The Reality of Offshore Trust Tax Avoidance

The offshore trust has been demonized over the past few years with the various offshore data leaks bringing into the light what was once highly private. As expected, the pitchforks came for the “wealthy” and anyone listed in the Panama papers was immediately branded a tax cheat by the media.
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The offshore trust has been demonized over the past few years with the various offshore data leaks bringing into the light what was once highly private. As expected, the pitchforks came for the “wealthy” and anyone listed in the Panama papers was immediately branded a tax cheat by the media. However, the reality of Offshore Trust Tax Avoidance is very different to what the media might have you believe.

Is Tax Avoidance with Offshore Trusts a Problem

The short answer is yes, and no. Trusts can be used for a variety of reasons and tax minimization is only one of them. They are legitimately used to protect assets from greedy, and overreaching, governments. However, they can also be used to shelter income and, potentially, obscure the ownership of assets.

What is an Offshore Trust

Offshore Trust Tax Avoidance
The Cook Islands is a Key Offshore Trust Jurisdiction

A trust is simply a legal agreement or document where parties come together to arrange the management of assets to the benefit of the beneficiaries. In simple terms, the settlor places assets under the control of a trustee who then owns those assets but has a fiduciary obligation to look after them for the benefit of the listed individuals named as beneficiaries.

The ownership of the assets passes from the settlor to the trustees and the settlor, therefore, no longer owns or has a claim to those assets. So, you can see how this would benefit someone from an asset protection perspective.

It makes it very hard to collect a lawsuit judgment given the settlor no longer “owns” the asset.

Trusts are exceedingly common structures under English common law and have been around for hundreds of years. Subsequently, there are plenty of good reasons to have either an onshore or offshore trust structure.

Who Actually Uses Offshore Trusts?

This is a good question because the public would be made to believe that offshore trusts are only the preserve of the ultra-wealthy. This is far from the trust and the mix of trust settlors, that I have seen, bridges the gap from the working class all the way to the wealthy.

The reality is that in today’s litigious world, with its terrible mix of call-out culture and wokeness, individuals across the spectrum are looking to protect their hard-earned assets. There is also less trust for western governments, as compared to the past, and this has meant that people have been increasingly looking abroad to diversify their risk of changes to the law.

However, the vast majority of individuals involved with offshore trusts remain wealthy. Typically, the reason why has to do with residency status with most offshore trust users being UK residents but not actually domiciled there. This provides tax benefits as well as asset protection and privacy.

Are Offshore Trust Tax Avoidance Structures?

offshore trusts are subject to tax minimization
Offshore Trusts are Not Designed as Tax Avoidance Entities

This is a difficult question to answer because it very much depends on how the trust has been structured and for what purpose. Rather than suggesting that they are a “tax fiddle” I would state that they are tax-effective structures that comply with the current legal obligations in most nations.

It is true that, in some cases, income or capital gains can be sheltered in an offshore trust thereby avoiding domestic taxation. However, in many cases, this is perfectly legal given that the settlor and beneficial owner of the assets may not be a tax resident in that country.

Subsequently, it pays to not come to a knee-jerk reaction over whether the tax status of an offshore trust is “moral” or not. Typically, this is what the media would have you believe, and, unfortunately, their reliability has been severely eroded over the past decade.

Where offshore trusts really shine is in succession planning and the fact that a dying person can form a structure that ensures that their final wishes are carried out. Unfortunately, many western nations have gone down the route of allowing all family members to contest a will, thereby, eroding your potential final wishes. I believe that this is amoral behavior and that a last will and testament should stand regardless of the wishes of the family.

Ultimately, offshore trusts avoid much of the “forced heirship” risks and allow your bequests to flow as you intended. This is a significant reason why the wealthy continue to establish trusts as they are very concerned about where the fruits of their hard work go when they pass on.

Yeah…But it’s Still Tax Avoidance, isn’t it?

No, today’s tax operating environment is all about disclosure. The past few years have seen the Common Reporting Standard (CRS) instituted across a vast number of countries. Effectively, this standard requires financial institutions to collect information on their depositor’s tax status and then report the account balance to the various tax agencies around the world.

Subsequently, there is little chance that you can hide money and assets anywhere around the world in 2022. Most countries submit CRS reports annually and you will be caught if you fail to disclose the existence of those funds or that account to your country’s tax agency.

Offshore Trust Tax Avoidance is Declining Due to CRS and FATCA

Americans face an even stricter regime known as FATCA, where global banks are forced to report directly to the U.S. government or face being cut off from transactions in U.S. Dollars. As you can imagine, most banks have fallen in line with FATCA reporting.

Subsequently, in 2022 the need to disclose the existence of an offshore trust or company is near 100% in most western jurisdictions. So, the media’s suggestion that anything offshore is an illegal tax dodge is generally without merit. Sure, there is some smart structuring going on but the vast amount of trust and company formations is about asset protection and not tax avoidance.

What About Criminal Usage of Offshore Trusts

CRS FATCA Offshore Trusts
Criminal Usage of Offshore Trusts is Declining as Disclosure and Reporting Increase

It was true that prior to 2001 that trusts were often abused around the world by criminals and money launders. It would be naïve to suggest that this was not occurring, at some level, even today given the ability to add a layer of privacy into asset ownership.

However, the number of illicit activities through trusts has been reduced to almost a trickle. This is due to highly rigid compliance activities by corporate service providers and global banks. Starting a trust, or opening a bank account, is a complex activity today that requires large amounts of due diligence and background checking.

Banks and service providers take their Know Your Customer (KYC) obligations seriously which has, considerably, complicated the route for money launders and criminals to use these sorts of entities. In fact, financial institutions can lose their correspondent banking facilities easily by allowing bad actors to use their services.

Subsequently, there are WAY fewer criminal proceeds flowing through offshore entities than anyone would have you believe. The industry is exceedingly aware of the risks of involving itself with any “shady” business operations or clients.

Why Setup an Offshore Trust If I Can’t Avoid Taxes?

The answer is a fairly simple one. Privacy and protection. Lawsuits in most western countries are reaching record settlement levels without even having done anything wrong. Typically, when you are being sued you need to make an assessment as to whether the costs of defending the action are more than the potential settlement. Unfortunately, in today’s legal environment truth and fairness have no place in the court process.

Subsequently, the smart move is to, effectively, make yourself judgment proof by owning no assets that can be attached to a civil action. This can be achieved through the formation of an offshore trust and the settling of assets into that trust structure.

In this way, you effectively have little in the way of risk given that you own almost nothing. Ultimately, trusts are an effective liability shield and make you, significantly, less of a target to vexatious litigants.

Also, privacy is a chief concern in the current days with almost all information, generally, available online. This has seen cases where pressure groups have looked up ownership information to harass and pressure company owners. In some cases, they have also pressured the local and central government into acting and changing the rules for specific businesses and operators.

This is where an offshore trust really shines as, typically, there is no central database available for searching. It can be almost impossible to discover who the ultimate beneficial owner or beneficiary is of an asset that is held in an offshore trust. This can help protect you from both cancel culture and the potential mobs of future litigants.

Conclusion

Offshore trusts remain an excellent vehicle for privacy and asset protection and, in some cases, tax sheltering. However, it very much depends on where you are a tax resident and what your personal circumstances are.

In 2022, trusts are less about tax avoidance and more about having a custom liability shield in place to deal with an uncertain future that is, clearly, unfolding in the west.

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