What Are Offshore Trusts?
An offshore trust is essentially the same as a conventional domestic trust. And, a trust in general is "basically a document of commands that a person with many assets gives to someone else," according to the Panama Offshore Legal Law Firm. A "settlor" is the person who transfers assets to a trust and appoints a trustee to manage the property for the benefit of designated beneficiaries. Although offshore and domestic trusts are the same in principle, different rules apply in different jurisdictions. This is true among states as well as countries. Offshore trusts are more expensive to set up and maintain than domestic trusts.
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Asset Protection
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Protecting assets from U.S. laws that are disadvantageous to settlorsis a common reason for creating an offshore trust. Transferring personal assets to a trust can insulate them from future creditors. The extra expense of pursuing a claim in a foreign court can make an individual a less-ttractive target for litigation. Physicians concerned about exposure to malpractice claims commonly use offshore trusts to protect their personal assets. U.S. divorce and bankruptcy laws supercede foreign laws that apply to the trust itself.
Fraudulent Transfer
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A transfer of assets to a trust in order to avoid payment of existing debt is fraudulent and will not be upheld by U.S. courts. It is unethical for an attorney to set up a trust for fraudulent purposes. A financial planner can be criminally liable for encouraging and assisting with a fraudulent transfer to a trust.
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Tax Planning
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An offshore trust is tax neutral with respect to the income tax consequences for the beneficiary. The grantor must pay income taxes on the income of the trust as it is incurred. Trusts are used to minimize estate and gift taxes. Asset value is frozen on the date of transfer to the trust, insulating future appreciation from U.S. estate taxes.
Financial and Estate Planning
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Planning for financial needs throughout your lifetime and beyond is a complicated and highly individualized endeavor. It is critical that you understand the fundamentals and have clearly identified your financial goals before you consider an offshore trust. While you are likely to need professional help with setting up an offshore trust, it is always advisable to take an active role in your finances.
Seek Competent Advice
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Look for assistance from competent specialists who will work with you to determine whether an offshore solution is appropriate, and if so, which jurisdiction best suits your purposes. Financial planners should be able to clearly identify specific reasons to form an offshore trust in a proposed jurisdiction. Beware of providers who simply market a packaged solution.
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References
- Photo Credit signing a contract image by William Berry from Fotolia.com
