How to Protect your Assets with an Offshore Trust
Setting up a foreign trust is a sound asset protection strategy to add a layer of protection between your assets and anyone trying to seize your wealth. By using an offshore trust rather than a domestic trust, you can enjoy additional protections not available in your home country.
The difference is that with an offshore trust, also called a foreign trust, the trustee is a financial institution that is not in the same country as the settlor – a foreign country, a foreign trust. A number of these foreign countries are offshore, hence the use of the term ‘offshore trust.’
Having an offshore trust just may be your best option when it comes to protecting your assets. You can work with an asset protection trust institution that is in a jurisdiction with advantageous laws around wealth, protection of wealth, and which has lower taxes.
This article is geared towards helping you understand the basics of offshore trusts. I’m sure that by the end of it you will see offshore trusts as a sure way to secure your financial future and protect your assets, all while still enjoying the benefits of your wealth.
Responsibilities of the parties involved in an offshore trust
There are three parties involved in an offshore trust: the Settlor, the Trustee and the Beneficiaries. Each are bound by a document known as the “Deed of Trust.” This document is agreed upon by the Settlor and Trustee. It will dictate what is to be done with the property while it is being held by the Trustee, and how it is to be distributed to the Beneficiaries.
Some legal systems name this person the trustor, grantor or donor. Either way, this is the person who creates the offshore trust. In order to create a valid trust in most English common law countries they must:
- Establish a certainty of intention – clearly outline their desire to start a trust
- Establish the certainty of subject matter – clearly outline the property to be entered into the trust
- Establish the certainty of objects – clearly outline the beneficiaries
This term applies to the person or institution that is holding property in the offshore trust for someone else. It is the responsibility of the trustee to:
- Follow the terms expressed in the Deed of Trust
- Defend the trust against debtors – a key element of any asset protection trust
- Invest the trust appropriately
- Act impartially amongst the beneficiaries
- Be accountable to all beneficiaries, keep them informed and act in their best interest
- Not delegate duties, or profit themselves from transactions
The trustee in most offshore asset protection and offshore trust situations is a financial institution. They will typically be given a very narrow number of duties to perform in the Deed of Trust.
Natural persons are typically the beneficiaries of all asset protection trusts which are established. However, it is not unusual for a trust to list a company, commonly a charitable foundation, as the beneficiary.
Once the property from a trust is in the possession of adult beneficiaries they can do with it as they please. They can take the property gained from the trust and:
- Sell any property
- Assign property to someone else
- Release it
- Use it in a mortgage agreement
And can usually do most other things associated with the property as they see fit under the chose in action common law.
The basic types of offshore trusts
I’ll first first look at revocable trusts and irrevocable trusts:
Revocable trusts are trusts which may be altered or terminated by the settlor either at any time, or after a certain date. Irrevocable trusts can not be changed or terminated at any time by the settlor.
The type of offshore trust set up by the settlor is dictated by the goals that they have for the offshore trust. Seeking expert advice is highly recommended when you make this basic decision about your offshore trust.
To break it down further, there are four common types of offshore trusts set up by settlors:
- Private trusts: Including discretionary offshore trusts, accumulation offshore trusts, maintenance trusts, life interest trusts, and fixed interest trusts.
- Corporate trusts: Including pensions and employee benefit trusts.
- Charitable trusts: Set up exclusively for the benefit of charitable organizations.
- Purpose trusts: Simply put, these are offshore trusts that are designed for a specific reason which doesn’t meet the ones listed above. They do not have beneficiaries and are instead custom tailored to specific purposes.
There are three main types of offshore trusts that settlors turn to:
- Discretionary trusts: This is the type of asset protection trust used most often for wealth protection and tax planning purposes. This highly flexible trust will allow the settlor to provide the trustees with a ‘Letter of Wishes.’ This letter provides guidance to the trustees on how to manage the property, and how to administer the trust.
- Interest in possession trusts: These are different than discretionary trusts as they allow the beneficiaries to be entitled to receive income and capital from the offshore trust, so long as it is outlined in the Deed of Trust.
- Accumulation and maintenance trusts: These are almost always arranged for beneficiaries who are children. The Deed of Trust will typically lay out provisions for college tuition, maintenance funds for the child, and finally give the child a certain income once a specified age is reached.
What are the benefits of an offshore trust?
The first point in why people set up an offshore trust is to protect their assets in a completely confidential manner. The trustee is expected to properly manage assets, titles to property, and anything else placed in the trust, in a way which completely protects the original owner (settlor) from being discovered.
What sort of protection are you looking for when you enter into an offshore trust? Protection from your own government. In one example, this is in the form of protection from over-taxation. Secondly, a judge in your country can not compel a foreign trustee to release funds and assets to a creditor.
These two points protect the settlor’s assets from:
Even if a creditor was determined to pursue assets held in an offshore trust they would have to get involved in an expensive legal battle within the offshore trust’s jurisdiction. This expense makes it highly unlikely for a creditor to pursue these assets, making an offshore trust an excellent asset protection trust.
Why would someone want to set up an offshore trust?
The main reason is because possessing something can be considered a liability. Taxes are charged on your property, creditors can be looking to get a piece of your assets, and your assets become vulnerable when suits are filed.
A foreign trust allows you to avoid these three negative aspects of owning a large amount of property while still:
- Allowing you access to the benefits of your property
- Securing your assets for future generations of your family to enjoy
- Allowing others (the trustee) to advise you on the best possible course of action to grow assets held in trust
Your foreign trust offers a buffer zone between you, your government, potential creditors and litigators. All while still making provisions for your continued enjoyment of your wealth.
When is the best time to set up an offshore trust?
Putting your assets into an offshore trust is generally done with the goal of protecting those assets from creditors, to establish a long term plan for retirement, or for the distribution of your assets when you pass on.
In the case of avoiding creditors, it is best to set up your offshore trust long before any legal action is taken against you. The closer that the formation of your offshore trust and legal proceeding against you take place, the greater the chance there is that creditors will succeed in securing your assets.
Your creditors will likely retrieve these assets indirectly by filing suit. If you’re looking to protect yourself from creditors then the time to set up your offshore trust is now, not tomorrow or next week.
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What can an offshore trust not do?
You can not think of a foreign trust as a bank account. You can not simply withdraw funds from it whenever you want to. This is done in accordance with the underlying principle of an offshore trust – it is meant to protect you, even from yourself!
Once you enter into a Deed of Trust with your offshore Trustee, it is no longer up to you as to how the funds are distributed – it is up to the agreement within the Deed of Trust. Without this crucial added layer of protection, an offshore trust is no more than an offshore bank. This link will help you learn more about offshore banking.
Tax implications of offshore trusts by country
One of the main uses of a foreign trust is to avoid unnecessary taxation by your home country. Who, believe it or not, want to tax you to death.
We’ll look at what certain key countries are doing to try to curb the use of offshore trusts, what it means to you, and how you will still benefit from an offshore trust.
Offshore trust tax law in the USA
The US government does not want its citizens to use offshore trust institutions for either investment, or for asset protection purposes. The IRS and Congress have passed laws that are aimed specifically at limiting the tax benefits of a foreign trust, while increasing the requirements for reporting.
Under US offshore trust law, establishing an offshore trust does not typically grant any special relaxing on the taxation of the assets, nor does it do much in the way of offering increased confidentiality.
An offshore trust will, however, still offer all of the protection from liability and creditors, while still allowing for the establishment of how the assets are to be distributed to beneficiaries.
Offshore trust tax law in the UK
Despite the efforts of a number of anti-offshore trust legislators, having your assets in an offshore trust as a UK citizen still has a number of tax reducing benefits.
The amount of tax savings vary widely, depending on who established the trust, when the trust was established, and who the beneficiaries of the offshore trust are. A consultation with a trusted offshore advisor is highly recommended.
When a UK resident has their spouse, children/grandchildren, or the spouses of those children as beneficiaries of a foreign trust, the settlor will be taxed on gains as they arise. If the settlor has passed on, or if no close family members are benefitting, then the gains will be rolled up free of the Capital Gains Tax.
An offshore trust which is set up and excludes the settlor and their spouse from being beneficiaries, such as an offshore trust set up for their children, it will be exempt from UK income tax law.
Offshore trust law in France
Trust law originated in England. With this being the case, the French did not have established trust laws for many years. French courts would recognize the legality of foreign trusts, but largely ignored legislating these trusts themselves until recently.
The first legislation aimed at offshore trusts occurred when the Loi de Finances Rectificative pour 2011 came into effect on July 31, 2011. This law made offshore trusts liable to gift, inheritance and wealth taxes.
Under French offshore trust law, trustees must report:
- The market value of all assets held worldwide as of January 1 of each year
- All changes made to a trust
- When an offshore trust is wound up
- When a new offshore trust is set up
This is the case for all foreign trusts that have any French assets in them, regardless of whether or not French residents are the settlors of the foreign trust. This recent legislation change is an excellent example showing that you need the expert advice of offshore professionals, because dated information will fail to protect your assets.
Offshore trust tax law in Canada
The tax saving benefits of a foreign trust are limited under Canadian tax law. While this is the case, an offshore trust can help Canadian citizens both preserve and enhance their wealth. Foreign trusts are still an important aspect of financial and estate planning for all Canadians.
Those who will benefit the most from an offshore trust are Canadian residents who:
- Have assets in various countries under a ‘Flag Planting’ principle
- Wish to distribute assets to people who are not living in Canada
- Have recently immigrated to Canada
- Intend to move to another country, leaving Canada
The other situation where an offshore trust is beneficial is when you are not a Canadian resident, but you plan to:
- Include Canadian residents as beneficiaries of the offshore trust, either in your will or while you are alive
- Immigrate to Canada, a wise decision considering how easy it is to obtain a second passport
The six points above are all excellent examples of how an offshore trust can help Canadians. The last point, when immigrating to Canada, offers the most significant tax savings.
Canadian offshore trust reporting requirements
There are two people involved in an offshore trust that are compelled by Canadian law to file information with the Canada Revenue Agency – the settlor and the beneficiaries.
Beneficiaries – Residents of Canada who receive assets from offshore trusts are required to file an information return annually with the Canada Revenue Agency.
Settlors – Canadian residents who contribute to an offshore trust, or who own certain types of foreign property, are required to file information returns with the Canada Revenue Agency annually.
It is important for both parties to receive expert advice on the management of the offshore trust. This is due to the complexity of the laws involved, and the fact that they change on occasion.
What are the best countries for setting up an offshore trust in?
The country which you choose for your offshore trust will, of course, have the second biggest impact upon your offshore rust, next to your country of residence.
While it is difficult to answer the question ‘What is the best country,’ it is easier to look at a general list of popular locations for offshore trusts:
- The Cook Islands: The gold standard of asset protection trusts, the Cook Islands are tied in with New Zealand – which also offers good laws for protecting assets – but operate on their own. Far from some “banana republic”, the Cook Islands are the only country that has repeatedly stood up to US courts in asset seizure cases.
- Jersey: Located just off the coast of France, this is considered the top offshore financial centre in the world (and 28th overall) in the most recent Global Financial Centres Index.
- The Cayman Islands: Boasts the highest value of foreign assets under management, this includes a large number of offshore trusts.
- British Virgin Islands: Has the largest number of offshore companies, and has been a trusted location for offshore financial institution for decades.
- Bermuda: The strongest presence they have in the global market is for offshore aircraft registration, but many also turn to them for offshore trusts.
- Anguilla: A British overseas territory in the Caribbean, Anguilla is an up-and-coming place to register an offshore trust.
- Mauritius: Heavily used by Asian, African and European countries for both inward and outward investment platforms, including offshore trusts.
Other popular locations for offshore trusts include: Barbados, Antigua, The Cook Islands (well known for asset protection trusts), Trinidad, Marshall Islands, Seychelles, Nevis, Cyprus (this was once very popular amongst Russians, but has since fallen out of favor), Isle of Mann and Marianas.
Two locations that are commonly used for offshore trusts, which aren’t actually offshore, are Switzerland and Liechtenstein. These countries will more commonly be called locations for foreign trusts, but all of the underlying principles remain exactly the same.
Determining which location is going to be best for your offshore trust comes down to your individual situation, how you plan on using the offshore trust, the residency of the beneficiaries, and a number of other mitigating factors. It is best to seek the advice of a professional in all cases.
What factors help determine which location is best for your offshore trust?
Since trusts, and offshore trusts, are founded on English common law, it is better if the jurisdiction chosen uses English common law as the basis for their legal system. It is not an absolute requirement, but it is beneficial.
The input of the settlor is important, but the help of a professional is essential when it comes to taking this final step. Here are four key points that commonly come up as a settlor looks to choose a location for their foreign trust:
- The settlors own preferences: To put it simply, sometimes the settlor feels better about some countries than others. In the list above, I spoke about certain countries favoring a particular jurisdiction for their offshore asset protection needs. This trend is generally related to each country having particular illusions built up about the safety and trustworthiness of these countries. While the settlor is free to have feelings, facts are better.
- Maturity, and trustworthiness, of the jurisdiction: A younger nation is usually one with more problems than a mature one in terms of stability. However, a more mature nation may have problems related to expenses, excessive regulation, and over-lawyering.
- Settlors own bank account: If the settlor routinely banks with a certain bank, and their bank is also operating within the jurisdiction they’re looking at for their offshore trust, they’re more likely to choose the one which their bank operates in.
- Type of offshore trust being started: This is the aspect where it is the most crucial to seek a professional’s guidance. Each jurisdiction will have particular strengths and weaknesses for each type of trust. Finding the one which is ideal for your trust is best left to someone with specialized knowledge.
Three out of the four criteria above come down heavily on the input of the settlor. However, as point four shows, they are all ultimately going to be determined by the advice given to the settlor by a professional offshore expert.
Learn more about offshore trusts and asset protection trusts
An offshore trust, or asset protection trust, is one of your surest ways to avoid the harsh penalties and taxes imposed by your country and control your wealth, and is a safe way to protect your assets from creditors.
By signing up for the intelligence report below, or purchasing any of our educational offshore products, you can receive some of the most current advice on which jurisdiction is the best choice for your foreign trust in any offshore area which interests you.
For the best possible advice, book yourself in for a one on one consultation. Our expert team will be able to properly assess your unique situation, and determine which is the best type of offshore trust to protect your assets, and find the best jurisdiction for it.