ask spread. The premium is a second investment;
it’s what you pay for the packaging, and you can expect to recover it when you sell or trade. And in the
circumstances when you would have the strongest reasons for thanking yourself for having bought some
gold, the premium you paid will look like a bargain.
On its own initiative, the IRS can freeze any bank account in the US without warning. The action might
arise from mistaken identity, from an erroneous filing by some other taxpayer, from your failure to respond
to an IRS notice in time or even from a postal error. And that’s what can happen without malice. Other
government agencies have similar powers to act on their own, without giving you an opportunity to object
in court. And any one of them might act against you for any of their specialized reasons – perhaps because
someone resents your inattention to the needs of the migratory birds that visit your property or perhaps
because someone thinks it would be fun to point to you as a terrorist, drug smuggler, arms dealer or child
porn merchant.
In principle, there are legal avenues for undoing a freeze or a seizure. But you’d need a lawyer, and being
suddenly penniless could get in the way of hiring one.
A foreign bank account protects you from being trapped in such a nightmare. The US government can get
to your foreign bank account eventually, because it can get to you. But a lightning seizure is very unlikely,
because it would require a foreign government to override its own legal processes, which it generally
wouldn’t be willing to do except in a grave emergency. So if your liquid assets at home were frozen, you
would have cash outside the US to fund the legal cost of untangling the problem.
A foreign bank account is also a way to step back from the uncertainties of the US dollar, since the account
could be denominated in another currency.
The US government has seen to it that Americans are no longer welcome customers at foreign banks. So
forget about opening a Swiss bank account in your own name. However, if you apply in person (not by
mail), you still can open a bank account in Canada. Be prepared to show your passport and to give the bank
an original utility bill that confirms your place of residence.
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The forced gold sales of 1933 were the work of an executive order signed by President Roosevelt. The
purported legal basis for the order was the Trading With The Enemy Act, a legislative artifact of World
War I. I have yet to find an explanation of how the authority for an order requiring Americans to sell their
gold to the government at the government’s official price of $20 per ounce could be found in the Trading
With The Enemy Act, but the fact that the enemy in question had gone out of business 15 years earlier
didn’t seem to interfere with the legal logic.
The forced sale was a prelude to an increase in the official gold price to $35. The government’s reason for
wanting that price rise was to gain leeway for a substantial, though limited, inflation of the dollar while
keeping the dollar on the international gold standard. The forced sale was a way for the government, which
operated in a political environment that still disfavored deficit spending, to capture the profit from the price
rise. That profit would be a kitty for more spending without more borrowing.
Today there is no gold standard for the government to stay on. And deficit spending isn’t something
politicians especially want to avoid; they’ve promoted it as a civic duty, to stimulate the economy. So the
depression-era motives for a gold grab don’t seem to apply. Yet you can’t listen to a conversation between
two gold investors without hearing the seizure topic coming up.
Are they just scaring each other? I don’t believe so. There are two potential motives for the government to
again treat gold differently from everything else.
If the dollar’s slide in foreign exchange markets threatens to turn into a panic, the government might
want to use gold sales to foreigners to mop up foreign-held dollars – in which case it might see a need to
mop up the gold owned by its own citizens. That’s bad enough, but a second motive is a good bit nastier.
At a visceral level, people who have centered their lives on government just don’t like gold. It’s an affront
to the government’s authority to command and control and an insult to government’s supposed aptitude
for solving economic problems. So disrespectful. From their point of view, every ounce purchased by an
American is another tomato hurled at the political class. And the purchasers still constitute a tiny minority
of the voting population. What could be more satisfying and convenient for the politicians than to kick
sand in the face of gold investors for being such lousy citizens?
A new attack on gold ownership probably wouldn’t be a point-for-point reenactment of 1933. There are
many weapons for mugging gold investors.
It could be a prohibition on gold ownership coupled with a prohibition on sales of gold to foreigners. The only one left to buy would be the government, and being the only bidder, it would be a very low bidder. It could be a commandeering of privately owned gold, with
token compensation like the $15 per day paid for jury duty. It could be a super tax, say 90%, on gold profits, which would get the job done slowly... or quickly if it were accompanied by a mark-to-market rule.
Or it could be something none of us has thought of yet.
Not only can’t we know the shape of a future gold grab, we can’t know whether or how the rules would
touch foreign-held gold. Owners of gold stored outside the US would be a minority of a minority. Their
gold wouldn’t be the low-hanging fruit – it would be higher up in the tree and more trouble to get to. That’s
why, in a casino sense, gold overseas is a different bet and a better bet than gold at home.
Maybe it will turn out that storing gold overseas won’t matter at all, in which case a little effort will have
been wasted. And maybe it will turn out to matter a great deal.
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A conventional annuity contract is a device for accumulating investment returns and eventually converting
the value into a lifetime income. The investment return on an annuity from a US insurance company is tax-
deferred until it is paid out to you. If you buy an annuity from a foreign company, tax-deferral is available
only if the annuity's value is tied to the performance of a pool of investments (a variable annuity).
Swiss annuities have long held a special place in personal financial planning. Such an annuity is
denominated in Swiss francs, i.e., it's francs, not dollars, that are owed to you. The Swiss insurance industry
has a perfect record; policyholders have never been hurt by a default. And a Swiss annuity comes with an
element of protection from would-be lawsuit creditors.
The Swiss franc is, like every other modern-day currency, just a piece of paper. It's not redeemable for
anything, not even a piece of chocolate. But the Swiss National Bank has a remarkable record of restraint in
issuing new francs, which means that the franc's prospects for holding its value have long been rated better
than for any other currency.
I believe that is still the case, despite the Swiss National Bank's current policy of suppressing any further
increase in the price of the franc. In September, in order to save export industries from being crushed by
the franc's rapid appreciation against other currencies, the Swiss National Bank announced that it would
purchase euros without limit to enforce a minimum exchange rate of 1.2 francs per euro – which implies
printing enough francs to pay for those euros. By itself, it is an inflationary move, but it's not a suicide pact
with the European Central Bank (the issuing authority for euros). If the ECB turns to a policy of rapid
inflation, I would expect the Swiss National Bank at some point to decouple the franc from the euro and let
the franc’s price rise. So owning some Swiss francs, whether directly or through an annuity, is still a good
step toward internationalizing your financial life.
Under Swiss law, an annuity is protected from the owner's creditors if the beneficiaries consist of family
members or if the owner has made a beneficiary designation that is irrevocable. For an owner in the US,
that protection is not an impenetrable barrier to the winner of a lawsuit, but it is a barrier, and it makes the
annuity a less-than-ideal prize for an attacker.
Earnings that are accumulating in a Swiss annuity are not eligible for tax deferral for a US taxpayer. The
advantages are currency protection, the reliability of Swiss insurance companies and a measure of asset
protection.
Owning real estate in another country gives you a suite of protections that distinguishes it from other steps
toward internationalization.
First, the property’s value will depend on economic conditions in the country you’ve chosen, not on what
happens in the US. If the economy of the foreign country grows and prospers, there is likely to be a
spillover effect on the market value of your house, apartment, farm or patch of land – regardless of what is
going on in the US.
Second, a foreign real estate investment would be hard to digest for any future capital controls imposed by
the US. New rules could compel you to repatriate the cash you have in a foreign bank; rules forcing you to
liquidate your foreign real estate and bring the money home would be another matter. Selling real estate
isn’t quick or easy. How does the government compel an unwilling citizen to do what an eager seller often
finds difficult to accomplish?
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Third, as a potential prize for a lawsuit attacker, foreign real estate is a stinker. Even if he wins a judgment
against you, foreclosing on your foreign property would be difficult to impossible, since it would require the
cooperation of the courts in the foreign country, about whose rules and procedures the attacker’s attorney
probably knows nothing. But he does know that even if he persuades a court in the US to order you to sell
the property, the inherent illiquidity of real estate would give you plenty of opportunities for foot-dragging.
Where to buy? The whole world is open to you... which can be a problem. So many possibilities and no
obvious place to start. One approach is to think about where you’ve been that you’d like to visit again or
about some place you’ve long wanted to see. Plan to spend a few weeks there. Minimize your hotel hours,
to maximize your exposure to the rest of the locale. Try to meet Americans, perhaps expatriates, who know
their way around the place and who can point you toward a real estate broker who won’t try to treat you as
an out-of-town sucker.
Buying foreign real estate isn’t for everyone. It requires a big investment in time and effort, but it could
repay you with an asset that is low on the list of things anyone might try to take from you.
A limited liability company organized under the laws of a foreign country is easy to set up and not too
expensive. To bring the company into existence, you (or a service you hire) would file a simple form with a
government office in the country you’ve chosen and pay a small fee. Then you as the LLC’s Manager and
you as the LLC’s owner would enter into an agreement (the “operating agreement”) that would be the
company’s governing instrument.
As the LLC’s Manager, you would open a non-US bank account or brokerage account in the name of the
LLC and transfer your personal cash and investments to that account. Again as Manager, you would make
all the investment decisions.
For a US person, a foreign LLC can be a powerful door-opener. It is welcome at many banks and brokerage
firms where you personally would be turned away. This enables you to keep a wider range of assets outside
the US, which puts more wealth beyond the reach of any arbitrary bureaucratic action. It also gives you
investment choices that aren’t available at home.
Access to foreign investments and overseas financial services is reason enough to consider using a foreign
limited liability company. But it can do much more for you, although at the cost of some complexity.
Notice the fundamental difference between a foreign LLC and what is going on at the first four rungs of
the ladder of internationalization. With the LLC, you no longer personally own the assets you are trying to
protect; the company owns them. This makes the LLC a powerful device for reducing your family’s expose
to gift and estate tax. And with the right provisions in the operating agreement, it can provide strong
protection against loss to any malicious lawsuit.
If you are the sole owner of a foreign LLC intended for holding investments, you can and almost certainly
should file an election for the LLC to be treated as a disregarded entity (indistinguishable from you
for income tax purposes). If your spouse or anyone else is going to share in ownership of the LLC, the
company can and should elect to be treated as a partnership for income tax purposes.
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A business that operates outside the US does even more than a portfolio of foreign investments to give you
the benefits of internationalization.
By its nature, a foreign business lives in a different environment than a business in the US. Economic
troubles at home might not touch it. If it’s a business that depends on your personal efforts, it’s even less
attractive as a lawsuit prize than foreign real estate. Being foreign, it would be outside the range of capital
controls in the US. And many of the financial institutions that might turn away an investment-owning
LLC because it is owned by an American will welcome an LLC that makes or sells goods or services.
If you already have a business in the US that has foreign customers or foreign suppliers, you may be able
to relocate the business’s non-US activities to a foreign LLC. Internet-based businesses are especially
amenable to internationalization.
Locating your business in a low-tax or no-tax jurisdiction, if it is practical to do so, can reduce your overall
tax burden. In many cases, a foreign LLC that operates a business should elect to be treated as a foreign
corporation for US income tax purposes. That can allow the business to reinvest its earnings while it pays
little in current taxes and you personally pay nothing.
Establishing a trust outside the US is the strongest internationalization step you can take for yourself
and your family. Doing so costs more than any other measure, but the costs needn’t be prohibitive if your
goal is to move $500,000 or more into the safest structure possible. What you achieve is a very high level
of protection from aggressive lawsuits, from potential capital controls and from the possibility of a gold
seizure. The trust also puts your wealth in a far better environment for income tax planning and for estate
planning.
To serve the purposes of protection and tax savings, an international trust is irrevocable (you can’t
simply call the institution you’ve chosen as trustee and say you’ve changed your mind) and discretionary
(meaning that the trustee has a responsibility to decide when to send a check to you or to any of the
other beneficiaries you’ve included). Putting assets under the control of a trust company under such an
arrangement is a big step. You’re not going to do it unless you’ve done the homework needed to understand
how and why you can count on the trustee to handle the assets in the way you intend.
Getting the protection and tax savings of an international trust doesn’t require you to give up management
control of the assets. The trust can be limited to owning just one thing – an LLC that you manage. The
LLC owns all the investments, under your supervision as LLC Manager.
If you establish an international trust, it will be tied to you for income tax purposes. But at the end of
your lifetime, it will completely disconnect from the US tax system. At that point, for the benefit of your
survivors, it becomes...
Being a beneficiary of an international trust established by someone other than a living US person is as
good as it gets. It’s not linked to you by any transfers you’ve made to it, and you don’t have a determinable
percentage interest in it (since it’s a discretionary trust). So until you actually receive a distribution, there is
nothing for you to report, nothing for you to pay tax on and nothing a potential lawsuit creditor can hope
to take from you. And, having no living connection to the US, the trust is as far beyond the orbit of any
conceivable US gold seizure or currency controls as the former planet Pluto.
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It's a long way from walking into the local coin shop and buying a few one-tenth-ounce gold Eagles to
setting up a trust in a foreign country. But the distance isn't nearly as great as you might imagine, and it
will get shorter both in fact and in apprehension with each step you take.
As you move up the ladder, you'll learn about the reporting requirements for US taxpayers. Rung 1 (gold
coins in your pocket) entails no reporting, nor does Rung 8 until you actually receive a distribution. Rung 5
(foreign real estate) also is free of reporting requirements, at least for now. But under rules in effect now or
soon to come, everything else covered in this article entails filing a form with the US government. The most
reliable way to make sure that you stay within the rules, so that internationalization adds to your safety and
not to your problems, is to let your accountant know what you are doing. Keep him informed, so that he
can see to it that all the reporting requirements are satisfied.
You can learn more about internationalizing your financial life at http://www.internationalman.com . There you’ll
find information about all the topics covered in this article and additional valuable intelligence provided by Doug
Casey, David Galland, Terry Coxon, Brandon Rowe and others. In fact, I recently contributed a brand new special
report entitled, What Vandals Can’t Touch, free for Casey Report Readers. For more information, visit http://www.internationalman.com/ladder .
[Casey himself is pretty deeply involved in this: http://www.laestanciadecafayate.com/ -FNC]