Over the years, a handful of jurisdictions gained a reputation for offering trusts that provide privacy and “bulletproof” asset protection. But their reputations were earned in a bygone era.
Legal, regulatory, and political systems have changed so radically over the last decade that storied jurisdictions are quickly losing their usefulness and relevance.
The so-called “offshore” or “tax haven” jurisdictions will likely facilitate a shrinking portion of global financial transactions as they shift to more traditional “mid shore” and “on shore” jurisdictions.
Often overlooked, the U.S. is well positioned to be the premiere jurisdiction for privacy-minded nonresident aliens (i.e. non-U.S. persons) looking to form a trust—it offers no registration requirement for trusts, no automatic exchange of banking information, and a 0% U.S. tax rate (on non-U.S. source income).
America’s privacy advantages come not from legislation but the lack thereof.
For example, trust instruments are private documents.
Unlike many other jurisdictions, trusts need not be registered with the government and there is no trust beneficial owner register in America—meaning, the trustee, settlor, protector (if any), and beneficiaries need not be entered in a government database.
If the trust has no “U.S. sourced” income (as defined by tax code Section 861), no U.S. tax return is required to be filed. Even the U.S. federal government won’t know the identities of a trust’s trustee, settlor, protector (if any), or beneficiaries.
By rejecting the OECD’s Common Reporting Standard (CRS), America is effectively the sole jurisdiction still offering a modicum of banking privacy.
Under CRS, participating jurisdictions automatically share the banking information of individuals and entities between one another.
Suppose a U.K. resident director of a Guernsey Trust Company has signatory authority on its Guernsey bank account. The Guernsey government will report this bank account to the U.K. government.
Because the U.S. does not participate in CRS, the account of a U.S. Trust Company will NOT be reported to the U.K. government pursuant to CRS.
0% U.S. Tax Rate
Ordinarily, U.S. domestic trusts are taxed on their world-wide income.
But nonresident aliens (i.e. non-U.S. persons) can settle a U.S. trust that is treated as foreign for tax purposes and achieve a 0% U.S. tax rate on all “foreign sourced” income—that is, income sourced from outside the U.S. (tax code Section 862).
Treasury Regulation Section 301.7701-7 dictates that a trust is a “United States person” if:
(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and
(ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).
By intentionally failing the court and/or control test, you can ensure that the IRS treats a U.S. trust as being a foreign trust for tax purposes. Having a foreign trustee, for example, would cause a trust to fail the control test.
Isolation Strategy For U.S. Income
In the event the trust has U.S. sourced income, a “blocker” corporation can be structured to receive it. This corporation will be taxed on U.S. income no differently than any other U.S. corporation.
By isolating U.S. sourced income in the blocker corporation, only the blocker corporation, and not the trust, will be required to file a tax return. Privacy is maintained.
Reduced Compliance Burden
Compliance costs for satisfying local regulations is significantly lower than other jurisdictions. Many require trustees to register the trust and comply with various reporting requirements and regulations pertaining to trust activities, beneficiaries, and trust assets. Trusts are largely unregulated in the U.S. so there are virtually no compliance requirements.
Furthermore, whether you are banking, trading, getting insured, etc., an American trust will make it easier to satisfy due diligence conducted by foreign counterparties compared to other jurisdictions—such as the British Virgin Islands.
Laws For the Modern Era
Asset protection laws in the U.S., especially in states such as Wyoming, are second to none—including the Cook Islands. In fact, the Isle of Man modeled its statutes after Wyoming’s, and Nevis modeled its statutes after Delaware’s.
Many jurisdictions require the use of professional trust companies to serve as trustees. Whereas, U.S. trusts in many states may use a private trust company (PTC). In short, settlors may form an LLC and appoint it as the trustee. As the “sole member” of the LLC, the settlor may effectively control the trust’s assets.
Many U.S. states allow trusts to be migrated (redomiciled) there from foreign jurisdictions (from the Caymans to Wyoming, for example). This is far preferable to winding up a trust and starting a new one—bank accounts and existing contracts can be retained, in addition to trust history. Critically, settlors wouldn’t need to endure the stress caused by a new “fradulent transfer” period.
Traditional trust jurisdictions can no longer claim to offer the same combination of benefits outlined above.
For the foreseeable future, America will provide unique benefits to foreigners seeking to legally maximize privacy, make fast international financial transactions, and achieve uncompromising asset protection with a 0% tax rate.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jimmy Sexton, LL.M., is the Founder and CEO of Esquire Group and the Chairman of the International Business Structuring Association (Middle East Chapter). He can be contacted at [email protected].