An Offshore Trust is a conventional Trust formed under the laws of a nil (or low) tax International Offshore Financial Centre.
A Trust is a legal arrangement (not unlike a contract) whereby one person (called the “Trustee”) at the request of a second person (called the “Settlor”) agrees to accept and hold property for the benefit of other persons (called the “Beneficiaries”).
Trusts date back to medieval times when Knights called to the defence of the Crown (aware of the possibility being killed in battle) would, prior to departure, transfer ownership of their lands to a trusted person together with instructions on how those lands were to be managed in the event of the Knight’s passing.
Although a trust traditionally arises when property is transferred by one party to be held by another party for the benefit of a third party, it is also possible for a legal owner to create a property holding Trust without transferring the property to anyone else, simply by declaring that the property will henceforth be held for the benefit of a particular beneficiary.
The rules determining how the Trustee is to hold and apply Trust property are not only enshrined in the Common Law but are also specifically set out in a document called a “Declaration of Trust” or (more commonly) a “Trust Deed” (which is not unlike a contract between the Settlor and the Trustee).
For legal reasons it is important that the Trustee be (and be seen to be) in control of the Trust. If a Trust is seen to be controlled from Onshore there is a risk that the Trust may be challenged as a sham or deemed by the onshore authorities to be a local resident for tax purposes.
If the settlor or a beneficiary wishes to see certain things happen during the life of a Trust he or she can express that desire by issuing a “Letter of Wishes” to the Trustee. In most cases provided what is being requested does not conflict with the terms of the Trust Deed (and provided the requested course of action is in the best interests of the beneficiaries) the Trustee will usually act on the Letter of Wishes.
Additionally the Settlor of the Trust can still attempt to steer the direction of the Trust post registration by being appointed as a Financial Adviser or Protector (preferably from the outset).
Tax Planning Advantages of an Offshore Trust
There is one fundamental difference between an Offshore/International Business Company (“IBC”) and a Trust that can dramatically impact on the ability of third parties to attack your property (and on the amount of tax you might otherwise have to pay on your offshore earnings).
In the case of an IBC, despite the extensive privacy features (and even if the IBC has been set up with a nominee director and/or shareholder), at law,the person for whom the IBC has been formed remains the underlying “beneficial” owner of the company and any assets it owns. In many western countries the owner of an IBC would have an obligation to declare and pay taxes locally on the IBC’s worldwide profits.
In the case of a Trust however any property transferred to the Trustee becomes at law the property of the Trustee (to hold for the benefit of others). Say an Offshore Trust is set up to own the shares of your IBC. This then creates a shift in the underlying legal and beneficial ownership of the IBC from you to a third party who is usually a resident of a nil tax jurisdiction ie The Trustee (who holds the Property on Trust for the beneficiaries of the Trust).
Not only does this make it near impossible for vultures to attack your assets but if the kind of Trust created is a Discretionary Trust (ie one where the Trustee has a discretion as to who to benefit and when) and provided you are only listed as a potential or discretionary (as opposed to a “presently entitled”) beneficiary then it may also be possible to avoid paying taxes in your country of residence on the Trust’s offshore earnings (until such time as you are made a certain beneficiary and paid a Distribution).
Additionally as the Trust survives you (most Offshore Trusts last for at least 100 years) an Offshore Trust can be deployed as means of managing family wealth post your passing.
It’s been said before that as much as one third of the world’s wealth is owned by “Offshore” Trusts. It’s not hard to see why!
Other common features of Offshore Trusts include:
- Limited record keeping requirements
- No requirement to file an annual return
- A person wishing to form a Trust can be both the Settlor and a Beneficiary
- A “Nominee” Settlor can be utilised (which has major privacy advantages)
- No income tax is payable in the country of registration
- Time limits apply as to when transfer of property to a Trust can be challenged
Whilst a number of Offshore Financial Centres offer Trust Products the quickest, easiest and most cost effective (and most private) places to register an Offshore Trust presently in our view would probably be Seychelles and Belize.
For more information on Offshore Trusts Contact Us or click on any of these links:
Every effort has been made to ensure that the details contained herein are correct and up-to-date, but this does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.