One of the key motivations for the setup of an offshore trust is the asset protection that it provides. As affluent investors and business people build their wealth across borders, they soon realize the exposure that these global assets have in an ever more volatile world.
With Covid-19 wiping out the national coffers globally there are fears that governments will be imposing wealth taxes to mitigate the drain on public funds.
According to Reuters in the United Kingdom ,”the government is weighing whether Britain’s rich – who on some measures have got wealthier while many lower income citizens have suffered hardship in the crisis – should pay more to plug the gap.” This has heightened the need for affluent individuals to reconsider their wealth and tax planning and revisit the use of an offshore trust to protect their interests.
What is an Offshore Trust?
A trust has existed in some form or other since Roman times and is mostly found in common law jurisdictions. It establishes a legal relationship between the Settlor (or Trustee) who creates the trust, those that have control over the trust, namely the Trustee, and those who benefit from the trust, the Beneficiaries. The rules under which the trust fund (assets held by the trust) is managed is set out in a binding trust deed.
To offer greater assurances as to how the trust fund is administered, Settlors may opt to include a Protector when setting up a trust. A protector can limit certain powers of the trustee. Protectors are normally an optional role and offer the settlor additional peace of mind that his/her assets will be duly managed by the Trustee, especially in the case where the Settlor and/or a Beneficiary passes away.
One of the distinctive elements of the trust is the legal separation it creates between the Settlor and his/her assets as ownership is assigned to the Trust and control is assigned to the Trustee.
By transferring assets to the trust, these are no longer the property of the Settlor.
Read more: The UK Trust Register is Expanding
Benefits of an Offshore Trust
Trusts can be set-up for a wide range of reasons including, to funnel funds for a specific purpose and avoid mis-management of these funds e.g., children’s education. They can also be used to safeguard funds from potential divorce or inheritance claims and generally, provide the settlor with the greatest degree of protection over his/her own assets.
We explore below some of the key benefits that offshore trusts provide:
- Privacy: It would appear that with the growing trend for transparency and far-reaching laws that now expand beyond national borders (such as FATCA), guaranteeing privacy is increasingly rare in today’s world. Financial privacy specifically encompasses the amount of information that is publicly disclosed regarding an individual’s wealth or assets. Certain offshore trust jurisdictions safeguard settlors’ financial privacy from the public eye, predominantly from those seeking to raise liability claims or creditors. They do so by limiting the details of the trust including the name, settlor and/or beneficiaries.
- Protection: Offshore trusts separate the legal and beneficial interest of assets that are held in the trust because the settlor of the trust in general, cannot distribute the assets to him/herself, therefore creditors can’t claim rights over these assets. Nonetheless, depending on the trust structure, the settlor can still be the recipient of distributions from said trust – allowing him/her to enjoy the assets held in trust without exposing them to legal claims. Importantly, trusts also offer protection from judgements by foreign courts. A foreign trustee cannot, in most cases, be forcibly obliged to release the trust’s assets when ordered to so by a court in another jurisdiction.
- Tax Mitigation: Numerous trust jurisdictions in the Caribbean and Europe offer tax incentives and/or exemption. If aptly structured, they can offer the settlor and beneficiaries an attractive tax planning vehicle. Depending on the jurisdiction, there may be other tax advantages when disposing assets. For example, in Cyprus, subject to meeting all pertinent conditions, no Capital Gains Tax is applied when the trust sells assets. Similarly, no inheritance tax or wealth taxes are applied to the Cyprus International Trust.
- Estate Planning: Jurisdictions that offer favourable offshore trust solutions are an invaluable estate planning tool as they do not recognize foreign inheritance or forced heirship laws. This can give the settlor greater control and discretion over who they decide will benefit from their wealth/assets in the future, without being restricted by the inheritance laws they would normally be subject to.
The Offshore Trust: A powerful wealth management tool
Popular trust jurisdictions include Cook Islands, an associated state of New Zealand under free association, which has substantial legal precedent in asset protection cases. St. Kitts & Nevis protect settlors’ assets by imposing even more barriers to creditors who which to raise a claim against an offshore trust’s assets, by asking the creditors for a US$ 25,000 cash bond. Cyprus, an EU Member state since 2004, also offers an international trust which is well suited for estate planning purposes. Other popular trust jurisdictions include the BVI, the Isle of Man, Jersey, Liechtenstein and Switzerland,
With expert guidance a trust can be an effective tax planning vehicle when HNWIs own assets internationally.
Offshore trust jurisdictions are becoming subject to more AML and KYC rules each passing day. This is a welcome move as it will bolster the reputation of the respective jurisdictions and increase the use and acceptance of the offshore/international trust as a wealth, estate and tax planning tool.
Those that serve HNWIs and UHNWIs should ensure that the international trust is part of their toolkit when advising their clients and work in partnership with trust companies/fiduciaries to offer a truly white glove and holistic level of service.
