My clients frequently ask me whether or not they should set up a trust offshore. Usually the answer is "no" but there are exceptions.
When it comes to protecting your assets, there is nothing more powerful than an offshore trust. Placing your assets in trust in certain foreign jurisdictions can protect you from creditors, ex-spouses, judgments and other claims arising from litigation within the U.S. Combining an offshore trust with multiple layers of entities in varying jurisdictions virtually ensures that no one, outside of the U.S. Government, can seize your property to satisfy a judgment.
The trend towards establishing asset protection trusts is growing as risks increase. Once thought of as a device used only by the super wealthy, offshore trusts are becoming a component of estate planning and asset protection for many others who feel vulnerable to litigation - such as professionals who are concerned with malpractice claims or business owners concerned with expanding limits of liability and escalating damage awards. Some look at offshore trusts as replacements for or supplements to professional liability insurance, a way to discourage lawsuits or as a means of strengthening prenuptial agreements.
Offshore trusts operate in legal systems much different than our own. Laws enacted in some foreign jurisdictions - such as Cayman Islands, Cook Islands, Bermuda - are highly favorable to U.S. citizens who want to lawfully protect their assets from creditors. Some of these are:
*Non recognition of foreign court judgments. For example, Cook Islands does not recognize the validity of a U.S. Court awarding a judgment to a creditor. Creditors are required to hire local attorneys and prove beyond a reasonable doubt that the creditor should be given access to trust assets. "Further, in most of these jurisdictions, the bank or trust company that administers these trusts may have already retained all of the local lawyers. If so, it will be impossible for the claimant to obtain local counsel without creating a conflict of interest."
* Short statute of limitations.
* Not subject to the claims of a surviving spouse.
* Flee clauses. Offshore trusts allow provisions for assets to be immediately removed to another offshore jurisdiction once a suit it filed. Creditors must then try to find out where the assets have gone.
* Anti-duress provisions. Foreign trustees are
allowed to ignore an order from a
Estate Planning Advantages
Because offshore trusts are considered "grantor trusts" for U.S. tax purposes, the income on the trust must be reported annually on the personal 1040 of the grantor as long as she is alive. Once the grantor dies, however, the trust earnings accumulate tax free until they are distributed to a U.S. citizen. Beneficiaries of the trust are exempt from taxation or any asset acquired by the trust, however, even though they may be used by them.
Most states have codified and respect the common law rule against perpetuities. A few, like South Dakota, have recently repealed it. Thus, those interested in establishing "perpetual trusts can do so by creating trusts in states that allow them or offshore.
Offshore trusts are complex. There are many ways to run afoul of the IRS (see note below) and all foreign jurisdictions are not created equal. There are currently 60+ offshore financial centers worldwide. How do you choose? How can the process accomplish your goals? Careful planning, trustworthy advisors and competent trustees are essential to your success. Contact The Rosen Firm.
A Strong Word of Caution
Before considering an offshore trust, be advised that an offshore trust does NOT escape U.S. taxation legally. The IRS must be notified whenever a trust is established and you must file a return thereafter as long as it exists. Transfers to and from the trust are potentially taxable transactions.
Failure to make disclosures to the IRS or pay taxes can result in criminal as well as civil penalties. The IRS' recent Offshore Voluntary Disclosure Initiative raised billions for the U.S. Government and solidified the power of the IRS to reach any foreign assets or bank accounts owned by U.S. citizens or resident aliens in any jurisdiction - including so-called tax havens.
Websites or attorneys who promise you relief from U.S. taxation through the creation of offshore trusts are CRIMINALS and will create criminal liability for you as well.