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Establishing an Offshore Trust. Myths and Reality

Trusts are a very old legal instrument, dating back to pre-Christian Roman times. In Ancient Rome, in pre-Christian times, only a Roman male citizen could inherit property. For you to be a citizen, your mother and father also had to be Roman citizens.

In case your father was a Roman citizen and your mother was a slave or a non-Roman, you could not inherit the property. Wealthy Roman men who had children with numerous non-Roman women (often slaves) found a way around this legal norm.

They were appointing certain Roman citizens as their legal heirs, who, for a fee, took possession of their property and were managing it for the benefit of real heirs. The ancient Roman courts confirmed the legal validity of this contractual relationship and the concept of trust emerged. 

Offshore Trust

Approximately a thousand years later, in medieval England of the 12th century, during the Crusades (when many rich knights went to fight for the liberation of Jerusalem for the Christian world), the first formal preceding documents of the contemporary Trusts Act were developed (although some legal historians point to Arab legal concepts of the 9th and 10th centuries).

Back in those days, the king was taxing his subjects, i.e. lords, knights and nobles who owned the property. One of the simplest cases of tax collection for the king was the death of the property owner. Curiously, in those old and rather violent times, the tax was mostly half of the property constituting the estate, which is very similar to the current tax levied on rich estates.

However, the medieval tax had two purposes.

First of all, the point was in the income per se. The king needed money to rule his kingdom, prepare crusades against infidels, and maintain order in his kingdom and his own power.

Secondly, the king could not allow creative, enterprising and successful owners of property accumulate too much wealth and too much power, because 50% of the inheritance, in any case, was taken from the heirs in favor of the king’s treasury, every generation.

It should be noted that after almost a thousand years, little has changed in this sense in Western countries because state institutions that act as a kind of collective king, still manage the contemporary inheritance tax. From this point of view, both elements of inheritance taxation are still applied in Western countries. 

The current government simply will not allow the wealth of generations and the power of any super-successful businessman such as Bill Gates, Jeff Bezos or Mark Zuckerberg to continue growing uncontrollably. This could take too much real power away from the world capital of our time, Washington D.C..

Perhaps in anticipation of this, the unknown creative lawyers of the 12th century have grasped the basic principle of common law, and perhaps even natural law, namely the right of a person (used in the present general sense for both men and women) to conclude a contract and/or make a free gift during their lifetime to someone (or something) whom they really appreciate and who is very dear to them. And it may not necessarily be their heirs by right of kinship or blood.

Frankly speaking, in our opinion, any ancient ruler and even a modern government would have lost the ability to govern its people if it had not respected this basic human right, which was gradually being legitimized throughout history, from Magna Charter to the modern constitutions of different countries.

Based on the above, it is clear that trust was absolutely natural, had its roots in the contract Roman law, and was later reflected in the share capital and became a kind of lawyers’ invention or instrument that was quickly accepted by the English common law. In fact, trusts are the oldest legal structure recognized by the British Common Law. It was established several hundred years before the partnership emerged and seven hundred years before the joint stock corporations appeared.

The Idea of a Trust in the Simplest Form

The nobleman entrusted his property to the certain legal entity known as a trust. When the nobleman was passing away, they had nothing that belonged to them, so the king just had no estate that he could tax or take the half of it away. And vice versa, being a legal institution, the trust could not simply cease to exist, but it was rather becoming a perpetuity of the deceased nobleman’s heirs, continuing to manage their property

While kings and governments have been trying to legally limit trusts and keep them away from being perpetual, there are several trusts in Britain that are eight hundred years old, and in the United States there are trusts that date back to the founding of this nation. Many of these trusts manage huge amounts of capital because they can limit their exposure to taxation, lawsuits, divorces and other troubles that affect an individual’s assets and property.

Is Everything So Rosy with Modern Trusts?

Unfortunately, trusts were seriously attacked not only in the United States, but also in the entire industrialized world that has high taxes. These attacks were abrupt, limiting and increasing taxation, in some countries trusts actually ceased to exist (for example, in Russia). All of that happened in our time.

Modern kings just cannot go on without our income, our property and even our estates. For example, in the US, the Rule against perpetuities in most states ensures that property is inherited by law within one or two generations and is not left out of the inheritance tax for long. Currently, trusts are mainly regarded by the American Internal Revenue Service (IRS) as individuals for the purposes of taxation of their income.

The legal practice convincingly proves that no trust has been established that could not be broken through by the court in favor of plaintiffs who are eager to get to the inheritance of their rich relatives and even more so if they were taxpayers for them. Even the children and grandchildren, beneficiaries of the Right Grantors sue their own trusts if they feel that they are being taken advantage of by the trust income management or distribution.

So, what can be reasonably expected from establishing a trust, and perhaps even more importantly, where should the trust be established to maximize the reliability of its operations, as desired by its Trustee?

You can guess the answer to the second part of the above mentioned question from the title of this article or from the fact that our experts and partners are international foreign lawyers with many years of practice.

To us, the answer us quite obvious. If you are going to invest time, energy and money in establishing a trust, then why would you do it in the countries where court proceedings are commonplace and are decided in favor of the law enforcement agencies and tax authorities? What is the point of establishing something in a jurisdiction that overwhelmingly supports the plaintiff, where protection from lawsuits can cost you tens of thousands of dollars, and every government official believes they are entitled to your wealth and the results of your many years of work?

We asked an international attorney working for plaintiffs under the US inheritance laws if they ever prosecuted offshore trusts. The answer was this. They never even tried to prosecute a foreign offshore trust as it is extremely difficult and expensive. Obviously, their success in working with trusts is based on purely internal judicial practice that treats the institution of trust as a way of avoiding taxation, but not as a fair way of transferring the last will and testament of a wealthy person who had the right to decide what should become of their inheritance.

Therefore, we strongly recommend that everyone chooses the jurisdiction in advance and very carefully. The jurisdiction that will best relate to their assets and protect them from the risk of falling into the hands of competitors, enemies and often absolute fraudsters. Multinational corporations have been doing business that way for many years. They concentrate in one jurisdiction, manufacture their product or service in another, distribute them in the third one and further scale up and adapt them in many other countries of the world.

What Are the Benefits of Establishing an Offshore Trust?

Every asset owner needs the best jurisdiction to achieve their goals in production, intellectual property protection, efficiency and profitability. They will not be paying a German worker 50 USD an hour for what an unskilled Chinese worker will do for 50 cents. But they will be paying the German worker 50 USD an hour because they will produce the product of higher quality with better efficiency, which the unqualified Chinese labor can never do. This is actually the reason why most of the high-tech and advanced production is still made in Germany, while in China everything is produced under license or upon analogues of the world’s leading designers.

No less obvious is the choice when establishing a family trust. Why would you want to establish a trust in the US and expose it to local, state and federal lawsuits, numerous taxes, high administrative costs, while limiting yourself to investing exclusively in government-approved domestic investment opportunities?

Foreign trusts can be used for profitable asset management in one jurisdiction, using protective law in another, overriding the British Common Law (and the US law) rules against perpetuities in a third jurisdiction, gaining access to the world’s best asset managers in a fourth jurisdiction and diversifying worldwide to obtain better investment opportunities for your assets wherever they are located.

The overall cost/benefit analysis is so simple and understandable that for those seeking to benefit from the trust, it is best to use offshore countries for certain, if not all, possible assets.

Remember, you trusting a jurisdiction does not mean that all of your money has to be there. Most international banks and trust companies operate on a truly global scale when it comes to accessing investments for their clients.

Is Establishing an Offshore Trust Legal?

Yes, it is. It is legal. You have a thousand years of common law, and the constitutional right to create a trust for yourself and your family wherever you live. Many lawyers and accountants suggest that establishing a foreign trust may be wrong or illegal.

Why do they think so? Because they don’t have the experience to do it, and of course, what interest do they have in their clients going to another country with their capital? It is just not in their interest. So, be prepared that your accountants and lawyers will try to dissuade you from establishing an offshore trust.

Many governments also assume, driven by the mainstream media, that only scoundrels, drug lords, tax evaders and money launderers create offshore trust structures.

This is because the government of any country would prefer that you kept all of your assets under their control and in close proximity, both for tax and judicial purposes. You will never hear or see a government official say something as simple as this:

“A citizen of any country has the legal right to establish a trust anywhere in the world where there is no excise control or restriction on the movement of funds or securities abroad, provided that the taxpayer meets their basic tax obligations and complies with the reporting requirements.”

However, that is true. Therefore, the answer to the question whether it is legal to own assets abroad is simple. The establishing of an offshore trust is legal and right, but many governments either hide it from their citizens or directly promote the opposite. 

Offshore trusts have clear advantages over any similar domestic structures, but the trust is also not a remedy for any financial problems and, of course, your trust will not force you into refusing to pay your taxes, as some speakers at offshore conferences claim.

Therefore, as soon as you hear from such “professionals” that an offshore trust will make your taxation a zero, then go away immediately and avoid further communication with them. A trust is not about tax evasion. Offshore trusts are needed to protect your property and assets from being encroached upon by criminal and corrupt government officials, often for narrow-minded political purposes. In addition, offshore trusts are necessary for the structured and competent distribution of your inheritance according to your decision, not the decision of the law or especially any judicial authorities.

So, be wary of unscrupulous “offshore promoters” as well as unscrupulous “trust sellers” who want to drag you into their illegal schemes.

These guys can often have very extensive and confusing schemes of transferring your money to an offshore location, and returning it to somebody somehow, at least that’s what they say. So, when you hear or see something similar, turn your back on them and follow the opposite direction.

We live in a very transparent world, where virtually every financial transaction leaves an electronic document behind, or a digital trace. Any mid-level bank manager will tell you in confidence that the bank’s client disclosure rules require them to report to the government and security agencies in real time on all foreign transactions and all clients.

This means that if you transfer money abroad, the government will know that you did it before you even leave the bank. Yet again, currency transfer is a perfectly legal transaction if it is carried out in accordance with the currency control requirements in your country, but not disclosing the transfer information in various tax forms and your tax return can be a tax crime that will cost you a lot.

Therefore, it is legal, ethical and moral to work without such control using a legal instrument, i.e. an international offshore trust, but you must have realistic expectations and understand that you will still have to pay taxes on your actual income from the trust operations regardless of where your trust is located and your country of tax residency.

This is different if you are a tax resident in a country with territorial type of taxation like Panama, or Madeira in Portugal. In this case, you may not have to pay personal tax on income earned outside these countries. But, it is a completely different story that has no direct relation to offshore trusts.

So, What Can an Offshore Trust Do?

An offshore trust can do the following:

  • improve your negotiating position with a third-party lender in the event that there are elements of pressure on you; 
  • prevent the lawyers of zealous plaintiffs from seeking your property and possessions; 
  • in combination with an offshore corporation and/or insurance products, you can achieve legal deferral of taxation on your personal income or the performance of your international business; 
  • it will provide you access to 70% of international investments that are not directly open to investors in your country, such as hedge funds, mutual funds, foreign equities and bonds; 
  • it will allow you to shop around the world for curious and advantageous financial products and services, and pay a fair and competitive price for these services.

Why should you pay a fortune to have your assets managed by a bank in New York, Chicago, Miami or Los Angeles where the lowest paid investment consultant earns from 250,000 USD a year? With offshore trusts, you can pay a much more modest amount to a foreign trust company that will become part of your business and will not try to make any profit at your expense.

An offshore trust manager, probably educated in the US or the UK, can earn 20,000 USD a year (which can be a huge amount in some countries), and a managing director may earn several times that amount.

Some managers work for a percentage of the profit they make you. This allows you to make your trust as efficient as possible being no different from the above mentioned example of production located in different countries.

You pay for what you need and what you want. If your trust needs the services of a financial planner, you will pay a fair fee for this top-class service. If you need basic banking services, you will be charged the amount for the globally competitive services. If you want a world-famous hedge fund manager such as George Soros to manage your trust assets, it is obvious that you will have to pay more, but the result of their years of experience is extremely high.

The fact is that offshore trusts can meet your needs for the protection, multiplication and transfer of your capital. And they can do it globally, competitively and precisely in those services that you really need and which you will choose for yourself. You will not be paying for various legal and investment services that you do not need, which often happens in the world’s major banks or financial holdings.

When you combine global cost effective services with the best judicial environment in terms of protection, as well as the best internationally diversified investment opportunities to legally support your heirs chosen by you, the choice is obvious, i.e. a global offshore trust that connects your aspirations and the instruments to guarantee their achievement.

The best countries for establishing offshore trusts are such jurisdictions as Malta, the Channel Islands (Maine, Jersey and Guernsey) and the Cayman Islands. These are the countries that are most frequently used, but this does not mean that it is impossible to establish a trust in other countries. We just need to know your specific situation and your goals to make recommendations.

If you are interested in establishing an offshore trust, please do not hesitate to ask questions and contact our experts for advice. This can be done via the chat in our web-site, messengers or email: info@offshore-pro.info. We are always happy to help in such a useful matter as the establishing of a trust. 

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