Offshore trusts have become very popular in recent decades. An increasing number of successful people and wealthy families use this vehicle to preserve their wealth, minimise tax burdens, manage their assets and decide how exactly their assets will be inherited. Although the trust concept has long been known in England and common law countries, it is rather complicated for someone from civil law or sharia law jurisdictions. This article is a short offshore trust guide designed to provide you with information about offshore trusts. Here you will find answers to questions like what an offshore trust is and how to create an international trust.
The question of what is an offshore trust is becoming ever more prevalent among people who want to protect their wealth. According to the trust concept, to form a trust, a settlor (the owner of the asset) transfers his legal ownership rights of the asset (the trust property) to a trustee, who, according to the trust deed, must hold the asset separately from his private property in favour of the beneficiary who is defined by the settlor.
This arrangement became possible with the development of a body of law called the law of equity under English law. In contrast to civil law, where property law is absolute, the law of equity allows the asset to be owned in favour of a third party – a beneficiary who has the right to enforce his equity rights against the trustee.
It is important not to confuse private family trusts with offshore unit trusts, which are mutual funds for investments and managed by investment managers. The specifics of offshore unit trust taxation allow investors to maximise their returns. These unit trusts should be distinguished from the private offshore trusts discussed in this article.
It is now clear what a trust is, but how do offshore trusts work? Following the offshore trust meaning, we can state that the trust itself is not an incorporated legal entity, but a legal arrangement regulated by a special agreement called a trust deed. The legal title over the assets transferred by the settlor does not belong to the trust itself, as in the case of a company, but to the trustee. A settlor can appoint any individual or a class of individuals (e.g., all born and unborn children) as a beneficiary. This may be himself, his family, children or any defined person.
A trust is an entity and any person can create or own shares in the company or have an interest in the trust, settle the trust and transfer their own property to a trustee. This is part of each person’s fundamental property rights, which are protected in almost every country in the world. An offshore trust specifically is a trust created in accordance with the laws of a foreign jurisdiction. The vast majority of countries recognise entities that have been allocated and registered under the laws of other foreign countries. So the short answer to the question are offshore trusts legal is yes: offshore trusts are absolutely legal to set up.
The benefits of offshore trusts are numerous. As we can see from the trust concept, after the settlor transfers his ownership to the trustee, they are no longer the legal owner of the trust property. Instead, the trustee holds and manages the trust property in accordance with a non-binding letter of wishes given to the trustee by the settlor.
This is in fact the main advantage of offshore trust formation: the settlor is not a legal owner of the property, nor is a beneficiary. Accordingly, the legal regime applicable to the settlor or beneficiary of a trust does not apply to the trust property. Instead, much more favourable legal regimes are applicable to the trustee and consequently to the trust fund.
This allows the settlor to distance himself from the trust property. At the same time, the beneficiaries and/or the protector retain partial control over the trustee and his actions.
The abovementioned allows us to implement one of the main benefits of the trust, namely asset protection.
Another benefit to mention is the utilisation of offshore trusts for tax planning purposes. As is well-known, offshore jurisdictions apply full tax relief on all income and operations involving the offshore trust fund. By way of example, let’s presume that we have an offshore trust with a UK resident beneficiary. In such a case, any income received by the trust would not be subject to taxation in the offshore jurisdiction. If the trust is correctly structured, such income received by the trust would not be subject to taxation in the UK either. In fact, UK taxation of offshore trusts depends on the current anti-avoidance rules that must be taken into consideration before establishing the trust structure. Moreover, distributions from an offshore trust to a UK resident will not be taxed in the offshore jurisdiction in which the trust was established. However, such a distribution will most likely be taxed in the beneficiary’s jurisdiction of residence, in accordance with the tax legislation of the beneficiary’s home country, in case of chargeable events.
It is worth mentioning another reason why offshore trusts for UK residents particularly are so popular. In countries like the United Kingdom, special offshore trusts are widely used for inheritance tax planning. As you may know, inheritance tax upon succession can reach astronomical amounts if the estate is above a certain threshold. A trust can be an easy way of avoiding inheritance tax if it is structured in advance and in the correct manner. It’s worth noting that the use of offshore trusts for UK tax purposes is absolutely legal. Offshore trust tax avoidance is an entirely legal way of minimising taxation. However, this should not be confused with tax evasion, which is a criminal offence in most countries, and should not be practised by anyone who does not want to land themselves in trouble.
A further benefit of establishing an offshore trust is that it’s an extremely useful tool for estate planning purposes. The property transferred by the settlor to the trust fund can, in due course, become excluded property out of the settlor’s estate. If planned correctly, the offshore trust may in many cases allow for forced heirship laws in civil law jurisdictions to be ignored. The main idea behind this is that the trust property would not become part of the settlor’s estate, but rather would be distributed among the beneficiaries as set out in the trust deed.
Offshore trusts are also widely used to structure foreign investments. The trust allows for the delegation of the management of investments to a professional trustee who supervises an outsourced investment manager. This opens doors for various strategies to be applied to a professionally diversified and managed portfolio. An offshore investment trust can hold all kinds of investments, ranging from traditional equity shares, bonds and real estate to antiquities and crypto assets. In addition, the offshore jurisdiction can increase the profits from investments. For example, special offshore bonds and trusts are combined to eliminate taxation on your investments and gain control over the distribution of profits.
Yet another advantage of setting up a trust offshore is the availability of outstanding banking services. The trust gives access to a much less regulated and more flexible banking environment. Another benefit is that the trust or underlying company can have several offshore bank accounts. In established financial centres, there are plenty of institutions that specialise in serving offshore entities. Moreover, it is possible to set up a trust in one offshore jurisdiction and open a bank account in another. Astra Trust can assist its clients in choosing an offshore bank that best suits their needs.
Although the trust concept was developed in England, many offshore jurisdictions have incorporated it into their legislation. Most of these are former British colonies that have made trusts even more attractive by reducing regulation and eliminating offshore trust taxation. For example, they abolished taxation of profits and capital gains from a local resident trust, and removed many of the formalities that derived from the original English law concept.
Some trust jurisdictions went even further and included strict asset protection clauses in their laws. In this way, they created an offshore asset protection trust concept. The asset protection trust is a type of trust whose main purpose is to protect assets from existing or potential creditors, or to protect family wealth from disputes that may arise between family members.
How exactly can a trust protect assets? Offshore trusts and the new rules introduced by offshore centres have significantly changed the balance of rights in favour of the settlor and beneficiaries of the trust. This shift in balance to settlors from their creditors is especially effective when it comes to disputes over the offshore fund held by the trust. Modern offshore asset protection legislation introduces the following obstacles for creditors of a settlor to challenge a trust in court:
The above are only general and very brief points on how offshore trusts for asset protection can assist in the protection of family wealth.
Asset protection is not a separate type of trust, though. It is the same regular trust that is formed in a jurisdiction with special laws and whose trust deed is tailored to the purpose of asset protection. Therefore, the offshore asset protection trust costs can vary considerably depending on the amount and scope of work involved.
For those looking to set up an offshore trust, a logical question seems to be, which jurisdiction is the best? This can indeed be confusing as so many of them are marketed by fiduciary professionals. Given that the trust will hold valuable assets, making such a responsible decision can be really difficult. And, of course, such a decision should be well informed. Below we have provided some useful information that may help in choosing the correct jurisdiction.
Among the most popular jurisdictions to set up an offshore trust are:
The list of trust jurisdictions can be expanded further. However, it is not possible to single out one jurisdiction that would be the best offshore trust jurisdiction for all cases. Despite the fact that the concept of a trust remains the same, each financial centre has its own laws and regulations. And different laws may be best suited to different situations. For example, the Nevis trust is deemed to be one of the most protective against frivolous lawsuits. On the other hand, the Cayman Islands has the most developed trust legislation, including the STAR purpose trusts, and is a key jurisdiction for high-net-worth individuals.
Legislation, however, is not the only reason why clients choose one or another offshore centre. The Channel Islands and the Isle of Man are very popular for establishing offshore trusts in the UK and the European region. The primary reason for this is their location in Europe (only a 40-minute flight from London) combined with the perfect reputation of these jurisdictions and the financial advisers based there. On the contrary, some clients prefer to allocate their assets as far away from their home country as possible. For this purpose, they may opt for offshore trust services in Mauritius or even as far away as the Cook Islands.
To determine the best jurisdiction for your offshore trust, it is vital to first understand the needs and circumstances for which the trust would be set up. For different situations, different jurisdictions may be the best option. If you want to set up an offshore trust and would like to know more, you can contact Astra Trust for a free consultation. Our experts can assist you in choosing the appropriate jurisdiction and the formation of an offshore trust, and provide you with all the necessary support to set up the working structure correctly.
Once the decision to go offshore has been made, it is vital to correctly structure the trust and the trust deed. Below is some information on how to set up an offshore trust.
First of all, it is important to bear in mind that the establishment of the trust may have a long-term effect on the legal and tax position of the settlor and beneficiaries in their home jurisdiction. Therefore, it is always advisable to seek legal advice in one’s home jurisdiction to understand the various implications for the trust and those associated with it. It would be better if such advice included information on the future offshore trust tax position and the position of the settlor, protector and beneficiaries. Astra Trust can assist in obtaining such legal advice in the client’s home country.
After the legal position has been fully clarified, you can begin structuring the future trust. The settlor, with the help of the consultants, will decide on the complete structure of the trust. All the conditions of the trust are set out in a document called a trust instrument. The trust instrument can have different names, the most common one being a trust deed. This document is indeed the most important document of the trust, as it essentially defines all aspects and the structure of the offshore trust. In general, the trust consists of the following parts:
Although the standard trust structure is quite basic, in practice, a large number of variations on this structure are possible. For example, the settlor can be an individual or an offshore company to avoid disclosure. The trustee is usually a licensed offshore trust company. The client can appoint co-trustees from his family members, or a special private trust company can be created to be appointed as a trustee. This in turn can lead to offshore trust costs being higher than expected.
Also, it should be noted that in most cases, the trustee does not own the assets directly. For privacy purposes, the trustee would own the assets through offshore companies called underlying companies. The offshore trust and international LLC is a very common structure used by someone who wants to set up an asset protection trust.
If you are interested in offshore trust services or have any questions, please contact us at email@example.com. We can then advise you on what options are available to you free of charge or arrange a free phone call with one of our qualified specialists.