A Guide to Forming an Offshore Trust (What You Must Know)

A Guide to Forming an Offshore Trust (What You Must Know)

A Guide to Forming an Offshore Trust

As the world becomes more litigious and the number of (frivolous) lawsuits grows exponentially each year, U.S. taxpayers who amass wealth want to be sure that they protect that wealth from would-be lawsuits the best they can. It is not uncommon for a taxpayer to consider creating a foreign trust in order to move assets offshore. Technically, these are referred to As Offshore Asset Protection Trusts (OAPT). While having an offshore asset protection trust may be a good idea, there are many important factors to consider – especially, in which jurisdiction should you create your offshore trust. While there are pros and cons to forming an offshore trust, when done properly an offshore protection trust can both protect your assets and offer you peace of mind. Let’s go through some of the key factors to consider:

Is the Country’s Tax System Established?

When it comes to forming an offshore trust in a foreign country, one very important aspect is the tax system in that country.  While you may be used to the US tax system, different foreign countries have different types of taxes and licensing fees — which may impact selecting one country over another. For example, is there an ongoing registration fee, is annual insurance required, and is income generated within the trust taxed in that foreign jurisdiction — and if so at what tax rate?

Are the Trust Assets Protected?

For most people, the key goal in moving assets offshore into an offshore trust is to protect the assets from creditors. Therefore, it is important to note just how protected the trust assets are from would-be creditors. In other words, will it be difficult for creditors to penetrate the trust in order to file a lawsuit or otherwise litigate against the assets, or are the assets pretty secured?

Must the Assets Be Located ‘Offshore’?

Oftentimes, when a person thinks about a foreign trust, they are imagining moving all their asses offshore –– but that is not always required. Just because the trust is considered an offshore trust does not mean the assets must be relocated offshore. Therefore, it is important to determine which assets must be offshore and if there is a minimum value as to the number of assets that must actually be located in that country.

Is there a Strong Sense of Confidentiality?

Another key selling point of an offshore trust is the idea that the assets are not only protected but they are kept secret. Typically, tax havens that offer offshore asset protection trusts do not regularly report to the US government in accordance with issues such as FATCA — although that is not always the case and taxpayers should confirm whether there are any bilateral agreements between the foreign jurisdiction and the United States and whether there is active reporting of US-owned trusts before forming the trust.

Can You Unwind the Trust?

One final important question to consider at the preliminary stage is whether the trust can be undone or not. Sometimes, taxpayers want to open an offshore asset protection trust to protect their assets, but several years later, for one reason or another, that trust is no longer necessary. Can the taxpayer cancel the trust and remove any assets from the jurisdiction if they want to or is it the type of irrevocable trust that does not allow cancellation?

Current Year vs Prior Year Non-Compliance

Foreign trusts must be reported annually as well on Forms such as Form 3520 and 3520-A. Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

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