An offshore trust is a reliable measure of asset protection that people use to secure their investments and enjoy more financial freedom. Contrary to popular belief, offshore trusts are not just a security measure for the mega-rich to hide money from the authorities. They are also a completely legal method for storing investments. In fact, anyone can set up an offshore trust, though it isn’t cheap to set up.
Offshore trusts are often used for real estate, cash and other valuable assets. However, these trusts are also set up by families who try to ease the burden of any potential wealth transfer. Because of the added protection layers that offshore trusts provide, it is a viable option you should integrate into your estate planning as you transfer control of your assets to your relatives or loved ones.
Why Should You Go With an Offshore Trust?
Offshore trusts allow you to diversify your portfolio. They let you administer your assets more efficiently and provide you with security benefits.
The biggest motivation for setting up an offshore trust is asset protection. You can place your assets in the secure hands of an overseas trustee, adding more protection between your wealth and people who are looking to seize that wealth from you.
Asset protection is especially helpful for Canadians considering that income tax exemptions for income earned within trusts managed by trustees who resided in a foreign jurisdiction was expunged in 2013. Even if you’re genuinely residing in the country where your assets are being held, like the Cayman Islands or St. Vincent, for example, you won’t receive any tax savings.
Though offshore trusts won’t save you from the brunt of tax reporting requirements, they can ease your tax burden, letting you create more reasonable conditions for estate planning. Additionally, these trusts help you secure freedom from the frustrations of probate.
You can use your offshore trusts to make legal investment decisions and set up offshore bank accounts that aren’t available to you as a Canadian citizen or resident.
How Do Offshore Trusts Aid Estate Planning?
Using an offshore trust, you can protect yourself from creditors by leveraging purpose-built legislation in various jurisdictions. These jurisdictions ensure that assets put into the trust by a settlor (the person who creates the trust) are not available to future creditors as long as the creditors’ cause of action accrues once assets are settled. Thanks to these parameters, it’s easier to secure and preserve your assets for your children and grandchildren without worrying about unforeseen creditor claims.
For example, in offshore jurisdictions like the Cook Islands, located in the South Pacific, strict privacy laws prevent client information disclosure unless required by local authorities. Given such a high level of confidentiality, an offshore trust provides families with the privacy necessary to carry out a successful wealth transfer.
Additionally, trusts established in offshore jurisdictions are not burdened by domestic tax laws. However, should the trust generate income, you must report it to the respective tax authorities. The level of tax advantages provided by an offshore trust depends on where you reside. This makes it essential to get cross-border tax advice before you create a trust.
Another crucial benefit of offshore trusts is that there is no requirement to publicize details about assets that you have settled into a trust. Usually, with probates, details of assets that must be probated should enter public records upon death. That is because probate fees are not charged if your assets are settled into an inter vivos trust as they do not form a part of the deceased person’s estate.
Though these advantages are also provided in Canada through domestic trusts, the risk is that the increased pressure of government deficits going forward will diminish the amount of protection that domestic trusts offer. Based on the uncertainty, it is better to mitigate risks through asset diversification, making an offshore trust the safer option for wealth transfer.
Overcoming Family Business Obstacles
Regarding family businesses, there is a common issue regarding share ownership in a holding corporation by siblings regardless of their business knowledge and presence in day-to-day operations. This means that a sibling who pursued a different career from the family business won’t be able to contribute as much as another sibling who’s directly involved in the business. Alternatively, there are health issues that prevent family members from properly exercising their shareholder rights.
By setting up an offshore trust, you can fix these issues as shareholding ownership is vested in it. Trustees will decide who will sit on the board of directors, then distribute income received by the trust according to beneficiary needs. If there is a death of a family member, nothing affects the transfer of share ownership. All interest of the deceased person within the trust is transferred according to trust deed provisions.
Offshore trusts prioritize privacy and protection during wealth transfer, allowing you to successfully conduct estate planning while also navigating the emotional/financial stresses that accompany it.
Ryan Faridan is the Principal Advisor at Global Solutions West, an advisory company dedicated to wealth preservation and long-term financial stability. With nearly a decade of experience in risk management, tax planning, and insurance, Ryan has made a name for himself as a Canadian wealth preservation expert.