The Offshore Asset Protection Trust (OAPT)

The Offshore Asset Protection Trust (OAPT)

The Offshore Asset Protection Trust (OAPT)

As taxpayers acquire more assets and become at higher risk for lawsuits and other enforcement actions, they need to find strategic ways to protect their United States and Foreign Assets. It is referred to as having deep pockets, and understandably taxpayers want to be able to protect their assets. While the typical revocable trust does little if nothing to protect a person’s assets — since the revocable trust is not separate and distinct from the taxpayer — and many domestic irrevocable trusts can be very stringent — 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 it’s actually made enforcement of abusive trust tax schemes a key compliance priority. The offshore asset protection trust 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 connotes, an offshore asset protection trust is designed to protect the assets of the trust creator. 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 person 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 significant 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 in order to pursue an action against that trust.

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 by 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 Structures of an OAPT

Each country will have its own requirements for the OAPT, but the basics include:

      • Irrevocable Trust

      • Domiciled Outside of the United States

      • Trustee

      • Usually Requires a Local Trustee

      • Posting a Bond

What Countries are They Available?

Offshore asset protection trust or available in many jurisdictions, but some of the more common ones include:

      • Cayman Islands

      • Cook Island

      • Nevis

      • Belize

      • Isle of Man

Can the OAPT Avoid US Creditor Enforcement?

Whether or not an Offshore Asset Protection Trust can withstand enforcement by US or other creditors will boil down to timing. If there are already creditors, then merely placing assets into an OAPT will 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 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.

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