The concept of Trust originates from English Common Law and is recognized in most English speaking countries. The essence of trust relationship is that the founder of the trust (Settlor, Trustor, Grantor) passes his assets to another person (Trustee) so that the latter hold and manage them for the benefit of a third party (Beneficiary).
The Less Money You Have, the Less Attractive Target You Are
However much assets you’ve got through your life to that moment you probably consider all possible options to protect them. Trust and, in particular, offshore trust is one of the most venerable devices for asset protection including but not limited to from effects of divorce and greedy spouse, possible bankruptcy and sometimes from unfair taxation. What is trust, how it works and when it doesn’t work?
For you to benefit from the trust structure you are to create a legal entity, transfer your title to certain assets to this entity, but remain its beneficiary.
It means that you loose your title to the assets and that’s the main “con”. However, the trust is a separate legal entity and the entrusted assets cannot be used to cover your personal liabilities. So, you legally separate yourself from your assets and this is what protects them from the creditors. That’s the main “pro”.
You continue to receive income and other benefits from the trust. You can also name somebody else as the beneficiary of the trust, say, your family members.
Basically the trust institute may work very well for a number of certain professionals such as accountants, lawyers, medical practitioners that may be particularly exposed to unexpected litigation. In some countries it is also a very good tool for a case of divorce, the consequences of which may be quite severe.
The Extra Benefits of Offshore Trust
Setting up your trust in a low or zero tax jurisdiction you have the trust profits free of local taxes on income and capital gains. This maximizes the productivity of the capital.
You get more protection when the trust with your assets is governed by a foreign legislation. For example U.S. courts judgement will not be recognized in another country.
Most offshore jurisdictions have strong privacy protection legislation. Set-up of an offshore trust is enhancing your privacy.
You can get access to investment in securities, insurance and annuities products that are not allowed or restricted in your home country.
Protection by means of a trust may appear much cheaper than same through insurance policies.
The Hidden Agendas of Offshore Trusts
To ensure the creditors of the Settlor cannot reach the assets the trust should be properly drafted and timely settled.
First of all it should be irrevocable, meaning once the assets are transferred to the trust you can’t get them back. It also means that you cannot be forced to retrieve them to pay to the creditors.
It should also be structured the way so that the assets stay out of access by the foreign Trustee.
It is recommended to set up your trust beyond your home jurisdiction and physically relocate any entrusted estate or assets off your home country when possible.
The trust is to be set up before the creditors’ attack, i.e. before you got sued, bankrupt and so on. Whatever happens you are supposed to have good motives like justifiable estate planning and investment purposes and not an intention to screw your creditors. Otherwise you may be easily convinced of a fraudulent transfer or contempt of court. Being unable to reclaim your money from the offshore trust you will definitely keep them safe as planned but at the same time did you mean to still go to jail for an uncertain period of time?
Trust is more an asset protection and estate planning rather than tax-saving tool. It is normally considered to be “tax neutral”. You will not get any reduction of taxable income, gift or estate taxes or deductions for personal expenses paid by the trust. IRS and tax authorities of many other countries require you to report any assets transferred in trust as well as all kind of income from them with payment of personal income tax as a consequence. Non-reporting may result in serious penalties including criminal ones.
There are situations when trust can save taxes to certain categories of persons but this matter is always a subject to thorough preliminary analysis.
Most popular jurisdictions having specific legislation relevant to an asset protection oriented trust are the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Gibraltar, Guernsey, Isle of Man, Jersey, Labuan, Liechtenstein, Madeira, Mauritius, the Turks and Caicos Islands and Western Samoa.
Any of the above jurisdictions would work fine, and important matters are mainly ease of communication and cost of set-up and maintenance. In case of impending threat from the creditors you can consider to relocate the trust to another jurisdiction.
Before entering a trust arrangement go for proper professional advice in countries of your citizenship, residence and domicile.