Offshore trusts provide for asset safety and protection thereof from both foreign courts and greedy relatives. Although an effective instrument at first glance, offshore trusts and legal purposes thereof require thorough understanding and careful treatment to efficiently use trust structures for achieving your goals.
Seen as a flexible asset holding and protection system by many foreign investors and HNWIs, an offshore trust is by far not the same for US nationals, who should carefully study all the related legal aspects to avoid open communication between offshore trusts and US residents. If the advice is ignored, they may experience multiple issues with both offshore trust bank accounts and general jurisdiction courts.
Understanding an offshore trust concept is important to decide where to set up an offshore trust. Besides, you’ll get a clear idea of trust benefits for their grantors as well as potential traps and pitfalls for US investors.
Setting up an offshore trust or company is safe and easy with the International Wealth assistance. You are welcome to contact the International Wealth experts for a free initial consultation on the subject. We will be happy to supply you with any related turn-key services you may require and spare you any potential issues so that you’ll succeed with establishing your offshore trust.
on offshore structures and jurisdictions
that would best meet your
asset protection goals.
on offshore structures and jurisdictions that would best meet your asset protection goals.
Offshore trusts in a nutshell
The following 2 offshore trust types can come handy to protect your assets:
- Revocable trusts that are used for estate planning and asset protection. All assets held in trust may be revoked by the owner thereof, either anytime or as agreed by the parties. Trust contract duration is subject to change as well.
- Irrevocable offshore trusts that are good to thoroughly protect assets from any outside attacks and encroachments. As provided for by the corresponding agreement, an irrevocable offshore trust may be neither modified nor revoked.
Offshore trusts are set up in the safest and most comfortable jurisdictions, with Nevis and the Cook Islands among them. Once a trust agreement is made, all the beneficiary’s assets shall be placed into trust, regardless of how many beneficiaries the trust has. Title thereto belongs to them no longer. The assets (be it accounts, moneys, securities, real estate, or anything else) are managed by the grantor holding the office as of the Trust Agreement date.
NB: most often, offshore trusts are self-settled, with their grantors and beneficiaries being the same. A trustee is typically a disinterested party that is either an offshore company or a foreign citizen. In case an offshore trust is set up by any US residents, the trustee shall have no US affiliation or office therein.
Advantages of trusts for offshore asset protection
Offshore trusts prove most effective for movable asset protection, regardless of what exactly such movables are. Here belong monetary resources, bank accounts, shares, securities, business interests, etc. Where real estate is put in trust, the resulting protection is not as effective, with any real estate units subject to the laws of the jurisdiction where they are located and not the trust laws of the incorporation jurisdiction.
With this in mind, offshore trusts are still the best solution to protect assets outside your tax residence jurisdiction or permanent residency. With US trustmakers, it is crucial that all the beneficiary’s assets be placed into trust of non-US citizens or trustees with no business presence in the US. This way, legal disputes with creditors can be avoided by disposing of the assets and placing them in a jurisdiction beyond the US judiciary reach.
Offshore trust benefits are as follows:
- protecting capital from attachment by foreign courts and attacks by relatives
- maintaining control of bank accounts after the capital has been put in trust
- transferring trust assets between LLCs and trusts in multiple jurisdictions, e.g., the Cook Islands and Nevis
- tax planning and 100% offshore tax immunity
- dismissing or not accepting foreign judgments or the said judgments being challenging to enforce.
The main offshore trust benefit is that the grantor is neither the asset beneficiary nor the holder thereof. In this situation, no legal redress in the grantor’s regard applies to trust assets. This way, efficient asset protection is achieved, be it from creditors, relatives, or foreign courts.
Best jurisdictions to set up offshore trusts and protect your assets
Below, you will find the list of states and offshore zones to set up a trust and protect your capital:
- Cayman Islands
- Saint Kitts and Nevis
- Cook Islands
- Bahama Islands
- Isle of Man
- British Virgin Islands
- Republic of Seychelles
- Saint Vincent and the Grenadines.
Although their number is high, you won’t find absolute confidentiality everywhere and holding assets with no danger of foreign court intervention is not 100% guaranteed.
The best options open to HNWIs and corporations today are the Cook Islands and Nevis. The governments of both Nevis and the Cook Islands secure a high asset protection level for trust grantors without violating any international law provisions.
Cook Islands Asset Protection Trust
The Cook Islands is among the few jurisdictions with a highly-developed statutory framework encompassing effective asset protection provisions.
No unrelated third parties are allowed in local asset protection trusts as trust protectors, trustees, and trust advisors. A trustee with no beneficial interest in trust assets is fully responsible for offshore trust management.
Setting up a Cook Islands offshore trust comes with essential benefits:
- As provided for under the jurisdiction’s corporate laws, foreign judgments are dismissed and not enforced in the Cook Islands as far as debt collection is concerned in case of trust UBOs.
- No information as to grantors may be shared with any third persons in the Cook Islands.
- In the Cook Islands, foreign creditors have 1 year to prove fraud as far as creating trust over assets is concerned.
- Creditors have no authority to collect unpaid debt from a trust or interfere with trust asset management. The same applies to foreign courts. The latter are not authorized to compel offshore trustees to take any actions in the Cook Islands with trust assets involved.
- Assets that may be put in trust include any property and financial holdings, including, inter alia, investments, securities, real estate, and accounts.
- With the Cook Islands being a distant location, foreign investors are seldom encouraged to travel that far to file their claims, and it is impossible to submit evidence and contentions online.
With their sound business reputation, the Cook Islands enjoy foreign investors’ trust that applies to local banks as well.
Nevis offshore trust
In terms of asset protection, Nevis offers more reliability as compared to the Cook Islands. Nevis comes with several important benefits for foreign offshore trust grantors:
- Any assets may be placed into trust in Nevis.
- Nevis offshore trust grantor and beneficiary may be the same.
- Offshore trusts are set up for an unlimited time period in Nevis.
- Nevis courts dismiss foreign judgments, and creditors are only allowed to submit their claims through Nevis competent authorities.
- The limitation period set for foreign creditors in Nevis to prove offshore trust fraud is 1 to 2 years.
Supported by the International Wealth experts, you’ll set up a Nevis offshore trust with LLC literally in no time and with no risks involved.
It will cost you a ton of money and time to file a lawsuit in a Nevis court against an offshore trust. In Nevis, the tax to be paid by overseas claimants to make it possible is USD 100,000. Where your evidence is found insufficient by a Nevis court, your deposit won’t be returned. In the above case, foreign creditors are obliged to pay their legal costs in Nevis.
Useful tips for US and other investors to successfully avoid any potential offshore trust pitfalls
An offshore trust is a complex structure but not all foreign grantors realize how complex offshore trusts are in reality. High asset protection level is a sheer temptation for way too many and potential grantors hurry to set up a Nevis, Cook Islands, Belize, or any other offshore trust without going into the specifics and pitfalls thereof.
It is a wise idea to think things over and plan ahead to set up a trust offshore, like in Nevis or the Cook Islands. Expert advice will come useful to study trusts and their significance in depth.
Asset types protected by trusts
An offshore trust is an effective instrument to protect bank accounts, securities, and corporate entities. At the same time, they are of little use for bankruptcy cases or foreign real estate.
Where houses, land plots, enterprises, residences, or commercial facilities are located in the US, for instance, they are subject to powers of foreign (US) jurisdiction courts. The fact that the property is owned by an offshore trust does little in this case. The court will reserve the right to control the debtor’s capital, as the assets remain within the foreign court’s jurisdiction.
Offshore trusts and bankruptcy issues
An offshore trust is the primary choice for many grantors since foreign courts often have no jurisdiction over offshore trustees. This is the case with the Cook Islands, where any bankruptcy cases are governed by common law principles and no stripping of bankrupt’s assets is allowed.
Like everything else, offshore trusts have their flipside. Take a look at the 2 US scenarios with the same initial conditions but varying outcomes:
- Where US creditors seek debt collection, and the debtor’s assets were partially placed into an offshore trust, US courts have no jurisdiction to collect such assets from the offshore trustee and may only use limited remedies to enforce US court orders.
- Where the debtor files for bankruptcy in the US, all their assets shall be surrendered to the bankruptcy trustee. Bankruptcy courts have worldwide jurisdiction, and no refusal on the part of foreign courts to comply with US civil court orders will ever stop them. Where the debtor refuses to independently repatriate the assets to the US, they will be compelled to. There are multiple ways to do it, including, inter alia, direct contempt charges or the debtor’s remand in custody. The grantor may either transfer their trust interests to the bankruptcy trustee under the US bankruptcy litigation procedures or be subjected to administrative or penal sanctions in their home jurisdiction.
To avoid establishing a precedent, the International Wealth consultants recommend you set up an offshore trust and place your assets into trust long before filing for bankruptcy. You should keep no affiliation with your offshore assets, either directly or through an LLC. A would-be bankrupt may not be associated with either the trust itself or any assets held in trust in order to prevent any brush with the law.
Intent and contempt with offshore trusts
The above subject indirectly deals with bankruptcy and court proceedings for intentional fund transfers in trusts. Where this is the case, the court may bring contempt charges, with all the ensuing consequences.
The court is not authorized to file charges against the defendant where it is impossible for the latter to comply with the court order and the defendant invokes the impossibility of compliance. Creating the impossibility by intent will result in a major litigation, whereby the defendant may potentially be taken into custody.
Here is an example to illustrate the above:
- The debtor is aware of their liabilities and uses an offshore trust to protect the remaining assets either shortly before or during the litigation.
- The court demands that the debtor unwind the offshore trust plan and bring back the transferred assets.
- The debtor claims the impossibility of compliance, as the trust is controlled by an offshore trustee.
- The court disallows the impossibility defense and issues a contempt order as the impossibility is the debtor’s own making.
FYI: It is a standard practice for US federal courts to deny any impossibility defense in offshore trust cases where the matter concerns assets held in trust.
Trustees and their functions
You should remember that a trustee and the things they are in charge of are extremely important when setting up an offshore trust, especially as concerns the asset protection level. The trustee controls the beneficiary’s offshore assets and thus shall possess all the corresponding personal and professional qualities:
- have the related industry experience and professional skills
- be well-informed and knowledgeable about offshore trust administration issues
- be able to navigate through challenging situations, including, inter alia, disputes with foreign creditors.
The record shows, finding a trustee with all the above qualities is highly challenging. You are about to transfer all your money and assets to a stranger or a company you are not familiar with. In this situation, it is natural to be willing to keep control of the management and substitute the trustee should it become necessary to do so.
NB: US residents that maintain their offshore trust administration powers, including inter alia powers to substitute the trustee bear certain legal risks. Thus, a US court may use the above legal gap to substitute the trustee for its own creditor agent. Similar risks arise where a person falling under US court jurisdiction is appointed as a trustee.
Offshore trust bank accounts
Another common misbelief shared by foreign investors and offshore trust grantors is that money in offshore trust funds is protected right after an offshore trust bank account is opened and the assets are deposited therein. Strangely enough, almost everyone is sure, the said offshore accounts are out of creditors’ reach and the creditors won’t be able to encroach on the above accounts even if allowed to do so by the court, as the bank has no corporate presence in the US.
This is how the things are in reality:
- Most major overseas banks do not accept US nationals as customers. The trend became even more obvious due to certain treaties between the US government and multiple states including those made under FATCA/CRS. With the latter signed, confidentiality as to the US resident accounts is practically non-existent.
- You should know that a personal account with an offshore bank does not protect your assets. It is taxed by your country of residence and will be recorded in almost all reports and documents. Bank customers themselves undergo all KYC procedures, their identity is known to the bank and may be disclosed if so requested by foreign regulatory, tax, and inspection authorities.
- To safely transfer your funds to an offshore jurisdiction and enjoy adequate protection, you’ll need to incorporate an offshore LLC or an offshore trust first. It is only then that you shall open a bank account in the name of a foreign body corporate through your LLC manager or offshore trustee.
In the latter case, the grantor has no direct access to offshore trust financial accounts. The trustmaker may still request that the trustee make a corresponding payment. The payment may also be made under any of the following schemes, please refer to the article below: How to Withdraw Money from an Offshore Bank Account – Legal Schemes in 2022.
Offshore trust taxation in US
Let’s discuss tax liabilities for trusts and offshore companies as these are the hottest issues for US residents.
Things to remember are listed below:
- Offshore trusts are not an effective instrument for income tax planning in the US. Using them, you won’t be able to reduce your US tax load or totally avoid paying US taxes.
- Internal Revenue Service treats an irrevocable trust as a grantor trust for taxation purposes.
- Grantor trusts are offshore structures whose taxable income is reported by the grantor. In layman’s terms, these trusts are disregarded for tax purposes in the USA and their income, including, inter alia, trust capital gains, shall be reported by the grantor on their tax return. The taxation regulations above apply to the US residents regardless of where their assets are.
- In the US, both offshore trust beneficiaries and grantors shall comply with IRS reporting requirements for offshore trustees and beneficiaries.
The conclusion follows, to protect their assets by setting up an offshore trust and putting them therein, US residents can decide in favor of Nevis and the Cook Islands. However, they should proceed with caution when choosing a trustee and an offshore company owner. Appointing dependent persons with neither direct nor indirect affiliation with the US economy is seen as the best decision.
Offshore trusts summed up
If in need to set up an offshore trust, consider Nevis and the Cook Islands. The above jurisdictions are the best for the purpose. Depending on the grantor’s permanent residence the International Wealth lawyers and consultants recommend that the grantor carefully study all related statutory, tax, and banking provisions in the Cook Islands and Nevis neighboring states. US persons should proceed with the highest caution, including both US tax residents and any persons with business ties and interests in the US.
Setting up an offshore trust in a foreign jurisdiction like Nevis or the Cook Islands is a challenging business that may leave you at a loss. The International Wealth experts are here to get you out of trouble and answer any potential questions. You will receive all the services you need within the shortest time possible by contacting us at firstname.lastname@example.org.
How much will it cost me to incorporate an offshore trust?
Setting up an offshore trust in a foreign jurisdiction, e.g., Nevis or the Cook Islands, is an expensive way to protect your assets albeit a reliable one. With trustee fees, trust structure set up, and incorporation expenses summed up, the total expense will amount to USD 12,000 to USD 25,000 per annum.
What jurisdictions are the best to set up an offshore trust in?
The Cook Islands, St Kitts and Nevis, West Indies, several US states, and Belize are among the most popular jurisdictions for offshore fund incorporation. Each country comes with its own trust legislation developed to make asset protection as efficient as possible. Nevis and the Cook Islands are considered to be the safest jurisdictions as they disallow foreign court decisions and protect trust assets from creditors.
How are offshore trusts taxed in the US?
Offshore trust tax treatment is pretty specific in the United States. You should consult a certified public accountant (CPA) experienced in offshore trust taxation to be sure your assets are adequately protected in an offshore trust, be it a Nevis Offshore Trust, a Cook Islands Asset Protection Trust, or any other analogous structure. A brief concluding remark, any person with US business ties will have tax liabilities on their bank accounts, including, inter alia, offshore trust interests.