16 August 2020
Everything You Should Know
What is an offshore trust?
Trusts are a popular and effective tool for owning and managing assets. It is based on an agreement established between three parties: Settlor, Trustee and Beneficiaries and allows one party to transfer their assets to a legal entity (the second party) for the benefit of a third party, the beneficiary.
The first two parties sign a document known as a “Deed Trust” where their responsibilities and rights are defined. The Deed Trust is also a guide on how the assets should be used and distributed.
In most cases, the individuals who create the trust can also include themselves as a beneficiary.
How do offshore trusts protect my assets?
When the Settlor decides to create a Deed Trust he appoints a trustee who receives title to the Settlor’s assets, becomes the owner of the property and is obligated to manage it in accordance with the rules contained in the Deed Trust.
This ensures the protection of your assets even in the case of a court judgment and/or an order to return your financial resources.
Your property placed in the trust won’t be affected and cannot be touched, because legally speaking it is no longer your asset. The judge in your country cannot compel a foreign Trustee to release assets in their jurisdiction. Additionally, the legal proceedings between two different jurisdictions are usually suspended because the costs are extremely high.
Types of trust:
Depending on your financial goals, tax plan and purpose in setting up a trust, you can choose from several types of trusts e.g: private, charitable, corporate and purpose.
1. Private Trust – is created for the interest of individual beneficiaries and can have various forms e.g:
- Discretionary: usually used for asset protection, it is very flexible and provides a guide for the Trustee with instructions on how to manage the trust.
- Maintenance: this type of trust is arranged when the beneficiaries are minors. It contains regulations on maintenance funds and income until they attain a certain age.
- Life Interest: (known also as Interest in possession) – allows the principal beneficiary to receive income and capital from the offshore trust through his lifetime. The trustee discretion in the disposal of the trust fund will be limited.
- Fixed interest trust: provides an accurate indication of who should benefit and also how they will gain from the trust. The Trustee therefore has very little, if any, discretionary power reserved for him/her in relation to who can benefit from the terms of the trust instrument.
2. Charitable Trust – this irrevocable trust is created for the benefit of a charitable organization and can be made in the form of a remainder trust or lead trust.
A Remainder trust is managed by the charity for a set period of time and the charity receives all the interest generated by the assets.
In a Lead trust, the Settler has full control and any interest generated is split between the charity and the Settlor’s beneficiaries.
In some jurisdictions, such as the United States, charitable funds can receive a favorable tax relief. Moreover, property and donation taxes are much lower when the trust expires and passes to the Settlor’s heirs.
3. Corporate Trust – refers to any trust created by a corporation. Businesses can use a corporate trust to fund pensions, fund employee benefit trusts, secure a bond or other debt security, or manage funds allocated and the processes used to access these funds.
4. Purpose Trust – it is a particular type of trust which can be formed to hold assets for a purpose without conferring a benefit on any specific person. An example of such a purpose can be the preservation of a family home or hold highly regulated assets such as firearms or registered aircraft, etc.
Characteristic of trusts:
Before you decide to create an offshore trust, you should know the key features of the trusts and choose if you want the trust to be irrevocable or revocable.
Irrevocable trust: may not be changed or canceled by Settlor at any time. Once a trust has been created and assets have been transferred by the Settlor, it is not possible to reverse what has been established. The Settlor cannot demand that the trustee return the assets. Irrevocable trusts remove the assets from the benefactor’s taxable estate, meaning they are not subject to estate tax upon death and they also relieve the benefactor of tax responsibility for any income generated by the assets.
Revocable trust: can be changed or even canceled by the Settlor at any time or after a specific date. The owner of the trust retains a high level of control, but his assets are not protected from creditors in the way they are in an irrevocable trust. If he/she is sued, the assets of the trust may be required to be liquidated in order to settle claims arising from the judgment.
Who is involved in a trust and what are its duties?
As you already know, the Trust involves three parties who have specific rights and obligations. The most common structure includes: Settlor, Trustee, Beneficiary and optionally a Protector. Below we will explain who is who in offshore the Trust and what he/she is responsible for.
A Settlor (also called ‘Trustor’ or ‘Grantor’) is the person who creates the offshore trust. He/she must establish the decision to set up a trust, clearly identify all the beneficiaries (which may include the Settlor) and appoint the rights and duties of the trustees.
A Trustee is the second party, usually a legal entity, which is responsible for holding, managing and protecting the Settlor’s assets. The Trustee must follow the terms expressed in the Deed of Trust, defend the trust against debtors, act impartially towards the beneficiaries, keep them informed and act in their best interests.
The Beneficiaries are individuals or organizations that the Settlor designates to benefit from the trust. The Settlor can include himself, his family (such as spouse, children, grandchildren or even great-grandchildren which are born after his death) or unrelated parties like friends, public institutions, religious organizations, charities etc.
Once an adult beneficiary receives the asset located in the trust, he is free to use it how he wants eg. Sell any property, assign it to someone else, release it etc.
The Protector is an individual or a company appointed in the Deed trust and his task is to supervise the Trustee, ensure that the offshore trust asset is managed properly and (in some cases) replace the Trustee if needed.
The powers of the Protector vary and depend on the terms in the trust agreement and the laws of the trust’s jurisdiction. However, the Protector usually has the power to add or remove beneficiaries, approve changes, propose trust distributions, remove and appoint a Trustee and nominate a replacement Protector.
How to choose the right Trustee and the best jurisdiction?
Offshore Trusts are mostly administered by professional trustees located in the chosen jurisdiction. When choosing the Trustees, the Settlor must ensure how they are regulated, how easy they can communicate and if they completely understand the Settlor’s aims, objections and expectations.
While determining which jurisdiction is the best for your offshore trust, you must take into account your individual goals, the citizenship of your beneficiaries, stability of the country where the trust will be located and the tax regulations.
One of the most popular jurisdictions are: Cook Island (which has repeatedly stood up to US courts in asset seizure cases), British Virgin Islands, St. Kitts and Nevis, Cayman Island, St. Vincent, Bermuda, Seychelles and Barbados.
Why should I create an offshore trust and what are the advantages?
An offshore trust is a great tool for estate planning and retirement. It is also the strongest legal structure available to protect your assets from creditors. The important thing is to be aware that you cannot wait until someone takes legal action against you and then create the trust ‘just in case’. If you want to be protected you must set up the trust long before any judicial measures are taken against you.
The key benefits of offshore trust are:
- Asset protection offshore trusts are designed to protect the property when the owner is accosted by creditors. Cook Islands for example, requires a “beyond all doubt” standard, similar to criminal trials in the United States.
St. Kitts and Nevis requires creditors to pay $25,000 in cash before filing a lawsuit.
- Tax benefits if you place your trust in one of the tax-free jurisdictions, the asset won’t be subject to local taxes such as interest income or capital gains. Additionally, after your death, your offshore trust will be completely separated from the tax system in your country, which can save it from high property taxes and thus leaving more of your assets for posterity.
- Increased Investment freedom this is an advantage that mainly benefits Americans who are often required to pay special taxes on their foreign investments while dealing with foreign exchange and capital controls, or are completely prohibited from making particular investments. Once the Deed Trust is signed, the assets are no longer under U.S. jurisdiction and therefore the Settlor is free to partake in investments that he/she may not have been able to before.
What is the difference between offshore trust and domestic trust?
Both of these vehicles have a related base and the same purpose – to protect the Settlor’s assets. The biggest difference between them is that an offshore trust is not physically tied to your country of citizenship and it is no longer under the legal jurisdiction of this court system, which offers full asset protection.
If you would like professional advice on how to create an offshore trust and choose the jurisdiction that best meets your needs, please contact our team.