5 Reasons Why People Set Up An Offshore Trust

Planning

5 Reasons Why People Set Up An Offshore Trust

It’s a common misconception that offshore trusts are used for tax avoidance. Here we explore the real reasons why people set up an offshore trust.

Written by Harneys on 11 October 2017

There has always been a general belief that offshore trusts are used by the wealthy to hide their wealth and avoid tax. But this is a misconception as both the British Virgin Islands and Cayman Islands has embraced effective, measured anti-money laundering regulation that reflects some of the highest standards in the world.

Firstly, let’s understand what a trust is – it is a legal relationship created when a person (the settlor) places assets under the control of another person (the trustee) for the benefit of specified persons (the beneficiaries) or for specified purposes.

The trustee is the legal owner of the assets put into the trust and is required to manage those assets for the benefit of the beneficiaries or to further the specific purposes set out in the trust deed.

Setting up a foreign trust is a sound asset protection strategy to add a layer of protection to your assets. By using an offshore trust rather than a domestic trust, you can enjoy additional protections not available in your home country.

Here are 5 key reasons why people set up an offshore trust:

01.

to protect their assets –
for example, against claims from creditors or in divorce proceedings

The British Virgin Islands and Cayman Islands are used frequently to establish structures designed to provide asset protection and to deal with succession issues. Both jurisdictions have well-established trust regimes backed by many years of judicial precedent.

Both jurisdictions have sophisticated firewall legislation, which dictates that foreign  judgments  inconsistent with the relevant legislation shall not be recognized or enforced.

02.

to manage assets for young, incapacitated,
or irresponsible beneficiaries

A British Virgin Islands or Cayman Islands trust may be discretionary in nature – meaning that the trust assets are held for beneficiaries with distributions of income and capital being made at the discretion of the trustees.

Alternatively, a trust may be fixed interest – meaning that each beneficiary is entitled to a certain interest. An example of this is the right to receive a set share of the income generated by the trust assets for a set period and then to receive a set share of the capital on attaining a specified age. Additionally, British Virgin Islands and Cayman Islands trusts can be established for charitable purposes or noncharitable purposes.

03.

to optimise the tax treatment of the assets placed in trust

The British Virgin Islands and Cayman Islands are often referred to as “tax neutral” and you might have been told that – for this reason – it would be advantageous to establish your trust in either jurisdiction.

Tax neutrality means that British Virgin Islands and Cayman Islands companies are not subject to corporate taxation on income, capital gains, or share transfers. Instead, the British Virgin Islands and Cayman Islands governments raise revenue through other means such as income taxes on resident individuals, real estate taxes as well as sales and import duties.

The fact that British Virgin Islands and Cayman Islands companies have no corporate taxes can make them particularly useful in fund structures, as one or more corporate vehicles can be used to pool investor funds without adding additional layers of taxation. However, investors are still taxed in the jurisdictions in which they are tax resident on any income and gains generated from investment into the fund.

04.

to circumvent forced heirship rules

A British Virgin Islands and Cayman Islands trust can help if a settlor wishes to avoid forced heirship rules (such as found in sharia law, for example), since the jurisdictions do not recognize forced heirship rules any assets held under trust are considered exempt from these rules.

It may also be the case that a timely lifetime transfer into trust may have beneficial estate or inheritance tax consequences that are jurisdiction-specific and on which separate onshore advice needs to be taken.

05.

to achieve multi-generational succession planning goals

The British Virgin Islands boasts a VISTA (Virgin Islands Special Trust Act) trust regime, which removes the duty of trustees to monitor and intervene in the conduct of directors and in the running of a British Virgin Islands company held by such trust.

A patriarch or settlor may place a British Virgin Islands holding company over the family business, which British Virgin Islands company is itself held in trust under the British Virgin Islands VISTA trust regime. This provides the benefits of asset protection and succession planning while allowing the patriarch or settlor to retain control over the running of the business itself through the board of directors of the British Virgin Islands company.

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