Common Questions About Offshore Trusts

We get many questions from clients about offshore trusts and how they work. Here are the most common ones.

How does an offshore trust work?

An offshore trust is essentially a conventional trust that is established in a jurisdiction outside of the settlor’s home country. The main components of an offshore trust are similar to those of a domestic trust, involving a settlor (the individual who creates the trust), a trustee (the party responsible for managing the trust), the beneficiaries (who benefit from the trust), and the trust assets (which can range from cash to real estate, and beyond).

The primary purpose of establishing an offshore trust is to benefit from the legal and regulatory environment of the jurisdiction where it is established. The legal framework in these offshore jurisdictions is typically favorable to asset protection, making it harder for creditors to access the assets within the trust.

Does an offshore trust really protect your assets?

Yes, an offshore trust can provide significant protection for your assets, but this protection depends on several factors, including the jurisdiction where the trust is established, its structure, and the specific legal challenges faced by the assets. Many of these jurisdictions do not recognize foreign judgments directly, which means a creditor would have to start a new legal proceeding in the offshore jurisdiction, often facing higher barriers to success.

However, the effectiveness of an offshore trust in protecting assets is not absolute. The timing of transferring assets into the trust is crucial; assets transferred after a legal threat has emerged may be considered a fraudulent transfer, potentially leading to the trust’s protection being voided.

Can a court order you to bring back assets from the offshore trust back to the U.S.?

Yes, under certain circumstances, a U.S. court can order an individual to repatriate assets held in an offshore trust back to the U.S. However, the effectiveness and enforceability of such an order can vary significantly depending on the trust’s structure, the jurisdiction in which it is established, and the specific legal protections offered by that jurisdiction.

When a U.S. court issues an order to repatriate assets, the court directs the individual (often the settlor or beneficiary of the offshore trust) to bring the assets back under U.S. jurisdiction. This scenario usually arises in the context of legal judgments against the individual, such as in cases involving creditors, divorce settlements, or other legal disputes. The court’s assumption is that the individual has the power to comply with the order, either by directly controlling the assets or by having influence over the trustees.

However, the enforceability of such orders in the offshore jurisdiction where the trust is located can be challenging. Many offshore trusts are designed with legal mechanisms to protect assets from foreign court orders, including provisions that replace the trustee with a new one if attempts are made to enforce a foreign judgment against the trust. Moreover, if the trust is properly structured and the trustees are located in a jurisdiction that does not recognize the U.S. court’s authority or judgment, the U.S. court’s order may have little practical effect on the offshore trust assets.

Can you still control assets that are in the offshore trust?

Yes, you can still control the trust assets by using both a managing trustee and a custodian trustee.

A managing trustee is actively involved in the day-to-day administration of the trust. This role includes making decisions about investments, distributions to beneficiaries, and other operational aspects of managing the trust’s assets. The managing trustee is responsible for ensuring that the trust operates in accordance with its terms and for the benefit of its beneficiaries. The management trustee’s role is hands-on, requiring a detailed understanding of the trust’s objectives, the needs of the beneficiaries, and the legal obligations governing the trust. The managing trustee directly controls the trust assets.

Typically, the grantor will serve as the managing trustee.

On the other hand, a custodian trustee has a more passive role, primarily concerned with holding the legal title to the trust assets. The custodian trustee’s responsibility is to safeguard the assets, ensuring they are correctly titled and protected. The custodian trustee may not be involved in the active management or decision-making processes of the trust.

If the grantor becomes under legal duress, the grantor can resign as managing trustee, shifting both managing and custodian responsibilities to the custodian trustee. The custodian trustee will thereafter serve as the sole trustee.

Can you open up a brokerage account inside an offshore trust?

Yes, it is possible to open a brokerage account in the name of an offshore trust. This approach is commonly used as part of the overall strategy for managing and investing the trust’s assets. Opening a brokerage account for an offshore trust allows the trust to invest in stocks, bonds, mutual funds, and other securities, potentially growing the trust’s assets over time.

Opening a brokerage account for an offshore trust involves several steps and considerations. First, the trustee must choose a brokerage firm willing to work with offshore trusts. This might require a search beyond mainstream brokers, which may have stricter regulations or policies against dealing with offshore entities. The chosen brokerage must understand the legal structure of offshore trusts and the regulatory requirements of the jurisdiction in which the trust is established.

Moreover, the trustee will be required to provide the brokerage firm with detailed documentation about the trust, including the trust deed, details about the settlor and beneficiaries, and information on the source of the trust’s funds. Additionally, the trustee must navigate and comply with the tax reporting requirements of the jurisdiction in which the trust is established, as well as those of the countries where the trust’s beneficiaries are tax residents.

What are the disadvantages of an offshore trust?

One significant disadvantage is the complexity and cost of setting up and maintaining an offshore trust. Initial setup fees, annual maintenance costs, and fees for legal and financial advisors can add up, making offshore trusts a less viable option for those who cannot sustain these ongoing expenses.

Another downside is the regulatory scrutiny and compliance requirements. In recent years, there has been a global push towards greater transparency and against tax evasion, leading to stricter reporting requirements for offshore trusts. Trusts must comply with international regulations such as the Foreign Account Tax Compliance Act (FATCA) in the United States. For U.S. persons, for example, this means disclosing the trust and related financial accounts to the IRS.

How much does it cost to set up an offshore trust?

The cost to set up an offshore trust can vary widely depending on several factors, including the jurisdiction in which the trust is established, the complexity of the trust structure, and the fees of the professionals involved in setting up and managing the trust. Generally, the initial setup costs range from $15,000 to $30,000.

Do offshore trusts pay taxes?

A U.S. resident who establishes an offshore trust remains responsible for paying U.S. taxes on the trust’s income, regardless of where that income is earned. This means that the IRS expects U.S. residents to report income from offshore trusts on their personal tax returns and pay any taxes due.

Are offshore trusts safe?

The safety of an offshore trust largely depends on the jurisdiction where it is established and the reputation of the trustee company managing it. Countries with stable legal systems and strong laws protecting trust assets, such as the Cook Islands, tend to be safer.

To mitigate risks, conduct extensive due diligence before establishing an offshore trust. This includes researching the legal framework of the jurisdiction, selecting a trustee company with a solid reputation

Is it illegal to keep money in offshore accounts?

Keeping money in offshore accounts is not inherently illegal. Many individuals and corporations use offshore accounts for various legitimate reasons, including diversification, business transactions, and estate planning.

For U.S. taxpayers, for example, the key to legality is transparency. Individuals are required to report their offshore accounts to the Internal Revenue Service (IRS) if the total value of those accounts exceeds certain thresholds. This is done through the Foreign Bank and Financial Accounts Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA) reporting requirements. Failure to comply with these reporting obligations can lead to significant penalties and legal consequences.