26 May 2022
A guide to the benefits of setting up an offshore trust
There are four main benefits offered by trusts in general – and offshore trusts in particular, depending on the laws of the land where the trust is set up. The following offers a general guide to the main benefits of offshore trusts.
Asset Protection is the main benefit of any trust. This is thanks to protection from litigation to do with any legal dispute – from divorce proceedings to creditor lawsuits.
An offshore trust offers the same benefits as a domestic trust, only under the laws of a foreign country with potentially far more asset-protection-friendly laws. As such, the setting up of offshore trusts has long been a strategy for both global financial freedom with superior asset protection.
It still is – provided the foreign laws that will govern the trust and the protections the trust offers, are more favorable than domestic laws.
Offshore trust-friendly jurisdictions help to further protect assets by making it very difficult, if not impossible, for anyone to sue the trustees.
- Very short ’statute of limitations’ times that can nullify claims not submitted within two years or less for some jurisdictions.
- Cash bonds allow claims to be brought before the court within the jurisdiction.
- Claims to be physically submitted through local courts, by the complainant.
Global Wealth Management
Related to this are a number of other wealth management and investment advantages offered by offshore trusts. Doing business through a trust set up in a non-US jurisdiction may offer greater financial freedoms. There may be opportunities to invest that are not otherwise available in the US or for US citizens.
The Tax Benefits of Offshore Trusts
It’s important to note here that the ‘traditional concept’ of an offshore trust as a way to hide money from the IRS does not form the basis of what an offshore trust can offer in 2022. Rather, it’s based on the true nature of an offshore trust: that it is subject to the laws of the country in which the trust has been set up, and where the trustees reside.
As an American, or US citizen, you are liable for taxation based on your citizenship. Therefore you are liable for taxes on global income even if you do not reside in, or do business in the US. This remains the case if you are a citizen of another country while maintaining dual citizenship with the US. Double taxation can therefore impact heavily on the value of your estate, the accumulation and movement of assets, and overall income tax liabilities.
If you are a high net worth individual, it can also make you and your inheritors liable for US Federal Estate Tax – purely by virtue of your citizenship.
Setting up an Offshore Trust can help you legitimately defer or reduce tax liabilities – depending on the type of trust, how it is set up, where, and the management terms of the Trust Deed.
However, Foreign Trusts can protect wealth – but they may not mean ‘No Taxes’…
If you are a beneficiary of your trust, IRS and Global Reporting Laws require that both you and the financial institution you work with, report the income from the trust – though not necessarily the assets held within the trust – to the IRS.
Your trust may also become ‘domestic for tax purposes if you owe the IRS. In such a case, your trust may be subject to both US law and the laws of the country where the trust is located.
However, if assets are no longer, by legal definition, personal assets and are under ownership and management of the trustees, the only taxes owed would be by the trust to the local tax authorities.
General tax benefits offered by offshore trusts
- Favorable taxation laws along with the traditional avoidance of probate.
- Deferred estate or inheritance taxation with multi-generational family legacy trusts.
- Tax benefits of the global asset management offered by trusts. This is particularly true of offshore trusts in jurisdictions that promote financial freedom to attract capital and investments. All offer attractive tax laws and other financial regulations. These may include lower taxes on real estate investments and sales, lower local tax, and no, or far lower, taxes levied on the trust’s global investment and business income.
- Depending on the jurisdiction, favorable cryptocurrency regulations may include legal crypto – with no tax on crypto transactions.
Important points for setting up an Offshore Trust
Choose your offshore jurisdiction carefully, with the guidance of attorneys and experienced global financial advisors. They should be familiar with IRS reporting laws and US tax agreements with countries around the world. In 2022, some of the top jurisdictions for favorable tax laws and asset protection are the Cook Islands in the Pacific, St Kitts & Nevis, and Belize in the Caribbean.
Consider what setup and annual fees would be applicable in different offshore jurisdictions.
With experienced expert advice, choose the right type of trust for maximum tax reduction -e.g. an irrevocable trust that puts an Estate or assets held in trust, as well as income from then trust, under the legal ownership of the trustees.
You may be advised that the only way to avoid paying taxes to the IRS at all is:
To ensure that your wealth is not tied to the US and no real estate assets are located in the US.
To give up US citizenship and cut ties with America by applying for a 2nd citizenship – either in the same jurisdiction you wish to set up your trust, or another one with favorable tax and reporting laws with the country you choose to become a citizen of.
Setting up an offshore trust is the ideal antecedent move for both of the above.
Send us a note to [email protected] to learn more about offshore trust or if you need assistance setting up one.