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Asset Protection and The Offshore Trust
Hong Kong Businessman"Shifts Key Holding Offshore"
May 18, 1995 Financial Post, Toronto
"Many Hong Kong Funds are Seeking an Offshore Trust in
Bermuda to Allay Fears Over the 1997 Changeover to Chinese rule"
May 28, 1995 South China Morning Post, Hong Kong
What is a trust?
A trust is a legal relationship created by a person ("the settlor") who wants to establish a trust and one or more persons or corporations willing to undertake the office of trustee ("the trustee") whereby certain assets contributed by the settlor are managed and held for the benefit of certain parties ("the beneficiaries").
With increasing competition for services, professional fees, banking fees and annual asset management fees are at levels where a trust is affordable to most families with a significant net worth.
Why do people use a trust?
There are many benefits of establishing a trust. The following is a summary of important considerations:
- Asset Protection
- Income Tax Savings
- Estate Planning
- Avoiding Delays in Estate Administration
- Privacy and Confidentiality
- Safeguarding the Interest of Minors
With increasing litigation in business, marriage breakdowns, currency exchange fluctuations and political uncertainty, asset protection through an offshore trust is becoming an essential financial planning point. Except in certain situations involving fraud and criminal activities, a foreign government cannot obtain information or seize assets held in trust in a country that is outside its jurisdiction.
Assets held outside the settlor’s country of residence can reduce the income and capital gains taxes of the settlor and in some cases, income earned on assets can be completely sheltered from tax by a trust resident in an offshore tax haven. Without income taxes and an average annual return of 10%, assets can double in value every 7 years.
Presently there is no inheritance tax in many tax havens. However, this is not the case in many countries including the United States, Taiwan and Hong Kong. In fact, the avoidance of inheritance tax was the reason given by a prominent Hong Kong businessman who recently placed his controlling interest in his corporation in an offshore trust for the benefit of his sons.
Assets held in a trust do not form part of the estate of a settlor on death and as such, trustees may distribute monies to beneficiaries without going through a lengthy probate process.
Trust deeds are completely confidential documents like a will.
A properly planned and worded trust can ensure continued financial security for minors. In addition, trust assets will be totally separate from the settlor’s other interests and liabilities.
Who is eligible for a trust?
Everybody is eligible to establish a trust, however not all offshore trusts are sheltered from income taxes. The income tax free status of an offshore trust will be subject to the income tax laws of the settlor’s and beneficiary’s country of residence.
What assets can be settled in a trust?
Assets can consist of and is not limited to cash, stocks, bonds and real estate. Assets with the greatest growth potential will benefit most from a tax free trust. However, assets contributed should represent discretionary assets not required to maintain the settlor’s lifestyle or business.
How is the trust established?
It is essential to obtain professional advice from accountants, lawyers and bankers. There is no minimum investment but because of start-up and annual fees, a minimum cash contribution of approximately U.S.$300,000 would be suggested for optimal returns.
It is important to engage a reliable financial institution or a reputable professional such as an accountant or lawyer as trustee with comprehensive services and is responsive to your individual needs. It is quite common for a trust to hold assets through a wholly-owned investment holding corporation.
How are the trust assets protected?
Most tax havens are governed by laws that are based on the British trust laws. A "trust document" which is negotiated between the settlor and the trustee, sets out the terms of the trust for (a) income and capital accumulation and payments to beneficiaries and (b) the powers of the trustee for investment and administration.
It is not unusual for the settlor to provide the trustees with a "letter of wishes" on matters such as distribution and investment of the trust fund. While this letter is not binding, trustees will generally observe reasonable and practicable wishes.
It is also common for the trust document to provide for a trust "protector". The protector will normally be someone who is independent of the trustees and in the settlor’s long-term confidence. Usually, the key power of the protector is in the event of a dispute between the settlor and the trustees, the protector can replace and appoint new trustees.
What are the fees?
Fees will vary amongst professionals and financial institutions. For a "basic" offshore trust structure, start-up fees could range from approximately U.S.$10,000 to U.S.$20,000 and should cover the following:
- consultation with accountants and lawyers
- income tax planning and advice
- start-up banking fees
- incorporation of a holding company
- government registration fee
- document filing fee
- preparation of the trust document
Depending on the amount of the total trust assets annual trustee fees range from 0.50% to 2% of the total trust assets. Annual fees for a holding company start at about U.S.$1,200 and covers the management, government fees and directors’ fees.
The above-mentioned fees do not include fees for extra services such as for an investment manager/trader, phone and fax charges, withdrawal fees, special fees to administer a business, real property, mortgages, other assets sited abroad or other disbursements.
Offshore Plus does not retain clients on the strength of information on its Web site alone but
only after following our own engagement procedures (e.g. interviews, discussions, retainer
agreements, ...etc.). The information contained on this site is intended to educate
members of the public generally and is not intended to provide solutions to individual
problems. Readers are cautioned not to attempt to solve individual problems on the basis
of information contained herein and are strongly advised to seek competent financial and
legal advice before relying solely on information contained on this site.
Enquiries can be made by e-mail: SChongCA@on.aibn.com 10/10/01