Do You Really Need an Offshore Trust? (A Complete Guide)
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Contents
- What is an offshore trust?
- Key Advantages
- Biggest Disadvantages
- Who needs an offshore trust?
- What can you hold in an offshore trust?
- How much money do you need to open an offshore trust?
- The best offshore trust jurisdictions
- #1: Cook Islands
- #2: Belize
- #3: Nevis
- Other jurisdictions
- What to look for in an offshore trust company
- How to set up an offshore trust
- How long does it take to set up an offshore trust?
- Frequently Asked Questions
- Find out if an offshore trust is right for you (free call)
A client told me someone recently tried to sell him a Cook Islands offshore trust. He wanted my feedback.
When this happens (and it happens surprisingly often), the first question I ask is, “What do you need it for?”
Because unless there’s a good answer, it’s rarely a good fit. Offshore trusts – although one of the best asset protection tools out there – are pricey, aren’t as flexible as you might think, and can be very hard to bank (which undermines their usefulness).
In this comprehensive guide, I’m going to introduce you to the pros and cons of this tool. I’ll talk about how to tell if you need one, how it should fit into your planning if you do, and the best places to set one up. And, of course, how to actually do it.
Our Offshore Trust Expertise
Long-time readers will know that we’ve helped thousands of clients since 1984. We’ve frequently worked on complex structures that involve domestic trusts, offshore trusts, and often both at the same time.
We’ve also been brought into many cases to fix poorly drafted offshore trusts.
In addition, our sister firm has been licensed as a trust company in Nevis, originally to set up and maintain trusts under Nevis law.
Needless to say, this is a topic we know well. So if you have an offshore trust and aren’t sure how to use it—or have been pitched one and aren’t sure if it’s right for you, please reach out to us.
What is an offshore trust?
In a nutshell:
Offshore trusts are similar to US trusts but established in foreign jurisdictions.
Like US trusts, they involve a grantor / settlor, trustee, and beneficiaries, but the key difference is the location.
People usually set them up for their asset protection value. In certain cases, they may offer a higher level of privacy.
It’s usually promoted as such but – during the lifetime of the person setting them up – they don’t offer any tax advantages if you’re a US taxpayer.
Key Advantages
Asset protection
When set up properly in the right place, offshore trusts offer some of the best asset protection available anywhere. Not just against private creditors but even governments.
Privacy
A lot is made of the privacy of this entity. And it’s true. But it’s also true that domestic trusts in the US are generally quite private, though not always. (It depends on which state you live in.)
Flexibility
Depending on your circumstances, offshore trusts can be structured to fit your needs better than other options, making them a great tool for complicated estate planning.
Tax benefits
If you’re a US citizen, offshore trusts can offer tax benefits to your heirs, not to you personally.
Protection from political risk
Assets held in an offshore trust give you a strong level of protection against domestic (i.e. US) political instability, especially if the assets within the trust are also outside the US.
Foreign judgment resistance
Most other countries do not automatically recognize judgments from the US thanks to a court system many see as unfair. Many specialized offshore trust jurisdictions go a step further and force litigants from other countries to go to court again under their own rules. That means if someone in the US wants to recover assets from your foreign trust, they will need to go to court in that country. That makes you much less of a target.
Biggest Disadvantages
Setup and maintenance costs
Offshore trusts can be expensive to set up and maintain. Because the market is opaque, fees vary widely. The more complicated your situation, the more it will cost. But it’s not uncommon to see quotes starting at $25,000–$30,000 to set up and $5,000–$10,000 a year to maintain.
They don't work for all asset types
Generally, if the asset is liquid (stocks and bonds, cryptocurrencies, precious metals), a trust can work well. But if the asset is illiquid – especially real estate (both foreign and domestic) – the picture gets more complicated.
Complex regulations
The US tax and reporting obligations for offshore trusts are complex. Making mistakes can mean big penalties. As a result, compliance is expensive in the form of legal and accounting fees.
You have to give up control
For the strongest asset protection, you need to be willing to give up effective control of your assets. This means putting a lot of trust in the person you hire to manage those assets on your behalf (the trustee). As we’ve learned from experience, not all trustees are honest.
Who needs an offshore trust?
If you spend much time in this business, you’ll get the impression everyone does. In fact, when I first entered this business, a newsletter writer sold a DIY kit to set up your own offshore trust in the Cook Islands.
(Predictably, it caused a lot of problems that clients then came to us to fix.)
Because the truth is, offshore trusts are not simple things. They are an advanced tool specifically for people who:
Have a higher risk exposure (to lawsuits or other threats).
Are prepared to move at least a few million dollars’ worth of assets into the trust.
Whose asset mix to be conveyed into the trust is fairly liquid (securities, precious metals, etc.).
It is generally not suitable for people who:
Aren’t at risk of being sued professionally.
Have a lot of their net worth tied up in property, unless the value of that property is more than $10,000,000.
Have investable assets of less than $1,000,000, unless you’re a high income earner in a very high-risk profession.
The reason for this is strictly due to fees. We have worked with too many clients who were “tricked” into setting up an offshore trust with no clear plan on how to use it or what specific threats they were protecting against. They spent tens of thousands of dollars to set it up. And then thousands of dollars a year to maintain it.
What can you hold in an offshore trust?
Offshore trusts can hold many different assets including:
Cash, publicly traded stocks, and bonds.
Businesses, intellectual property, and shares in private companies.
Valuable collectibles like artwork, antiques, jewelry, and firearms.
Mutual funds or hedge funds.
Certain types of insurance policies
Real estate, both domestic and international, can also be placed in the trust. However, the situation here is more complicated. It depends on which country your property is located in, what exactly you plan to do with that property, and how long you plan to hold it.
I can’t stress enough how important it is to properly look at your options if you’re thinking about moving real estate into an offshore trust.
How much money do you need to open an offshore trust?
Frankly, it’s not just about the money. It’s about how likely you are to be a target and how important it is for you to protect against that risk.
In general, though, it’s hard to justify if you don’t plan to move in at least a few million dollars.
(In a perfect world, we aim to ensure that the returns on the assets in a trust more than cover the fees to maintain that trust, effectively making the trust free.)
If clients come to us with a low risk profile – they’re W2 employees, retired, or have a low-risk business, we generally recommend $5 to $10 million to ensure that gains from those assets cover the cost of the trust and then some.
If clients come to us with a high-risk profile – medical professionals, high-risk businesses like manufacturing and certain services, or certain types of real estate investments – there can be a case at $1 million. The returns on those assets might not cover the yearly fee, but you do get very strong asset protection and the peace of mind that comes with it.
To figure out this risk factor is a core part of the planning we do for clients. If you need some help with this, please feel free to get in touch.
The best offshore trust jurisdictions
Technically, an offshore trust is any trust outside your home country. (To our readers, that usually means outside the US).
But when most people talk about “offshore trust,” they’re almost always talking about trusts in places that have specifically created trust law focused on asset protection.
There are really three options.
#1: Cook Islands
The Cook Islands has built a strong reputation for asset protection since passing its International Trusts Act in 1984, specifically designed to attract foreign clients.
It offers some of the best protections against creditors. It has a short statute of limitations (the time a creditor has to sue you based on a potential claim). And if foreign creditors (including from the US) want to sue your trust, they have to come to the Cook Islands; the place doesn’t enforce foreign judgments.
The Cook Islands is considered the gold standard, with higher fees to justify that.
#2: Belize
Belize was next to the game with the Belize Trusts Act in 1992. The protections were made a lot stronger in 2000, in order to compete better with Cook Islands and Nevis trusts.
Like the Cook Islands, Belize makes it hard for creditors of a trust. But unlike the Cook Islands, they don’t try to be everything to everyone. They tend to appeal to people who want an offshore trust that’s a little simpler and less pricey.
In practice, however, we almost never recommend setting up here. Banking a Belize trust is very hard. Belize is also seen as dodgy on the international stage and sits on a number of tax blacklists, creating reputational risk if you set one up there.
And there are other reasons that could potentially open us up to claims for slander – what industry insiders know but has never been successfully litigated in court – so we won’t repeat them here.
#3: Nevis
With the passing of the Nevis International Exempt Trust Ordinance in 1994, Nevis was the last of the three to join the group here. They offer much of the same legal protections as the Cook Islands and Belize.
However, they try to thread a middle path between the two – they offer an easy solution at generally lower rates than the Cook Islands, but without the reputational risk of a Belize trust.
[Full disclosure: Our founder, Mark Nestmann, is the CEO of a Nevis corporate services company called Fortress Trust.]
Other jurisdictions
As mentioned, an “offshore trust” is any trust established outside your home country. For most of our clients, that’s the US.
When most people speak of getting an offshore trust, they are talking about setting one up in one of the three jurisdictions above specifically for asset protection.
But sometimes, offshore trusts from other countries can make sense for certain clients. For example, New Zealand has some good options for non-resident US clients who are holding larger real estate portfolios in multiple countries.
And for clients who live in other common law countries like the UK, Ireland, Canada (except Quebec), Singapore, Australia, or a couple of dozen other countries, local trusts in those countries can make sense too.
What to look for in an offshore trust company
What makes for a good offshore trust provider is much the same as for any offshore service. That includes:
Reputation and experience: Choose a company with a strong track record in managing offshore trusts. The more the better.
Trustee qualifications: Ensure the trustees have the necessary experience and legal knowledge to manage the trust properly. Especially with US clients where compliance issues are half the work.
Jurisdiction expertise: The company should have in-depth knowledge of the specific country’s trust laws and regulations and how they work with US planning. In our case, we coordinate the US side of things and hire local attorneys to put together the entities under our direction.
Licensing and regulation: Ensure the company is licensed and regulated in the jurisdiction where it operates. This should be obvious but not everyone holding themselves out as experts are properly licensed.
Fee structure: Look for transparent pricing, including for setup, management, and “extras”. This is an opaque market often full of hidden fees.
Customer service: The company should offer reliable support and be responsive to your needs. This is often overlooked, but it makes a big difference in the day to day.
IMPORTANT: The Protector should be from another firm!
We’re aware of a practicing lawyer in one of the three famous offshore trust jurisdictions who will set up an offshore trust for you and make himself both trustee and protector. (A protector is basically a form of checks and balances to ensure the trustee is acting in a way that’s best for the beneficiaries.)
This is a big red flag because it gives him total control over the assets and takes away any legal right you have to ever claim them back.
Your trustee and protector should be two different people at two different firms who have no personal connection to each other.
How to set up an offshore trust
Different planners do it differently. Here’s the process we’ve found gets the best results for our clients.
Step One: See if an offshore trust is needed
Offshore trusts are powerful tools, but they’re not for everyone. When we work with clients, we’ll first look at what options will fit your needs most cost-efficiently. If an offshore trust will do it, we’ll let you know. If not, we’ll recommend something else.
Step Two: Choose a jurisdiction
For us, it’s usually a choice between Nevis or the Cook Islands. Which one works better depends on the client.
Step Three: Set up the trust
That includes drafting the trust deed according to the rules of the jurisdiction, choosing a trustee, choosing a protector, setting the beneficiaries, and laying out the terms for how the trust will operate day-to-day. Getting this right is critical.
Step Four: Transfer your assets
Once the deed is ready, we will help convey your assets into the trust. This involves paperwork both on the US side and in the trust jurisdiction.
Step Five: Ongoing Management
Offshore trusts aren’t set-it-and-forget-it. To make it easier for clients, we coordinate everything as assets are moved in, assets within are managed, and as assets are moved out.
How long does it take to set up an offshore trust?
Setting up an offshore trust usually takes a few weeks to a few months, depending on certain factors. Simple trusts with straightforward assets can be completed quickly, while more complex structures involving multiple jurisdictions or asset classes take longer.
Frequently Asked Questions
How are Offshore Trusts different than Domestic Asset Protection Trusts (DAPTs)?
Functionally, there’s very little difference. Both have the same positions – the grantor (that’s you), the trustee (who manages the assets on your behalf), the beneficiaries (who benefit from trust assets), and a protector (who ensures the trustee is acting in the best interest of the beneficiaries).
However, the biggest difference is the body of law that governs the trust. Offshore trusts as we mean them here – ones set up for asset protection – are more protective to US clients than DAPTs (domestic asset protection trusts).
By being outside the country, offshore trusts are harder for US threats to get into. Offshore trusts also have a stronger body of law behind them than the relatively young and unproven DAPT structures.
Does a law firm have to put together an offshore trust?
No. We’ve found that oftentimes it’s better to use a specialist who can deliver a whole solution, instead of a lawyer who may do one piece and leave you to figure out the rest.
How much does an offshore trust cost?
That depends on how complicated your case is. However, you’ll often see fees of $25,000 – $30,000 for setup and $5,000 – $10,000 a year to maintain.
That said, it can vary widely. We have one client right now who came to us with an offshore trust. He’s currently paying $30,000 per year to maintain it.
(We’re working to lower that cost because, in his case, it’s much too high.)
Are bridge trusts offshore trusts?
A bridge trust isn’t exactly an offshore trust, but it can supposedly become one. It starts as a domestic trust under US law, keeping things simple and cost-effective.
However, if a legal threat arises, the trust can “migrate” to an offshore jurisdiction like the Cook Islands or Nevis for stronger protection.
In practice, however, there is no legal basis for this idea. In fact, the fellow who came up with it (an early mentor of Mark Nestmann), specifically laid out how a US court could prevent the “migration” to the offshore jurisdiction, basically making the thing no better than a domestic trust from an asset protection point of view.
That said, some very smart lawyers we know think it could work if it’s properly drafted. But we’re not aware of any cases when it’s actually been tested, and we don’t think making our clients guinea pigs is the right thing to do.
Who does offshore trust formation?
There are plenty of providers out there, especially in the Cook Islands and Nevis. But we don’t recommend going to any provider until you are 100% sure you need it.
Is there such a thing as an offshore living trust?
Yes. Offshore trusts can be living trusts aka revocable trusts, which basically means you can close them or pull out assets as you like. However, there’s no real value in doing this as there’s much less asset protection. If that’s what you want, a living trust set up in your home state is much better value for money.
Most offshore trusts are set up to be irrevocable. They are designed to protect your assets by creating a barrier between you and your wealth. You have to give up some control – the opposite goal of a living trust.
What's an offshore irrevocable trust?
This is basically an offshore trust set up for asset protection reasons. It’s the default.
What's the cheapest offshore trust?
Find out if an offshore trust is right for you (free call)
It sometimes feels like we talk more people out of offshore trusts than we recommend them. But it’s what our clients expect. In the words of one recently, “I really appreciate that you give it to me straight even if it costs you money.”
That might not be the smartest business move in the short term, but it’s hard to go wrong long-term by keeping our clients’ interests front and center.
To see if an offshore trust is right for you, book in a free, no-obligation call with one of our Associates here. We’ll tell you up front if this structure is right for you. If not, we’ll share our thoughts on what sort of planning might be a better fit.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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