Offshore Asset Protection Trusts
In case you’ve never heard of them trusts are in a sense the holy grail of offshore asset protection and international tax planning. It is different from an offshore bank account as you need some additional structures to enable it to work properly.
When there’s no other way to achieve your goals often it’s possible with a properly structured trust (I say “properly structured” deliberately because they are complex and you can easily mess it up by not structuring properly).
With an offshore asset protection trust you can have as close as possible to bullet proof asset protection (more on this subject in the future).
With an offshore asset protection trust you can potentially shelter your assets from tax when no other option is available.
This being said trusts are extremely misunderstood by everyone from banks to governments and individuals in part because trust law doesn’t exist in much of the world (we’ll cover this too).
What is a Trust?
I’ll often hear clients say something like “the trust will own it?”
And I have to explain to them that technically this isn’t correct because unlike a corporation, which is a separate legal person in most countries a trust doesn’t exist as a thing.
A trust isn’t a separate legal person it’s more like a relationship between persons concerning assets.
At the basis it helps to understand that most of the time 3 things are tied together:
A trust potentially allows you to separate these things so the person who owns something doesn’t benefit from it (much like how employees of a company won’t benefit from the profit they generate for the company).
In the simplest form a trust is a relationship between three parties:
- A settlor/grantor – this is the person who sets up the trust
- A trustee – this is the person who legally owns the assets and typically manages them
- A beneficiary – this is the person who will ultimately get the benefits of the assets, there can be multiple beneficiaries
The relationship between these three parties is governed by what’s called a “trust deed”, which is a fancy term for a document or agreement spelling out the roles of the various parties and terms for how they are to operate with respect to the trust assets.
The trust assets are whatever assets have been placed into trust by the Settlor/Grantor (Grantor is the US term the rest of the world tends to use the term Settlor).
So a Settlor gives assets to a Trustee and the Trustee has a legal agreement in the form of a trust deed with the Settlor about what to do with those assets.
The Trustee holds those assets “in trust”, perhaps in an offshore bank account for the beneficiaries and ultimately passes the benefit of those assets on to the beneficiaries when the terms of the trust deed are met.
For example, it would be common for a grandparent to leave money in trust for their grandchildren rather than giving them inheritance immediately. It might say “hold it in trust until they turn 18 and upon their 18th birthday give them their share”. Or maybe it’s held in trust to pay for educational and medical expenses for their grandchildren and descendants afterwards.
Where it can get complicated is the Settlor could also be the beneficiary, the Settlor might also be the Trustee, there might be additional roles in the trust such as a Protector, etc.
It can further get complicated by the fact that someone might be deemed a trustee even if they aren’t officially listed as the trustee because they perform the role of the trustee and exercise the powers of the trustee.
What is a Trust company?
A trust company is a legal entity, that acts as an agent or trustee on behalf of a person or business for the purpose of management, administration, and the eventual transfer of assets to a beneficial party. The trust company acts as a custodian for trusts, estates, stock transfer, asset management, and other related arrangements.
How do trust companies work?
A trust company doesn’t own the assets that have been assigned to. It has the ability to manage them, and it has a legal obligation to take care of the assets on behalf of other parties.
An individual or business would transfer their assets to a trust company-trustee, to be managed according to the terms of the trust deed, which is created according to the wishes of the person transferring the assets into trust. That person is called the settlor or the grantor. The trust company is going to manage those assets for a fee, until such a time as they will be distributed to the beneficiaries specified by the settlor.
Things to consider when setting up a trust
There are different types of trusts that can be used for different purposes. In some of those you are going to have control until the end of your life, in other cases, you are giving up the control over your assets.
In some cases you can take the assets out of trust and in some cases, you cannot.
Often, trusts are used for one of two things: either to manage an inheritance (sometimes called a dynasty trust) or to protect assets from creditors (what we call asset protection trust).
In a case of an asset protection trust it’s important to realize that assets can be taken away from the trust if it hasn’t been long enough since the trust was created, in cases of what’s called the fraudulent transfer.
Let’s imagine that someone is getting sued. They figure they might lose a lot of money, so they decide to transfer the funds into a trust in order to protect them from the lawsuit. In most places, this could be considered a fraudulent transfer, because the intention was to defraud creditors.
In most cases for the assets to be protected, they would need to be placed in a trust for at least two years before the assets were threatened though this varies in some places they can come after the assets 10 years after the assets were placed in trust! The lesson? Be very careful about choosing the right jurisdiction but also be aware the choice of law might not favor you if the substance doesn’t match as well (contact us for more details on this subject).
Asset protection trust
Trusts can be a powerful tool to protect your assets from a lawsuit. However, it’s very important that it’s done properly otherwise it might bring more damage than good.
If you are in certain businesses with a high risk of getting sued, we recommend that you think about setting up a proper trust structure in order to prevent losing your assets in the future.
A trust has far more benefits than just protecting you or your company’s assets. It can go beyond that and protect your personal assets. If somebody sues you, they are going after what you own. When you put your assets in a properly structured trust trust (again be careful here trusts are very complex and the details matter, you don’t want to waste tons of money setting one up for it to be useless so contact us to discuss before you go ahead with it), you don’t technically own them anymore. In this case, a creditor cannot take those assets because they are beyond their reach (again, there can be exceptions to this so details matter, I can’t caution you on this enough).
It is also a powerful tool to protect your heirs from themselves. For example, you intend to give them a certain amount of money for education, healthcare or starting a business. Trusts ensure that they can only use the money for the purpose you inteneded them to use. They can’t simply take the money to go partying around the globe. Also, if they are getting sued those assets are protected by a trust and cannot be seized.
History of trusts
It helps to get some background of where trusts come from to understand what they are and how they work.
The original history dates back to the crusades when Knights, lords, etc. were going off to war and would hand their possessions or wealth to the church to care for it for them in their absence and then get it back when they returned from the Crusades if they survived.
This concept has been expanded into all sorts of quasi trusts or trust relationships over the years where you give something to someone else to take care of for you. It isn’t their’s, you aren’t giving it to them.
If you think about it this essentially what happens when you hand money over to an investment advisory/custodian, or to the executor of a will when you die.
Going back to the Crusades example you might say in this case, which weren’t formal trusts with sophisticated law like we have today the Settlor was also a beneficiary because if the settlor (Crusader who gave their assets to the church (to hold as a trustee)) returned they’d get the assets back and if not maybe those assets would be handed to their children or meet some other criteria.
Essentially, the thousands of scenarios over the years where someone has needed to hand assets to someone else for a specific purpose have led to the evolution of complex trust laws around the world.
What makes a Trust Offshore?
In many countries (typically those with Common Law) it’s possible to have local domestic trusts and this is common for inheritance, estate planning, asset protection and potentially other situations.
In fact a trust can exist even without the formal creation of a trust relationship through a trust deed (first established in British Common law through what’s called a Quistclose trust based on a famous case where a company handed money to another company to invest on their behalf and the other company then ended up going bankrupt).
The complicated thing about determining whether a trust is domestic or foreign/offshore is you’ve got so many pieces of a trust.
For example, if the assets are located offshore is it an offshore trust or a domestic trust?
If the beneficiaries are located abroad is it an offshore trust or a domestic trust?
If the trustee is located abroad is it an offshore trust or a domestic trust?
The list goes on.
For our purposes it helps to understand with any trust there are 3 jurisdictions (legal regions where laws prevail) to consider. These are:
- Jurisdiction of registration – trusts are typically registered in a register somewhere much like a company, but it’s worth noting that for example a Quistclose trust isn’t formal and obviously isn’t registered anywhere but still the trust relationship exists and could be upheld by courts
- Jurisdiction of administration – this is essentially where the trust is managed from, loosely speaking where the powers of the trustee are exercised or exercised from
- Jurisdiction of adjudication – this is where the laws of the trust default to in the event of a dispute
This creates the complex reality that trusts can in principle be multi-jurisdictional. So people will sometimes talk about Cook Islands trusts or Nevis trusts and ask “where is the trust based?” but maybe it’s registered and adjudicated to Nevis but administered from somewhere else or any variation thereof.
For the purposes of various governments around the world a trust might be considered a domestic trust (or a trust governed by their local laws) based on any of the above 3 factors or where the Settlor is from or where the Beneficiaries are located.
So for example, Canada has generally deemed that rules of management and control on corporate residency (fancy term for when a company is subject to Canadian tax rules on its full worldwide income) also apply to trusts.
It’s very common to say “anywhere where the person forming the trust (the settlor) is a local the trust is also local”.
Bottom line? Trusts are super complicated and you’ve really got to know what you’re doing. Anyone trying to sell you a trust online for $2000 is leading you wrong, all they are selling you is a piece of paper and maybe a registration neither of which are going to determine all these complex factors. If you’re going to go down the trust road invest in doing it right or it might not do what you want it to.
So, why are trusts so powerful?
Quite simply because as the Settlor or Beneficiary you potentially don’t own the assets. You do not need to set up an elaborate solution such as gaining dual citizenship
Think about this from the perspective of if you’re being sued. They are going after your assets but you don’t own these assets you’ve given them up and put them into trust so courts typically (I saw typically because it’s complicated and there are lots of exceptions to this rule) can’t go after them.
But on the flip side, the Trustee doesn’t own them either they are simply holding them in trust, even though they hold the legal title and so in the event of a lawsuit they can be protected from the attack, from insolvency/bankruptcy etc.
This puts them in a very unique category where the assets are hard to get at for someone attacking them.
The same principle sometimes applies to tax. A lot of tax rules are based on ownership such as CFC rules so what happens if you don’t actually own the asset?
We don’t want to imply Trusts are magic bullets, they aren’t there are ways they can be pierced in courts and there are often special tax rules for trusts designed to prevent them from being used for abuse. It really depends on the country and because it’s so complicated it’s beyond the scope of this article so you can contact us to discuss your specific situation.
What we would say is with proper planning, proper management, etc. trusts are a tool to do things you can’t do otherwise. The key is proper planning and proper management.
For example, you can’t simply get sued then decide to transfer assets into a trust and magically have them protected. In many parts of the world, there are rules concerning something called “Fraudulent Transfer” where you’re trying to defraud a creditor, which would cause serious issues so various countries have limitations on the time frame of those transfers to determine whether it’s valid or can be reversed.
There’s a multitude of legal scenarios that could arise so it’s too complicated to cover here but reach out to us for a conversation and we can discuss.
What About Countries Where There Are No Trust Laws?
Trusts come from Common Law but most of the world isn’t governed by Common law and as a result trusts don’t natively exist in most of the world.
This being said a lot of people misunderstand this topic. I’ve received statements like “xyz country doesn’t have trusts” but this doesn’t mean for example a citizen of that country couldn’t be a beneficiary of a foreign trust.
Loosely speaking there are 3 forms you’ll find for how trusts are treated/recognized (again this is an oversimplification to help you understand the general concept):
- Countries with local trust law – these are usually common law countries
- Countries without local trust law but have accepted trust recognition in some form – this is most common for signatories to an international treaty called the Hague Convention on the Applicability of Trusts and Their Recognition. Loosely speaking this means local jurisdictions with recognize foreign trust law between signatories when those trusts operate locally and arose because there was huge amounts of money held in these trusts and countries wanted to encourage them to invest locally but the trustees would say “no, we don’t know what the consequences will be if we invest there because you don’t have trust laws” so the convention helped to clarify some of these points. Along with these are a history of laws arising from foreign countries without trust laws of their own having had to deal with foreign trusts and how they’ve decided to handle it.
- Countries without any recognition of trusts at all – some countries (such as UAE) go so far as to explicitly state that trusts do not exist in their laws and are not recognized as existing at all. In other cases, there is not statement one way or another.
Why this is especially important is because we live in a connected world and actually a country not recognizing trusts locally can make them even more powerful because for example the tax code might not be designed to deal with them.
Countries like Spain and France are examples of this where there are no trusts and therefore the taxation of assets held abroad in trusts even if held for local beneficiaries aren’t prepared to apply their normal anti-deferral rules (in plain language forcing you to bring the money back and pay tax).
Bottom line, you might not be able to form a trust relationship in terms of the trust deed in many of these countries but it doesn’t mean the Settlor, Trustee, Beneficiary, or Protector can’t be located in one of those countries and this can give you many more options.
Trusts Are Very Complicated So Contact Us to Discuss
A trust might be the best option for your situation to achieve goals like:
- Asset Protection
- Estate Planning
- Investment Structuring
- Tax Planning
But they aren’t simple and sitting reading about them on the internet isn’t likely to give you sufficient insights into all the variations of country rules, management nuances, offshore asset protection trusts potential, tax consequences, etc.
So contact us for a no-obligation consultation to help determine what’s best for you in your situation and take action on your next step.