Offshore Trust: Benefits and How to Set One Up?
- Last updated on . Written by Offshore Protection.
Offshore trusts have time and again proved to be one of the most powerful financial vehicles for asset protection, confidentiality, and tax optimisation. More high net worth individuals are turning towards offshore trust structures to help them fulfil their financial objectives in the simplest and most effective way possible.
In this article, we walk you through what an offshore trust is, its primary purpose, and its main benefits. We also provide an overview of the steps required to set up an offshore trust.
Table of Contents:
- What Is An Offshore Trust?
- What Is The Purpose Of An Offshore Trust?
- Benefits Of An Offshore Trust
- Are There Any Disadvantages Of An Offshore Trust?
- How To Set Up An Offshore Trust
- Should You Set Up An Offshore Trust?
What Is an Offshore Trust?
An offshore trust is simply a trust agreement that is created in a jurisdiction outside of the one in which the grantor of the trust resides. Offshore trusts are commonly set up in foreign jurisdictions with favourable trust structures, tax laws, and asset protection mechanisms. The most common type of offshore trust used is that of an offshore asset protection trust (APT).
This is a special type of irrevocable trust whereby the grantor of the trust can name themselves as the sole beneficiary of the trust. It is used primarily for asset protection and financial privacy, and not for estate planning.
A trust is a legal agreement between three parties: the grantor/settlor, the trustee, and the beneficiary/beneficiaries. Under a trust agreement, the grantor transfers ownership of assets to the trust, which are in turn overseen and managed by the trustee, for the ultimate benefit of the beneficiaries. Trusts have been widely used for asset protection, estate planning, and tax optimisation.
They are separate legal entities which provides a layer of protection between the grantor of the trust and the assets which they decide to transfer into the trust’s procession.
What Is the Purpose?
Offshore asset protection trusts in foreign jurisdictions such as Cook Islands, Seychelles, Liechtenstein, Belize, and many more, serve the primary purpose of creating a legal barrier between the grantor of the trust and the trust’s assets.
Even though the grantor effectively remains in control of the assets through the trustee and by being sole beneficiary, they are no longer legal owners of the assets while they are in the trust’s possession. This means that the assets are protected from creditors, litigations, and various other threats.
Keeping the assets offshore provides an additional layer of security as local courts have little to no jurisdiction in the offshore country, and forcing a repatriation of the trust’s assets is extremely difficult.
Offshore trusts can also be used as part of a wholistic wealth management plan to optimise taxes, increase investment returns, and provide financial privacy.
Some of the many benefits of an offshore trust include:
The primary reason for most people to set up an offshore trust is to protect their assets with a highly secure financial structure in an offshore jurisdiction. Offshore asset protection trusts are the go-to asset protection tools recommended by most asset protection attorneys.
Offshore trusts in tax havens and international financial centres (IFCs) can offer great tax incentives and can help to reduce your overall tax liability if structured correctly. In most of these jurisdictions, the trust will not be subjected to any income or capital gains taxes locally.
This does not mean guaranteed tax avoidance as you may still be liable to pay taxes in your home country when you repatriate the assets and/or income from the trust.
Offshore trusts in havens such as Cook Islands and Belize uphold the principles of financial privacy and security. Not only will your assets be well protected, but they will be difficult for unwanted persons to discover in the first place.
There are no public records of trust owners, nor are there any requirements to file accounts or conduct regular audits.
Due to the numerous types of trusts in existence and the many offshore jurisdictions to choose from, they are highly versatile instruments.
It should be possible to find an offshore trust structure to suit just about any individual’s specific requirements.
Estate planning and avoidance of probate
Estate planning is one of the primary traditional uses of trusts, and offshore trusts offer similar benefits. Although they are angled more towards personal asset protection and privacy, offshore trusts can indeed be used for estate planning purposes with great effect.
They allow your beneficiaries to avoid lengthy and expensive probate procedures, can lower or eliminate estate taxes, and offer various flexible structures to allow you to dictate the exact terms with which your assets are distributed.
Greater Investment Freedom
Offshore trusts may provide much greater freedom for making investments. This is because they are seen as a separate legal entity to the settlor and are generally based in more liberal foreign jurisdictions than the settlors home country.
This is especially true for US citizens who face various limitations and restrictions on what they are able to invest in internationally. A prime example is cryptocurrency, where US citizens are severely limited in what coins they may invest in. An offshore trust can help to overcome these limitations.
Are There Any Disadvantages?
While offshore trusts are generally highly advantageous and effective financial instruments, there are also some downsides. These include:
Expensive to Set Up
While the exact costs vary greatly depending on where you set up your offshore trust, it is common to find that it is much more expensive doing so in an offshore jurisdiction than domestically.
You will also have additional expenses in hiring the right expertise to help you with the foreign set up process, paying for offshore trustee services in the foreign jurisdiction, and so forth.
The additional cost of an offshore trust is a necessary payoff for the array of benefits it brings. Furthermore, the potential tax savings of an offshore trust usually easily offset the added expense.
Offshore trusts are touted as ideal tax reduction tools. While this may be true to a certain extent, don’t get fooled into thinking that simply plonking your assets in an offshore trust will completely eliminate your tax liability. Tax laws are complex, and you need to consider the tax rules of your home country too.
It is very likely that you will have to pay taxes when you repatriate the assets from your offshore trust to your home country. If you are very unlucky you may even end up paying double tax (both in the offshore jurisdiction and in your home country) but this is quite rare and can easily be avoided.
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How To Set It Up
Setting up an offshore trust is much the same as setting up a trust locally; however, there are some additional considerations and steps required. These include the need to carefully select the right jurisdiction, navigating the legal processes in said jurisdiction, and finding the right offshore Trustee to manage the trust on your behalf.
The basic steps for setting up an offshore trust are:
- Choose the jurisdiction: Before you can begin the process of registering your offshore trust, you need to do the required due diligence and research to select the appropriate offshore jurisdiction. An asset protection attorney or other expert in offshore trusts can help you choose the right offshore jurisdiction for you.
- Decide upon the structure of your offshore trust: This goes hand in hand with selecting the right offshore jurisdiction. While doing so, you will also need to choose how your trust will be structured to best fulfil your objectives. This may itself be a determining factor in selecting the jurisdiction, so could even be the first step in some cases.
- Hire a foreign entity/individual to act as Trustee: There are many good offshore trust companies in international financial centres which offer both registration and trustee services. You could opt to utilise these services, or select your own trusted offshore trustee.
- Follow the procedures required to register the trust in the jurisdiction of choice: the exact registration procedures will differ slightly in each offshore jurisdiction. Generally, the process should be relatively straightforward, but it is certainly worth enlisting the services of an asset protection attorney to help you with the registration process.
You may need to submit some or all of the following documents to register your trust:
- Affidavit of solvency
- Trust information document
- Deed of indemnity
- Certified copy of the grantor’s passport
- Proof of address
- Bank reference letter
Once you have followed the registration procedures and submitted all the required documents, you can proceed with finalising your trust agreement. This is the legal agreement between grantor, trustee, and beneficiary, which gives the trust its formal existence as a legal entity.
For more: How to set up an asset protection trust
Should You Set One Up?
Deciding whether or not you should set up an offshore trust depends entirely on your personal circumstances and financial objectives. While an offshore trust has been shown to be a powerful vehicle with a number of beneficial uses, it may not be the ideal instrument for everyone.
As such, it is always best to have a personal consultation with an asset protection expert. They can not only help you deem whether it would be a good option for you to set up an offshore trust, but also help to walk you through the process of doing so in the most effective way possible.