How does the offshore asset protection trust really operate?
The offshore asset protection trust is composed of the settlor (or grantor), who is the individual creating the trust; the trustee, who is a trust company located in the jurisdiction where the trust is established; and the trust beneficiaries, who are the persons (including the settlor) who are to receive income and principal distributions from the trust both during the settlor’s life and after his or her death.
Until the settlor experiences an "event of duress," i.e. the entry of a judgment, a divorce decree or bankruptcy filing, the settlor has the unfettered ability to deal directly with the trustee and to modify the provisions of the trust in any way. If an "event of duress" occurs, a virtual wall comes down between the settlor and the trustee. At that point, the settlor no longer can deal directly with the trustee but must act through a trust protector, who is a trusted individual (preferably a lawyer or financial advisor) named by the settlor at the time the trust is established will look out for the settlor’s interests. Once the "event of duress" passes, i.e. when the judgment is satisfied or the divorce settlement is finalized, the wall is lifted and the settlor may once again deal directly with the trustee and may modify the trust, e.g. convert it into a domestic U.S. trust so that the settlor also can act as the trustee.
What kind of assets can I transfer into the trust?
Once the trust is established, the settlor can transfer a variety of assets into the trust, including cash into an offshore bank account (which can be set up in either the same location as the trust or another offshore jurisdiction), securities into an offshore brokerage account, shares of a domestic or offshore corporation (except for a U.S. "S" Corporation), artwork, yachts, luxury automobiles and interest in real estate. With respect to real estate, it makes more sense from an asset protection perspective to mortgage the real estate to some reasonable extent and then transfer the cash proceeds into the trust.
How difficult is it for me to access the assets in the trust?
As long as the settlor is not acting under an "event of duress," it is extremely easy for him or her to access the trust assets, particularly cash and securities, for any reason. The settlor can have himself or herself appointed as an investment manager so that he or she can directly trade on an offshore brokerage account set up in the name of the trust. However, once an “event of duress” occurs, the settlor may no longer directly access the assets during the period of duress, and must rely on the trustee and/or the trust protector to both manage the assets and pay any necessary bills or invoices out of the trust assets.
How can I be sure about the security of the assets held in the trust and the stability of the trustee?
The assets physically held in the trust accounts, such as cash and securities, are every bit as safe as if held in a bank or brokerage account in the U.S. The banks used by the trustee to hold these assets, such as First Caribbean Bank, Credit Suisse, Royal Bank of Scotland and Deutsche Bank, are well-known and long-established entities that have stood the test of time. The trust and banking laws of the various jurisdictions where the trust and bank accounts are established are very strict and provide for a significant amount of protection for the account holder. The trust company generally used by The Sequoia Group as the offshore trustee and/or corporate director (or LLC manager) is the ATC Group, which has over $50 billion in assets under its management, and which has been providing private client trust and corporate services since 1893.
How does an offshore trust help me reduce the threat of creditor attack or being the victim of a specious or unwarranted lawsuit?
By creating an offshore trust and making the appropriate transfers of assets, the settlor essentially makes him- or herself a significantly less inviting target for creditors. Because the offshore trustee is not directly subject to the jurisdiction of a U.S. court of law, the trustee will not be subject to the subpoena power of those courts and will not be required to give automatic "full faith and credit" to a judgment rendered in a U.S. court. In essence, the creditor/plaintiff would have to file a brand new action in the courts of the nation where the trust is established, prove its case based on the specific laws and evidentiary code of that jurisdiction, and show that the jurisdiction’s statute of limitations for filing the suit has not run. In most offshore trust jurisdictions, any legal action against the trust must be brought within a year after its creation and transfer of the assets into the trust.
As a result of the prior establishment of the offshore trust, most legitimate creditors are willing to accept a significantly reduced amount in order to settle their legal action, and many potential plaintiffs who are aware that the settlor has previously established an offshore asset protection trust will not bother to file a questionable lawsuit in the first place.
How does it help me to set up an offshore corporation or limited liability company in addition to an offshore asset protection trust?
First, there is no requirement that an offshore asset protection trust be established in order to create an offshore corporation or LLC. An offshore corporation or LLC can be established at any time in order to hold specific assets such as shares of a domestic corporation/LLC or U.S. real estate. Having an offshore trust hold all of the shares of an offshore corporation or membership interest of an LLC makes it more difficult for a potential creditor to place a judgment lien on the assets of the corporation or LLC. If the direct owner of the shares of the offshore corporation is a U.S. individual, then it is much easier to force the repatriation of the assets of the corporation because that U.S. individual is completely subject to the enforcement powers of a U.S. court. If the shares of the corporation are held by an offshore trust, however, then the legal owner of the shares is the offshore trustee, which is not subject to the same enforcement powers.
In addition, a non-U.S. resident can use an offshore corporation to hold title to assets so as to avoid the imposition of any U.S. estate tax on those assets, even though that individual is living in the U.S. at the time of his or her death. Also, there is no income tax on the offshore corporation or LLC imposed by the offshore jurisdiction, and any income earned flows through to the settlor of the trust, who pays income tax under the tax laws of the country where he or she is a tax resident (i.e., a U.S. citizen will pay U.S. income tax on the earnings of the offshore corporation just as if he or she had earned that income themselves).
What are the income and estate tax aspects of an offshore asset protection trust if I am a U.S. citizen or resident alien?
Simply stated, an offshore trust created by a U.S. citizen or resident alien is defined for tax purposes as a "grantor trust," which means that it is a "flow-through" entity for U.S. income tax purposes (similar to an "S" corporation or LLC). Any income, deductions or credits earned by the trust as a result of its investments or the activities of a business operated by a corporation/LLC it owns, effectively flow through to the trust settlor. The settlor is personally responsible for paying any U.S. income tax imposed on that income. Each year, the trust provides the settlor with an informational tax form (similar to a K-1 for a domestic trust) that specifically indicates the amount and type of income the trust has earned, along with any relevant deductions. At the creation of the trust, IRS tax form 3520 is filed in order to advise the IRS of the fact that the taxpayer has established an offshore trust deemed to be a "grantor trust."
From an estate tax perspective, any U.S. citizen or resident with has an interest in an offshore trust and/or offshore corporation/LLC at the time of the death, will have the value of that trust or corporate entity fully included in their gross estate for purposes of calculation of U.S. estate tax. Therefore, for a U.S. citizen, there is no direct estate tax benefit from establishing an offshore trust, although such a trust can be coupled with the formation of a family limited partnership or LLC in order to significantly reduce the value of an estate.
How does the purchase of an offshore life insurance policy benefit me?
First and foremost, just as with a domestic life insurance policy, as long as the owner of the policy itself is a life insurance trust, and not the individual whose life the policy is on, then the proceeds of the policy are not included in the gross estate of the individual upon death. Thus, the proceeds either can be used to pay any estate tax due or distributed to the estate beneficiaries.
Where an offshore life insurance policy is superior to a domestic policy is when the individual whose life the policy is on becomes the focus of a legal action. In most states in the U.S., life insurance is not considered an “exempt asset” and thus can be attached by a court pursuant to a judgment. However, if the policy is held in an offshore life insurance trust, then the assets of that policy are not subject to attachment by a U.S. court.
What are the benefits of establishing an offshore annuity policy?
An offshore annuity policy is the only legal and effective means of deferring U.S. income tax for a U.S. taxpayer. By taking out such a policy and using income-producing assets to fund the annuity, the taxpayer defers all U.S. income tax on the growth of the investments until such time as the annuity begins to pay out. Payout begins at set age of the individual that is established at the time the annuity is created. Once payout begins, a portion of each distribution is used to offset the original basis in the assets so that only a portion of the distribution is treated as income. In addition, there is no income tax assessed by the local jurisdiction where the annuity is created.
Also, with an offshore annuity policy, unlike a domestic one, the annuitant can serve as his or her own investment advisor and manage the annuity investments. Also unlike a domestic annuity, the assets used to fund the policy are sheltered from creditor attack. By having an offshore asset protection trust purchase the annuity on behalf of the individual annuitant, and having the specific assets serve as collateral for the policy, the assets held in the annuity become extremely difficult for any potential creditor to access.
What is the approximate cost to establish an offshore asset protection trust or offshore corporation/LLC?
The cost to create an offshore asset protection trust is $7,500-25,000, depending on its complexity. (A domestic asset protection trust such as The Sequoia Trust can be established for considerably less initial expense.) There are both legal costs incurred in creating the trust, as well as initial trustee and administrative fees that must be paid in the jurisdiction where the trust is established. In addition, there are trustee and administrative fees that must be paid on an annual basis after the trust is created. It should be noted that the initial legal fees paid to establish the trust structure usually can be deducted as an estate and tax planning expense on the individual’s U.S. income tax return.
The cost to establish an offshore corporation or LLC varies according to the specific jurisdiction in which the entity is set up. The most inexpensive corporate entities tend to be British Virgin Island corporations and St. Kitts and Nevis limited liability companies, which can be established for as little as $2,500. Also, annual director/manager fees and administrative fees must be paid where the entity is managed by an offshore director or manager for asset protection purposes. Annual fees are less where the individual himself or herself serves as the director or manager of the corporate entity.
For additional information on any of the above information, please contact The Sequoia Group at 561-988-6885 or toll-free at 866-988-6009 or e-mail us.
– Domestic Asset
– Family Limited Partnerships