An offshore trust is a primary legal tool involved in offshore planning. The offshore trust is generally a “self-settled trust.” This is a trust where the settlor and the beneficiary are both one and the same. The trustee is a person who is nominated by the settlor and is either an individual who is not a U.S. citizen or a business having no U.S. offices or affiliation. An offshore trust has additional people who serve as trust advisors or trust protectors. These individuals are not under the settlor’s control, but they have certain powers in the administration and protection of the trust and its assets. Offshore trusts provide a method of transferring assets between generations, probate free. The trust will usually provide that assets will automatically pass to named successor beneficiaries upon the settlor’s death.
Offshore trust planning is the establishment of legal entities in favorable foreign jurisdictions that are under the control of trustees who are neither citizens of the U.S. or persons having a business presence in the U.S. The purpose of offshore planning is the removal of legal battles with creditors to jurisdictions that are beyond the reach of U.S. courts. Offshore planning works because there are offshore jurisdictions that do not recognize judgments rendered by U.S. courts.
There are four key elements for proper protection from creditors when assets are transferred to a trust.
- The assets cannot be fraudulently transferred,
- The trust must be established as irrevocable,
- Distributions from the trust must be discretionary in the judgment of an independent trustee; and
- The trust instrument must include “spendthrift” provisions that provide that creditors of the beneficiaries of the trust cannot reach the trust assets.
Conflicts of law and choice of law issues are definitively settled in many foreign jurisdictions. Only the foreign law will apply since offshore jurisdictions are not subject to the control of U.S. courts.
Richard M. Colombik, JD, CPA, is an award-winning attorney and CPA with a doctorate in jurisprudence with distinction and was formerly on the tax staff of one of the world’s wealthiest families.
Mr. Colombik has also been a tax manager at a Big Four accounting firm, the State Bar’s liaison to the Internal Revenue Service (IRS), vice president of the American Association of Attorney-CPAs, and vice chairman of the American Bar Association’s Tax Section of the General Practice Council, as well as the past chair of the Illinois State Bar Association’s Federal Tax Committee. Mr. Colombik has also served on the liaison committee to the Washington, DC, National Office of the IRS. Mr. Colombik is also a member of the Asset Protection Committee, American Bar Association, and a member of its captive insurance subcommittee.
Mr. Colombik has appeared on numerous television shows, hosted a weekly radio show on tax and business planning, and authored more than 100 articles on income taxation, asset protection planning, IRS defense, and estate planning. He has also instructed more than 100 seminars to professional groups, business groups, bar associations, CPA societies, and insurance groups. This is in addition to authoring a published work on business entity structures offered by the Illinois Institute of Continuing Legal Education, as well as writing a chapter for The Estate Planning Short Course and Asset Protection Planning.