An offshore trust is an estate planning tool that can be used for asset protection. It allows an individual to transfer assets into the control of a legal entity based in an offshore jurisdiction. Once transferred, the trust owners cannot reclaim ownership, and alteration or revocation of the trust is not possible. It is important to note that offshore trusts can be both costly and complex. However, for those who have concerns regarding liability, these trusts offer privacy, protection, and potential tax benefits. It is advisable to seek the guidance of a knowledgeable financial advisor or wealth solutions firm like Morgan Stanley, Wells Fargo, or Ora Partners to navigate the intricacies of this process.
Offshore Trust Basics
Offshore trusts are irrevocable. Both offshore trusts and domestic trusts are used in estate planning and protect assets from being claimed by litigants or creditors who won damages in tort lawsuits. Similar to domestic asset protection trusts, offshore trusts allow estate planners to avoid costly and lengthy probate processes.
Offshore trusts are based outside the jurisdiction of the United States. Being offshore adds an extra layer of privacy and protection, as well as the ability to manage taxes.
For example, because the trusts are not based in the United States, they do not have to follow the judgments of U.S. courts. It makes it more difficult for litigants and creditors to pursue claims against assets in offshore trusts.
Similarly, domestic trusts have more reporting assignments than offshore trusts. It’s a lot more difficult for third parties to find the assets and owners of offshore trusts, which aids privacy.
In order to set up an offshore trust, you need to select a foreign country in which to establish the trust. Some popular locations include the Cook Islands, Nevis, Belize, and Luxembourg. These countries have favorable privacy and tax regulations.
Once the country is selected, the next move is to choose a trustee. For asset protection, an offshore trust has to be managed by a non-U.S. citizen acting as trustee. It is generally a company based in an offshore location.
When setting up the trust, draw up all the necessary trust documents, including the deed of trust describing the distribution and use of assets placed in the trust. It requires an estate planning attorney.
Finally, transfer your assets into the trust. Trust owners can first create a limited liability company (LLC), transfer their assets to the LLC, and then transfer the LLC to the offshore trust.
Limitations of Offshore Trusts
Offshore trusts can be useful for asset protection and asset planning, but they have limitations. Offshore trusts are irrevocable, so asset owners cannot reclaim the assets.
At the same time, assets in an offshore trust are not completely invulnerable to claims by U.S. litigants and creditors. However, being in a foreign country does make it costly and difficult for others to pursue claims against assets in offshore trusts. It tends to discourage attempts to collect debts and damages from the trust.
Also, while trusts can help reduce taxes, U.S. citizens cannot escape all taxes. Earnings by assets in an offshore trust are free of taxes. However, U.S. beneficiaries who receive distributions have to pay income taxes on the distributions.