          
          
          
          
             The Offshore Mutual Fund and Insurance Loopholes
          
               The most popular investments for U.S. investors in
          recent years have been mutual funds and insurance
          products. For the internationally minded investor,
          there are offshore versions of these products
          available.  In some cases, they offer even more
          benefits to U.S. investors than do their domestic
          counterparts.  The IRS and other elements of the U.S.
          government apparently do not believe in offering
          international opportunities to U.S. citizens, however,
          so in some cases these investments are less attractive
          to U.S. investors than to residents of other countries.
               The main obstacle standing in the way of many
          foreign opportunities is the U.S. securities laws.  Any
          "investment contract" sold in the United States must be
          registered with the Securities and Exchange Commission
          and with its counterpart in each of the states.  This
          is a very expensive process.  U.S. securities laws
          require far more disclosure than do those of most
          foreign countries and also require different accounting
          practices.  Therefore, many offshore mutual fund
          companies decide that whatever income they might
          eventually earn would be inadequate compensation for
          the time and expense involved in attempting to comply
          with U.S. securities laws.  In fact, several of the
          mutual funds and hedge funds with the top performance
          records are run from the United States by U.S.
          residents but do not accept investments from U.S.
          residents.  To reduce registration costs and avoid
          other restrictions, the funds are made available only
          to foreigners.  
               Fortunately, U.S. citizens can get around this
          obstacle through bank accounts or trusts.  Basically,
          you can travel overseas to buy the shares in person,
          you open a foreign bank account and invest through the
          account, or you can establish a foreign trust. Only
          then will these opportunities be open to you.

          
          Offshore mutual funds

               To diversify your portfolio internationally, you
          could invest in the international funds of a U.S.-based
          mutual fund company. This approach has satisfied many
          U.S. investors. But offshore mutual funds (or unit
          trusts, as they are known overseas) have been around
          longer than U.S. funds and have some outstanding
          long-term performance records. U.S. funds only recently
          got into the international investment markets, while
          the offshore funds have existed for some time. You
          probably will find more experienced management at the
          offshore mutual fund companies. Also, because the
          offshore funds do not have to meet U.S. securities
          laws, they are likely to have lower operating costs.
          These qualities do not exist for all offshore funds,
          but a number of them do have these advantages.
               If you choose to invest in an offshore mutual
          fund, you will find very attractive treatment under
          foreign tax laws and some unpleasant treatment under
          U.S. tax law.
               Most offshore mutual funds are of a type called
          accumulative, or roll-up, funds. Under U.S. tax law, a
          mutual fund avoids taxes on its income and gains by
          making distributions to the shareholders at least
          annually. The shareholders then are taxed on the
          earnings. But most foreign countries do not impose this
          restriction on their funds. The funds can retain and
          compound all income and gains. So while the U.S.
          investor has his investment funds depleted by taxes
          each year, the overseas investor can let the investment
          compound tax-deferred. Even a U.S. investor who has
          distributions reinvested in shares each year must
          include those distributions in gross income and pay
          taxes on them.
               A foreign country taxes the accumulated income and
          gains only when shares are redeemed. In addition, many
          foreign countries do not tax capital gains at all or
          tax them at rates far lower than those imposed by the
          United States. The U.S. taxpayer who invests offshore
          will reap the benefit of such tax breaks. In addition,
          any taxes imposed by the foreign country on the
          redeemed shares might be exempt from tax withholding
          under a tax treaty between the United States and that
          country.
               The bottom line is that there are tremendous
          advantages to investing in an offshore mutual fund. In
          addition to the international diversification and
          experienced management you can expect, your investment
          gains compound tax-free until you redeem shares.
          Foreign countries essentially treat all mutual funds as
          nondeductible IRAs with no investment limit.
               Some of these advantages disappear when you
          consider the U.S. tax aspects of offshore mutual funds,
          but there are some ways to overcome these tax aspects
          as well.
               A few years ago, the United States taxed U.S.
          shareholders of foreign investment funds the same way
          the foreign countries did. No taxes were due until
          shares were redeemed. Then this country decided that
          treatment should apply only when more than 50% of the
          shareholders were foreigners. In 1986, Congress changed
          the rules again so that no U.S. shareholders of
          offshore mutual funds would get beneficial tax
          treatment.
               The current rules are that you have two choices of
          how to treat the offshore mutual fund on your U.S. tax
          return. The first choice is to invest in a "qualified
          electing fund." This is an offshore investment company
          that elects to have its shareholders taxed on their pro
          rata shares of all earnings each year. An established
          offshore mutual fund is unlikely to be a qualified
          electing fund, and you would lose all the benefit of
          tax deferral if it were.
               The next option is to not pay any taxes until
          shares are redeemed. But if you take advantage of this
          approach, you get hit with the regular income tax plus
          a penalty tax. The penalty tax is an interest charge
          for not paying taxes on the income and gains each year
          as they accumulated in the fund. In other words, you
          pay interest on the tax that would have been paid if
          the earnings had been distributed each year.
               For example, suppose you buy shares in an offshore
          fund for $1,000 on January 1, 1992. You have the shares
          redeemed for $2,000 on December 31, 1996. You will be
          deemed to have earned the $1,000 gain equally over the
          four years, for $200 of gain each year. The gain for
          1996 is included in your 1996 gross income. The other
          $800 of gain is taxed at the highest rate that applied
          in each of the years you held the shares, and an
          interest charge is added to the tax. 
               The tax and the interest charge sound oppressive
          and initially discouraged Americans from considering
          offshore mutual funds at all. But if you examine the
          situation a little closer, you'll find that offshore
          mutual funds still can be attractive.
               The interest rate charged is 3% more than the
          federal short-term rate, and it is not imposed until
          after the shares are redeemed or an "excess
          distribution" is received. So you still get tax-
          deferred compounding. If the mutual fund earns a high
          enough return, the tax-deferred compounding will more
          than offset the taxes plus the interest charge. The
          longer you plan to hold the shares and let the gains
          compound, the more attractive the offshore mutual fund
          looks.
               You might also have the shares owned through
          decontrolled foreign corporation, an offshore
          corporation with substantial non-subpart F income, or
          some other entity that will not have the income pass
          through to U.S. shareholders. This might avoid the
          interest charge if set up properly.
               Another option is to invest in an offshore mutual
          fund and never redeem the shares. Let your heirs
          inherit them. The heirs then will get the tax basis of
          the shares increased to their fair market value on the
          date of your death. It is not clear from the tax code
          how the compounded gain will be treated when your
          estate or your heirs sell the shares. Congress
          apparently did not contemplate this action when it
          wrote the law. So it is possible that the heirs will
          not have to pay the penalty tax after the shares are
          sold. Since the tax basis to the heirs will be the new
          fair market value of the shares, there will be little
          or no capital gain to pay taxes on.
               Another possibility is to have the shares owned by
          an offshore trust, that you have established and never
          sell the shares during your lifetime. After you die,
          the trust no longer has a U.S. person as grantor. That
          should mean that the trust can redeem the shares after
          your death and the gain will not have to be passed
          through to you or your estate if the trust is set up
          properly. The trust then could reinvest the income. The
          tax rules are technical and sometimes rather murky for
          this option, so be sure to get advice from a U.S. tax
          adviser before trying to implement it.
               If offshore mutual funds appeal to you, one fund
          you will want to consider is the Assetmix fund of the
          Royal Trust Bank of Canada. This is an umbrella fund
          with 14 subfunds that have different investment
          objectives. You can allocate your account among the
          subfunds however you want and switch the investment
          allocation whenever you want at no additional fee. This
          type of investment option usually is available only to
          the very wealthy. But Assetmix is available for a
          $20,000 minimum initial investment, with a minimum
          $2,500 to each subfund.

          
          Offshore annuities

               A better way to get international diversification
          with less-complicated tax consequences could be an
          annuity from an offshore insurance company. As with the
          offshore mutual funds, we are not talking about
          fly-by-night, shell companies that might take your
          money and disappear (though there are many of those
          available if you are interested). We are talking about
          annuities sold by Swiss and British insurers who have
          been in business for hundreds of years.
               Unlike many of their U.S. counterparts, offshore
          insurance companies are financially sound. In 130 years
          not a single Swiss insurance company has failed, which
          is a claim that the United States cannot make. So
          safety definitely is available in offshore insurance
          policies.
               Offshore annuities (and whole life insurance) have
          essentially the same advantages of their U.S.
          counterparts. You get tax-deferred compounding of
          income until withdrawals from the policy begin. The
          annuity payments are taxed the same as payments from a
          U.S. annuity policy. Just be sure that the insurance
          company selling the annuity has an opinion letter from
          a U.S. tax lawyer stating that the annuity meets the
          tax-deferral requirements of U.S. tax law. If the
          company is not willing to provide an opinion letter or
          does not have one, it probably has little experience
          working with Americans and you will want to find
          another insurance company.
               Annuities also offer offshore tax advantages.
          Switzerland, for example, encourages the purchase of
          annuities. A nonresident will not pay income taxes,
          capital gains, or inheritance taxes on the annuity. In
          addition, insurance contracts are exempt from the 35%
          Swiss withholding tax on interest payments.
               Offshore annuities offer some non-tax advantages
          as well:
               * International diversification. Some will let you
          select the currency in which the annuity is
          denominated; others, however, offer only one currency,
          so you gain or lose depending on currency swings.
               * Privacy. True annuities are not be reportable as
          foreign bank accounts on your tax return. 
               * Protection from legal judgments. U.S. creditors
          will find it difficult or impossible to first locate
          your annuity and then try to collect against it. Again,
          ask for a legal opinion.
               Some advisers say that the offshore annuity offers
          little asset protection. When a creditor asks for a
          list of your assets, you must list the annuity or you
          will be guilty of perjury. Though the U.S. court system
          doesn't have jurisdiction to seize the annuity or order
          the insurer to transfer the assets to a creditor, some
          lawyers say that the court could order you to liquidate
          the annuity and give the assets to your creditors. The
          likelihood of this will vary from state to state and
          from contract to contract. A few states fully protect
          annuities from creditors; others give annuities little
          or no special protection.  Swiss annuities have covered
          this by protecting annuities when an irrevocable
          beneficiary has been named.  
               * High returns. Returns vary between policies, of
          course, and you should compare several of them. But you
          should be able to get an offshore annuity that credits
          your account with income based on market returns.
               The main problem with the offshore annuity will be
          the currency risk. If you are planning to retire in the
          country in which you bought the annuity, that probably
          is not a problem. Otherwise you might want to hedge the
          currency risk with an offsetting investment in a U.S.
          annuity, for example.

          
          Insurance annuities

               Swiss annuities minimize the risk posed by U. S.
          annuities.  They are heavily regulated, unlike in the
          U.S., to avoid any potential funding problem.  They
          denominate accounts in the strong Swiss franc, compared
          to the weakening dollar.  And the annuity payout is
          guaranteed.
               Swiss annuities are exempt from the 35%
          withholding tax imposed by Switzerland on bank account
          interest received by foreigners.  Annuities do not have
          to be reported to Swiss or U.S. tax authorities.  They
          are not a foreign financial account for the purpose of
          U.S. reporting requirements.
               A U.S. purchaser of an annuity is required to pay
          a 1% U.S. federal excise tax on the purchase of any
          policy from a foreign company.  This is much like the
          sales tax rule that says that if a person shops in a
          different state, with a lower sales tax than their home
          state, when they get home they are required to mail a
          check to their home state's sales tax department for
          the difference in sales tax rates.  
               The federal excise tax form (IRS Form 720) does
          not ask for details of the policy bought or who it was
          bought from -- it merely asks for a calculation of 1%
          tax of any foreign policies purchased.  This is a one
          time tax at the time of purchase; it is not an ongoing
          tax.  It is the responsibility of the U. S. taxpayer,
          to report the Swiss annuity or other foreign insurance
          policy.  Swiss insurance companies do not report
          anything to any government agency, Swiss or American --
          not the initial purchase of the policy, nor the
          payments into it, nor interest and dividends earned.
               Earnings on annuities during the deferral period
          are not taxable in the U.S. until income is paid, or
          when they are liquidated, following exactly the same
          tax rules as for annuities issued by U.S. insurance
          companies.
               Swiss annuities can be placed in a U. S. tax-
          sheltered pension plans, such as IRA, Keogh, or
          corporate plans, or such a plan can be rolled over into
          a Swiss-annuity.  (To put a Swiss annuity in a U.S.
          pension plan, all that is required is a U.S. trustee,
          such as a bank or other institution, and that the
          annuity contract be held in the U.S. by that trustee. 
          Many banks offer "self-directed" pension plans for a
          very small annual administration fee, and these plans
          can easily be used for this purpose.)
               Investment in Swiss annuities is on a "no load"
          basis, front-end or back-end.  The investments can be
          canceled at any time, without a loss of principal, and
          with all principal, interest and dividends payable if
          canceled after one year.  (If canceled in the first
          year, there is a small penalty of about 500 Swiss
          francs, plus loss of interest.) 
               A new Swiss annuity product (first offered in
          1991), SWISS PLUS, brings together the benefits of
          Swiss bank accounts and Swiss deferred annuities,
          without the drawbacks -- presenting the best Swiss
          investment advantages for American investors.
               SWISS PLUS, is a convertible annuity account,
          offered only by Elvia Life of Geneva.  Elvia Life is a
          $2 billion strong company, serving 220,000 clients, of
          which 57% are living in Switzerland and 43% abroad. 
          The account can be denominated in the Swiss franc, the
          U.S. dollar, the German mark, or the ECU, and the
          investor can switch at any time from one to another.  
          Or an investor can diversify the account by investing
          in more than one currency, and still change the
          currency at any time during the accumulation period --
          up until beginning to receive income or withdrawing the
          capital.  
               If you are not familiar with the ECU, it is the
          European Currency Unit, a new currency created in 1979. 
          It is composed of a currency basket of 11 European
          currencies, and its value is calculated daily by the
          european Commission according to the changes in value
          of the underlying currencies.  The ECU is composed of a
          weighted mean of all member currencies of the European
          Monetary System.  Since the ECU changes its balance to
          reflect changes in exchange rates and interest rates
          between these currencies, the ECU tends to limit
          exchange rate risk and interest rate risks.
               Although called an annuity, SWISS PLUS acts more
          like a savings account than a deferred annuity.  But it
          is operated under an insurance company's umbrella, so
          that it conforms to the IRS' definition of an annuity,
          and as such, compounds tax-free until it is liquidated
          or converted into an income annuity later on.
               SWISS PLUS accounts earn approximately the same
          return as long-term government bonds in the same
          currency the account is denominated in (European
          Community bonds in the case of the ECU), less a half-
          percent management fee.
               Interest and dividend income are guaranteed by a
          Swiss insurance company.  Swiss government regulations
          protect investors against either under-performance or
          overcharging.
               SWISS PLUS offers instant liquidity, a rarity in
          annuities.  All capital, plus all accumulated interest
          and dividends, can be freely accessible after the first
          year.  During the first year 100% of the principal is
          freely accessible, less a SFr 500 fee, and loss of the
          interest.  So if all funds are needed quickly, either
          for an emergency or for another investment, there is no
          "lock-in" period as there is with most American
          annuities.
               Upon maturity of the account, the investor can
          choose between a lump sum payout (paying capital gains
          tax on accumulated earnings only), rolling the funds
          into an income annuity (paying capital gains taxes only
          as future income payments are received, and then only
          on the portion representing accumulated earnings), or
          extend the scheduled term by giving notice in advance
          of the originally scheduled date (and continue to defer
          tax on accumulated earnings).
               According to Swiss law, insurance policies --
          including annuity contracts -- cannot be seized by
          creditors.  They also cannot be included in a Swiss
          bankruptcy procedure.  Even if an American court
          expressly orders the seizure of a Swiss annuity account
          or its inclusion in a bankruptcy estate, the account
          will not be seized by Swiss authorities, provided that
          it has been structured the right way.
               There are two requirements: A U. S. resident who
          buys a life insurance policy from a Swiss insurance
          company must designate his or her spouse or
          descendants, or a third party (if done so irrevocably)
          as beneficiaries.  Also, to avoid suspicion of making a
          fraudulent conveyance to avoid a specific judgment,
          under Swiss law, the person must have purchased the
          policy or designated the beneficiaries not less than
          six months before any bankruptcy decree or collection
          process.
               These laws are part of fundamental Swiss law. 
          They were not created to make Switzerland an asset
          protection haven. In the Swiss annuity situation, the
          insurance policy is not being protected by the Swiss
          courts and government because of any especial concern
          for the American investor, but because the principle of
          protection of insurance policies is a fundamental part
          of Swiss law -- for the protection of the Swiss
          themselves.  Insurance is for the family, not something
          to be taken by creditors or other claimants.  No Swiss
          lawyer would even waste his time bringing such a case.

          
          Contact information

               The only way for North Americans to get
          information on Swiss annuities is to send a letter to a
          Swiss insurance broker. This is because very few
          transactions can be concluded directly with foreigners
          either with a Swiss insurance company or with regular
          Swiss insurance agents.
               When you contact a Swiss insurance broker, be sure
          to include, in addition to your name, address, and
          telephone number, your date of birth, marital status,
          citizenship, number of children and their ages, name of
          spouse, a clear definition of your financial objectives
          (possibly on what dollar amount you would like to 
          invest), and whether the information is for a
          corporation or an individual, or both.
               So far only one Swiss firm specializes in dealing
          with English speaking investors, and everybody in the
          firm speaks excellent English.  They are also familiar
          with U. S. laws affecting the purchase of Swiss
          annuities.  Contact:  Mr. Jurg Lattmann. JML Swiss
          Investment Counsellors,  Dept. 212, Germaniastrasse 55,
          8033 Zurich, Switzerland; tel. (41-1) 363-2510, fax:
          (41-1) 361-4074, attn: Dept. 212.
          
          
