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There are many specific advantages of foreign or offshore trusts for lowering explicit taxation, increasing after-tax profit & safeguarding assets amongst other benefits. Domestic asset protection will be reviewed against the more formidable advantages of the foreign or offshore asset protection. Within asset protection there’re two basic types of asset protection: Revocable Trust & Irrevocable Trusts. Each has their specific filing sequences.

TAX COMPLIANCE MAKE FOR A STRONGER OFFSHORE TRUST – FEDERAL IDENTIFICATION NUMBER

A domestic trust may or may not apply for a federal identification number. Revocable trusts need not apply, but an irrevocable trust generally applies for Federal identification. A federal identification application is filed on federal Form W-4. If it is a foreign trust, the grantor must check the box on Form 1040 schedule B, line 7a for the existence of a foreign bank account, & Form 1040 schedule B line 8 reporting the creation of a foreign trust on Form 3520.

WHY CONSIDER A FOREIGN OR OFFSHORE TRUST

OFCs (Offshore Financial Centres) can be often used for legitimate reasons taking advantage of:

1. Lower explicit taxation & consequentially increased after-tax profit.

2. Simpler prudential regulatory frameworks that reduce implicit taxation.

3. Minimum formalities for incorporation.

4. The existence of adequate legal frameworks that safeguard the integrity of principal-agent relations.

5. The proximity to major economies, or to countries attracting capital inflows.

6. The reputation of specific OFCs, & the specialist services provided.

7. Freedom from exchange controls, and

8. A means for safeguarding assets from the impact of litigation etc.

They can also be used for dubious purposes, such as tax evasion & money-laundering, by taking advantage of a higher potential for less transparent operating environments, including a higher level of anonymity, to escape the notice of the law enforcement agencies in the “home” country of the beneficial owner of the funds.

The practical consideration of going offshore is that court judgments are not enforceable in offshore jurisdictions. There is more. The fraudulent conveyance rules do not apply for example in the Cook Islands & are not enforceable. A U.S.-based creditor holding a judgement in his favor from a U.S. court would be required to commence a new action in the offshore jurisdiction would be required to post a bond & has to hire a local attorney admitted to practice before the courts of the offshore jurisdiction. If this lawyer takes one of these cases, it may very well be his last case. Offshore lawyers get paid upfront, because they do not take contingency cases.

WHEN DOMESTIC ASSET PROTECTION IS NOT ENOUGH

When onshore (i.e. domestic) asset protection isn’t enough, the only alternative is to go offshore. The U.S. lawsuit explosion is forcing people to think outside the box. Even where Alaska & Delaware have enacted special provisions to allow these states to compete for the offshore trust business, the requirements are too burdensome. In other words, some of the assets must be domiciled in Alaska & the trustee must be in Alaska.

These states that have enacted special provisions say their provisions are competitive with offshore jurisdictions but they’re sadly mistaken. If the asset is within the jurisdiction of a U.S. Judge, the assets are at risk to the full extend of the U.S. Court system. It’s true it may be a little more hard to enforce but it’s certainly within the U.S. borders & therefore can not compete with a non-executable judgment offshore.

Author bio – Rocco Beatrice, CPA, MST, MBA
Award-winning estate planning & trust expert
MS – Taxation, Master of Science Taxation
MBA – Management / Taxation
BSBA – Management / Accounting
CPA – Certified Public Accountant
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Asset Protection Irrevocable Trust-Estate Planning
Differences of Domestic & Foreign Trusts
71 Commercial Street #150, Boston, MA 02109
tel: +1.508.429.0011 fax: +1.508.429.3034

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