The use of an offshore trust for tax planning and asset protection purposes is a popular method adopted mainly by high net worth individuals as part of their overall tax planning strategy.
Discretionary offshore trusts are the main type of trust structure used by those who wish to gain the maximum in privacy, security and flexibility from their offshore investment and asset protection plans.
Care needs to be taken when planning an offshore investment or tax reduction strategy because not all the actions that can be taken are necessarily recommendable for an individual. Even more importantly, not all actions that can be taken are legal nor will they necessarily reduce or negate an individual’s taxation liability. Advice should be sought from an independent financial specialist on an individual basis and the information contained in this article does not constitute advice.
By placing assets into a basic offshore trust structure a settlor can inadvertently create a situation whereby the beneficiary of the trust, who has to be named in the trust document, will be taxed on income and gains from the trust even though they are not the actual owner of the assets. This is because the taxation authorities are not stupid and can easily see through the veil that the settlor is tying to create to avoid paying tax!
Discretionary trusts for offshore taxation planning and asset protection purposes are therefore used in the majority of cases nowadays. A discretionary trust allows the trustees to decide upon the trust’s beneficiaries and the choice is made entirely at their discretion.
As no beneficiaries are actually named in the trust documentation the thinking behind using this type of structure is that the taxation authorities cannot tax a beneficiary as no beneficiary is named and no one can therefore prove when or even if an individual will benefit from the offshore discretionary trust.
Of course anyone who does realize an income or benefit from a dividend from the offshore trust at any stage may be liable for taxation depending on their individual taxation status – again, advice should be sought about a beneficiary’s obligations to the revenue authorities in such a situation.
Offshore discretionary trusts are also known more commonly as offshore asset protection trusts and are being used by an increasing number of individuals who wish to protect their assets not just from unnecessary taxation but from unfair potential litigation from creditors for example. The applicability or otherwise of the use of such a structure for an individual’s own asset protection planning purposes can be determined after expert advice has be obtained.
