When you think of offshore trusts, images of shady corporations stashing their money away to avoid taxes or commit financial crimes may come to mind. Although offshore trusts sometimes are portrayed negatively in movies and the media, they actually offer a legitimate and legal way to protect your assets from creditors, divorce, and other entities that want to get their hands on your hard-earned money.
Find out how to move assets into an offshore trust the right way below.
Advantages of Moving Assets Into an Offshore Trust
Setting up an offshore trust can seem overwhelming initially, but it’s a fairly straightforward process that offers many benefits.
If you are a high-net-worth individual, you may become an attractive target for lawsuits that can drain the assets you’ve worked so hard to build. When you store assets in an offshore trust, however, the cost of litigation against you can become prohibitively expensive. This can dissuade plaintiffs from coming after your assets through pricey and time-consuming lawsuits.
Transferring assets into an offshore trust shields your money from creditors, too. If a creditor wants to come after you, they would need to hire a foreign attorney and file suit in the foreign jurisdiction. This creates a complicated situation that many creditors would prefer to avoid.
Additionally, an offshore trust enables you to open certain financial accounts or make investments that were previously unavailable to you in the U.S. If you’re interested in expanding your investment portfolio, an offshore trust may make sense for you.
How to Protect Your Assets with an Offshore Trust
If you’re ready to learn how to move assets into an offshore trust, proceed carefully. Thorough preparation is key to ensuring you don’t run afoul of local laws or choose an offshore trust that’s not right for you.
1. Research Offshore Trusts
Before you can transfer assets, you’ll need to research and select an offshore trust that’s a smart fit for your needs. Trust types include:
- Private: A trust created for individual beneficiaries
- Purpose: A trust set up to provide funds for a specific purpose, such as preserving a home, caring for pets after a loved one’s death, or holding highly regulated assets
- Charitable: A trust set up for charitable organizations. Either the organization or the settlor (donor) can manage the trust.
- Corporate: A trust for fund management, employee benefits, pensions, and other business-related purposes
You’ll also need to understand the terms of each trust. A few of the most common terms are:
- Irrevocable: You cannot cancel or alter this trust at any time after creating it.You must set up an offshore trust as irrevocable for asset protection purposes. However, irrevocable does not necessarily mean inflexible. In many circumstances, an irrevocable trust can be amended or dissolved.
- Revocable: You can change or cancel this trust at any time. Revocable trusts don’t protect your assets from lawsuits and creditors because your assets are not separate and distinct from you.
- Discretionary: This is a flexible type of trust that gives you greater control of what assets your beneficiaries receive and when. Your trustee can determine the distribution of assets on your behalf.
- Life Interest: Your principal beneficiary will receive assets from the trust during their lifetime.
2. Choose a Jurisdiction
Next, you will need to choose a jurisdiction for your offshore trust. Select a jurisdiction that offers strong protections for your assets as well as one that’s politically stable. If you don’t, you could put your assets at risk of seizure.
Two foreign jurisdictions that offer strong asset protection include Belize and the Cook Islands. Belize grants immediate asset protection upon trust formation. In the Cook Islands, trusts receive stronger legal protections than in most other jurisdictions. Other places that provide robust asset protection include St. Kitts and Nevis, Cyprus, and the British Virgin Islands.
3. Choose a Trustee
Once you choose a jurisdiction, you’ll need to select a trustee. Normally, this is a non-U.S.-based company or financial institution that’s located in a foreign jurisdiction. The trustee must:
- Follow the terms in the “Deed of Trust”
- Act impartially among beneficiaries
- Invest the trust appropriately
- Defend assets against debtors
- Not personally profit from trust transactions
You can choose a foreign individual to serve as your trustee, but this carries greater risks. Individual trustees typically don’t have access to a team of lawyers and accountants like corporate trustees do. They may also not have liability insurance, putting your assets at risk if something goes wrong.
4. Create Trust Agreement
In this step, you’ll work with an asset protection attorney to set up the trust. This part of the process involves drawing up trust documents and determining the distribution of assets in your trust.
5. Transfer Assets
Next, you’ll need to transfer assets into the control of the entity you’ve chosen as your trustee. One way to do this is by creating a limited liability company (LLC), transferring assets to the LLC, and then finally transferring the LLC to the trust.
6. Manage the Trust
When you set up an offshore trust, your chosen trustee will manage it according to your terms. Creating an LLC and then giving ownership of the LLC to a trustee is one of the smartest ways to maintain more control over your trust.
This way, you control the LLC’s assets while still protecting yourself from risk. If a creditor or lawsuit tries to come after your assets, your trustee can take over management of your LLC.
7. Comply with Reporting Requirements
- Transfer assets to a foreign trust or make a loan to a foreign trust
- Receive distributions, loans, or uncompensated use of property from a foreign trust
- Receive certain large gifts or bequests from foreign persons
- Are treated as the owner of an offshore trust under grantor trust rules
The trust itself must also file Form 3520-A. This form includes information about the trust, its assets, investment structure, and income or losses on the trust.
Types of Assets That Can be Transferred to an Offshore Trust
Part of understanding how to move assets into an offshore account is knowing which assets you can move. You can put almost any asset into your offshore trust, including:
- Investments in your portfolio
- Movable, immovable, or intellectual property
- A life insurance policy
- Cars and boats
- Shares or securities
- Real estate
Funding an Offshore Trust
When you initially set up an offshore trust, you’ll need to pledge assets to it right away. Depending on the trust structure, however, you can start by pledging a minimum amount of assets and add more to the trust over time.
You can fund your trust with cash, cryptocurrency, stocks, bonds, real estate, and many other types of assets. It’s also possible to loan money to the trust rather than gift it.
Regardless of how you fund the trust, remember that you’ll need to file IRS Form 3250 to report your funding. If you file late or not at all, the IRS can subject you to heavy penalties.
Are There Risks When Transferring Assets to an Offshore Trust?
One of the biggest risks of an offshore trust is that, unlike domestic trusts, it’s subject to foreign laws and rules. These can change at any time, which could have ramifications for you and your beneficiaries.
A U.S. court may also demand the return of assets in your trust if it determines that the transfer of assets was fraudulent. If a defendant refuses to comply, the court may issue fines or jail time until they return their assets to the U.S. A defendant should always comply with U.S. court orders, however, a Trustee should not release funds when their client is acting under duress.
Another risk is that by putting assets into a trust, you no longer legally own them. You may feel uncomfortable allowing someone else to manage your assets for you, which is why you should work with a highly reputable attorney who has personal relationships with the offshore trust companies.