Setting up an offshore trust isn’t as simple as stashing your money in the Bahamas and calling it a day. You’ll have to consider setup fees, administrative charges, legal costs, and other expenses. Those fees can add up quickly, but the peace of mind an offshore trust brings is often well worth it.
Wondering how much it costs? Learn about the costs of managing an offshore trust below.
Initial Setup and Administrative Fees
You must select a trust company to manage your funds in offshore jurisdictions. Creating an offshore trust involves a good deal of paperwork, and the trust company will charge a setup fee to handle all of it for you. Depending on your chosen jurisdiction, expect to pay anywhere from $3,000 to $8,000.
Currency Exchange and Banking Charges
Savvy investors worried about the dollar’s falling value may opt to diversify their wealth with a foreign currency basket. For instance, they might build a portfolio consisting of Japanese Yen, Swiss Francs, and Euros. They then move their currency basket into an offshore trust for safekeeping.
If you’d like to try this strategy, you’ll have to keep currency exchange rates in mind. Some currencies are worth more than the U.S. dollar, others less. As of the writing of this article, the Australian dollar, for example, is the equivalent of about $1.47. The British Pound is worth about 78 cents.
You should also keep banking charges in mind. You’ll pay a fee when transferring money into or withdrawing from the trust. Wire fees vary by bank and typically cost $50 to $100 per transaction.
Legal and Professional Advisory Costs
Setting up an offshore trust involves drafting legal trust documents, and you’ll need to hire an asset protection lawyer. This is one of the biggest expenses for creating and maintaining offshore trusts.
Legal fees for domestic trusts are often $10,000 to $25,000, but for foreign trusts, fees can be a bit higher. Depending on the lawyer you choose and the complexity of your trust, expect to pay anywhere from $10,000 to $100,000.
In addition to trust document drafting, attorney’s fees include professional guidance and advice on setting up your trust. They can advise you on how to shift your money to a foreign jurisdiction for the strongest possible protection.
Tax Implications of an Offshore Trust
Some people who set up an offshore trust think it will help them avoid U.S. taxes, but this is a myth. Offshore trusts are primarily for asset protection, not tax avoidance.
In the eyes of the IRS, most offshore trusts are treated as grantor trusts; therefore, most trusts are tax-neutral. They neither increase nor decrease your taxes. For example, you’ll need to report capital gains earned from your trust just as you’d report capital gains held outside of a trust.
Is there a minimum investment required for offshore trusts?
Most offshore trust companies don’t require you to have a minimum investment to set up a trust.
Even if the trust company has no minimum, we generally recommend that you have at least $250,000 in assets before setting up an offshore trust to justify the pricing of offshore trust upkeep, as well as setup fees. Paying that much for a setup to protect assets worth less than $250,000 generally would not be worth it.
If your estate is valued at less than $250,000, consider setting up a domestic trust instead.
Factors Affecting the Cost of Establishing an Offshore Trust
Now that you know how much it costs to maintain an offshore trust, you may wonder what affects those fees. Offshore trust maintenance expenses vary depending on jurisdiction, assets held, your attorney, and the type of trust you choose. We’ll explore each of these in more detail next.
Some jurisdictions are cheaper for trust setup than others. A country’s tax system is one of the biggest factors affecting trust costs. Some countries, such as the U.S., have a progressive tax system that taxes high earners at a hefty rate. Others have very low taxes or even none at all.
To enjoy the biggest bang for your buck, choose a jurisdiction that has no or low capital gains tax, inheritance tax, gift tax, or income tax. If you own a business, picking a jurisdiction with no corporate tax can be a wise choice. Many businesses, including quite a few Fortune 500 companies, set up subsidiaries in the appropriate jurisdictions.
If you’re budgeting for offshore trust maintenance, here are a few favorable offshore jurisdictions to consider.
The Cayman Islands
You may have heard of the Cayman Islands referred to as a tax haven, and for good reason. This British overseas territory has no capital gains, wealth, gift, or income tax. However, taxes in your home country would still apply. Additionally, the Cayman Islands often doesn’t recognize foreign judgments, which means creditors may have to go through the local courts to come after your assets.
Kitts and Nevis
St. Kitts and Nevis is an offshore jurisdiction consisting of two islands. This jurisdiction doesn’t recognize foreign judgments, and courts tend to side with trusts and beneficiaries. Creditors coming after assets here must prove, beyond a reasonable doubt, that the defendant fraudulently transferred assets into a trust.
The Cook Islands
The Cook Islands has a free association agreement with New Zealand, which means this jurisdiction has full autonomy over its foreign policy. Many investors favor this jurisdiction because it has no capital gains, wealth, gift, or inheritance tax. It also boasts a short statute of limitations (just two years). It is widely considered to be the optimal jurisdiction for asset protection.
Belize is yet another jurisdiction that doesn’t recognize foreign judgments. It does have a fairly high-income tax rate of 25%, but this only applies to locally earned income, so this won’t affect you if you earn all of your money overseas.
Cyprus is a popular offshore trust jurisdiction for asset protection because it’s very secure. Here, creditors must prove that there was intent to defraud by opening a trust. This is such a burden that most creditors won’t bother to try.
British Virgin Islands
If you’re a business owner, the British Virgin Islands can be a smart pick. By setting up a company here, you won’t owe any corporate income tax locally, however, your home country taxes would still apply. Additionally, the jurisdiction has no capital gains, gift, or wealth tax. The only downside is that the local courts occasionally recognize foreign judgments.
Type of Trust
The type of trust you choose can affect the cost as well. Your lawyer may charge different fees depending on whether you open a revocable or irrevocable trust.
A revocable trust is the least restrictive option. With a revocable trust, you can easily change the terms, add or remove beneficiaries, or even terminate the trust at any time.
That may sound appealing, but if you’re interested in asset protection, you must open an irrevocable trust. This type of trust may appear more restrictive than the revocable variety, however, this is not always true. Irrevocable trusts can provide a great deal of flexibility.
Legal and Professional Fees
Legal and professional fees can vary significantly depending on the attorney you choose. Some attorneys will set up an offshore trust for as little as $10,000, while others charge $100,000 or more. Much of the fee depends on the value of your assets and the complexity of your estate.
If you’d like to learn more about how much it costs to maintain an offshore trust, contact Blake Harris Law today.