Question: The Myths and Reality of Establishing an Offshore Trust. Is One Right For You?
Trusts are an ancient legal vehicle dating back to pre-Christian Roman times. In B.C. Rome, only a Roman male citizen could inherit property. To be a citizen, both your mother and father had to be a Roman citizen.
If your father was a Roman citizen, but your mother was a slave or non-Roman, you could not inherit property. Wealthy Roman men who tended to have children by numerous non-Roman women (frequently slave women) found a legal way around this prescription.
They would designate a Roman citizen to be their legal heir and for a “fee” this Roman citizen would take possession of the property and “manage” it for the real heir. Ancient Roman Courts upheld the legal enforceability of this contractual relationship and the “Trust” concept was born.
Fast Forward a Millennium
Medieval England of the 12th Century during the times of the Crusades (when many wealthy Knights went off to fight to liberate Jerusalem for Christendom), the first formal precursor of today’s Trust Law were devised, (although some legal scholars point to Arabic legal concepts of the 9th and 10th Centuries).
It was the practice of the day for the King to tax his lords, knights and noblemen who owned property. One of the easiest times for the King to collect taxes was at a property owner’s death. Interestingly, the tax in those days was basically one-half of the property comprising the estate, quite similar to today’s tax on wealthy estates.
The tax, however, had two purposes:
First, there was the revenue aspect. The King needed the money to operate his Kingdom, fight the Crusades and maintain his Kingdom.
Secondly, the King kept the creative, entrepreneurial and successful property owners from amassing too much wealth and too much power, since 50% was taken away after each generation and given to the King.
A Thousand Years Later, the Same Principals Still Govern the Modern Day “Estate Tax”
And I would argue that both elements of the tax still apply. Today’s Government would simply not permit the generational wealth and power of any über successful entrepreneur like Bill Gates to continue growing unchecked. That would move too much real power away from Washington, DC.
Some creative lawyers of the 12th Century, however, jumped upon a basic tenet of common law and perhaps even natural law, which is the right of man (used in the current generic sense to comprise both men and women) to enter into a contract and/or to make a gratuitous gift during their lives.
Any King of the 12th Century or Government of today would lose the ability to govern their people if they did not respect this basic human right, which has been codified throughout history from the Magna Carta to the Constitution of the United States.
The Trust had its roots in contract law as well as equity and became a “juridical” invention quickly embraced by English common law. In fact, trusts are the oldest legal structure recognized by English Common Law developing several hundred years before partnerships and seven hundred years before corporations.
The Trust Idea, Boiled Down to its Simplest Terms
The Nobleman transferred his property gratuitously to the legal entity known as the “Trust.” When the Nobleman died, he had nothing, and there was simply no “Estate” for the King to tax. Conversely, as a “Juridical” creation, a “Trust” would not die, but go on into perpetuity holding and managing the property for the nobleman’s heirs.
While Kings and Governments have tried legislatively to limit trusts and keep them from going on “Forever,” there are some trusts in the U.K. dating back eight hundred years, and trusts in the U.S. that pre-date the very founding of our country. Many of these “Trusts” administer vast sums of wealth because they were able to limit their exposure to taxation, lawsuits, divorce and the other maladies that affect mankind.
Is It Still So?
Unfortunately, trusts have come under severe attack, not only in the U.S. but throughout the developed, industrialized and “high-tax” world. Attacking, piercing, limiting and increasing exposure to taxation have all come about in modern times.
The “Kings” of today simply can’t function without our incomes, our property and yes, even our estates. The “Rule Against Perpetuities” ensures in most states that property must legally pass within one or two generations and not stay away from the grasp of estate taxation for very long. Trusts are now basically treated by the IRS as individuals for income tax purposes.
A plaintiff’s attorney recently commented to me that there was not a trust created that he could not pierce on behalf of his clients. Even children and grandchildren beneficiaries of Grantors sue their own trusts, if they feel they are being wronged by the management or disbursement of trust distributions.
So what can reasonably be expected from establishing a trust, and perhaps more importantly, where should the situs of the trust be located to maximise the enforcement of the trust as desired by the trust Grantor?
You might guess the answer to the second part of the above question by the title to this article or from the fact that I am an International Legal Practitioner.
To Me, the Answer is Obvious
If you are going to take the time, effort and expense to create a trust, why would you do it in the Land of Litigation? Why would you create something in a jurisdiction that is overwhelmingly pro-plaintiff; where nuisance lawsuits can cost you $50,000, and everyone feels they are entitled to your wealth?
I asked my plaintiff attorney friend whether his boast applied to offshore trusts. He looked at me sheepishly and then finally admitted that he had never even tried to go after a foreign trust. Clearly his boast only applied to domestic structures.
The choice IS quite obvious to me and that is people should shop for the jurisdiction which will treat their assets best and protect them the most. Multinational corporations have done business this way for many many years. They incorporate in one jurisdiction, manufacture in another, distribute in a third and sell in many others.
Because they want the best jurisdiction that will accomplish their overall goals for production, intellectual property protection, efficiency and profitability. They won’t pay a German worker $50 per hour to do something unskilled Chinese labour will do for 50 cents. They will pay the German worker $50/hour, however if the German production and efficiency makes it the most productive, which, in fact, is why much high-tech production is still done in Germany.
The choice is no less clear in establishing a family trust. Why would you set up a trust in California, and expose the trust to local, state and federal litigation, numerous taxes, high administrative costs, and limit yourself to invest solely in SEC approved domestic investment opportunities?
Foreign trusts can be utilized to administer assets cost effectively in one jurisdiction, avail themselves of pro-defensive legal rules in another, eliminate the English Common Law (and U.S.) rules against perpetuity in a third, access the world’s greatest asset managers in a fourth jurisdiction and diversify across the globe for the world’s best investment opportunities wherever they may be found (much of which is closed to U.S. investors).
The overall cost/benefit analysis is so simple and straightforward that it defies logic for someone seeking the benefits of a trust to not consider foreign jurisdictions for some, if not all of the person’s assets.
Remember, just because your trust is in one jurisdiction doesn’t mean your money has to be. Most international banks and trust companies operate on a truly global scale when it comes to accessing investments for their clients.
Is It Legal?
Of course it is legal. You have a thousand years of common law as well as the Constitutional right to establish a trust for yourself and your family wherever you choose. Many lawyers and accountants suggest that it might be improper or illegal to establish a foreign trust.
Because they don’t have the expertise to do them, and of course, what interest do they have in seeing their clients go elsewhere?
For these lawyers, if they have Nevada trusts to “sell,” then everyone gets a Nevada trust regardless of their situation.
The Government also suggests through the mainstream media that only rascals, drug kingpins, tax evaders and money launderers establish offshore structures.
This is because the Government would prefer that you keep all of your assets on shore and easily within its close reach for both tax and litigation purposes. You will never hear or read a Government Official say something as simple as this:
“A United States citizen has the Constitutional right to establish a trust
anywhere in the world. There are no excise controls or limitations in
moving funds or securities abroad, provided a taxpayer complies with his or her
basic tax and reporting requirements”.
Yes, there is even a tax form specifically for establishing an offshore trust. It is Form 3520. Go online to irs.gov and you can easily download the form and instructions.
If it were illegal to have an offshore trust, then why would there be a Government tax form to file when you set one up?
Finally, why didn’t the presidential candidates in 2012 (Obama/Romney) or 2016 (Clinton/Trump) ever even talk up the subject of the other holding personal or trust assets overseas? Could it be because they ALL have offshore assets?
OK, so the answer to whether holding assets overseas is legal, is simple. It is legal and proper to establish an offshore trust, but Uncle Sam demands that you report it so that he can keep tabs on both your onshore and offshore wealth.
An offshore trust has clear advantages over its domestic counterpart, but it is not a panacea to solve every financial problem and will certainly not make your taxes go away as some offshore conference speakers claim.
If You Hear this . . . Run for the Hills!
“If you put money into My offshore trust ‘Program,’ you will never pay
“You don’t have to report anything to anybody.”
There are certainly unscrupulous “Offshore Promoters” just as there are unscrupulous “Onshore Promoters” who want to pull you into their illegal schemes.
These promoters will also have very extensive and convoluted schemes to get your money offshore and to eventually get it back (or so they say). When you hear or see any of this type of blarney, turn your back and head for the hills.
We live in a very transparent world where virtually every financial transaction leaves an electronic trace or footprint. My own U.S. banker recently admitted that bank disclosure rules required real time reporting to the Government on all foreign transactions.
That means if you transfer money overseas, the Government will know that you did so BEFORE you even make it out of the bank. Again, making the transfer is perfectly legal, but failure to disclose the transfer on a variety of tax and reporting forms can be a federal crime.
The bottom line is it is legal, ethical and moral to have an international offshore trust, but you need to have realistic expectations and understand that you’ll still need to pay U.S. taxes on the income earned by the trust regardless of where it is domiciled.
So What Can a Foreign Trust Do?
An offshore trust can:
- Improve your situation with regard to third party creditors.
- Thwart zealous plaintiffs’ attorneys
- When combined with an offshore corporation and/or insurance products, achieve a level of legal tax deferral
- Allow you to access the 70 percent of international investments not directly open to U.S. investors such as Hedge Funds, Mutual Funds and Foreign Stocks and Bonds
- And allow you to shop globally for financial products and services and pay a fair and competitive price for these services
Why should you pay a fortune to have your trust be administered by a bank in New York, Chicago, Miami or Los Angeles, where the lowest paid Trust Officer makes $250,000 a year? With offshore trusts, you can pay a modest sum to a foreign trust company that wants your business and will do back flips to get it.
The Trust Officer, probably educated in the U.S. or U.K. might make $20,000 a year (which may be a princely sum in itself in some countries) and the managing director perhaps several times that amount.
Some trustees charge you a percentage of the return they make for you. It gives you options to make your trust as efficient as possible, which is no different than the manufacturing example above.
Pay for What You Need and Want
If your trust needs the services of a Financial Planner, you will pay a fair fee for that service. If you need basic banking services, you will be charged a globally-competitive fee for that service. If you want an internationally acclaimed hedge fund manager like George Soros to manage your trust assets, obviously you will pay a bit more.
The point is, offshore trusts will cater to your needs and offer globally competitive services for exactly the services you need and choose. You won’t pay for a variety of legal and investment services you don’t need as you frequently do with big banks in the U.S.
When you combine globally cost-efficient services with a better litigation environment (pro-defense), internationally diversified investment opportunities, and the ability to legally provide for your grandchildren’s grand-children’s grand-children, the choice is clear—an offshore trust may be the right type of trust for you.
Joel M. Nagel is an international attorney and managing partner of the law firm Nagel & Associates, LLC. Mr. Nagel is a frequent writer and speaker on international legal topics. Mr. Nagel has established trusts, corporations, foundations and other global structures in over 40 countries around the world to protect his clientele. He welcomes reader feedback at telephone (412) 749-0500 or contact him online..
About Joel Nagel
Joel Nagel is a U.S. licensed attorney who specializes in international business tax planning and offshore asset protection. Mr. Nagel has been practicing for over 20 years and is considered one of the top experts in planning, structuring, and operating an offshore business in a tax efficient manner. He is also the former Ambassador for Belize to Austria.
Joel Nagel sits on the boards of a wide variety of global companies including banks, real estate developers and online publishers. He brings a unique skill set and real world experience to each engagement.
Joel is a hands-on, in the trenches lawyer working on behalf of his clients. No matter the size or scope of your offshore business, he’s “been there and done that.”