Common Offshore Trust Options for U.S. Persons
|Self-settled Trusts Allowed
|Laws bar foreign judgments
|Fraudulent Transfer Limits
|Plaintiff must prove fraudulent transfers
Offshore Trusts by Jurisdiction
An offshore asset protection trust can help defend your assets by placing them beyond the reach of national courts and government agencies. Offshore trusts have features not found on their domestic counterparts, and so it is important to review the specifics regarding the foreign legal environment, the political stability of the offshore location, and the financial strength of its banks and trust companies. Needless to say, the jurisdictions in which these trusts are frequently established have reputations as safe places to do business in and invest assets.
One of the main benefits of going offshore is the ability to select the most favorable jurisdiction that will fit your goals and needs. However, with many different jurisdictions to select from, all with separate governments, legislation, and compliance requirements, deciding on what offshore jurisdiction makes the most sense is far from obvious. This article will explore the most favorable alternatives available for United States persons when considering an offshore asset protection trust, including the Bahamas, Belize, the Cayman Islands, and the Cook Islands.
Located only about fifty miles from Florida’s east coast, the “Commonwealth of the Bahamas” is a former British colony and thus retains the English Common Law tradition as the basis of its legal system and English is the official language. The Bahamas allows trusts to have foreign settlors and beneficiaries, and all trust assets can be held abroad. Under local law, the names of settlors and beneficiaries can remain private and need not be included in any public records. Bahamas Asset Protection Trusts can generally be set up within a few days and can have an indefinite duration. The Bahamas also does not impose income taxes on foreign settlors and beneficiaries of Bahamas Trusts and the local laws protect trust assets from foreign judgments filed more than two years after the assets were placed into a trust.
Bahamas trust providers include local branches of many major international banking companies. A Bahamas trustee company must have obtained a trust license issued by The Central Bank of the Bahamas and are subject to strict confidentiality laws regarding disclosure of trust information. There are no requirements to register or record a trust under Bahamas law. While the Bahamas does not have the same degree of established asset protection offered by the laws of places such as Nevis or the Cook Islands, it represents a competitive option in the offshore environment particularly for those with smaller fortunes who might be more reluctant to move towards more remote destinations.
Belize is another popular jurisdiction that offers high quality offshore services, including asset protection trusts. Belize enjoys a very flexible trust legislation, a streamlined trust formation process, and aggressive asset protection laws. A Belize offshore trust is generally safe from foreign civil judgments, including creditor claims, bankruptcy proceedings and divorces. Belize has no foreign exchange controls, and its tax laws impose no gift, estate, or income taxes on Belize offshore trusts.
To qualify under the Belize Trusts Act, the settlor, beneficiaries, and trust assets must all be located outside of Belize, and the purpose of the trust is to be implemented outside of Belize’s borders. The trust is established under Belize’s laws and a local fiduciary must serve as trustee. One of the major advantages of a Belize offshore trust is that it offers immediate asset protection upon the formation of a trust. Normally it takes two or more years from the date the assets were transferred to the trust to be safe from fraudulent transaction claims. Belize has decided to exclude the application of its narrow fraudulent transfer statute to trusts established in Belize. As long as the trust was lawfully created, the courts in Belize will not consider any claims of fraudulent conveyance.
Compared to many other offshore jurisdictions, Belize boasts a larger gross national product and population than other places on this list, which means it has a lower jurisdictional risk. The costs of establishing and maintaining an offshore trust in Belize are also generally lower than other locations.
The Cayman Islands
The Cayman Islands is renowned as one of the world’s principal offshore jurisdictions, as an international financial center for investment funds. The Cayman Islands is a British Overseas Territory with its own constitution, bill of rights, and a sophisticated judicial system. The Governor of the Cayman Islands is appointed by the government of the United Kingdom.
A key benefit of Cayman Islands trust law is the power retained by the settlors, their family members, or their appointees over significant decisions of the trust’s management. Since asset protection trusts must be irrevocable, if the settlor retains too much power over the trust and its assets it risks the trust being invalidated by a court. The powers that may be reserved to a settlor without invalidating a Cayman Islands trust include amending the trust deed, directing the trustee regarding purchase and sales of trust property, naming or removing a trustee, trust protector or beneficiary, restricting the powers of the trustee, among others. As with other popular offshore jurisdictions, there are no income, capital gains, corporate, estate or inheritance taxes in the Cayman Islands.
Trusts in The Cayman Islands can be established for asset protection purposes, however under the Fraudulent Dispositions Act, any gift made with the intent of defeating a creditor can be set aside within six years of the date of the gift, much longer than the average period of time for other offshore jurisdictions. Although The Cayman Islands has enacted statutes which create the presumption that a trust is valid even though the settlor is also a beneficiary of the trust, a self-settled trust risks failing to satisfy the requirements of a valid trust under the law since the Cayman Islands state that the settlor should have only a limited beneficial interest in the trust property. As such, for anyone looking to establish a trust for asset protection purposes, other jurisdictions exist that offer a more competitive legal environment.
The Cook Islands
The Cook Islands is a self-governing island state located in the middle of the South Pacific Ocean. The Cook Islands was a forerunner in the use of offshore asset protection trusts, having developed its statutes recognizing and regulating offshore trusts during the 1980’s and 1990’s. Today, the Cook Islands is generally recognized as the safest jurisdiction for offshore asset protection and is home to reputable and experienced professional trustee companies.
One of the main reasons drawing people to the Cook Islands is its “defendant friendly” legal and judicial system as well as the high costs and other impediments for plaintiffs. Since the laws of the Cook Islands specifically exclude foreign judgments, anyone brining a claim against a Cook Islands trust must do so in the country’s courts and with local attorneys. In addition to the challenge of brining a claim in such a remote location, the plaintiff must also cover the judicial costs associated with their legal action. While the Cook Islands has a one-year statute of limitations on fraudulent transfers (two years from the cause of action), the plaintiff would need to prove beyond a reasonable doubt that the trust was established with the intent to defraud him or her specifically. This is a much higher threshold than other jurisdiction as the burden of proof in civil matters is usually a preponderance of the evidence. For these reasons, together with decades of favorable case law, the Cook Islands asset protection trusts are considered by many attorneys as the world’s best.
While the Cook Islands might have the best laws for asset protection, its small geographic size and population means an increased jurisdictional risk compared to many of the other locations discussed here. Its local economy is also very reliant on offshore services. A Cook Islands trust can be more expensive to maintain compared to other offshore alternatives as the trust requires a professional trustee located within the jurisdiction. Often, working with an offshore trustee requires legal proficiency and continued assistance from an attorney. As with other offshore trusts, there are reporting requirements that the Internal Revenue Service imposes on U.S. persons with offshore accounts.
The Caribbean Island of Saint Kitts and Nevis has become one of the world’s most favorable locations to establish limited liability companies (LLCs) for both privacy and asset protection. The island of Nevis enjoys defendant friendly legislation, well-established banking system as well as strict privacy laws. A Nevis LLC can be used in combination with an offshore asset protection trust or on its own to hold and protect assets even if they are located elsewhere in the world. For example, an offshore trust can be the member/owner of a Nevis LLC, providing two entities with separate layers of legal protection.
If used without a trust in place, a Nevis LLC can still provide offshore protection, along with flexible management, and lower upfront and ongoing expenses when compared to offshore trusts. Because it is not a full-fledged trust, a Nevis LLC on its own requires less paperwork and no offshore fiduciary to serve as trustee. One important difference between a trust and a limited liability company is that the LLC only requires member(s), manager(s), and a registered agent in Nevis. A Nevis LLC can be formed with only one member who also serves as the manager and need not be domiciled in Nevis.
A Nevis LLC may be used for any lawful business purpose, either as a business venture or holding company. No initial capital is needed to fund the LLC and no officers need to be appointed. The LLC’s operating agreement can be specifically drafted with asset protection in mind. The legal fees and the costs of a local registered agent tend to be lower than those of offshore trusts, accordingly a Nevis LLC is a competitive alternative to a full-fledged offshore trust.
Other Notable Offshore Trusts
Since trusts originated and developed within the English common law system, it is generally countries with these shared legal traditions that are most competitive in the space. It is important to consider each jurisdictions’ legal system, existing legislation, track record and tradition for recognizing and enforcing trusts. Another important factor is business environment especially as it relates to offshore trusts. Finally, it is essential to consider the tax obligations imposed by each jurisdiction. Particularly for individuals located in the United States, the jurisdictions discussed in this article represent those generally considered as the best opportunities in the offshore world due to their established legal records, history of recognizing and enforcing trusts, and permissive tax environments.
When discussing offshore trusts, the number of options and possibilities are numerous. Places like Bermuda, the British Virgin Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Malta, Singapore, the Isle of Man, and even the United Kingdom are considered attractive offshore jurisdictions. These places tend to have stable governments, well-established financial systems, legislative and judicial traditions regarding trusts, as well as low taxes, at least for those not domiciled within their borders. Many of these jurisdictions are more attractive to citizens of other nations due to the potential tax savings in their home countries. Since the United States taxes its citizens and residents on their worldwide income, any potential tax advantages are diminished. Thus, while there are situations where these options make sense, they are generally not on the top of the list for U.S. persons looking for the best foreign asset protection alternatives.
Do You Need to Pay Taxes in Creating an Offshore Trust?
These prevalent offshore jurisdictions will generally not require settlors to pay any “entry taxes” for transferring assets offshore. In fact, their permissive tax regimes are a large part of what makes them so attractive for offshore trusts. As discussed above, many of these jurisdictions are well known for imposing very few, if any, taxes on offshore entities. In many cases, no income taxes, gift, or estate taxes are levied by the local governments, although some jurisdictions such as the Bahamas charge a small revenue stamp for new trusts established there. Normally any such government fees are minimal, and no local tax attorneys are needed.
On the other hand, offshore asset protection trusts are not a device to reduce or avoid taxation in your home country. Citizens and residents of the United States should be aware of the increased reporting requirements imposed by the Internal Revenue Service (IRS) on foreign held bank accounts. While this may not necessarily translate into a higher tax bill at the end of the year, it does represent a regulatory burden on offshore accounts and potential onerous penalties for noncompliance. Offshore trusts must be carefully established and managed to avoid problems with the IRS. It is advisable to work with a CPA experienced with foreign trust reporting and taxation. For more information regarding the IRS reporting requirements click here.
Advantages of Offshore Trusts vs Domestic Trust
While domestically we have the option to select between U.S. states, going offshore opens a much wider diversity of jurisdictions and legal systems. Just like asset protection trusts established domestically, an offshore asset protection trust must be irrevocable, have an independent trustee located in the state or country where the trust is established, the trustee must have discretion for any distributions and a spendthrift clause must be drafted into the trust deed.
Asset Protection Trusts are recognized in Alaska, Colorado, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Over the years, Nevada, South Dakota, and Wyoming have emerged as the best jurisdictions in the United States due to their favorable state laws regarding trusts. While domestic asset protection trusts can be effective, they are at risk of being sued under the laws of another state with a different outlook towards asset protection trusts, not to mention exposure to potential federal rulings. As such, while an offshore trust can come with higher fees and reporting requirements than a domestic asset protection trust, no domestic trust can match the level of protection that can be offered by an offshore jurisdiction.
Offshore asset protection trusts are still vulnerable to legal threats, but they pose considerable hurdles to anyone attempting to reach trust assets. The most obvious advantage of an offshore trust is that unlike a trust located in the United States, anyone trying to sue the trust will likely have to litigate the matter in a foreign court. Under international law, a sovereign nation’s laws must be accepted by other foreign governments. Additionally, since jurisdictions such as Nevis and the Cook Islands also do not recognize foreign judgments, winning a lawsuit in a U.S. court against an offshore trust will be a futile effort. Offshore jurisdictions are simply outside and beyond the reach of U.S. laws. 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 but must also litigate in a different legal regime.
Choosing an Offshore Trust
A benefit offered by offshore trusts is the opportunity to select a preferred jurisdiction well beyond the options found within national borders. It is important to note that the offshore jurisdiction represents the lawful home of the trust, it does not necessarily mean the trust assets need to be domiciled in the same jurisdiction. Funds can be deposited and held in a bank account in Switzerland or Luxembourg and held in turn by a Cook Island trust or a Nevis LLC.
Selecting what offshore options works best for your trust is a multifaceted process which will depend on individual circumstances, priorities, and needs. It is also possible to draft an asset protection trust with special provisions (often referred to as flee clauses) that can give the current trustee or a trust protector a discretionary power to change the situs of the trust. This means an existing trust might be able to change its home jurisdiction by assigning new trustees, moving assets to another jurisdiction, and/or amending the trust to comply with the laws of a new jurisdiction.
Those wishing to maintain the highest degree of control over the management of the trust assets without might prefer a trust settled in the Cayman Islands. If the highest level of asset protection is the main priority, the Cook Islands might merit higher consideration. Someone wishing to safeguard assets in the shortest time without having to worry about voidable transfers might want to consider a place like Belize, while Nevis might be a better option for those looking to obtain the benefits of offshore asset protection in a budget conscious manner. In these times on rising uncertainty, it is wise to take steps to help protect your assets and wealth.
Naturally, you would want to be confident that the jurisdiction you are considering is the best for your situation. 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.