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What is an Offshore Trust and How Does It Work?

Contributed by Luigi Wewege At Caye International Bank

The underlying purpose of international finance is to provide a broader range of opportunities to grow wealth. Along with establishing accounts like savings, time deposits, and checking accounts with offshore banks, the idea of creating an offshore trust is worth considering.

How does an offshore trust work, and why would you consider adding this resource to your overall financial planning? Here are some basics that will help you decide if an offshore trust would be the right choice.

What's Meant by an Offshore Trust?

An offshore trust is a trust account that a client establishes with an offshore financial entity. Further, the account is managed at an international location rather than a domestic one. Trusts are intended to protect and grow assets that ultimately come into the possession of a designated beneficiary or a group of beneficiaries.

What is an Offshore Trust and How Does It Work?

These types of trusts make it possible to provide for loved ones, charitable organizations, or other recipients once the originator has passed away. In some cases, the ability to draw from the trust may be delayed until the beneficiary reaches a certain age. Even then, the trust provisions may limit the annually withdrawable amount. Typically, the goal is to ensure that the recipient or beneficiary has a steady income source that lasts for years.

How Does an Offshore Trust Differ from a Domestic Trust?

In many ways, an offshore trust provides the same structure and function as a domestic trust. There are a few differences to note. The options for investing assets held in the trust are more varied than their domestic counterparts. In other words, the trustee granted control over the trust may utilize the funds to participate in foreign investments that are not available for use with a domestic trust.

Another factor to consider is the type of trust that can be set up in an offshore location. While there are exceptions, most are structured as irrevocable trusts. This means that once the trust is established, the originator has few legal options to change or dissolve the trust.

While not completely impossible, the process for doing so in many jurisdictions is complex. For this reason, it's essential to make sure the offshore trust is structured precisely as the originator wants and should include some provisions that would allow for changes in beneficiaries if certain events should transpire.

Privacy and Your Offshore Trust

One of the primary benefits associated with offshore trusts is the degree of privacy involved. The trustee and key personnel with the institution where the trust is established will have information about the originator.

Outside of this, most nations have laws and procedures in place that limit or prevent access to this type of data. The same holds true for information about the assets held in the trust. Unless there's a legal reason for access to the data, data is held in the strictest confidence.

The level of privacy that applies to an offshore trust is often more significant than a domestic trust. For example, domestic tax agencies may or may not have ready access to information about the trust. Instead, it's necessary to rely on information that the trustee supplies. The same cannot always be said about domestic trusts of various types.

Protecting Assets with Offshore Trusts

Offshore trusts do provide some degree of protection for any assets held. However, it's essential to understand that the amount of protection is often different from what you have with funds kept in offshore checking, savings, or time deposit accounts. With the latter, assets in those types of bank accounts are often protected from seizure by domestic courts and other entities.

What is an Offshore Trust and How Does It Work?

The assets held in your offshore trust may be more challenging to reach than those held in domestic trusts, but they may still be called upon to settle certain types of financial obligations. For example, the assets in your offshore trust are not protected from use if you file for and receive any personal bankruptcy protection. This is because bankruptcy courts have jurisdiction in most parts of the world.

If you file Chapter 7 bankruptcy, you must document all of your assets, including those in offshore accounts. All or at least some of the assets held in an offshore trust may be surrendered to the court to settle as much of your debt as possible. Once your offshore and your domestic assets classified as non-exempt are seized and sold to pay off a portion of the debt, the court will discharge the remainder.

Understanding the Tax Obligations Associated with Offshore Trusts

You (or your trustee, depending on the tax laws that apply in the country where you hold citizenship) will be responsible for reporting any increase in the value of the assets held in the offshore trust. This is because the offshore trust is typically considered a grantor trust under the prevailing tax laws.

All capital gains and other forms of trust income must be reported as personal income. The institution where the trust is based can provide detailed reports that you can use for this purpose.

Failure to report the income from an offshore trust has serious consequences. At the least, expect stiff fines. There is also the risk of incarceration in some cases. Knowing what to report and when you should provide this information makes it possible to avoid any potential legal issues.

Choosing the Right Country to Base Your Offshore Trust

As with any banking or real estate accounts, it pays to look closely at what different countries offer in the way of offshore trusts or foundations. Financial laws and procedures differ not only between offshore locations and domestic ones; they can also vary from one country to another. Never assume that the laws and regulations that apply in one country automatically apply in a different one.

Your goal is to identify the offshore location that offers the best options for trust accounts, their management, and the laws that govern their function. A professional with a bank or investment firm located in that country can often provide the information needed to make the best choice.

Look closely at your present situation and your future plans. Would an offshore trust help you attain your financial goals? If so, today is the ideal time to begin your research and reach out to professionals who labor in the countries that seem like the most likely places to establish the trust.



Tags: asset protection | offshore trusts | offshore

View more features and contributed articles

The Report

Offshore Trusts Guide: Introduction

Offshore Trusts Guide: Jurisdictions

Bahamas Barbados Bermuda British Virgin Islands Cayman Islands Cook Islands Cyprus Gibraltar Guernsey Isle of Man Jersey Liechtenstein Madeira Malta Mauritius Monaco Nevis New Zealand Panama Seychelles Turks & Caicos Vanuatu