International Wealth Preservation Planning

Offshore Wealth Preservation Trusts

Few areas of the law are as complex or misunderstood as the law applicable to Offshore Trusts and international wealth preservation planning. Even before Bankruptcy reform (i.e. the Bankruptcy Abusive Prevention and Consumer Act of 2005 commonly known as the 2005 Bankruptcy Reform Act finally passed by Congress and signed by President Bush on April 20, 2005), the use of wealth preservation planning to legally maximize the protection of a client's personal wealth had gained new recognition and acceptance as a result of today's litigious society. Now any business or estate plan requires a careful review and analysis of the risk associated with the client's activities and business holdings. An International Trust, commonly referred to as an "Offshore Trust" is a trust that has been formed outside the resident jurisdiction of the person establishing the trust. Most offshore jurisdictions where trusts are formed are considered to be independent of the country in which they are physically located and thus impose little or no taxes on income earned in the Offshore Trust jurisdiction (hence the term "tax haven").

For clients with very significant assets at risk, a client's advisors should consider the benefits, goals, issues, and risks involved in establishing an Offshore Wealth Preservation Trust as part of a comprehensive asset preservation plan. The benefits of an Offshore Trust are indeed obvious in those situations when a client without one, but with substantial assets at risk, becomes a defendant in a serious lawsuit. If such a client had not already protected his or her assets with an Offshore Trust, the client could face financial ruin. Family limited partnerships and family limited liability companies can be incorporated with a self-settled trust to maximize the protection of assets by providing several layers of protection for the client at risk while enhancing the estate planning benefits of an existing or proposed estate planning strategy. For wealthy clients, such wealth preservation structuring can be organized offshore where the client can legally maximize the asset protection goals of their overall wealth preservation strategy.

The fact that a domestic trust is located within the United States makes it a natural and easy target for creditor lawsuits. Among the variety of reasons why a settlor might want to avoid locating a trust within the United States are the following:

1. Trust assets and its trustees are subject to the whims of State and Federal Judges and subject to their control;
2. Confidentiality;
3. Personal Jurisdiction. Unlike a foreign site for a trust with no presence in the United States, it is impossible for a domestic trust to claim that a Court in the United States does not have jurisdiction over its assets or the trustees.

Whether established prior to marriage or after marriage, upon a divorce, the asset in a properly implemented Offshore Trust can be protected from the claims of a divorcing or surviving spouse, particularly with an offshore structure where the assets are safely and legally outside the jurisdiction of a divorce court.

While such structures can provide a multitude of benefits, they should only be used under specific circumstances. Clients must be fully knowledgeable of the issues involved with the implementation of such a wealth preservation structure, especially when done after the client has married. Use of a wealth preservation structure in an attempt to defraud an existing spouse will, in most states, fail outright, and in the worst case, result in potential civil liability. Nevertheless, with careful planning, an Offshore Wealth Preservation structure can provide the client with significant protection against the uncertainties associated with the division of assets upon a divorce or death.

The problems associated with, and aggravated by, outrageous jury verdicts and result-oriented Courts, have prompted many individuals to seek asset preservation strategies beyond the borders of the United States. Although transfer of assets offshore has traditionally been associated with illegal attempts to evade tax or conceal assets, Offshore Trusts have become generally acceptable throughout the world as a legitimate means to deal with the many uncertainties in today's world that can result in threats to wealth. Thus, it is vital that any offshore planning be fully compliant with applicable United States tax law and a plethora of Federal laws which might be applicable to any proposed transaction.

Although there are many advantages of forming a wealth preservation trust in an overseas jurisdiction, there are two primary benefits for doing so. First, by selecting the law of a foreign jurisdiction to form the trust, the client is able to use the best law available to fulfill the client's goal of effective but lawful wealth preservation. Many offshore jurisdictions have adopted legislation that is specifically designed to offer the maximum amount of protection to the settlor and the assets transferred to the trust by a solvent settlor. This is true even when the settlor is the primary beneficiary of the trust, an option that is generally not available in the United States. Second, Americans seek the benefits of an International Trust to protect assets which, when located within the United States, pose easy targets for potential future creditors.

Possibly the most important decision to be made in establishing an Offshore Trust is the selection of the jurisdiction for the trust. Most offshore jurisdictions that are active in seeking wealth preservation trusts have also been active in modernizing the law governing such trusts.

Possibly the biggest myth associated with the use of an Offshore Trust is that its income is not subject to taxation in the United States. Under the law of most tax haven jurisdictions, all income earned by a foreign trust established by a U.S. Citizen is free from taxation in that jurisdiction. However, such tax free status does not mean the income is not taxable in the United States! The formation of a foreign trust that is classified as such for Federal Income Tax purposes carries with it significant IRS reporting requirements which are accompanied by significant penalties if not complied with. Thus, the uncertainties of judicial and jury awards require a prudent examination of the benefits associated with the establishment of an Offshore Wealth Preservation Trust.

Contact Knowles & Associates P.C. to meet with an Indianapolis area attorney to assist in your investigation as to what benefits, if any, are applicable to you with regards to wealth preservation planning.