How Do Offshore Trust Accounts Work?

Offshore trust accounts have long been viewed from a shady and even illegal point of view, especially with the frequency of high-profile court cases involving wealthy individuals and leaks from whistleblowers. 

But contrary to these perceptions, an offshore trust account is an entirely legal, albeit expensive, tool that individuals and corporations can use. 

An offshore trust is an estate-planning tool that transfers asset ownership to a foreign trustee outside the jurisdiction of the courts in the United States of America.  

Offshore trust accounts aim to protect your assets from creditors and incidents like government seizures. If someone comes for your assets, they cannot access them because they are in the hands of a trust in an overseas jurisdiction where the US judicial system has no say. 

Offshore trust accounts typically only hold assets located outside of the US. Some of the best offshore trust jurisdictions are the Cook Islands, Bahamas, the Cayman Islands, Belize, and Malta. These nations are known for their fluid financial processes and political and economic stability.

Offshore Trust Account 101

When setting up an offshore account, the key people involved are the settlor, the trustee, and the beneficiary. 

The settlor, also known as the trustor or grantor, is the creator of the offshore trust. They have assets they wish to protect by establishing an offshore trust account.

The trustee is, in most cases, a legal entity like a financial institution mandated with holding and managing the property in the offshore trust account on behalf of the settlor. 

The beneficiary is the individual or organization benefitting from the offshore trust account. They can do whatever they please with the property or income from the trust account once they are of age, including but not limited to selling, reassigning, and releasing it. 

A protector, who the settlor appoints as a third party to oversee the trustee, is a recent addition to the offshore trust account landscape. 

When the settlor signs over the property to the trustee, the latter can only use the property per their agreement. The trustee’s ownership of the trust account is enshrined under the deed of trust. It dictates that while they are technically the property owners, they are required to only use it in the interest of the settlor and the beneficiary.

Types Of Offshore Trusts

There are many types of offshore trust accounts entities can use. Here are four of the most common: 

  • Revocable offshore trust: Revocable offshore trust accounts grant the settlor the flexibility to cancel or alter the deed of trust after a designated period or a time they deem fit. In this case, income earned by the trust is distributed to the settlor while they still live. Otherwise, the property transfers to the beneficiaries upon the settlor’s demise.
  • Irrevocable offshore trust: Irrevocable offshore trust has a ‘no going back’ clause. In this case, once the settlor has signed their property to the trustee, they no longer get free access. Everything happens per the agreements enshrined in the deed of trust.
  • Discretionary offshore: The discretionary offshore trust is known for its flexibility. This offshore trust account allows the settlor to send a ‘letter of wishes’ to guide trustees on administering the trust account.
  • Interest in possession: Beneficiaries in this type of offshore trust account benefit from the income generated by the property in a trust without owning the property in the trust. They are also called life tenants.

Each one has its pros and cons. Knowing them well is crucial for finding the perfect arrangement and terms.

Benefits Of An Offshore Trust Account

There are several benefits to having an offshore trust account. Apart from diversifying your investment portfolio, it also offers the following perks:

  • Confidentiality: Confidentiality is the core of most offshore trusts. Most enjoy privacy laws that protect their investors, which rightfully become moot if you engage in illegal activities.
  • Reduced tax liability: An offshore trust account will not exempt you from taxation. But it can reduce your overall taxation burden. In most cases, your only requirement will be to pay US-rate taxes on capital gains from your investments held in trust.
  • Asset protection: In case of a lawsuit, you get an extra buffer between your assets and potential creditors.

For these reasons, offshore accounts are popular among entities that want to make the most out of their assets as much as possible.

Should You Make One?

Trust accounts are not an avenue for crime, though shady dealings are not uncommon. Most financial institutions will take you through jumping hoops to check the legality of your business ventures before they take you in as their client. 

Suppose your business is legal and your intentions to start an offshore trust account are honest. In that case, it’s recommended that you access a reputable law firm’s services to guide you through setting one up. Lawyers can help research the best country to set up the trust, the best foreign entity to serve as your trustee, and the draft of your offshore trust account agreements.

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