- 1 The Asset Protection Trust
- 2 Offshore Asset Protection Trusts
- 3 Will an OAPT avoid US Income and Estate Tax?
- 4 How is an Asset Protection Trust Structured?
- 5 What Countries are They Available in?
- 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 Asset Protection Trust
There are many different types of trusts the taxpayers may utilize in order to eliminate headaches, minimize taxes and overall make it easier for family members when it comes time for estate administration and probate. The asset protection trust is a different type of trust. As the name connotes, the purpose of an asset protection trust is to protect assets from creditors. Some states have enacted certain laws that provide for Domestic Asset Protection Trusts (DAPTs) and various jurisdictions across the globe have developed Offshore Asset Protection Trusts (OAPTs)– to entice US Citizens and others to move their asses into that foreign country in order to provide asset protection. When it comes to asset protection trusts, timing is crucial as well as the specific verbiage used in the trust. In general, offshore asset protection trusts are more popular than their domestic asset protection trusts — at least for US persons. Let’s look at some key aspects of asset protection trusts for US persons utilizing foreign jurisdictions.
Offshore Asset Protection Trusts
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.
Will an OAPT avoid US Income and Estate Tax?
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.
How is an Asset Protection Trust Structured?
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 in?
Offshore asset protection trusts are 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.
Contact our firm for assistance.