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Suspicious Bankruptcy Declarations and Other Ways The Ultra-Wealthy Hide Their Money

By: NerdWallet
Posted: 9/6/2013 12:15:00 PM
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People hide their money for all sorts of reason--privacy, paranoia or, in many cases, tax evasion. The more money you make, the more you pay in taxes. That's at least the way it's supposed to be. In reality, the super rich have a knack for exploiting loopholes and using dubious financial practices to conceal the enormity of their wealth from Uncle Sam. Here are five ways the rich have tried--and often succeeded--to hide their fortunes.

1. Hiding assets in bankruptcy fraud

In 2009, three-time Major League all star Lenny Dykstra filed for bankruptcy, claiming his debts of $37.1 million exceeded assets of $24.6 million. While he was in fact seriously indebted, he was less than honest about the sum of his assets, choosing to save as much as possible instead of paying off his debts. He listed his $18.5 Ventura County mansion and his $5.4 million home in Westlake Village, but he lied about items he had removed or sold in an attempt to retain a small fraction of his wealth. He sold some of his memorabilia and used the proceeds to purchase a $15,000 cashier's check in another person's name. He even removed a $50,000 sink from his mansion and sold a number of fixtures to an LA consignment shop, robbing creditors of nearly $400,000!

Selling off assets is just one way the ultra-wealthy attempt to preserve wealth through bankruptcy. They may also attempt to temporarily place money in exempt accounts, such as a traditional or Roth IRA, or transfer assets to a trusted friend or relative.

Bankruptcy Declarations

2. Cheating bankruptcy the legal way

How can Donald Trump declare bankruptcy four different times and still live like a king? He knows how to work the system--and his methods are completely legal. By keeping his personal accounts insulated and entirely separate from his business accounts, his wealth remains untouched by the repeat Chapter 11 filings. He can crash huge, overly ambitious business schemes into the ground and come out virtually unscathed. Preferring to view bankruptcy as "restructuring debt," Trump is shameless about his tactics even in the face of heavy criticism.

3. Offshore accounts

One of the most notorious methods of concealing wealth is the classic offshore account. By holding money in countries with low tax rates and minimal financial transparency  (the Cayman Islands are the common example), the rich can avoid high tax brackets in their own country.

A few years ago, the IRS began an initiative to crack down on offshore banking. In early 2013, Palm Beach mega-millionaire Mary Estelle Curran pleaded guilty to hiding more than $43 million from the IRS. She failed to disclose accounts in Switzerland and Liechtenstein to the IRS between 2001 and 2007--an omission that cost her $21.7 million in penalties.

4. Shell trust funds

This shady little scheme can reduce the income tax of wealthy individuals to just 1% annually. Basically, people put their salaries into a trust fund. These contributions are accepted as "donations." Contributors can then take out cheap loans they are not required to pay back. Because loans are not subject to income tax, converting income into loans saves these individuals a ton of money.

Last year, English comedian Jimmy Carr was exposed as a participant in such a scheme. Transferring over $5 million of income annually to a Jersey-based K2 fund operated by Peak Performance Accountants, Carr avoided Britain's 50% top bracket income tax. Though he admitted to moral wrongdoing, Carr did not technically break the law and suffered no legal ramifications (though his reputation certainly took a hit).

5. Shell Companies

A shell company is a type of company that exists as a vehicle for transferring money. It has no significant assets and provides few products or services. Because there are indeed legitimate uses for them, shell companies are not illegal. However, they are often employed in suspicious business transactions. A common tactic is buying and selling through shell companies to conceal profit. Because international operations do not have to be reported, the government cannot tax the transactions of overseas shell companies, but you would need to have quite a healthy risk appetite to try this yourself.

In the short span of three and a half years, Russian immigrants Peter Berlin and Lucy Edwards laundered a whopping $7 billion dollars through shell companies Benex International and BECS International. After opening the accounts in 1996, massive sums of money came flooding in from Russian businessmen hoping to bypass customs duties and conceal profits. When caught, the couple was slapped with 5-year suspended sentences, 6 months of house arrest, fines of $20,000 apiece and a $685,00 debt to the IRS

Cliff Goldstein is a personal finance associate for NerdWallet, a website dedicated to providing unbiased financial information and helping consumers find the best financial advisors, savings accounts, credit cards and many other financial products.