Dateline: Bogota, Colombia
A friend of mine received a postcard in the mail the other day. It didn’t come with a beautiful picture of the beach or a panoramic view of a bustling city skyline. No, much to their disappointment, this postcard was covered from front to back with fine print about a class-action lawsuit against a car manufacturer.
My friend actually took the time to read it.
It turns out that the lawsuit never went to court and both parties agreed to a settlement to avoid steep litigation costs. As part of the settlement, even if my friend did nothing after reading that postcard, the warrantee on their car engine – a car they had since sold – was now extended.
My friend admitted that, as they mused at that little piece of paper, they couldn’t help but laugh at its absurdity. They had spent the majority of the past decade living outside of the United and had never seen anything like that little postcard before.
While my friend is back in the US for a short time to be with family, that little postcard was a reminder of why their ultimate goal is to continue their international lifestyle.
Why? Because the absurd thing about that postcard was that it was totally normal.
At least, in the US… and the West, in general.
The US is the fifth most litigious country in the world. Germany takes the top spot, followed by Sweden, Israel, and Austria. The top ten is rounded out with countries like the UK, Denmark, Hungary, Portugal, and France.
But the US takes the top spot for all the other dismal litigation statistics. For instance, there are more lawyers per capita in the United States (1 lawyer per 300 people) than any other country in the world.
And the US is, without a doubt, the most litigious business environment around. In a 12-month period, 55% of US businesses reported having more than five lawsuits filed against their company.
Only 23% of businesses in the UK and 22% in Australia reported the same. On the flip side, only 18% of US businesses reported no lawsuits, while 42% in the UK and 36% of companies in Australia were lawsuit-free.
While statistics like these are reason enough to internationally diversify your life and business on many different levels, they are some of the most compelling reasons to set up your greatest protection against costly and unnecessary lawsuits: an offshore trust.
To many people, a trust is something only rich people use to pass on generational wealth. And offshore trusts sound so foreign that most automatically assume they must be shady and illegal. They are not, and trusts, in general, are much more than a fancy and costly will.
But since there are so many misconceptions about offshore trusts and trusts in general, I want to back things up a bit and show you exactly what a trust is, why an offshore trust is even better, and how and where you can set one up. In this article, we’ll cover the following:
- What Is a Trust?
- Parties and Responsibilities
- The Structure
- Types of Trusts
- Private Trusts
- Corporate Trusts
- Charitable Trusts
- Purpose Trusts
- Common Terms and Characteristics
- Revocable Trusts
- Irrevocable Trusts
- Discretionary Trusts
- Interest in Possession Trusts
- Accumulation and Maintenance Trusts
- What is an Offshore Trust?
- Offshore vs. Domestic Trusts
- What Can an Offshore Trust Not Do?
- What Are the Benefits of an Offshore Trust?
- Accessing Your Money
- Asset Protection
- Increased Investment Freedom
- Banking Regulations
- Tax Relief
- Estate Planning
- Peace of Mind
- Concerns About Offshore Trusts
- Becoming an IRS Target
- Litigation Complications
- Shady Offshore Reputations
- Who Should Set Up an Offshore Trust?
- How Much Does an Offshore Trust Cost?
- How to Set Up a Foreign Trust
- Due Diligence
- Trust Structures
- Investment Management
- Where Should You Set Up Your Offshore Trust?
- Offshore Trust Jurisdictions
- When Should You Set Up an Offshore Trust?
What Is a Trust?
If you want a technical definition, you could say that a trust is three-way fiduciary relationship. All this means is that it is an agreement that allows one party to transfer their property to a legal entity (the second party) for the benefit of a third party, the beneficiary.
This agreement – known as the “Deed of Trust” – is set up and agreed upon by the first two parties. It does not relinquish control of the assets placed in the trust, but it does clearly spell out how the assets are to be used and distributed.
The most common use of a trust is to ensure that the trust assets are protected from misuse by the beneficiaries and managed according to the wishes of the Settlor of the trust.
This is the key difference between a trust and other wealth management options.
For example, having a life insurance policy alone is not enough to protect beneficiaries or their guardians from their own poor decisions or misuse. Any minors who are named beneficiaries, for instance, will need guidance on how to make the best use of the funds for their future.
A trust ensures that this is done. A will or insurance policy, on the other hand, may not.
The overall picture is easier to understand when you look at each of the individual parties involved in the relationship and their corresponding responsibilities:
Parties and Responsibilities
There are various names used in different legal systems for the first party, but whether they go by the Settlor, the Grantor, the Trustor, or even the Donor, the responsibilities are the same. This is the individual who creates the offshore trust. Under English common law, the Settlor must clearly outline and establish:
- Their desire to set up a trust,
- The property they wish to transfer to the trust, and
- The names of all the beneficiaries (which can include the Settlor).
The Trustee is the legal entity that is entrusted with administering the property of the Settlor and protecting any assets transferred to the trust. They are typically a financial institution and/or licensed trust company. They are given a very narrow number of duties, which include:
- Following the terms outlined in the Deed of Trust
- Defending the trust against debtors (this is key, as we’ll discuss in a moment)
- Managing and investing trust assets in a way that protects the Settlor
- Acting impartially and in the best interest of the beneficiaries
- Communicating with all the beneficiaries
- Refraining from making a profit from trust transactions
The beneficiaries include all individuals and/or institutions that the Settlor designates to receive benefits from the trust, such as cash distributions and other assets.
It is common for the Settlor to include themselves, their spouse, their children, their grandchildren, and their great-grandchildren (even those born after their death) as trust beneficiaries.
However, the list of potential beneficiaries is not limited to these familial relations alone. It is possible to include other relatives, as well as friends, charities, schools, religious organizations, companies, public institutions, and others.
While there are a few limitations, in general, the Settlor has total discretion in determining who they will include as a beneficiary of their trust. And the Deed of Trust will outline the terms and conditions for the distribution of trust assets to these beneficiaries.
Once an adult beneficiary receives property from a trust, they are free to use it as they see fit. Under chose in action common law, a beneficiary can sell the assets, assign them to someone else, release them, utilize them in a mortgage agreement, and essentially employ them for whatever personal needs they may have.
In many instances, issues arise with a trust that are not easily addressed by the roles of the Settlor, the Trustee, or the Beneficiaries. Thus, while a trust is technically a three-way fiduciary relationship, a fourth party has been introduced into the mix in recent years: The Protector.
The role of the Protector originated in offshore jurisdictions as Settlors were often concerned about handing their assets over to a trust company in a distant country and wanted an additional third-party to watch over the Trustee. Trust Protectors are now commonly used throughout the United States and the rest of the world.
The Protector is an individual or institution appointed in the trust agreement who is charged with ensuring that legal and circumstantial changes do not negatively affect the trust and the purposes for which it was set up. Their role is to advise and monitor the Trustee’s administration of the trust.
The main reasons to appoint a Protector include:
- Flexibility – While the terms of the Deed of Trust are set in stone, including a provision for a Protector allows for a degree of long-term flexibility as the Protector will be granted the power to address circumstantial changes such as death, divorce, legal changes, new beneficiaries, the shifting tax landscape, and more.
- Oversight – The Settlor may worry that the Trustee will not adequately attend to the terms set out in the trust agreement and can give the Protector power to advise the Trustee on these issues so that they can better reflect the Settlor’s wishes. They also have the power to replace the Trustee if they ever fail to comply with the Settlor’s requests via the Protector’s counsel.
- Point of Contact – The Settlor may wish to provide a point of contact between the Trustee and the Beneficiaries to communicate about all trust-related matters, from asset distribution to investment decisions. Because it allows for improved communication, having a Protector makes it easier for the Trustee to fulfill client needs, and it gives the Settlor peace of mind.
The powers of the Protector vary according to the terms of the trust agreement and the laws of the trust’s jurisdiction, but they generally include:
- Adding or removing beneficiaries
- Approving changes in proper law
- Greenlighting investment recommendations and proposed trust distributions
- Authorizing the appointment of trust agents and advisers
- Appointing a replacement Protector
- Removing and appointing a Trustee or terminating a trust altogether
Because of the more recent origin of this role in trust law, the Protector’s responsibilities are not always clearly defined or understood. This makes it vital that the Settlor clearly dictate in the Deed of Trust the specific powers that will be granted to the Protector.
One key provision that must be included is that the Protector may only act of their own free will. Often called an “anti-duress” provision, this specification essentially suspends the Protector’s powers if they are under any form of duress. This shields the trust from becoming too flexible by protecting the Protector from coercion.
For example, a court could demand that the Protector relocate the trust to a Trustee in the United States (where the assets are more vulnerable to seizure), but since the Protector would never make such a decision of their own free will, their role would be suspended and they would be legally incapable of fulfilling the court order.
Depending on the jurisdiction, the Settlor can name themselves as the Protector. Or, if this is not allowed or desired, the Settlor can appoint a friend or family member, an attorney, or even another trust company to fill the role of the Protector.
Now that we have a better sense of each party and their responsibilities, the process of setting up a trust is simple to understand. We’ve outlined the most important steps below:
1. The Settlor hires a trust attorney.
2. The trust attorney creates the trust documents and, with direction from the Settlor, includes provisions for:
- The assets to be transferred and how they are to be managed
- The names of the beneficiaries
- The duties of the Trustee
- The rights retained by the Settlor, and
- The powers granted to the Protector.
3. The attorney files the Deed of Trust, making the trust both legal and operational.
4. A Trustee is then appointed to manage the trust assets.
5. The Trustee receives the title to the Settlor’s assets – money, shares, and other property – effectively transferring ownership of the assets from the Settlor to the Trustee to hold as part of the trust fund. This transfer must be irrevocable. (We will discuss the reasons for this in a moment.) The Settlor cannot change their mind after this point and ask the Trustee to hand it all back.
6. The Trustee is now legally responsible to protect the trust fund and “apply” it – send checks, invest, pay bills, etc. – for the wellbeing of the beneficiaries as stipulated in the Deed of Trust.
7. The Protector instructs the Trustee on how to protect the trust and distribute funds.
Types of Trusts
Depending on their tax plan, financial goals, and purpose in setting up a trust, a Settlor can choose one of several different types of trusts. Someone who intends to use a trust as part of their estate planning, for instance, will likely need a different structure than someone seeking asset protection.
There are four main types of trusts: private, corporate, charitable, and purpose trusts.
A private trust is created for the benefit of individual beneficiaries versus that of the public or a charitable foundation.
There are various types of private trusts, including discretionary, accumulation, maintenance, life interest, and fixed interest trusts.
A corporate trust is any trust created by a corporation. Businesses can use a corporate trust to fund pensions, employee benefit trusts, secure a bond or other debt security, or manage funds allocated for various reasons and the processes used to access those funds.
A charitable trust is an irrevocable trust that is set up for the benefit of a charitable organization(s). There are two basic types of charitable trusts.
In a remainder trust, the assets in a charitable trust are managed by the charity for a set period and the charity receives all the interest generated by those assets, often on an annual basis. When the trust expires, the trust’s assets become the property of the charity.
In a lead trust, the donor (i.e., the Settlor) maintains control, and any interest generated is split between the charity and the Settlor’s beneficiaries. When the trust expires, the trust’s assets become the property of the Settlor’s heirs and/or beneficiaries.
In many jurisdictions, charitable trusts can make use of advantageous tax breaks. For instance, in the US, charitable lead trusts can receive a federal income tax deduction based on the value of the trust, and income tax is only paid on the revenue produced by the assets. Furthermore, estate and gift taxes are significantly lower when the trust expires and passes to the Settlor’s heirs.
Purpose trusts do not have individual beneficiaries and are, instead, set up to provide funds for a specific purpose.
Technically, charitable trusts are considered purpose trusts as well, but they have their own category given their focus on the public good and the corresponding tax benefits that are awarded for such endeavors.
Purpose trusts, then, are often referred to as non-charitable purpose trusts. In many jurisdictions, these purpose trusts are not recognized as legally enforceable. However, there are some historic examples of when they have been upheld.
The most common examples of legitimate non-charitable purpose trusts are those whose purpose has been to fund one of the following:
- The maintenance or construction of cemetery plots, tombstones or monuments;
- The care of a pet or other animals after an owner’s death;
- The preservation of a family home;
- To hold highly regulated assets such as firearms or registered aircraft;
- To hold valuable collectibles, such as artwork, that require a high level of expertise to preserve, protect, and appraise before liquidation and distribution to beneficiaries.
It should also be noted that some jurisdictions actively promote the use of non-charitable purpose trusts, another benefit of looking for offshore for financial solutions.
Terms and Characteristics
You need to understand several key terms and characteristics of trusts before you can know which type of trust will best fit your needs. Here are the most important ones to know:
A revocable trust is one that can be altered or even canceled by the Settlor at any time, or after a designated date.
If a trust is revocable, the income earned by the trust is distributed to the Settlor during their lifetime. The property is only transferred to the beneficiaries after the Settlor’s death.
Irrevocable trusts cannot be altered or canceled at any time by the Settlor. Once the trust is set up and the Settlor has transferred their assets, there is no undoing what has been done. The Settlor cannot demand that the Trustee return the assets.
While this sounds extreme, this is the provision that makes a trust such a powerful instrument for asset protection. Why? Because even if a court ordered a Settlor to revoke their trust and retrieve their assets to pay for a lawsuit, the Settlor would no longer have the legal power to do so.
The Settlor’s past action – transferring their assets to the care of a Trustee – is irreversible. They no longer have free access to their assets. Distribution is dictated entirely by the Deed of Trust.
A discretionary trust is the most flexible type of trust and allows the Settlor to provide the Trustee with a “Letter of Wishes” that offers guidance about how the Trustees should manage and administer the trust and its assets.
This ability to set the terms of the agreement makes discretionary trusts a popular choice for asset protection and tax planning.
With the stipulations laid out in the “Letter of Wishes”, the Trustee is granted greater discretion to determine what each Beneficiary receives and when. One advantage of such a setup is that Beneficiaries do not have a claim to a fixed percentage share of the trust income and, therefore, cannot be obligated to sign their shares of the trust over to a creditor.
Interest in Possession
An interest in possession trust gives at least one beneficiary an immediate right to receive income generated by the trust or to enjoy the assets in another way, minus any trustees’ expenses.
A beneficiary with such a right is known as an “income beneficiary”, “life tenant” or “having a life interest.” A beneficiary who has a right to the trust capital is known as the “capital beneficiary” or the “remainderman.”
Accumulation and Maintenance
Accumulation and maintenance trusts are a special type of discretionary trust that accumulates income that is then used for the maintenance of Beneficiaries who are typically minors. Generally, the Deed of Trust will dictate how the funds will be distributed for the maintenance of each child, payment of college tuition, and the provision of a fixed income once the child has reached a certain age.
Accumulation and maintenance trusts receive several tax benefits. For example, if all the Beneficiaries have at least one grandparent in common and they are each entitled to receive the trust assets on or before the age of 25, the assets will be given special relief for inheritance tax reasons.
In addition, no inheritance tax is charged during the life of the trust and all transfers of property to the trust are often exempt from tax as well.
What Is an Offshore Trust?
Simply put, an offshore trust is one in which the Trustee is a financial institution in a foreign country.
Foreign country = Foreign (i.e., offshore) trust.
The parties, responsibilities, end goals and types of trusts all remain the same. However, an offshore trust provides additional layers of protection that are not available in your home country.
In fact, when located in a jurisdiction with beneficial wealth protection laws and lower taxes, an offshore trust is your best option for protecting your assets.
Offshore vs. Domestic Trusts
Unlike a domestic trust in the United States, an offshore trust offers full asset protection because your property is not physically tied to US soil and it is no longer under the legal jurisdiction of the US court system.
I’ve heard arguments in the past that opening an “onshore” trust in jurisdictions like Delaware or Wyoming – specifically in Teton County Wyoming – is a good alternative to offshoring. But despite their favorable laws, US states simply cannot provide the same protection as an offshore trust.
Wyoming provides the perfect platform for comparison. They impose no state income or capital gains tax on trusts, they have low property taxes, and there is no state corporate income tax. As far as trust-related laws go, this is about as good as it can get in the United States.
One trust company in Teton County argues that there are numerous characteristics of the region that make it more advantageous than other domestic and even offshore jurisdictions. Their arguments include the fact that you will have access to the Teton County judiciary and juries (one of the wealthiest counties in the US) and the US appellate court system, you’ll avoid the stigma of offshore activity and be less of a target to the IRS, and there will be fewer expenses and compliance burdens.
While none of these arguments are very strong, let’s examine each one in contrast to what you can get with an offshore trust.
Access to the Teton County Judiciary
While the Teton County judiciary may or may not be more favorable to individuals looking to protect their wealth, they’re still an arm of the United States government and will operate as such. Furthermore, the laws in Wyoming pale in comparison to a place like the Cook Islands, which has repeatedly stood up to the US government in asset seizure cases.
In the Cook Islands, the statute of limitations for your opponent to claim fraudulent transfer is one or two years after the underlying cause of action, which is usually before a court case in the US would be finished (meaning that they would remain protected after legal action in the US). Many offshore jurisdictions have laws like this, and simply having a friendly judiciary in Teton County cannot compare to a place that is set up to handle these sorts of things.
Access to Teton County Juries
This is a weak argument to begin with as there are no guarantees that a wealthier jury pool will side with you in a civil case. Wealthy people are not immune from attacking each other with frivolous lawsuits.
The bigger issue here is that your assets will be far safer in a place where the laws won’t even put them in front of a jury.
Access to the US Appellate Court System
I’m not sure why this is considered a strength at all as the US government has proven that it’s doing everything it can to confiscate wealth. Offshore trusts can be opened in several countries with mature legal systems that are far more reliable than that of the US government.
Avoids the Stigma of Offshore Activity
While opening an offshore trust in a banana republic or small country like Liberia could draw more eyes to you, if you’re not doing anything illegal there shouldn’t be anything to worry about.
Secondly, places like the Cook Islands and Mauritius are well respected enough that an individual opening a trust there would not face any stigmatization.
Less of a Target of the IRS
We’ll talk about this in more depth below, but I doubt that the trust company that made this argument has any data to back it up. Having a trust does not make you a target of the IRS. This is a myth. If you report what you are supposed to report, you will not get in trouble.
Having a trust is not about hiding money or evading taxes. It is about asset protection. There is nothing shady or illegal about that, no matter where you set up your trust.
More importantly, the IRS has a much greater ability to discover unreported income in the United States compared to anywhere else in the world. It’s still easier for them to investigate your accounts in the US than anywhere else, so other than avoiding a “stigmatized” locale, there’s really no benefit here either.
The Burden of FATCA Compliance
It’s true that FATCA has created new compliance obligations and risks to US persons holding offshore trusts. The argument here is that offshore trusts are now more costly and risky to hold as they are reportable to the US government, so you may as well open your trust within the United States.
The problem with this line of thinking is that an offshore trust still has many benefits over a domestic one, chief of which is protection from liabilities. Plus, an offshore trust can actually help alleviate the burden of FATCA (but more on that in a minute).
Less Expensive to Maintain
There are so many different types of trusts that you can open that the cost really depends on your situation and the location in which you wish to open your trust. There are relatively inexpensive offshore options if that’s a primary concern for you.
There are plenty of highly qualified companies that have been in the offshore trust business for decades. Whatever the cost, offshore is always better than onshore.
Domestic trusts cannot shelter you from income taxation, estate taxes, or legal judgments. And, as unfortunate as it is, one of the biggest threats to your assets in the United States is not even the government itself, but the endless string of lawsuits brought against individuals and companies.
The only way to truly protect your assets is to remove them from the reach of this system.
What Can an Offshore Trust Not Do?
Now, before we jump into the extensive list of the benefits of an offshore trust, let’s clear up any confusion about what an offshore trust – or even just a trust, in general – is or cannot do.
A Trust is Not a Bank Account
The purpose of a trust is to protect your assets, even from yourself. Because of this, once you sign the Deed of Trust, how your funds are distributed is no longer up to you.
You cannot simply withdraw funds from your trust whenever you feel like it. They are distributed to you according to the original agreements set up in the Deed of Trust. Without this layer of protection, your offshore trust would be nothing more than an offshore bank.
A Trust Cannot Eliminate Tax or Reporting Requirements
While it is true that an offshore trust can protect you from unnecessary taxation by your home country, it cannot fully eliminate the taxation of trust income distributed to you or your beneficiaries. Various countries wish to curb the use of offshore trusts and have put measure in place to do so. Here are a few examples:
The United States
Congress has passed laws that limit the tax benefits of an offshore trust. Basically, there is no relaxation of asset taxation when they are placed in an offshore trust.
An offshore trust will not grant you any increased confidentiality, either, as the IRS has increased the reporting requirements for offshore trusts.
If you create, transfer money or property to, receive distributions from, or are treated as the owner of a foreign trust, you must file Form 3520 with the IRS. Depending on your situation, you may be required to file other forms as well.
The United Kingdom
In contrast to the United States, placing your assets in an offshore trust as a UK citizen will reduce your overall tax burden. The amount you can save depends on who sets the trust up, when it was established, and who the beneficiaries are.
In some cases, gains will be taxed as they arise in the trust. In other cases, trust income will be free of capital gains tax. And in other cases, it will also be exempt from income tax law.
Both Beneficiaries and Settlors must file information returns to the Canada Revenue Agency on an annual basis. Tax laws in Canada also limit the tax benefits of an offshore trust.
However, an offshore trust can still help Canadian citizens to protect and enhance their wealth, especially if they live an international life.
Before 1991, Australians could keep their wealth in offshore structures and avoid income taxation. However, since then, CFC laws and transferor trust rules have put an end to these tax advantages.
If they are considered tax residents, Australians must pay tax on their worldwide income, including income derived in an offshore trust.
Australians who have lived outside the country and plan to become tax resident once again must use caution if they have received any trust distributions. Income received in the tax year that they return to Australia will be taxed, even if they received them before they returned to Australia.
What Are the Benefits of an Offshore Trust?
Owning anything can be a liability. The government taxes for your property, creditors may come after your assets, and your hard-earned money is vulnerable to anyone who files a lawsuit.
An offshore trust can create a buffer zone between your assets and your government and any possible creditors or litigators while still giving you the following benefits:
1. Accessing Your Money
An offshore trust allows you to access your wealth despite the protective layers placed around it. With a trust, you can protect your assets and financial future and still receive regular distributions in the present as a Beneficiary.
2. Asset Protection
Asset protection is the primary reason to set up an offshore trust. While morally bankrupt politicians in fiscally bankrupt countries are all too eager to take wealth from the so-called “rich” and redistribute it to “middle-class families”, well- connected trial lawyers suing the pants off of anyone they can represent an equally sinister tradition in the United States.
During a short visit to the US several years ago, I saw more commercials for “you don’t pay unless you win” hucksters promising fast cash in five minutes than I have in years living overseas.
Seeing those ads over and over again gave me the same revelation my friend had with the class action lawsuit postcard: US persons have become so brainwashed by lawyers to believe that any minor injustice is somebody else’s fault and deserves compensation.
In a wreck? Sue someone and get a check.
Slipped and fell? Sue the business owner for not salting the steps enough.
You let your child in the pool unsupervised and they got hurt? Someone should have told you to watch your kid, and you deserve a big payday.
When I lived in the US, I operated or invested in businesses from broadcasting to car repair to swimming pool maintenance to film production. In every case, the business required an insurance policy to protect against people suing for anything and everything.
And it’s not just business owners who are at risk. Medical doctors are among the biggest targets for lawsuits that could wipe out decades of hard work and savings.
While there are certainly cases where businesses deserve to pay, most of these cases involve low-level negligence or even no negligence at all.
The doctor that operates on a patient can’t guarantee the outcome of the surgery yet may be held responsible by the family if the desired result is not achieved.
In short, US business owners and professionals are at a huge risk for having everything they’ve worked so hard for wiped out. Even doctors who sell their practice, or business owners who sell their company, live in fear that someone will come back and sue them personally for something that happened years ago… even if it wasn’t their fault.
This is where an offshore trust comes into play.
Placing your assets in a jurisdiction that is different from your home country creates an additional layer of protection between your property and anyone who wants to take it because a judge in your home country does not have jurisdiction over foreign trusts and the judges that have authority over them.
Assets such as cash, stocks, and real estate that were once in your name and easy to seize are protected by the laws of the offshore trust jurisdiction. A judge in the US cannot compel a foreign Trustee to release assets in their jurisdiction, even if a judge elsewhere orders them released.
A plaintiff who wants to attack assets held by your offshore trust must litigate in the jurisdiction of the trust. Once there, they would face an expensive legal battle in a system that favors defendants over the creditor.
Jurisdictions like the Cook Islands require a standard of “beyond a reasonable doubt” similar to criminal trials in the United States. This provides a much more difficult burden of proof on the plaintiff than the typical “preponderance of evidence” standard used in civil courts in the United States.
Some offshore trust jurisdictions even go as far as placing obstacles for creditors. St. Kitts and Nevis requires creditors to post a $25,000 cash bond before bringing a lawsuit, and losers must pay for their own court costs.
The offshore world doesn’t have a bunch of monkeys working on contingency the way the United States does. If you want to sue someone, you must pay.
Obviously, that makes would-be creditors think twice before bringing frivolous lawsuits against you.
An offshore trust can also protect you from government seizure of your assets. Many years ago, the California Franchise Tax Board made a mistake that led them to believe that I owed them a tax fee for a year in which I had not conducted business or even lived in the state.
Thanks to this error, some low-level government employee decided to bypass both federal law and bank policies to illegally confiscate money from my account to pay the fee.
A fee that I did not actually owe.
We do not peddle doom and gloom here, but this experience highlighted for me the reality that government officials are not beyond locking you out of your bank account, brokerage account, or even your business.
They don’t even have to go through the court system. If they suspect something is wrong, they just act. If you have not diversified, you can be left without cash and other vital resources to ensure that the situation is resolved.
Having a legal offshore trust will safeguard your assets from government seizure and provide you with consistent access to cash distributions.
This will also protect you from debt. Several years ago, a construction company was successfully sued for product liability when a building collapsed and killed over 125 people. Even though the construction company complied with all the architectural plans and specifications, they were found culpable.
After the court decision, the company’s bank accounts were frozen pending the final judgment.
Because the company’s funds were frozen, they could not continue operating on other projects and were subsequently sued by several other clients for non-completion. The company had to lay off all its workers and eventually went bankrupt.
Fortunately for the architectural firm, they had set up an offshore trust where they had kept a “rainy day” account. During the long appeals process, the firm was able to carry on operations without going into debt and eventually had their liability for the collapse overturned in appeals.
You can also protect your assets by creating a tax shelter with a universal life insurance policy purchased through your offshore trust. This is a complicated structure to set up, but it is well worth the work. You can read more about offshore life insurance here.
3. Increased Investment Freedom
US citizens deal with many different investment restrictions. For instance, we’ve spoken before about the various limitations that US crypto investors face and how they can benefit from building a passport portfolio.
Investors can also benefit from an offshore trust.
The main reason for this is that a foreign trust is not a US citizen and, therefore, is free to make investments that the Settlor may not be able to make as an individual.
US citizenship can be a liability when seeking to invest internationally. Whether they must pay special taxes on their foreign investments, deal with exchange or capital controls, or are banned from other investments altogether, US citizens are at a serious disadvantage.
There have even been cases in the United States when, in times of crisis, the US government has ordered everyone to sell their gold to the government for a set price. And failing to do so was punishable by a fine of $10,000.
If you were to transfer your gold assets to your offshore trust before such an event, it would be out of the reach of the US government as the gold would now be in the possession of the Trustee, who is governed by the laws of their country and not the United States.
We’ll examine exactly how investment works with an offshore trust down below, but the advantage is real and is reason enough for serious investors to consider an offshore trust just to avail themselves of the opportunities.
4. Banking Regulations
The fact that an offshore trust is not a US person creates more benefits than just good investment deals, too. We regularly discuss here at Nomad Capitalist the challenges of setting up foreign bank accounts as a US citizen. Thanks to FATCA, many banks just don’t want to deal with you anymore.
They don’t want to be dragged into all the paperwork and compliance measures that US citizens deal with on a regular basis.
But an offshore trust is not a US citizen.
So, while you will still need to report to the US government about your trust and all related activity, the bank will not need to report to the US government about the account set up under your trust, increasing your options for where you can get an offshore bank account.
5. Tax Relief
An offshore trust cannot eliminate your tax burdens completely, but it can alleviate them in many ways. For example, it can give you access to investments that are not available in the US that receive more favorable tax treatment.
It can also provide you with better tax planning opportunities. For instance, upon your death, your offshore trust will disconnect entirely from the US tax system, saving it from heavy estate taxes and leaving more of your wealth for your posterity.
Additionally, while it is true that any distributed income is taxed as if the beneficiary directly earned that money, income that is not distributed and remains in the trust is taxed like a non-citizen, non-resident individual. In general, this means that it only pays tax via a withholding tax on income derived from US sources.
In practice, this means that most offshore trusts do not pay US income tax on interest income or capital gains. However, there are throwback rules and interest charges that should be considered in relation to these tax benefits.
6. Estate Planning
Many people who have already set up an estate plan hesitate to start the process all over again by creating an offshore trust. However, there are many added benefits to combining your estate plan and offshore trust, even for the individuals who have already gone through every painstaking detail of their estate plan.
And it doesn’t take as much work to transfer your estate to your trust as you might believe.
No matter how well you’ve managed your estate plan to minimize taxes, the reality is that the sum of all your assets is still located in the United States and is taxable according to whatever laws are in effect at the time.
And, let’s be honest, you never know what those laws are going to be.
Just a few years ago, estates worth more than $5.25 million were subjected to the 40% estate tax. At the time, that meant that there were over 4,650 taxable estates in the US. Just a decade earlier, the exemption was a mere $675,000, with over 52,000 taxable estates.
More recently, in 2017, the Trump tax reform more than doubled the threshold. Today, the estate and gift tax exemption is $11.4 million per individual or $22.8 million per married couple. This means that, in 2018, only 1,890 estates were affected by the estate tax.
It sounds like things are going in the right direction, doesn’t it?
Unfortunately, the Trump tax cuts are set to expire at the end of 2025. And there’s really no telling where the tax rates will go from there.
They could go up – it has been as high as 60% in the past – or they could go down. And the threshold for taxation could go down… or it could keep going up.
How can you know?
Try answering these questions: Who will be in power? Will they hate the rich or want to protect them? Will they see your life’s work as something they can snatch up at the time of your death and redistribute at their whim? Or will they recognize that you have the right to share your wealth as you intended? Will they change the rules of the game just as you’ve finished polishing the final details of your estate plan?
You can never really know.
This is why it is best to relocate your estate to a jurisdiction where none of these questions will ever become an issue. And, yes, you can relocate. You don’t have to redo your estate plan. Everything that you’ve set up under your estate plan can seamlessly transition into an offshore trust.
Using annual gift tax exemptions, protecting your lifetime credit amount, marital deductions, QTIP trusts, life insurance trusts, installment sales to a grantor trust, using an LLC to reduce gift and estate taxes, Grantor Retained Annuity Trusts, marital exemptions,… you can do all of this and more with an offshore trust.
For one, you do not have to worry about putting away too much too soon. With an offshore trust, you can move your assets out of your taxable estate and still have access to them (see the first benefit on this list).
Secondly, with the power of the Protector in place, you have everything you need for estate supervision. You can appoint one child (or several) as Protector upon your passing.
Finally, at the time of your death, a discretionary trust will disconnect from the US tax system for both estate and income tax purposes. Beneficiaries will still need to report and pay taxes on distributions they receive from the trust, but they will not need to pay tax on investment returns that have accumulated in the trust itself or file reports.
By effectively removing the family estate from the US tax system, the assets you have left behind for your family will no longer be subjected to estate taxes one generation after the other.
7. Peace of Mind
Whether you are concerned about asset protection, financial security, investment freedom, estate planning, over-taxation, or strict banking regulations, the greatest benefit of an offshore trust is that it offers you peace of mind.
With an offshore trust in place, you can rest assured that your assets are legally protected and structured in a way that you will always have access to what you need while you live. And you will have the confidence that your assets will be distributed according to the terms you’ve set out both during your life and once you are gone.
Concerns About Offshore Trusts
Now, even with all the benefits of an offshore trust, many people still get hung up on three key concerns:
- Becoming an IRS Target
- Litigation Complications
- Shady Offshore Reputations
In a nutshell, they are all myths. But since we care about putting your concerns to rest, let’s crack the nut open and dissect these concerns.
1. Becoming an IRS Target
Many people falsely believe that creating an offshore trust is like voluntarily painting a target on their back for the Internal Revenue Service to come after them with an audit.
There are no legal grounds nor is there experiential evidence to back such reasoning.
I am a practitioner, not a theorist, and more than a decade of practice has revealed nothing that could support this concern. International attorneys and accountants will tell you the same thing: having an offshore trust will not increase the likelihood of being flagged for an IRS audit.
What will get you in trouble is if you fail to follow the rules for offshore trusts.
The IRS operates on tax rules. There are rules for everything, from distinguishing a hobby from a business to reporting and paying taxes on an offshore trust.
If you follow the rules, you stay out of trouble.
Rules create freedom. That’s why we focus on 100% legality here at Nomad Capitalist. That’s why I’ve become known as the goody-two-shoes of the offshore industry: if you want true freedom, you need to follow the rules.
The folks who think that they can create an offshore trust to avoid reporting their assets to the IRS and evade taxes… they’re the ones painting a target on their back.
The benefit of an offshore trust is not to hide your money, it is to protect it. So, report what you need to report. Pay what you need to pay.
The main rule you need to understand is that any offshore trust that receives assets from a US person and that has any US Beneficiaries (both citizens and residents) is considered a grantor trust. For income tax purposes, even if you transfer assets to a grantor trust, you are still considered the owner of those assets and must continue to pay taxes on the income they earn.
You do not pay taxes on what you put in or even what you take out, only on income earned. You must report the income on your personal tax return, pay whatever is due, and file all the required forms.
If you do that, the IRS will be content.
2. Litigation Complications
This concern really boils down to people worrying that their offshore trust will not do what they created it to do: mainly, protect their assets.
Now, we talk about a lot of different offshore strategies here at Nomad Capitalist – from setting up an offshore bank account to forming an offshore company – and each strategy has an important role to play in a holistic offshore plan. But none of those other strategies have legal safeguards in place to protect you from being forced to undo what you have done.
An offshore trust does.
To illustrate, let’s look at the worst-case scenario and see how your offshore trust would hold up if you were to lose a lawsuit and could not pay the judgment.
First, the creditor would likely request that the court order you to complete a creditor’s examination in which you must answer questions about your financial life under penalty of perjury. This line of questioning will reveal anything you have offshore.
If you have an offshore bank account, the court will require you to pay the judgment with any assets held in your account.
If you have an offshore company, the court will order that you make a distribution to yourself to pay the judgment.
If you have a foreign brokerage account, you’ll be ordered to sell everything to pay the judgment.
If you have a foreign annuity, you’ll have to cash it in to pay the judgment.
As difficult as it may be to do any of those things, there is nothing that would legally prevent you from following through with the court’s orders. And with no legal obstacles to prevent you from successfully cashing in your annuity, selling everything in your brokerage account, or emptying your foreign bank account, failing to comply would land you in jail.
So, you comply.
But if the creditor’s examination revealed that you had an offshore trust, things would play out a little differently.
First, the court would order you to relocate the trust to the US or otherwise recover the property that you transferred to the trust in order to pay the judgment.
And you would try.
You would do everything in your power to get your assets back. But since you set up an irrevocable discretionary trust, legally speaking, the assets you transferred to the trust no longer belong to you. The transfer was irreversible. There’s no getting it back.
You would still try. You would have the creditor send the Trustee a written demand that they relocate the trust to the US. You would hire a lawyer in your Trustee’s jurisdiction to determine how to compel them to release the money you need to pay the judgment.
You would do everything you were counseled to do by the lawyer, the court, and even the creditor. And none of it would work. If you set your trust up correctly, there would be nothing that you could do to force the Trustee to return your assets.
The court may not be happy, but you wouldn’t end up in jail or bankrupt.
This is why an offshore trust is so invaluable. Other offshore strategies can create geographical barriers and allow you to diversify your wealth internationally, but an offshore trust is the only strategy that will provide you with an impenetrable legal barrier between your assets and anyone who wants to take them, even if that person is you.
In most cases, this legal barrier is so insurmountable that most creditors will never come after your money in the first place.
3. Shady Offshore Reputations
In the movies, it is easy to paint anything international as shady and illegal because so few people are familiar enough with the rest of the world to know just how normal it actually is.
But thanks to the work of folks in Hollywood and Washington DC, most people hear the word “offshore” and automatically conjure up images of criminals, drug dealers, embezzlers, and terrorists hiding stacks of cash from their illicit activity in some exotic locale.
No one wants to be associated with that kind of company.
But the reality is that there are powerful market incentives and legal measures that ensure that offshore trust companies keep their reputations spotlessly clean.
First, any jurisdiction worth your consideration for your offshore trust will have KYC rules. Not only are trust companies in these locales required by law to know their client but they must also know how their client obtained the property that they are transferring to their trust.
Offshore trust companies conduct thorough inspections that put any financial institution in your home country to shame. You will be required to provide extensive documentation – from affidavits to passports to professional references – and the company will likely do their own research about who you are via the internet.
Secondly, a trust company is a business just like any other. They want to protect their reputation and provide quality service to keep good clients and attract more like them.
Trust companies must have a license to operate and they never want to risk losing that by taking on anyone with a shady reputation. The jurisdictions where these companies operate zealously protect their reputations as well because they know they need to compete for your business.
Even just one bad client could damage the reputation of a trust company or an entire jurisdiction, so you can bet that they do everything in their power to weed out any potential problem clients.
Wealthy families looking to protect generational wealth – not crooks – have been using offshore trusts for decades. Those are the clients these jurisdictions want to attract and that foreign trust companies are willing to take on.
That is the company you will be keeping.
Who Should Set Up an Offshore Trust?
Now that we’ve covered the benefits and addressed the concerns associated with offshore trusts, the next question to ask is, “Who actually needs one?”
In my experience, offshore trusts are all too often overprescribed. However, there are several situations where an offshore trust is more than recommended:
- Corporations who are subject to product liability beyond insurance coverage limits.
- Medical doctors and lawyers who could be exposed to malpractice suits.
- Contractors and construction companies.
- Any person or company that has assets that may be subject to litigation and subsequent seizure. Generally, if you have $500,000 or more in assets outside of US real estate, you ought to consider an offshore trust for asset protection.
Trusts, both domestic and offshore, have their specific applications. In both cases, an attorney specialized in trusts along with a financial planner or accountant should be part of your team before going through the expense of setting up a trust. This is particularly true for offshore trusts.
How Much Does a Foreign Trust Cost?
At the beginning of this guide, we briefly addressed the false conception that offshore trusts – and trusts in general – are tools only available to the wealthy. In reality, setting up a simple revocable trust can start at around $750.
Depending on the complexity and value of the assets you wish to transfer to the trust, the cost will go up from there.
Setup costs mostly include legal fees, so if you want to find the most expensive lawyer or accountant out there, you could end up paying as much as $100,000. However, there is no need to spend that much. You can get a similar service for around $30,000.
But you don’t need to pay that much, either.
If you do your research and select the right offshore service providers, you can expect to spend around $5,000 for a robust offshore trust with ongoing annual administrative costs ranging from 0.5% to 5% of trust asset value.
Ultimately, how much you pay comes down to how much you know going in combined with a cost-benefit analysis and your risk tolerance.
How to Set Up a Foreign Trust
Once you have hired a lawyer, they will do the actual setup of the trust. They will know the steps to follow, the wording to be used depending on the jurisdiction, and the various requirements for citizens of different countries.
However, the more prepared and knowledgeable you are going into these conversations, the better you can advise your lawyer or accountant about the jurisdiction and trust company you want to use and the stipulations you want included in the Deed of Trust.
Here are the most important things for you to do as you go through the process of setting up your offshore trust:
Start by investigating the different jurisdictions you are considering. The next section in this guide will go over the qualities you want to find in a good trust jurisdiction along with some of our top suggestions. Review that section and select a couple of jurisdictions that best fit your needs.
At this point, you’ll move on to investigating specific trust companies in your jurisdictions of interest. In the age of the internet, it is easy to find people complaining about bad service. If a company offers poor services or has created ethical problems for its clients in the past, you’re going to hear about it.
All you have to do is look.
You can also go to the trust company’s website and research the specific people who work there or ask your lawyer or accountant about the trust company’s reputation. If everything sounds good, get in touch with the trust company and ask to speak to a trust officer.
If the call goes well, the next step is to travel to the jurisdiction to meet the trust personnel in person. For individuals who already live an international lifestyle, a trip of this nature is a regular investigative measure.
If you’re less accustomed to flying across the world to meet with a financial institution, this step may seem challenging and you could be tempted to skip it. Don’t. The confidence you’ll gain by meeting the people who you will entrust with your assets is more than worth the time and expense.
If you do not want to rely wholly on your trust to protect your assets, you can use a couple of different structures to place someone (often yourself) between the trust and your assets.
The first structure is to use a broker or an offshore bank. To do this, you would set the trust up with a small amount of money and then have your Trustee open a bank or brokerage account in the name of your trust.
You would be the designated manager of the bank or brokerage account, which would grant you the power to give the buy and sell orders and receive account statements. You wouldn’t be able to withdraw anything from the account, but you would have a high level of oversight.
The second structure is to use an offshore company. Once again, you would set the trust up with a small amount of money, but this time you would request that the Trustee form an offshore LLC in the jurisdiction of your choosing.
Once this is done, you will purchase shares in the LLC by transferring cash and other assets you want to protect to the accounts that the LLC owns. Then, you would transfer your LLC shares to the trust. This will allow you absolute control of the assets.
By using either one of these structures, you will regain control over the management of your assets and reduce the chances that a Trustee could do any damage, ethically or otherwise.
A trust is not an investment, it is a way to hold and protect your investments. If you are concerned that the Trustee will not adequately manage the assets that you have placed in your trust, you can control the investment power of your Trustee.
If you ask the trust company how they will manage your assets to produce long-term profit and you’re satisfied with their answer, keeping things simple and giving the Trustee full management control may be the best choice.
However, if you are not satisfied with their answer, you have other options. You can have the Trustee set up an account with a brokerage firm you already have a relationship with and then have the Trustee hire your current investment adviser and they can continue to manage your investments for you.
The only difference is that they are now protected inside your offshore trust.
If you want to control investment decisions yourself, you can follow the process we just reviewed but have the Trustee hire you as the investment manager. Or, you can set up an LLC as described above and manage your assets that way.
Where Should You Set Up Your Offshore Trust?
Determining which jurisdiction is the right one for your offshore trust will depend on several factors, including your citizenship, country of residence, individual goals and circumstances, how you plan to use your offshore trust, the citizenship and residence of your beneficiaries, along with several other factors.
Because there are so many variables to consider, it is essential you get the help of a professional before making a final decision.
However, you can start whittling down the list of contending jurisdictions before you seek professional help. Here are the main qualities to look for in an offshore jurisdiction:
Trusts are founded on English common law. Because of this, jurisdictions that base their legal system on English common law are usually your best option for finding an offshore trust company.
Some civil law jurisdictions have attempted to adapt their systems to replicate English legal principles, but the real deal is usually better.
Tax and Litigation Laws:
You will lose many of the benefits of an offshore trust if you choose a jurisdiction that applies income and inheritance taxes on trusts. Look for countries with no estate taxes and that have favorable tax laws for trusts.
You should also pay attention to litigation laws. As we discussed earlier, many jurisdictions are much more defendant-friendly and will even require creditors to post a $25,000 bond before they can bring a lawsuit to court.
You want to find a jurisdiction where the legal system is on your side from the start.
One of the greatest benefits of international diversification on any level is that it enables you to have a Plan B in case things go sideways in your home country. But if you set up your Plan B – in this case, an offshore trust – in a country where things are just as likely (if not more) to become unstable, you have not removed the risk.
Look for countries that have a strong track record of stability and a healthy socio-economic foundation. Younger countries often face more instability issues, but more established countries tend to be more expensive and have more regulation and over-lawyering.
You may feel more comfortable setting up a trust in a jurisdiction where you have connections, bank accounts, or even a base.
While there are benefits to “feeling comfortable” with a jurisdiction, it is better for your decision to be based on facts and how each moving part fits into your holistic offshore strategy.
This is why, in the end, it is best to work with someone with specialized knowledge in this field to find the ideal jurisdiction for your trust.
Offshore Trust Jurisdictions
With these qualities in mind, the following are some of the most popular locations for offshore trusts, listed in alphabetical order:
- British Virgin Islands
- Cayman Islands
- Cook Islands
- Isle of Mann
- Marshall Islands
- Kitts and Nevis
When Should You Set Up an Offshore Trust?
Offshore trusts are the strongest legal structure available to protect your assets from creditors. They are also a powerful instrument for retirement and estate planning that can bless yourself and the generations that follow you.
They are not for everyone, but if it is the right thing for you, the time to set one up is now. If you want the protection of an offshore trust, you must set it up long before any legal action is taken against you.
The longer you wait, the greater the chance that a creditor can successfully retrieve your assets with one of the 100 million+ lawsuits that are filed every year in the United States.
If you’d like our expert advice on how an offshore trust could fit into your holistic offshore plan and want professional help selecting a jurisdiction and trust company that will best meet your needs, feel free to reach out to our team.
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