Asset Protection

5. THE OFFSHORE DIMENSION

5.1.1 Individuals with international assets have traditionally used Offshore Trusts as Will substitutes, thereby achieving affective asset transmission. As noted at 1.3 above, Offshore Trusts have been a successful way of protecting against "political risk" for decades The effectiveness, confidentiality and favorable tax status of Offshore Trusts make them attractive vehicles for these purposes. In response to this need, the Offshore Trust industry has expanded enormously in the last thirty years.

5.1.2 However, the full range of possible benefits of Offshore Trusts are by no means automatically available to everybody.  Most countries with sophisticated tax and estate duty laws have limited the scope for their own citizens or residents to use Offshore Trusts.

5.1.3 For example, in the United States, amendments to the Internal Revenue Code passed in 1976 rendered it disadvantageous for "United States persons" (namely, United States citizens and "resident aliens") to use Offshore Trusts for income tax planning purposes.  And in the United Kingdom, changes introduced in the 1991 Budget have severely curtailed the use of Offshore Trusts for Capital Gains Tax planning purposes.

5.1.4 As the typical CPT Client might be a United States Professional, two questions naturally arise.  The first is "Why use Offshore?" if Transfers into Trust may be upheld anyway Onshore?  The second is "Are there any tax implications in the home country?"

5.2.1 The answer to the first question is that if the initial transfer of assets is to a Trust established in an Offshore jurisdiction, than the party seeking to set aside the Transfer will need to consider TWO sets of laws: not only those of the home jurisdiction, but also those of the host Trust jurisdiction.

5.2.2 This means two sets of Attorneys, with the added costs entailed.

5.2.3 American Plaintiffs begin to feel distinctly uncomfortable when confronted with what to them are "foreign" laws.

5.2.4 Also, as a preliminary matter, the necessity for Plaintiffs to obtain evidence within the Offshore jurisdiction relating to the CPT and its assets may present further hurdles in terms of privacy, confidentiality, or secrecy laws.

5.2.5 'Domestic' proceedings, brought in the Transferor's own jurisdiction, may well establish that - under local Law - the Transfer was invalid.

5.2.6 But unless the home country judgment can be enforced against the Trustee, and the Trustee compelled to release the assets to the Creditor, the domestic Judgment will be of no practical effect.

5.2.7 Nor can the home country court order the individual Transferor (on pain of contempt) to re-transfer the assets, as the Transferor no longer has the power to do so.  Only the Trustees can take that decision, and, being in a foreign jurisdiction, they are not responsive to Orders made by a United Stated Court.

5.2.8 The question of location of Trust Assets may be of critical importance in relation to enforcing a home country judgment.  If part of the Trust Fund is "within the jurisdiction", then the local Court may make Orders in respect of the asset or assets in question.

5.2.9 The Creditor may therefore need to proceed against the Offshore Trustee in the Offshore Jurisdiction to obtain a Judgment that will be binding on the Offshore Trustee.

5.2.10 Many of the Offshore jurisdictions have recently taken initiatives, and have amended (or are amending) their laws so as to limit the scope of both their fraudulent transfer rules and their bankruptcy legislation in relation to CPTs.  These legislative innovations are discussed in Part 8 below.

5.3.l On the second question, the Income Tax provisions of the Internal Revenue Code do not per se prevent a United States person from setting up and being a Beneficiary of an Offshore Trust, and if the Trust is 'tax neutral' for Income Tax purposes (and properly reported) it can be advantageous for non-tax reasons.

5.3.2 The United States Income Tax and Federal Estate and Gift Tax aspects are further considered in Part 9.

5.4 The next part of this Paper will provide an understanding of the relevant United States provisions relating to Transfers into Trust.  This is essential, as it is assumed throughout this Paper that the typical CPT Settlor/Transferor is from the United States.

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