This article looks at the pros and cons of international trusts versus domestic trusts. We’ll look at some of the benefits of offshore trusts, while also discussing the broader income tax implications.
Setting up a foreign trust can be a great way to protect your assets. Many of the top trust jurisdictions have tough laws specifically to keep your assets safe from risks such as predatory litigation.
Foreign trusts have many benefits but only if done properly. That’s why it’s so important to get the right advice the first time around. At Nomad Capitalist we create full holistic plans which combine legal tax reduction with offshore banking and trusts, contact us today to learn how we can create a customised plan for your exact needs.
International Trusts – TL;DR
There are many benefits to having foreign trust. Foreign trusts generally provide greater flexibility, privacy and a higher level of protection for trust assets.
With an offshore trust, professional trustees can manage your assets on your behalf and for your beneficiaries.
You will, however, need to be aware of the income tax implications so, if in doubt, contact us and we will find the most suitable solution for you.
International Trusts – Overview
A trust is a type of legal entity formed when the party known as the settlor or grantor, wishes to create a structure designed for the transfer of assets to one or more beneficiaries.
The third party in this arrangement is the trustee, who manages the trust on behalf of the settlor, for the overall benefit of the named beneficiaries.
Creating A Trust Deed
The settlor first creates a trust deed, a legal document outlining who the beneficiaries are, how the trust works, the assets held within the trust and the exact method in which these are to be disbursed to the beneficiaries. The trust deed also determines the type of trust.
Generally, there are two types of trusts, irrevocable and revocable trusts. Irrevocable trusts cannot be altered once created, whereas revocable trusts can be altered, provided the settlor is alive and of sound mind and body.
With an irrevocable trust, assets placed in the trust are no longer considered your property, which makes this type of trust good for protecting assets. But with a revocable trust, because you can continue to make changes to the trust, you also have the option of, for example, adding new beneficiaries.
If you are using a trust as part of your estate plan, then you will naturally need to give plenty of thought to this, as you may decide to make changes further down the line – e.g. if your children give birth to grandchildren.
Between the settlor and the beneficiaries, the trustee acts in a fiduciary capacity, managing the trust.
Ultimately they have access to the trust and manage it, but the assets either become the property of the beneficiaries, or the beneficiaries receive regular cash payments based on the value of those assets.
Trustees can be individuals, for example, a lawyer or attorney who specialises in trust law though it’s also common for trusts to be managed by trust companies whose business it is to operate trusts for multiple clients.
If you are looking to set up a foreign trust then it is likely that you will be using a trustee company to manage the trust. These companies will obviously all want to compete for your business and are likely to tell you that their foreign trust solution is the best, though it may not always be the best for your needs.
As a Nomad Capitalist client, however, you can be guaranteed a more impartial assessment based on your exact needs. We’ll help find you the most suitable jurisdiction and put you in touch with our partners on the ground.
Our team works with trustees all over the world. We have built these relationships over the years so you can rest assured they will always have your best interests at heart.
Domestic Vs Foreign Trusts
Setting up a domestic trust is, generally speaking, and also legally speaking, less complicated than a foreign trust.
The trade-off, however, is that domestic trusts don’t offer anywhere near the same level of privacy and asset protection that you will get with a foreign trust.
Despite this, many individuals feel more secure forming a domestic trust since they don’t like the idea of their assets held in a foreign country. This is a mistake since the more foreign financial assets you have, the more diversification you have, the more resilient you are to shocks.
If you are a US citizen, having a foreign trust, much like having an account with a foreign bank, means specific reporting requirements.
This is true of other countries too, depending on where you are tax resident, though America’s citizenship-based taxation makes it more complicated.
If you are looking to set up an offshore bank account, however, setting up a foreign trust in an offshore jurisdiction can be the first step in doing this, so you get the value of both, but you will need to be aware of your country’s reporting requirements.
This can be complicated if you try to go it alone but as a Nomad Capitalist client, we can help ensure you are fully compliant at all times and find you the most efficient and suitable solution.
Foreign trusts are generally easy to establish, you draw up the trust document and transfer money into the trust. Once the funds are in place, they are then held securely for distribution to your beneficiaries. It is also possible in some jurisdictions for the settlor and beneficiary to be the same person.
International Trusts – Asset Protection
One of the main selling points of the top offshore trust jurisdictions is that they have their own laws in place and do not accept foreign rulings. So a court order from your home country won’t have any bearing on your offshore trust.
If you have a Cook Islands, Cayman Islands, Saint Kitts And Nevis or Belize trust, for example, creditors and litigators will have to go to that jurisdiction and commence new legal proceedings there with a very low chance of success and the experience is generally expensive and prohibitive enough to act as a deterrent.
Assets and property held in the trust are therefore shielded from predatory litigation. Having a foreign trust in such a legal jurisdiction can also counteract inheritance claims, making them ideal for estate planning.
International Trusts – Tax Planning
Using a foreign trust can also have some notable tax benefits both for you as settlor, as well as your beneficiaries, depending on how and where you decide to create it.
This does not mean the same thing as exemption, however, and reporting requirements still apply. If you are a US citizen that means you need to report it to the Internal Revenue Service.
It’s worth noting, however, that many of the top jurisdictions for offshore private trusts are also tax havens. This means no income tax or capital gains tax for residents.
Those looking for a second passport option to supplement the creation of a foreign trust may, for example, be interested in applying for citizenship by investment in a jurisdiction such as Saint Kitts and Nevis.
This is the essence of what we do at Nomad Capitalist, combining strategies together to help you achieve your goals, such as legally reducing your taxes and providing greater protection for your assets. Talk to us today to find out more.
Foreign Trust – Pros And Cons
Although a domestic trust might be easier to establish and less complicated from a fiscal point of view, with a foreign trust you have far more options available.
Each jurisdiction offers a unique combination of benefits but generally speaking, the primary advantages are enhanced privacy and more layers of protection for your assets.
The cons, on the other hand, are that foreign trusts take more planning and also have tax implications which can prove problematic if not handled properly. That’s why we recommend you don’t try to go it alone and instead get professional advice. If you want all the benefits of an offshore trust without the drawbacks, get in touch with us today to discuss your options.
Is A Foreign Trust The Answer?
A foreign trust can provide you with far more flexibility than a domestic trust but it’s vital that you fully understand the tax implications.
That’s why it’s so important that you get the right advice first, so you can make the right choice.
At Nomad Capitalist we create fully holistic solutions for our HNWI clients. We work with a global network of professionals, including bankers, lawyers and trustees in multiple jurisdictions.
We can help you find the right trust jurisdiction from which to facilitate your estate plans and protect your assets, while also ensuring you enjoy the maximum amount of legal tax reduction.
Contact us today to find out more.
International Trusts – FAQ
Specified foreign financial assets are assets held in a foreign (non-US) financial institution, such as a bank, or investment assets, such as stock issued by a foreign company. The IRS also classifies foreign trusts under this term, which means they need to be reported.
The main benefits of a foreign trust are enhanced privacy and more robust provisions for the protection of assets. It should be noted that many of the top trust jurisdictions are also popular tax havens with little or zero income tax or capital gains for residents.
A grantor trust is a type of trust whereby the settlor or grantor of the trust remains the owner of the assets in the trust for tax purposes. In other words, if you set up a grantor trust, you will be liable to pay income and estate tax on the trust’s assets, not the trust itself.