Use of a Discretionary Trust for Asset Protection Offshore
Use of a Discretionary Trust for Asset Protection Offshore
Most jurisdictions have some variation of what in British and Canadian law is called a discretionary trust. In Australia, for example, it is referred to as a family trust. Although the precise term may vary from jurisdiction to jurisdiction we will use the term discretionary trust to describe a legal vehicle designed to provide trustees with extensive latitude in which beneficiaries will receive payments and how much they will receive. There may be any number of reasons why a person will set up a trust in this manner. However, a discretionary trust provides a degree of asset protection for passing wealth from generation to generation which is not found in many other vehicles. Combining features of a discretionary trust with other offshore asset protection vehicles can be an extremely effective way of reducing the tax consequences of inheritance. It can also be an effective means of avoiding the attacks of unscrupulous lawyers searching for "deep pockets" in a law suit or, for that matter, anyone looking to scam or steal from ones heirs.
Trusts in General
A trust is a legal vehicle typically set up so that an individual may pass inheritance to his or her heirs without probate and with reduced tax consequences. There are many forms of trusts. Depending upon jurisdiction the creator of the trust is called a settler, trustor, grantor, donor or creator and those who will receive assets of the trust are beneficiaries. An individual, company (such as a bank), or other persons with experience in this matter are trustees. Trustees are charged with the obligation of carrying out the terms of the trust, typically after the settler has died although there are various forms of living trusts wherein the trust may function while the settler is still alive. A trust can be defined in many ways an in the event of substantial wealth can be multigenerational. The prime reasons for setting up a trust are generally to care for the needs of ones heirs and to reduce the tax consequences of passing money to the next generation or generations.
Offshore Asset Protection and Privacy Solutions
Many choose to look offshore from their nation of birth for a degree of privacy and protection of their hard earned assets that is not available in their homeland. It may be a legal system that encourages "fishing expeditions" by unscrupulous lawyers or an excessively "transparent" system that lays ones assets out for the world to see. There are times when moving assets offshore to a tax advantaged location can very, legally reduce the tax consequences of earnings, holding property, and the like.
Commonly used offshore solutions include offshore banking, offshore business formation, an international business corporation for doing business or simply holding assets, various types of foundations, and trusts. Depending upon the needs of the individual, family, or company a single offshore vehicle may be the "offshore solution" or a mixture of vehicles, one owning the other will be advisable. The point of these measures is typically to place ones assets in less intrusive and more tax advantages jurisdictions. Most of these jurisdictions have laws that specifically shield ones assets from public view. An individual may form an offshore international business corporation and not have his or her name listed in any public document or registry. He or she will then bank through the corporation, use a debit card or credit card assigned to the corporation and not have any of his or her monetary dealings exposed to the public eye.
Similarly one can form a foundation such as a Panama Private Interest Foundation which in turn holds the corporation, and therefore the bank account, as an asset. The beneficiary of the corporation is not an owner and can be changed upon the death of the first beneficiary so that his or her heirs become beneficiaries with no tax consequences.
A trust will function in much the same way by passing assets to heirs. The use of discretionary trust, however, will provide an extra layer of protection from unwarranted intrusion, taxation, and the like.
A Discretionary Trust
As with all trusts a discretionary trust is governed by a trust document. In the case of discretionary trust the creator of the trust will have left instructions to the trustees for administration of the trust. However, the instructions will typically be rather general or non-specific. The indeterminate wording of a discretionary trust document makes this a highly flexible vehicle and can provide for excellent asset protection of trust assets and benefits to beneficiaries. An advantage is that it is not difficult to change benefits according to current circumstances. Benefits are not set in stone. In addition, if a beneficiary owes money or is being sued with the possible outcome that his or her assets may be subject to confiscation the discretionary trust provides a level of protection. If the amount and nature of benefits that the beneficiary might, or might not, receive are unclear then it can be very difficult to attach assets of the trust. There is no clear interest to which to attach a clear liability.
Typically in a discretionary trust the trustees are guided by a memorandum written by the creator of the trust. However, the memorandum most commonly has no legal status. This, again, provides a level of asset protection if anyone comes looking to attach a liability to assets of the trust.
Practical Uses of a Discretionary Trust with Other Asset Protection Vehicles
A practical example of the use of a trust, discretionary or otherwise, goes like this. An individual sets up a trust in the country of New Zealand. He or she then forms a Panama private interest foundation as an asset of the trust. The foundation will hold various assets which could include an offshore business such as a New Zealand Offshore Financial Company or an international business corporation in any of several countries. The foundation could hold an offshore bank account in Belize, for example. In each instance the offshore vehicle used will typically be set up to be owned by the "parent" so that when a beneficiary of the trust uses a white label debit card from the company or offshore bank it will be in the name of the company or bank. The names of foundation beneficiaries, bank account beneficiaries, and the like will not in any public document. At the root of this arrangement will be a very flexible trust arrangement, administered by those whom the trust creator chooses, taking care of beneficiaries in a most tax advantaged and private manner, away from the prying eyes.
NOTE: As a practical matter there are many offshore jurisdictions and laws change from time to time. Please consider the above material to be a useful but general review of the opportunities offered by mixing a discretionary trust with other offshore asset protection vehicles. To do the job right the individual will need to seek counsel that currently deals with such issues across national borders and has no vested interest in any particular solution but will advise for the benefit of his or her client.
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