If you have heard anything about offshore trusts, it might have been in connection to some scandal in the news or some reference in a film, television show, or other work of fiction. The truth is, offshore trusts might be a lot more common than you think. They are a completely legal and effective way to protect your wealth.
In fact, many asset protection attorneys commonly work with these types of trust on a daily basis. This article will provide an in-depth examination into the details of offshore trusts and how they might help you protect yourself from a lawsuit or other legal threats.
Why Are People Wary About Offshore Asset Protection Trusts?
Offshore trusts can get a negative reputation from the media. Whether it is stories about leaks or hacks revealing the offshore trust holdings of the rich and famous or movies and television shows portraying hidden accounts of money stored overseas.
These are the type of exciting storylines that tend to get peoples’ attention but not exactly the most realistic ones. The world of offshore trust structures and asset protection is in fact much more mundane.
It is true that offshore trusts can be used as a device for unlawful activity such as tax evasion and financial crimes, but they also have perfectly legitimate uses that are fortunately much more prevalent. At the end of the day, an offshore trust is just a legal contract, it is what people use it for that can be good or bad.
In reality, professional trustees and banking institutions are required to comply with due diligence inquiries regarding their clients and the source of funds. Legitimate players in the offshore trust industry have an incentive to avoid fines by their respective regulators and maintain their reputation of legitimacy.
History of Offshore Asset Protection Trusts
The use of offshore asset protection trusts originated during the early decades of the 20th century. Initially, it was the only the very wealthy who started using offshore trusts for asset protection and for tax efficiency. Citizens of the United States mainly used the Bahamas as an offshore site while the Channel Islands were popular for people in the United Kingdom.
As tax rates in many developed countries rose after the Second World War, offshore asset protection trusts continued their rise in popularity.
By the 1980’s new legislation concentrating on offshore asset protection trusts started being enacted in countries such as the Cook Islands. This began the start of the modern era in offshore trusts, where the focus is mainly on asset protection.
Today, jurisdictions focusing on offshore trusts such as the Cook Islands and St. Kitts & Nevis are benefiting from their protective legal system and continue to attract people from all over the world thanks to its favorable laws for asset protection.
When Should You Consider Using an Offshore Asset Protection Trust?
If you are a high net worth individual, or if you are engaged in a high-risk profession such as medicine, real estate, or a business owner, the time to consider an offshore asset protection trust might be today. Asset protection is a complex subject you should discuss with an asset protection attorney.
An offshore trust provides asset protection because it acts as a separate legal entity and assets transferred to the trust are very difficult for creditors of the trust maker to seize.
This might sound counterintuitive, but the best time to create an offshore trust is when things are calm and before any storm clouds show up in the horizon. Offshore asset protection trusts provide the best level of protection when they are established well in advance, before a legal threat arises.
Generally, a year or two is enough time to demonstrate that the offshore trust was not created in response to any lawsuit or with the intent to avoid paying any specific party.
Creating an offshore trust shortly before a lawsuit is filed against you may still be possible, but it can create a negative presumption and draw more scrutiny from the courts. In addition, voidable transfer statutes can prevent recently transfers to an offshore trust from being respected.
How is an Offshore Asset Protection Trust Taxed?
Another misconception is that an offshore asset protection trust can help reduce or eliminate income tax obligations. This may be the case in some countries, but for U.S. citizens the tax burden generally stays the same.
The United States taxes its citizens on their worldwide income, so if you are from the U.S., an offshore asset protection trust will not help reduce or avoid U.S. income taxes.
Income taxation tends to be a complex subject, and that is especially so for an offshore trust. So, how are offshore trusts taxed? Trusts, regardless of whether they are domestic or international, can be treated in two different ways by the Internal Revenue Service (IRS). The two classes are grantor trusts and non-grantor trusts.
In a grantor trust, the grantor maintains an element of control over the property held in trust. A U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (IRC sections 671-679) is taxed on the income of that trust. This means the IRS will disregard the trust and treat any of its income as if it was the grantor’s.
In the other hand, if the grantor has no control over the trust, the IRS will treat it as a non-grantor trust. In this case, the grantor will not need to pay taxes on any trust income, but the trust will be a separate tax entity that will need to pay its own taxes. Additionally, transferring appreciated property into a non-grantor trust may trigger capital gain taxes.
In addition, there are special IRS reporting requirements for trustees and beneficiaries of offshore trusts. Congress imposed substantial penalties for failure to report offshore trust holdings. There are numerous reporting rules that can apply to a U.S. person who enters into transactions with a foreign trust or is treated as an owner of a foreign trust under the grantor trust rules of Internal Revenue Code (IRC) sections 671-679, including information reporting on Forms 3520 and 3520-A; on Form 8938, Statement of Specified Foreign Financial Assets; and on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
It is imperative that a grantor works with an experienced CPA regarding foreign trust reporting and taxation to understand the reporting requirements and overall tax burden of the offshore trust.
As for the offshore trust’s home country, many of the most popular offshore jurisdiction do not impose any income taxes on trusts. This prevents complicated double taxation issues from arising since only the U.S. is imposing taxes on any gains.
What Type of Assets Can an Offshore Asset Protection Trust Protect?
Once you set up an offshore asset protection trust, it can be used to hold a variety of different assets such as cash, securities, limited liability companies, real estate, cryptocurrency, and other digital assets.
To take advantage of the offshore asset protection, assets held by an offshore trust should be located outside of the U.S., as U.S. real estate or other U.S. assets could be reached by U.S. courts.
Generally, an asset protection trust works together with other legal entities as part of a comprehensive asset protection plan. The use of an offshore or domestic limited liability company together with offshore bank accounts at a foreign financial institution can help shield assets from lawsuits.
Advantages Of Offshore Trust in Terms of Asset Protection
The number one reason for establishing an offshore trust is to protect assets. If there are numerous layers of legal protection that a potential creditor or lawyer must penetrate to gain access to your property, the chances are they’ll let their claim go or accept a settlement offer.
While domestic asset protection trusts can offer a degree of asset protection, inconsistent legislation and overly aggressive courts means only offshore trusts can provide a heightened level of security over your assets.
An offshore trust works by transferring legal title of assets over to an offshore trust company located outside the United States. This level of asset protection is particularly important for high-net-worth individuals or those who are commonly exposed to lawsuits.
Those who fall into the following categories are the best candidates for offshore trusts: Business owners, people with over $500,000 in assets, physicians, attorneys, and other high-risk professionals. When your assets are held in an offshore trust, they become less accessible to domestic courts which don’t have jurisdiction to reach assets held in a foreign country and controlled by a foreign trustee.
The principal advantage of an offshore asset protection trust is the ability to place assets beyond the reach of the courts in your home country. This means a potential plaintiff would not be able to collect from any assets held in an offshore trust by suing in a county, state, or even federal court.
Reaching the assets of an offshore trust requires the plaintiff to sue in the trust’s home jurisdiction, which of course is a much more complex and expensive undertaking than filing a local lawsuit. In addition, offshore trusts are often established in jurisdictions where it is much more difficult to bring and win a legal battle.
Naturally, the added effort and expenses associated with bringing a lawsuit in a foreign jurisdiction is a significant deterrent to all but the most motivated plaintiffs. Not only will a plaintiff have to find and retain local attorneys to sue an offshore trust, but they must also litigate the claim in a different and unknown legal regime. This puts the person with an offshore asset protection plan in a much more favorable position if a lawsuit or claim ever arises.
How Much Does an Offshore Trust Cost?
Setting up an offshore trust is not inexpensive, but it might be more affordable than you think. In general, you should expect to spend over $15,000 in legal fees to set up an offshore asset protection trust with some costing as high as $50,000. This normally includes the first year of trustee expenses.
The annual fees typically range from $5,000 to $25,000 per year to maintain an offshore trust. Part of these fees are paid to an offshore trust company that will serve as trustee in the foreign country as well as to the trust protector if one has been appointed.
What are the Best Offshore Jurisdictions to Form an Offshore Trust?
Since trusts originated and developed within the English common law system, it is generally countries with these shared legal traditions that are the most competitive in the offshore trust space. It is important to consider each jurisdictions’ legal system, existing legislation, tax laws, track record and tradition for recognizing and enforcing trusts. The prevalence of respected offshore trust companies to serve as foreign trustee is also crucial.
The jurisdictions in which offshore trusts are frequently established have stable political systems, excellent legal systems, reputations as safe places to do business in and invest. The most favorable offshore trust jurisdictions available for United States persons when considering an offshore asset protection trust include the Bahamas, Belize, the Cayman Islands, St. Kitts & Nevis, and the Cook Islands.
These countries’ favorable laws have continued to attract offshore trust business and foreign trust company investments. Additionally, respected offshore trustee companies operate in all of these offshore trust jurisdictions.
While any offshore trust jurisdiction has its advantages and disadvantages, the Cook Islands is generally considered the best foreign country for offshore trusts. The Cook Islands’ legal system is very favorable towards individuals defending themselves in legal proceedings, such as seizures and forfeitures, and it is widely considered to be amongst the most protective in the world.
The offshore asset protection trust statutes of the Cook Islands are among the most formidable asset protection laws. Even lawsuits or judgments originating from countries such as the United States won’t be able to reach assets held in a Cook Islands Trust.
Protect Your Assets Today
Protecting assets can be of utmost importance. Naturally, you want to be confident that the offshore trust jurisdiction you are considering for your offshore asset protection plans is the best for your situation. When considering an offshore trust, it is important to consult an asset protection attorney to ensure you are taking the right steps towards preserving your wealth.
At Blake Harris Law, we can walk you through the process and help you understand the options open to you and what might work best for you. If you are looking to learn more about offshore asset protection or are looking for guidance with different offshore trust alternatives, please contact Blake Harris Law.