Offshore Trust

Trusts are integrated frequently in international asset protection and estate planning for a variety of reasons. The main reason is that, once you have transferred an asset to a trust, it is simply no longer yours. If it is no longer yours, then future creditors, plaintiffs, even government agencies can no longer take it from you.

An extra benefit to a foreign trust is that the trust actually creates a foreign “juridical” person. That foreign person is not a U.S. person. That means that foreign banks, for example, which, all over the world, are currently closing bank accounts of their U.S. clients, frequently spare the accounts of foreign trusts, even when a U.S. person is involved as a guarantor or beneficiary.

Other types of global investment, including offshore hedge funds, insurance products, private placements, and even real estate acquisition, can be made possible through the creation of a foreign trust. U.S. regulatory agencies such as the SEC, which keep foreign investment closed to U.S. persons, simply have no legal authority to regulate foreign trusts. For people interested in establishing global bank and brokerage accounts and in making real foreign investment, the foreign trust can open a world of opportunity quickly being closed to U.S. persons.

The second benefit of a foreign trust has to do with the legal protection and the timing when it goes into effect that extends to both the grantor and the beneficiary. While this concept is governed largely by the 50 state laws in the United States, certain characteristics of U.S. law, such as the British Common Law prohibition on what are referred to as “fraudulent conveyances,” are not permitted.

While nobody would agree that someone should be able to evade creditors by running out and forming a trust in which he or she places his or her assets, the opposite is also true. Nobody can get inside someone’s brain to try and figure out what that person was thinking when they created a trust. The various U.S. states have solved this dilemma by introducing “waiting” periods after a trust has been created before the benefits of the trust can be extended to the assets inside the trust.

This time period ranges from one to three years.

California, for example, has a waiting period of three years. So let’s imagine an obstetrician in California who helps deliver “premature” babies.

Any baby that is anything less than perfect upon delivery automatically means that he or she (or, we should say, his or her insurance carrier) will face a lawsuit. Under the traditional standards of fraudulent conveyances, it would be virtually impossible for that physician to try to protect any of his or her assets from lawsuits, real or nuisance.

Jurisdictions outside the United States, however, have interpreted or legislatively handled the English Common Law concept of fraudulent conveyances differently. Belize, for example, has legislated a “bright line” test for fraudulent conveyances that asks the simple question, “What came first, the lawsuit or the creation of the trust?” If the lawsuit came first, then the trust can be legally attacked. If the trust creation came first, then the claim against the trust is barred under Belizean law.

Many people may not need this level of asset protection, but then again the obstetrician is not alone in suffering lawsuits as a normal occupational hazard.

For those with above-average occupation hazard risks, the foreign protection offered by this type of statutory bar against lawsuits can be the difference between keeping or losing one’s wealth.

The final important difference between U.S. and foreign trusts has to do with their length. Again, English Common Law tradition mandates how long assets can be held in trust. Essentially, they have to be for what is called a “life in being,” meaning that, by the time the grantor dies, the generation identified as the trust’s final beneficiaries (normally grandchildren or great-grandchildren) must be in existence. If you leave assets beyond that point in time, you are said to have violated the “rule against perpetuity.”

The concept is pretty technical and complex, and many a young would-be lawyer has failed the bar exam for not being able to navigate the rule against perpetuity

Rather than parsing into complex nuances, some jurisdictions have simply eliminated this Common Law rule with time limits or, in some cases, no time limits, as to how long an asset can be held in trust. After all, you earned your money.

Why should any government tell you what you can or can’t do with it (provided the activity is legal)? If you want to hold assets in perpetuity for the next thousand years to allow your heirs to have a college education or start a small business or buy a home, why shouldn’t you be able to do that?

Many offshore jurisdictions agree with that logic and have eliminated any limitations on trusts. To be fair, there are also some states in the United States, including Alaska and Nevada, that allow for very long periods of trust, up to 350 years. And more states will follow suit as business is lost to foreign jurisdictions and these states.

So, when it comes to trusts, if you are looking to create a foreign platform for investment; if you are in need of above-average asset protection with a short or no waiting period before the protection comes about; or if you are looking for a very long holding period for your assets beyond the normal holding period offered by your home state, then you should consider offshore jurisdictions for your planning needs.

If you don’t need or want these levels of complexity and prefer something that your local community bank can administer, then you don’t want an international trust.

If you have an offshore trust, two IRS forms are required for reporting associated with a foreign trust: 3520 and 3520-A.

Form 3520 reports the transactions that the trust makes… as when a U.S. person creates a foreign trust or when a U.S. person receives a distribution from a foreign trust. Form 3520-A addresses the informational reporting requirements when a foreign trust has a U.S. owner.

The filing requirements for foreign trusts are complicated to say the least, but, generally speaking, you’ll need to file one or both of these forms if you are a U.S. person who has created a foreign trust and/or if you are a U.S. person who is a beneficiary of a foreign trust.

Even if you do your own taxes, these forms are something you want to pay a professional to deal with… at least the first year so you can better understand what gets reported and how. The required information flow can get complicated.