What Benefits and Risks Are Associated with Setting Up an Offshore Trust?

A large number of our readers have expressed interest in learning more about offshore trust formation over the recent time. In particular, many of you would like to know what disadvantages foreign trusts have and what risks can be associated with creating a trust abroad.

The benefits of a trust are numerous and we are going to remind you about them below but we will start with the risks that you may encounter when setting up an offshore trust.

Risks associated with foreign trusts

One of the most important issues to consider when you are pondering the opportunity to create a foreign trust is the choice of the country where the trust is going to be registered. Different jurisdictions will offer different conditions to foreign nationals setting up trusts there. This concerns both the efficiency of asset protection and the level of personal information confidentiality.

The first thing that you have to realize is that not all countries allow creating trust but many of them do. If you choose to establish a trust in a jurisdiction that practices Common Law such as Great Britain or the United States, for example, you may face the following main disadvantages:

Regular trust disadvantages:

• Trusts are regulated by national laws. In some instances, the trust property can be confiscated by a court decision. This may happen if a creditor files a lawsuit and wins or if the trust settlor declares bankruptcy.
• You cease to be the legal owner of the property when you put it in an irrevocable trust. If your life changes dramatically at some point, you might regret the decision to put property in a trust that you made several years ago.
• In some countries, the trust settlor cannot simultaneously be the trust beneficiary. If he or she is, the property is considered to be owned by the trust settlor and therefore, it is not protected by the trust legislation.

Benefits of setting up a trust in a foreign country

The main advantages of a trust as an instrument of asset protection are listed below:

• Confidentiality of the assets kept with a trust and confidentiality of the trust founder’s identity. In some offshore jurisdictions, public registers do not contain this information and according to the documents, the property belongs to the trust. You have to realize that there are some important differences between onshore and offshore trusts as far as the information confidentiality is concerned.  
• Tax exemption that the trust enjoys. Tax liabilities occur when the profit is distributed to the trust beneficiaries or when the property is inherited. Until that time, there are no tax obligations for the trust. There is one exception, however. Foreign real estate that is part of the trust property can be taxable in accordance with the regulations of the country where the estate is located.
• Inheritance planning. You can use a trust as an alternative to a will to hand your property down to your heirs. This instrument allows avoiding arguments between the heirs and court hearings. With a trust, you can be very flexible and choose various methods of inheritance. For instance, you can specify the date when an heir can come into property possession or assign lifetime alimony to another heir through the trust. As far as inheritance planning is concerned, a trust has benefits that a will doesn’t have. 
• Protection of assets from creditors and foreign courts of law. Trusts set up in Nevis, the Cook Islands, and Belize will suit this purpose especially well. These jurisdictions disregard court decisions made in other countries and when the plaintiff wants to lay a claim, he or she has to pay a considerable sum of money beforehand. An irrevocable trust in one of these jurisdictions will bring you maximum asset protection. Because you are no longer the owner of the property (it officially belongs to the trust), it cannot be expropriated from you. Even on the basis of a court ruling.
• Protection of assets from greedy relatives and ex-spouses. Similarly to protecting your assets from creditors, your offshore trust can safeguard them from mean relatives and angry ex-spouses. You have to think diligently how to word the Deed of Trust to achieve this goal in the most efficient manner.
• Capital accumulation via your offshore trust. Your trust can own commercial companies, open bank accounts, and participate in international investment projects. You can use it to accumulate incomes from different sources and then distribute the profits to the trust beneficiaries in accordance with the conditions spelled out in the Deed of Trust.
• Protection from political risks. The world seems to have lost stability. Sanctions and reverse sanctions are affecting a great number of people and businesses. When is the best time for geographical asset diversification? It is now and you can do it with an offshore trust.
• Universality of the asset protection mechanism. You can put any kind of property in a trust including financial assets, real estate, business companies, securities, intellectual property, and so on and so forth.

Trust advantages and disadvantages for business operations

You can use an offshore trust for asset protection but you can also use it to conduct business operations. If this is your intention, you need to create a discretionary or a unit trust. A corporate trust can bring certain tax benefits but some risks are also associated with this sort of business structure. These can occur due to some specific requirements concerning profit distribution to the trust beneficiaries.  

The profits need to be distributed annually, which can make the company management a more challenging task. Besides, a corporate trust is not the most efficient fundraising instrument either. Potential investors would probably be more attracted to an offshore company than an offshore trust.

Trust advantages for corporate purposes

A trust is a rather complicated business instrument but if you fine-tune it properly, you can successfully manage your companies located in different parts of the world and obtain good profits from their operations. If you link an offshore trust to an offshore company, you will gain access to the following business-related advantages:

• The profits can be distributed at the discretion of the Trustee who acts in accordance with the guidelines specified in the Deed of Trust. An offshore company Director is less flexible in this matter as he or she has to follow strict rules in distributing profits to the company shareholders.
• The trust beneficiaries are taxable at the rates applied in the countries of their tax residency. If these rates turn out lower than the rates applied in the country where the profit is made, setting up a trust will allow saving on taxes.
• An offshore trust is a more confidential business structure in comparison to an offshore company. This goes for both the trust beneficiaries and the property kept in a trust.
• Trust beneficiaries are not the owners of the trust property. This provides for protection from foreign court decisions and creditors. There is an exception to the rule that you should be aware of, however: if a beneficiary of a unit trust goes bankrupt, the creditor may gain access to the bankrupt beneficiary unit via the Trustee.

Risks involved in creating a corporate trust

You may have good reasons to ponder opening a corporate trust in an offshore jurisdiction. However, you should take into account some challenges that you may face if you choose to do so. The main challenges include the following ones:

• Trust registration and maintenance costs are higher than the costs of registering and maintaining a foreign company.
• If the trust is liquidated or some changes to its structure are introduced, you may have to pay the capital gains tax and/ or the stamp duty.
• It’s difficult for a corporate trust to qualify for a bank loan. Many banks are reluctant to give loans to trusts.
• Profits can be distributed via a trust without much trouble but in some cases, you will have to pay the taxes without being able to deduct the trust maintenance costs from your tax base. 
• Trusts have to distribute profits to the beneficiaries every year. If this does not happen, the Trustee will have tax liabilities for the undistributed profits. 
• The Trustee can have personal liability for the debts that the trust makes if such is the condition specified in the Deed of Trust. However, if the Trustee is not a natural person but a corporate entity, its liability can be limited.

Trusts in Europe and offshore: their comparative advantages and disadvantages

If you would like to make use of some trust benefits, you have to realize that different kinds of trusts serve different purposes. Depending on your primary objectives, you may want to create a trust in an offshore or an onshore jurisdiction. Below please find descriptions of the available opportunities:  

• If you are interested in setting up a trust to protect your personal assets, to control an offshore company, or to plan inheritance, then you should opt for an offshore jurisdiction. Legislations in Nevis, Belize, and the Cook Islands provide the most efficient asset protection from foreign court decisions. The trust settlor and beneficiaries’ identities are also well protected there.
• If you would like to lessen your fiscal burden, make a profit by entering international investment projects, or make regular allowances to one of your dependents, then you should consider setting up a trust in an onshore jurisdiction. You can consider such places as Nevada in the USA, Singapore, the UAE, or Great Britain.
• You have to remember that real estate kept in a trust is governed by the regulations of the national state where it is located. You have to take this fact into account when planning to set up a trust and put some real property there.
• If you would like to manage an offshore company via a trust, you have to calculate all the costs involved including those that you will incur when registering the trust. It might happen that the tax reductions that you can obtain are not going to compensate for the trust establishment and maintenance costs.