- 1 The Offshore Asset Protection Trust (OAPT)
- 2 What is an Offshore Asset Protection Trust?
- 3 Can You Avoid US Estate and Income Tax on an OAPT?
- 4 Basic Structure of an OAPT
- 5 What Countries are They Available?
- 6 Can the OAPT Avoid US Creditor Enforcement?
- 7 Form 3520/3520-A for Offshore Asset Protection Trusts
- 8 International Tax Lawyers Represent Clients Worldwide
The Offshore Asset Protection Trust (OAPT)
When taxpayers accumulate wealth and acquire more assets, they become a target for lawsuits and other enforcement actions. To protect themselves, taxpayers must find strategic (and legal) ways to shield their domestic and foreign assets from creditors and lawsuits. In the world of litigation, it is referred to as having deep pockets — and taxpayers (understandably) want to be able to protect their hard-earned assets from creditors and lawsuit judgments. The typical revocable US trust does not protect a person’s assets from creditors, since the revocable trust is not separate and distinct from the taxpayer. Likewise, Domestic Asset Protection Trusts are still subject to US federal and state tax laws. Therefore, some taxpayers seek to create offshore trusts in the hopes of better protecting their assets. In general, the Internal Revenue Service frowns upon these types of trusts and has made enforcement of abusive trust tax schemes a key compliance priority — noting, that not all offshore trusts are bad or abusive and may provide some additional asset protection above and beyond a domestic trust. The Offshore Asset Protection Trust (OAPT) is offered in various jurisdictions (usually non-treaty countries) and may provide some benefits and protections to taxpayers, even if their assets are not located in that foreign jurisdiction. Let’s look at the basics of an Offshore Asset Protection Trust (OAPT).
What is an Offshore Asset Protection Trust?
As the name indicates, an offshore asset protection trust is a trust located in an offshore country and designed for asset protection. In a common scenario, the foreign jurisdiction will require a person seeking to go after the assets in an OAPT within their jurisdiction to jump through several hoops in order to try to pursue enforcement against the asset protection trust. While a creditor may be able to meet the preponderance of the evidence requirements in the United States to obtain a civil judgment — a foreign jurisdiction may require significantly more proof in order to attack the Offshore Asset Protection Trust. Depending on which jurisdiction the offshore asset protection trust is created will impact the requirements necessary to pursue an action against that trust. This may include putting up a heavy bond in order to even go after the assets — and meet a much higher burden of proof.
Can You Avoid US Estate and Income Tax on an OAPT?
Generally, the answer is no. It is important to note, that the purpose of these types of trusts is not to avoid income or estate tax — rather, they are designed to protect the assets. In general, a US person is subject to income tax on their worldwide income and their entire worldwide estate is subject to estate tax. Simply putting these assets into a foreign offshore asset protection trust does not avoid tax consequences. Rather, the goal is to protect the assets from judgments and creditor enforcement actions.
Basic Structure of an OAPT
Each country will have its own requirements for the OAPT, but the basics include a trust that is irrevocable; domiciled outside of the United States, and utilizes a foreign trustee. In addition, in order to attack the trust, the country will usually require the creditor to post a bond.
What Countries are They Available?
Offshore asset protection trust or available in many jurisdictions, but some of the more common ones include:
Isle of Man
Can the OAPT Avoid US Creditor Enforcement?
Whether or not an Offshore Asset Protection Trust can withstand enforcement by US creditors will usually boil down to timing. If there are already creditors at the time the trust is formed, then merely placing assets into an OAPT will usually not shield against enforcement for those creditors most of the time — although it may frustrate the creditors and lead to a settlement. But, as to future creditors, if the offshore asset protection trust is properly executed then it may be able to avoid certain enforcement actions. In addition, if it is found that the trust was created for fraudulent purposes, then it too would not be able to withstand enforcement by creditors.
Form 3520/3520-A for Offshore Asset Protection Trusts
When it comes to reporting foreign trusts, the Internal Revenue Service has made enforcement a key priority. Foreign trust reporting could be complicated, with taxpayers being required to file Forms 3520 and 3520 –A. The failure to properly file Forms 3520 may result in significant fines and penalties and they could be very difficult to abate.
International Tax Lawyers Represent Clients Worldwide
Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
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