Offshore Trust: Why You Should Create One and How You Can Do It

Wealthy families and individuals living in different parts of the planet and especially in Europe have been creating trusts since a very long time ago. Today, many of them prefer to establish trusts in offshore jurisdictions. Why do people use offshore trusts? Because a trust is probably the most efficient instrument of asset protection of those available to the contemporary person.

Below we discuss what a trust is, what subtypes of trusts exist, and what it takes to set up an offshore trust. We also dwell on the benefits that a trust can bring and dispel some popular myths about offshore trusts.

A trust as a legal entity

When creating a trust, you transfer the ownership of your property to a legal entity that is distinct from you. In other words, you separate yourself from your property, entrusting the property management to another person or organization. Thus, at least two people are required to create a trust, namely, the Settlor (the trust creator) and the Trustee (the appointed property manager or the trust administrator). As a rule, law firms are chosen as Trustees rather than private individuals even though the latter option is legal too. Any trust will also have a beneficiary or several beneficiaries. Normally, a third person (company, institution, or an organization of any other type) acts as the trust beneficiary but the Settlor can legally designate him or herself as the trust beneficiary. In other cases, the Settlor (who is also sometimes called the Trustor or the Grantor) can list him/ herself among the trust beneficiaries.

So, a prototypical trust will have three parties: the Settlor, the Trustee, and the Trust Beneficiary even though the minimum required number of people to form a trust is two because the Settlor can simultaneously be the trust beneficiary. Since a couple decades ago, a fourth party has started joining trusts when they are created, namely, the Trust Protector. This is a person, usually an attorney or a legal firm, that oversees the management activities of the Trustee. The Protector is also in a position to consult the Trustee and advise him or her on trust-related matters.

The duties and the scopes of authority that both the Trustee and the Protector have are specified in the Trust Deed that is the document that legally establishes the trust. So, when you create a trust and appoint the trustee, you have the power to decide how much authority the trustee is going to have and what guidelines he or she should follow in managing the trust property. You also decide how much authority over the trustee the protector is going to have and in what cases the latter can overrule the former’s decisions.

The popularity of the Trust Protector’s role began growing when well-to-do people from Europe and North America actively started to set up trusts in offshore jurisdictions. They often felt a bit uneasy about entrusting their property to law firms located in faraway island states sitting somewhere in the middle of the ocean. So they thought they needed an additional layer of protection, an intermediary between themselves and their foreign trustees. Some Trust Deeds give trust protectors overwhelming powers indeed. The protector can even be authorized to dismiss the trustee if he/ she finds it necessary.

So, when creating a trust, you assign the property management duties to another person or legal entity but you are not giving your property away. The Trust Deeds defines how exactly the entrusted property shall be managed by the trustee under the supervision of the protector. If you expect to derive an income from the property that you have put in a trust, the Trust Deed will also specify the principles of profit distribution. In other words, the document indicates who the trust beneficiaries are and what share of profits each of them is entitled to receive.

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Trust types

Trusts can be divided into types by different criteria. First, there are private trusts and corporate trusts. As the names suggest, a private trust is set up by a private individual (or a family) and a corporate trust is set up by a corporation. Private trusts are usually created for asset protection and inheritance purposes and businesses can have various goals.

Second, there are charitable trusts and purpose trusts. A charitable trust is created to sponsor some kind of charity and a distinctive characteristic of such a trust is that it is eligible to some serious tax reliefs in many jurisdictions. Purpose trusts are those that do not have beneficiaries. Rather, they are created for special purposes other than charitable purposes.

Probably, the most significant characteristic of a trust is whether it is revocable or irrevocable. If you set up a revocable trust (in Nevis, for example), you are entitled to make any changes to the list of assets that it holds. Depending on the Trust Deed specifications, you may be able to introduce the changes (add or retrieve property) at any time or after a certain expiration date. However, a revocable trust does not bring many advantages in terms of asset protection or tax benefits. This is because the trust property remains at your disposal both legally and factually.

If you would like to acquire the most powerful mechanism of asset protection, however, you should consider creating an irrevocable trust in an offshore jurisdiction. We will first dwell on the advantages of an irrevocable trust and later turn to the characteristics of an offshore trust.

When you create an irrevocable trust, you transfer your property to the trust once and forever: it cannot be revoked anymore. It may sound scary at the first sight but let us describe how an irrevocable trust can save you from creditors and actually preserve the property for you.

We wish you would never find yourself in a situation when a creditor files a lawsuit against you and you lose the case. But this may well happen statistically. The number of lawsuits annually filed in the USA, for example, exceeds a hundred MILLION, according to reports. These statistics look appalling indeed, as the total number of US citizens and legal residents is around 330 million people. Thus, every adult American files approximately one lawsuit per year. Believe it or not, there are a few countries in the world where the number of lawsuits per capita is even higher.

So what happens if the judge finds you guilty and you have to pay the creditor? You have to use all the financial resources available to you to repay the debt or you will go to jail otherwise. If you have a bank account – foreign or domestic – you will be obliged to withdraw money from it. If you own a business company – at home or abroad – you will have to use its assets to settle your debt. If you have some real estate registered in your name, you have to sell it too. The same goes for all other property that you possess and that is not in a trust.

But what if you have an irrevocable trust and especially one that is registered in an offshore country? You will be unable to use your property kept in a trust to repay the debt because it does not belong to you. Instead, the trust is the possessor of the property in legal terms. Because the trust is irrevocable, there is no legal way for you to repossess the property. The judge may also rule that you make the trustee relocate the trust to your home country because once it is at home, it would be easier for the local authorities to seize the trust property. But in accordance with the Trust Deed, you have no power to make the trustee relocate the trust to another country. Moreover, the trustee doesn’t have the power either as he/ she is bound by the trust deed and the offshore country’s trust-related legislation.

Offshore trusts

Previously, the word ‘offshore’ had some negative connotations. Today, offshores are not associated with tax evasion and money laundering any longer. Why? Because due to serious international campaigns, it has become impossible to evade taxes and launder money through the use of offshore jurisdictions. Thus, in the contemporary language ‘an offshore trust’ is not more than ‘a foreign trust’. This said, however, some foreign countries offer certain advantages related to trust establishment that may be unavailable in your home country. The Cook Islands, for example, are well known for providing efficient protection of assets kept in trusts established there by US citizens in particular. The legislation of the country defends the trust settlors’ rights rigorously and the US authorities have hard times trying to seize the property that is kept in Cook Islands-based trusts.

An offshore trust can protect your property not only from creditors but from greedy relatives too. Did you know that in Italy 100% of commonly owned property goes to the wife in case of divorce? No wonder, the services of psychologists specializing in working with divorced males are in high demand in the country. Setting up a trust is an option to consider just in case your married life goes wrong. Divorce is a common thing especially in the western world.

Another important advantage that an offshore trust has is the tax exemption. If you register a business company in a foreign jurisdiction to make it the owner of some property, a corporate tax is usually due. This is not the case with a trust. Let us repeat, however, that the trust beneficiaries are taxable on the income that they derive from the trust. Please do not think of a trust as a tax avoidance instrument because it is not.

Besides, an offshore trust can bring you a wider spectrum of investment opportunities if you would like to participate in some investment projects in foreign countries. You can use your offshore trust to make investments all around the world. The profits are not taxable until they remain with the trust: the taxes are due only when the profits are distributed to the trust beneficiaries.

In any case, when preparing for creating an offshore trust, you should always consider applying for professional assistance in the matter. There are a number of various little things to make a note of and trusts come in different subtypes. The type of offshore trust that you personally need depends on your main objectives.

The choice of foreign jurisdictions where you can open a trust is also wide. In addition to Nevis and the Cook Islands that we have mentioned above, we suggest that you should look into the opportunities to create trusts in Anguilla, the Bahamas, Singapore, or Switzerland. Please contact us if you would like to find out what other options may look attractive.

How to create an offshore trust

The process of setting up an offshore trust contains the following steps:

1. Choose the country where you would like to create a trust.
2. Follow the documentation requirements that are in force in the country of your choice. You will have to supply the information about the trust purposes and the trusted property to the national trust registration authorities, as well as the personal data of the trust settlor(s) and beneficiaries. In addition, you have to draft the Trust Deed.
3. Register the trust in the jurisdiction of your choice.
4. Appoint the Trustee. We cooperate with several law firms in several different jurisdictions that specialize in providing trustee services to foreign investors. We would be happy to advise you on this matter.
5. Hire an attorney who will turn your Trust Deed draft into an official document.

Now when you have a foreign trust, the Trustee is in charge of managing the trust property including making investments, writing checks, making payments, and so on. If you also appoint a Protector, he or she (or the legal firm) will supervise the activities conducted by the Trustee and provide recommendations on the trust property usage.    

You can decide to what degree you want to be personally involved with the trust business. This will depend on whether you are a (the) beneficiary of the trust or not, first of all. Secondly, the type of your offshore trust (revocable or irrevocable) will affect the degree of your personal involvement with the trust business.

Not everyone needs an offshore trust. But if you do, you are welcome to apply for our assistance in setting one up.