Are you looking to set up an Offshore Trust?
Have you looked into or considered the Private Foundation option?
If your reason for wanting to set up an Offshore Trust is to try and avoid tax at home on the earnings of the Trust and/or if you want to be able to exercise ultimate control over the assets handed/transferred to your Offshore Trust you might want to consider setting up a Foundation instead.
The main disadvantage of a Trust is most Offshore Trusts are caught by Transferor Trust Rules (which tax the movement of assets into an Offshore trust) and/or are caught by local Controlled Foreign Trust laws. Put simply if you have the means to remote control an Offshore Trust or are a presently entitled beneficiary of an Offshore Trust in many jurisdictions you would be required to declare locally and pay tax on the Trust’s earnings (or on the share thereof that you would/should be entitled to as a Trust beneficiary).
A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation.
Moreover, a Foundation may get you around the tax issues as it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and by law the beneficiaries are not entitled to the income or capital of the Foundation until the Foundation actually resolves to pay a distribution. What this means is you should be able to defer paying tax at home on any income/gains derived from investments held/made by the Foundation enabling you to reinvest 100% of that income not just the after-tax component.
This should also enable you to access the power of compounding on those investment earnings meaning your net worth will grow MUCH faster than what it would were you to pay tax each year on your investment income.
Control
Often I am asked by a client “I want to set up a Trust to protect my assets and for the benefit of my children… How can I control what the Trust invests in and who is to benefit and when?”
In short if you want to have maximum control (of what would otherwise be your Trust Estate) without effecting the legal integrity of the entity/structure the preferred form of entity again would probably be a Private Foundation.
Why?
Because if/where a Trust is used any time you want the Trust to do something (eg buy/sell an asset, add/remove a beneficiary, etc) you need to work through the Trustee and the Trustee has to be agreeable… (and many Trustees are extremely conservative/risk averse and/or poor/slow communicators/administrators). In short the process of getting the Trustee’s approval can be slow, painful and expensive!
Trusts and Foundations are very similar creatures:
- A Trust is set up by/at the request of a person called a Settlor, is managed day to by a Trustee and (typically) has beneficiaries ie persons who are designed ultimately to benefit financially from the set-up of the Trust.
- A Foundation is set up by/at the request of a person called a Founder, is managed day to by a Councillor and (typically) has beneficiaries ie persons who are designed ultimately to benefit financially from the set-up of the Foundation
Unlike a Foundation a Trust (which is in essence an arrangement between the Settlor and the trustee, almost like a contract) is NOT a separate legal entity. If a Trust owns an asset (eg a piece of real estate) the legal/registered owner of the asset is the Trustee but the beneficial owners of the asset are the beneficiaries of the Trust. Moreover, in certain circumstances, the beneficiaries of a Trust are entitled to, and thus can compel the Trustee to pay the beneficiaries, a distribution. This can potentially leave Trust property at the mercy of any of the beneficiary’s Judgment creditors AND it leaves a door open for a local taxman to sneak through and try and tax the beneficiary’s share of the Trust’s earnings (ie the Trust and or any Company it might own would probably be caught by CFT/CFC rules)
A Foundaton on the other hand is a separate legal entity. It can sue and be sued in its own right. If a Foundaton owns an asset the Foundation itself is presumed at law to be both the legal owner AND THE BENEFICIAL OWNER of any asset the Foundaton holds. AND the beneficiaries of a Foundation have no interest in Foundation property/no entitlement to a distribution unless or until such time as the Foundation Council resolves to pay them a distribution. Only then should a beneficiary (potentially) be liable to declare/pay tax ie on the distribution then paid to him or her by the Foundation.
Why?
Because CFT rules and CFC rules are based on the presumption of beneficial ownership. If you aren’t/can’t be classified at law as the beneficial owner of the income producing asset – and/or if you’re not entitled to receive a distribution from the asset owner – it stands to reason that the entity that owns the asset shouldn’t be classified as a CFT/CFC.
Moreover with a Foundation, (and this will be of particular interest for persons who want to maintain maximum control over their Offshore Trust/Foundation) the Foundation Councillors rights/powers can be reserved at settlement to the Foundation Founder; + where a “Nominee” Founder is deployed (eg so that the actual Founders name doesn’t appear on the public record/publicly accessible record as Founder) the rights reserved to the Nominee Founder can be assigned to you (ie the person who authorized the set up of the Foundation) or any 3rd party of your choosing (for more details, check this link: https://www.dropbox.com/scl/fi/vg8bze1p0nlf9uotinxtl/What-Powers-Can-Be-Reserved-to-a-Founder-Assigned.docx?rlkey=obxkgxlgt1q4m4npcg18ttolq&st=z5ctn3cy&dl=0 ).
In short, with each passing year, we are seeing more and more clients choosing to set up Private Foundations rather than Offshore Trusts. Hopefully having read the above verbage you can see why!
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
