What is an offshore trust? How can you use it? What purposes does a trust serve? We answer these and other related questions in the text below. To begin with, we will say that an offshore trust is one of the most efficient instruments of asset protection. If you have something to lose, you should definitely consider creating an offshore trust.
What a trust is in simple words
The first trusts appeared in the 12th century so this asset protection mechanism has been in existence for quite a while. A trust is not a legal entity but rather a fiduciary agreement. One person called Grantor, Settlor, or Trustor puts his/ her property in trust to another person called Trustee. At this point, they make an agreement and issue a Trust Declaration that specifies how the Trustee should manage the property in trust. The Trust Declaration also indicates how the property and the profits that it makes should be distributed to Trust Beneficiaries. Therefore, a trust has three principal parties: the property owner (the Settlor), the property manager (the Trustee) and the property/ profit receiver (the Beneficiary). The key legal consequence of establishing a trust is that the property ceases to belong to the Settlor: it now legally belongs to the trust. The key requirement for the Trustee is that he/ she should manage the property in the interests of the trust Beneficiary (or Beneficiaries). Trusts are most often used for the purposes of asset protection and inheritance planning.
An offshore trust is a trust registered in an offshore jurisdiction. The role of the Trustee can be fulfilled by a natural person and this is sometimes the case with family trusts registered at home. If you would like to register a trust in a foreign country, you should certainly appoint a legal firm the Trustee. We must note that a corporate entity acting as the Trustee is a common practice. Assets that can be transferred to a trust include money, real property, business companies, intellectual property rights, jewelry, art objects, and so on and so forth.
Purposes of trusts
If you are wondering why create an offshore trust, here are some goals that trusts help to achieve:
- Information confidentiality is sometimes the only reason why a trust is created. A Will is a document accessible to the public while transferring the property to be inherited to a trust protects the confidentiality of the heirs.
- Asset protection. Creating a trust is a legal way of alienating property from its rightful owner (a natural person or a corporate entity). In this way, the Settlor can protect him or herself from losing the property.
- Protection against waste. Not all people are good at handling money or other assets. A trust can insure the property from wasteful use by the beneficiaries. The trust agreement can specify how much every beneficiary is eligible to receive and at what times the income should be distributed to the trust beneficiaries.
- Handing down the property. The Settlor can hand down all or part of their property to their children or other heirs through a trust. The trust declaration can indicate when the heirs are eligible to come into possession of the property. For instance, they may have to come of age to become eligible.
What are the most attractive properties of offshore trusts?
An offshore trust has a number of attractive properties. Below we list the most important of them.
- Confidentiality and anonymity. Even though an offshore trust has to be registered with the country’s authorities, the Register does not have the information about the parties of the trust, nor the assets put in the trust, nor the details of the trust declaration.
- Tax exemption. If you create a trust in a tax-free offshore jurisdiction, the assets are taxed neither when they are transferred to the trust nor when they are distributed to the beneficiaries. Please note that while trusts are tax-exempt, trust beneficiaries are not. They have to pay taxes on their personal incomes if they obtain material benefits from the trust.
- An opportunity to transfer property within a short time and a comparatively low cost. If you use an offshore trust as an inheritance planning mechanism, transfer of property to your heirs is going to cost them less in comparison to the situation when you make a Will.
- Asset protection. A trust protects the assets from obligatory inheritance (applied in some countries) as well as from expropriation in case of divorce or bankruptcy. An offshore trust is not subject to any foreign laws.
- Capital accumulation. Because an offshore trust can hold commercial enterprises and open bank accounts, it can participate in investment projects and serve capital accumulation purposes.
- Security. Your capital will be securely protected from financial, economic, or political turbulence that might occur in your home country.
- Universality. You can transfer almost any property to an offshore trust, material and non-material such as patents, for example.
- Posthumous trusts. A trust can be created while the Settlor is still alive (a live trust) or after he or she dies. If you specify in your last will that a trust should be created when you die, your heir will be able to skip the probate.
Revocable and irrevocable trusts
Trusts come in many different variations but probably one of the most important characteristics of a trust is whether it is revocable or irrevocable. If the Settlor is entitled to change the list of assets in trust, to amend the list of trust beneficiaries, to replace the Trustee, and to annul the trust, then it is a revocable one. A revocable trust is not an efficient asset protection mechanism. Why? Because since the Settlor is free to amend the trust declaration at any time, the property in trust is considered his/ her own property for legal purposes. This means that the property is taxable and it can be expropriated on a court decision. For this reason, we do not recommend that you create a revocable offshore trust.
An irrevocable trust, on the contrary, cannot be changed by the Settlor. When the trust is irrevocable, no property can be added to it or extracted from it. The list of trust beneficiaries cannot be changed either in most cases. Why is an irrevocable trust a highly efficient asset protection instrument? Because the property in trust is not the Settlor’s property any longer and it cannot be taken away even on a court decision. How can anyone take away from you something that does not belong to you? No way! Therefore, your property is under ironclad protection if you put it in an irrevocable trust. At the same time, you can list yourself among the trust beneficiaries when creating a trust and reap the fruit.
Registering an offshore trust
We suggest that you consider Belize or Nevis in the first place if you would like to create an offshore trust. Registering a trust is impossible without a certified registration agent in any of these jurisdictions. Legal firms usually act as registration agents. Even though you have to pay the agent company, it will do many useful things for you. It will register the trust with the authorities, help you draw up a trust declaration, offer trustee services to you, and protect the confidentiality of your personal information.
In conclusion, we would like to suggest the most efficient asset protection combination. Register an IBC or an LLC in any of the abovementioned jurisdictions, transfer your assets to the company, then create a trust in the same jurisdiction and put the company there. Your assets are now as safe as they can only be.