Offshore Dynasty Trust Explained

An offshore dynasty trust, also known as a foreign generation skipping trust, legacy trust or perpetual trust, is one of the most advanced offshore planning tools available today. A properly structured offshore dynasty trust can provide asset protection, wealth management, tax efficient growth, and wealth accumulation for multiple generations of your family.

When combined with an offshore life insurance policy, you can convert the trust to a zero tax dynasty trust both for income and capital gains generated within the trust, as well as for trust distributions made as non-taxable loans from the life insurance policy.

An offshore dynasty trust, funded over time, can eliminate estate and gift tax on “both ends of the transaction.” On the front-end, gift taxes are eliminated or minimized by using your annual and lifetime gift exemptions. On the back-end, estate taxes are eliminated by holding the principal within the trust for generations so that only distributions and not principal is taxable to the heirs.

An offshore dynasty trust is also a powerful method of protecting a family businesses from being sold when you pass. You can effectively force the family to hold the business and keep it going.  

A dynasty trust will protect your heirs from divorce and lawsuits. Only distributions from an offshore dynasty trust will be available to creditors, and those can be limited based on the fixed criteria or at the discretion of the trustee.

When trust assets are invested in a U.S. compliant offshore life insurance policy, no income or capital gains taxes are due on the gains. Also, these gains, in the form of insurance proceeds, will pass tax free to the trust. As a result, trust assets inside an offshore life insurance policy can appreciate and be distributed to your beneficiaries tax free.

Dynasty trusts will allow you to make investments in the United States, including real estate. The gains on the property inside an insurance wrapper will remain tax free, so long as the beneficiaries of the trust do not use the property. If they do utilize the property, they should pay fair market value for that benefit.

Another interesting use of the offshore dynasty trust is by non-U.S. persons. If the family patriarch is neither a U.S. citizen, resident, or green card holder, but his heirs are U.S. persons, the dynasty trust can become a very powerful tax planning tool.

A non-resident alien settlor has an unlimited estate, gift and generation-skipping transfer tax exemption. This compares to a US person who as a $5.49 million estate tax exemption  (2017 value).  Such a settlor can gift an unlimited amount of foreign property and assets into a dynasty trust. The most common is to gift cash held in a foreign bank and to buy insurance on the settlors and/or the U.S. beneficiaries lives.  

Likewise, these dynasty trusts can provide tax advantages to those who plans to immigrate to the United States. If you transfer your assets and businesses into an offshore trust well in advance of becoming a U.S. person (resident, green card holder or citizen), you can reduce or eliminate U.S. capital gains and estate tax on those assets.

For more on using an offshore dynasty trust as a pre-immigration tax planning tool, see: Pre-Immigration Tax Planning for Future US Residents.

I should point out that both dynasty trusts and offshore life insurance, also referred to as international private placement life insurance, are for higher net worth individuals. I generally don’t recommend you setup an offshore life policy with less than $2 million. Because of the costs and fees involved, it rarely makes sense to build such an advanced structure for a lesser amount.

An offshore trust for asset protection purposes can be created to protect any sized nest egg. We typically see trusts used by those who want to move assets offshore and out of their control (under the management of a foreign trustee). Most offshore trusts hold $1million or more.

For smaller estates, those who want to manage their own money, and those who will hold an international active business, we often recommend a Panama Foundation over an offshore trust. This structure is less costly to maintain and gives you more flexibility. While the level of asset protection is lower than with an offshore trust, a Foundation is still a powerful deterrent.

Much of the tax planning around offshore dynasty trusts is focused on Federal gift and estate laws, and how those interact with U.S. compliant offshore insurance policies. Here’s a summary of those numbers for 2017:

The 2017 individual federal lifetime gift and estate tax exemption is $5.49 million.  A married couple will be able to transfer just under $11 million ($10.98 million) from federal estate and gift taxes. The annual gift exclusion, which is the amount you can transfer to an offshore dynasty trust tax free, remains at $14,000 for 2017.

These amounts go up and down with politics. They’ve been has low as $2 million from 2003 to 2007 and as high as $50 million in the 1930s (click here for a table with historic rates). The fate of the federal estate tax is uncertain. President Elect Donald Trump says he wants to repeal it and impose a new carryover basis regime for estates over $10 million. While this would change the timing, it might also increase the total amount paid by eliminating the step-up in basis heirs receive.  

Moving cash into an insurance policy within a dynasty trust will protect you should the rate fall in the future. If the estate tax be repealed, the life policy would effectively maintain the status quo of a step-up in basis and the tax free transfer of inherited property.

I hope you’ve found this article on the uses and benefits of offshore dynasty trusts to be helpful. For more information, please contact us here.

For some of the most interesting and compelling information of going offshore, please make sure to read: The Ultimate Guide to Going Offshore