I still remember the Broadway musical Fiorello!, based on the life of the popular New York City mayor, Fiorello LaGuardia, a reform Republican who served three hectic terms from 1934 to 1945.
In one of the musical’s songs, an investigative committee demands to know how Mr. X, a minor city official, can afford a private yacht…
An offended Mr. X bursts into song:
I am positive your Honor must be joking!
Any working man can do what I have done.
For a month or two I simply gave up smoking,
And I put my extra pennies one by one
Into a little tin box…
That a little tin key unlocks.
Like Mr. X, it might be worth getting your own “little tin box.” It gives you greater personal and financial privacy, and it’s also a good protection against theft or destruction of cash, valuables, important papers, or stock certificates.
A safe deposit box is just a lockable metal box or drawer, inside a bank or private vault, which is used for safely storing your valuables. And the annual rent for a safe deposit box can be as little as $500.
On a traditional safe deposit box there are two different keys, both of which must be used to open the box. One key (usually two copies of it) is given to you as the box renter. It is up to you to safeguard the key. Typically, the key will not have a box number or bank name on it.
The second key is known as the “guard key.” It is not a master key like those used in hotels and office buildings to open all rooms. Instead, it is the second half of the security on the safe deposit box. The box cannot be opened solely with the guard key. Both your renter’s key and the guard key must be used.
If you lose your keys the box lock must be drilled and a new lock supplied. Not surprisingly, under the contract, you have to pay for drilling and re-keying the box.
This key system provides some protection against a dishonest employee pilfering boxes. But nowadays, safe crackers like those Sherlock Holmes encountered in the “The Red-Headed League” or crooked bank employees may not be the greatest threat.
Before the 2001 PATRIOT Act became law, as a general rule, in the U.S. only a court could issue a search warrant authorizing access to a safe deposit box. That warrant had to be based on a finding of “probable cause” that the box might contain illegal substances, stolen property, illicit cash, or documents or other evidence required by the court.
But Now the IRS Can Gain Access…
But now the U.S. Internal Revenue Service can gain access to a domestic safe deposit box when they freeze all a person’s assets, including bank accounts and the box contents as part of the collection process. For this method of IRS collection, they do not need a separate search warrant to access the box. (In the United Kingdom, police have staged massive raids on safe deposit boxes in the London area, which have been hotly contested in court.)
One easily-available defense against unwarranted police or legal actions is to rent a safe deposit box located in a foreign country.
Many offshore banks offer safe deposit boxes for private custody of cash, securities, diamonds, gem stones, gold bullion, and other precious metals. This is usually an associated service that goes along with an actual bank account; if that is the case, it is reportable to the U.S. Treasury on the Foreign Bank Account Reporting Form (FBAR), also known as TD Form 90-22.1, which is due by June 30 each year.
Most banks require you to open an account first before you can rent a box. But provided you keep the account value under the $10,000 limit during the calendar year, you don’t have to declare it on the FBAR.
To avoid having to make a personal visit to your offshore safe deposit box each time you wish to add or remove valuables, you can give a local offshore attorney or other trusted intermediary a limited “Power of Attorney” to perform this function for you.
But banks are not the only places that offer safe deposit boxes. Non-bank safekeeping is available through private vaults. Since private vaults are not financial institutions, they are subject to fewer record keeping and disclosure requirements. Vaults permit anonymous safekeeping arrangements and they honor Power of Attorney arrangements. For added security and confidentiality a box can be rented in the name of your LLC or corporation.
Since private-vault safe deposit boxes are not associated with a bank account and do not constitute a “financial account,” they are not FBAR reportable.
It’s a good idea to insure your valuables against theft or damage. Bear in mind that a domestic insurer will have to know what’s in the box. Some private vaults do offer their clients insurance.
One foreign private vault I recommend is in Austria.
Editor’s note: Bob Bauman is a regular writer in International Living’s monthly magazine. In the last few months alone he has written about safe deposit boxes, why Uruguay is an easy, low-tax haven and about a tropical paradise where you can protect your wealth. When you subscribe to International Living magazine, you’ll have instant access to all these articles…and a lot more — from offshore matters to retirement lifestyles to property overseas. Find out more here.