The Best Foreign Jurisdictions to Create an Offshore Trust 2023

The Best Foreign Jurisdictions to Form an Offshore Trust

The Best Foreign Jurisdictions to Form an Offshore Trust

There are many different foreign jurisdictions that offer extended protection for trusts settled in their country (aka ‘offshore trusts’). And, as the world becomes more litigious and the number of (frivolous) lawsuits grows exponentially each year, U.S. taxpayers who amass wealth want to ensure 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: 

Which Offshore Jurisdiction?

There are many different jurisdictions in which a person may consider opening an offshore asset protection trust. Most of these are considered ‘offshore tax heavens’ but that is not necessarily a bad thing (or illegal) — even though it tends to have a negative connotation. Let’s take a look at some of the more common foreign jurisdictions that a person may consider when creating an offshore trust.

Cayman Islands Trust

The Cayman Islands is one of the more popular locations to open an offshore asset protection trust. The main body of trust law in the Cayman Islands is the Cayman Islands Trusts Act (2021 Revision) This jurisdiction provides extensive protection to trusts including the requirement that the creditor must prove to a relatively high degree that the person who settled their trust in the Cayman Islands acted in bad faith. Moreover, it is the creditor that has to fund and/or require a bond when necessary.

Cook Islands Trust

The Cook Islands Trust is one of the mainstay locations to create an offshore asset protection trust — with the main body of law being the Cook Islands International Trusts Act (1984) (ITA) and the International Relationship Property Trust Regulations. That is because, under Cook Islands trust laws, the creditor has the burden of showing beyond a reasonable doubt that the person acted fraudulently. Therefore, the creditor has a very large burden standing before them in order to try to litigate against a Cook Island offshore trust. As a result, the Cooks Islands remain a top choice for people seeking to settle an offshore trust.

Cyprus

For the past 30 years, Cypress has also been a very popular location to form an offshore trust. That is because the creditor has to prove that there was an intent to defraud, which is a very high burden on a creditor. In addition, like many of these other offshore tax jurisdictions, there is a very short time period in which a creditor has in order to go after the trust. The main benefit of the Cyprus Trust is the requirement that the creditor must show that there was an intent to defraud by forming the trust – with the burden of proof being on the creditor and also with a relatively limited statute of limitations. The law is referred to as the Cyprus International Trusts Law of 1992.

Belize

Belize is another country that is known for having solid protection laws when it comes to offshore trusts. In order to challenge and try to attack a Belize Trust, the creditor must show that the Trust was created based on fraud. And, like many of the other trust locations listed above, there is only very limited time that a creditor has to go after a trust in Belize under Belize law — Trusts Act, Chapter 202 of the Laws of Belize.

Mauritius

Similar to Belize, Mauritius has its own trust law that was developed in order to provide as much protection as possible to trusts that were created or settled in Mauritius. Similar to some other jurisdictions — and even though it is a civil matter — the creditor must show beyond a reasonable doubt that the trust was created for fraudulent purposes (Revised Trust Laws of Mauritius).

Bahamas

In general, the Bahamas is one of the more popular Caribbean Island locations that US persons like to relocate to — as well as settling trusts outside of the United States. There is a very short statute of limitations that a creditor has in order to go after a trust that was formed in the Bahamas. (Bahamas Trustees Act).

Saint Kitts and Nevis

In recent years, Saint Kitts and Nevis become more popular for US persons in general — due to their relatively less expensive Citizenship-by-Investment program. Likewise, the country also has strong trust laws favoring trusts settled in its jurisdiction. Like several countries identified above, creditors must prove that, beyond a reasonable doubt, the trust was settled for fraudulent purposes.  And, there is a very short statute of limitation or amount of time a creditor has to go after the trust. (Saint Kitts and Nevis Trusts Act)

Five Important Offshore Trust Considerations

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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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

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