the offshore trust   

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Offshore trustAn offshore trust is one that is created outside the country of residence of the person who promotes it (who is called the settlor). Usually located in a tax haven, its features and characteristics are essentially the same as those of a common trust, but as it is created under more favorable legislation, it provides a greater level of security, legal protection and privacy.

What is an Offshore Trust useful For?

Due to its flexibility, it can be used for many different purposes. Some of the most common ones are the following:

Tax Reduction. The offshore trust creates a special legal framework in which the property is separated into legal ownership and beneficial ownership. This feature of the trust can be leveraged in some cases to achieve tax advantages, especially in combination with other entities. For example it is common for the Trust to hold shares in offshore corporations or to exercise control of family properties.

Asset Protection. This term describes measures to protect personal or family property. By setting up an offshore trust, the assets are transferred to a “trustee” or administrator and legally no longer belong to the “settlor” or person who promoted it. This puts them out of reach of potential creditors or plaintiffs from causes such as divorce, labor disputes, allegations of negligence, etc. Offshore trusts are also generally used for the separation of property between spouses, especially in cases where one spouse is involved in economic activities with high risk of lawsuits or indebtedness.

Inheritance and Succession Planning. Trusts are a convenient alternative to the will, as they offer greater flexibility in planning the division of property of the deceased among relatives and friends. They avoid probate and related costs, and sometimes also serve to avoid the enforcement of laws that prevent free choice of heirs, e.g. where surviving spouse or children are entitled to a percentage of the estate.

Who Usually Creates an Offshore Trust?

It is generally created by people who have assets (tangible or intangible) to protect or who are in professions in which they are at risk of suffering lawsuits such as doctors, architects, artists, entrepreneurs, but also ordinary people who seek to plan their taxes in a more advantageous way or seek a higher level of protection for their property. Leaving part of it in an offshore trust reduces the risk of it being seized or claimed in the event of suffering a civil lawsuit or bankruptcy or insolvency.

What are the Most Common Forms of Offshore Trusts?

Most of them are created as “inter vivos” or living trusts, and their role is to manage property and assets of the settlor in favor of the beneficiaries. There are many different versions, but nearly all belong to one of the following categories:

  • Private Trusts. These are the most common ones and are used for the administration of family property.
  • Corporate Trusts. These have business purposes, often to administer employee pension schemes or investments.
  • Charitable Trusts. Established for the benefit of organizations with social purposes.
  • Purpose Trusts. This one has no beneficiaries, and it can be established for any clear, reasonable and possible purpose.

On the other hand, the offshore trust may also be created with different characteristics. In this sense it can be:

  • Revocable or irrevocable. In the first case the settlor or grantor retains the right to modify or cancel the trust at any time. If it is created as irrevocable, he has no power to alter or end it, and its terms will be fulfilled as originally established.
  • Fixed interest or discretionary. In the first case, beneficiaries and their interests are determined at the time of drawing up the contract or deed. In the second case, the decision on how to split the assets between the different beneficiaries rests with the trustee or administrator.

Normally, if the objective of the establishment of the offshore trust is tax planning, the safest option is to define it as irrevocable and discretionary. Only in this way the settlor will be completely detached from the property, and can therefore prove that it does not belong to him anymore. Any other solution is at risk of being ignored by a Court as it may reach the conclusion that the person who has created the structure still has control over it.

In a discretionary trust the trustee has wide powers of decision, as it is in his hands to decide how and in what way he will manage and distribute the property. However, this does not mean that the indications of the settlor will not be taken into account. To this end, a confidential and private letter in which the settlor expresses how he wants the assets  (investment, property division, etc.) to be administered is drawn up to guide the trustee in his acts and decisions. This letter is called a “letter of wishes” and, although not legally binding, is generally respected by the trustee, provided that the content is legal and reasonable. This letter of wishes can be updated regularly, in order to adapt it to changing circumstances of the property or the beneficiaries.

As an additional control measure, it is common to use a protector. This is a person appointed by the settlor to oversee the trustee and has the power to replace or terminate him if he deems it necessary.

Finally, the jurisdiction chosen to create an offshore trust is also a determining factor. Not only must it have a favorable legislation that protects it, but also sufficient legal and political independence, so that its Courts, if necessary, resist external attacks. It is precisely at this point where many small offshore tax havens fail.

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