Pre-Immigration Tax Planning Via Offshore Trusts
[IMPORTANT NOTE: The subject of global taxation is immensely complex and varies from jurisdiction to jurisdiction. The scope of this article is broad and does not constitute legal advice. Any individual concerned about global tax implications needs to discuss the subject in detail with qualified tax advisors in both their home country and in the foreign countries in which they are investing and/or considering as a future immigration destination.]
For many investors, the idea of liquidating their assets to avoid future immigration-triggered taxation is unpalatable. In such cases, especially when the investor has extensive holdings abroad and is unable/unwilling to liquidate them, a properly structured offshore trust can provide the necessary legal insulation against future immigration-triggered taxation on global assets.
We've all heard of the “Panama Papers” and of offshore trusts being used by international criminals, dictators, etc. to circumvent the law, but offshore trusts are indeed a viable and fully LEGAL option for most high net worth investors considering immigration. Before getting into the specifics of offshore trusts, let's take a look at the basics of what a trust is and how it works.
Generally speaking, a “trust” is a legal mechanism where a person with an asset (“Settlor”) can legally convey those assets to a third party (“Trustee”, usually a law firm or bank) for the purpose of separating him/herself from the obligations (e.g., taxation of income, capital gains, etc.) of asset ownership. The Trustee is like a guardian of the assets in the trust, but the benefits u2013 money, income, whatever u2013 go to the “beneficiary”. The named beneficiary is either the settlor (which works in certain situations but NOT for the purposes of pre-immigration tax planning) or another person, usually a relative like a sibling or child, who will not be immigrating and doesn't have to worry about the new foreign tax burdens the trustee is seeking to avoid. Done properly, a trust can save a person millions of dollars legally, in full compliance with US (and most other Western countries') laws.
There are many versions of trusts, but for this purpose the main consideration is if it is “revocable” (i.e, the settlor can subsequently cancel it) or “irrevocable” (the settlor cannot cancel it.) In the eyes of the U.S. and other major nations, if a trust is revocable, it doesn't count when taxes are under consideration because you can cancel it any time. The assets you put into the trust could be back under your control in the future, so they are still considered YOUR assets.
Pre-immigration trust planning can have both offshore and offshore components. An Onshore trust in based in the jurisdiction in which you live (or your assets are based) and an Offshore trust is one based in another country in which you do not live or have assets. Let's say you are a wealthy America already subject to U.S. tax laws. Putting your asset base into an onshore “living trust” (so called because it is an estate planning tool which lets you define asset ownership today while creating your desired succession plan when you pass away) can be a valuable tool in protecting your heirs from U.S.estate taxes. [NOTE: A U.S. Living Trust can also serve as a powerful tax protection tool for any foreign investor who intends to make U.S. business and real estate investments but does NOT intend to immigrate to the U.S.]
But for investors at least considering future U.S. immigration, the best solution is often an Offshore Trust, in which you place your non-US assets…BEFORE you immigrate to the U.S. While LatourLaw is not an estate planning firm, over the past two and a half decades the firm has worked with qualified international trust professionals on dozens of occasions to craft U.S. and Western nation u2013 compliant offshore trusts as part of our clients' pre-immigration tax planning.
Attorney José E. Latour