Offshore Trust Formation

Offshore trust formation rules are based on the fundamental principles of what a trust should consist of. Because offshore trust formation is pursued for various reasons different types of trusts can be formed to best suit the needs of the person or corporation that establishes the trust.

Some of the most common reasons why offshore trust formation is undertaken involves:

  • charity (charitable trust)
  • protection against improvidence (spendthrift trust)
  • safeguarding assets and controlling property
  • setting up wills (testamentary trust)
  • pursuing certain interests while alive (inter vivos trust)
  • planning estate (pension funds, life insurance, savings and investments)
  • avoiding taxation
  • child support

Offshore trust formation has basic elements which are needed to ascertain that a trust, and not any other entity is formed. To meet the legal requirements of a trust, offshore trusts must have a:

Offshore Trust Formation - Settlor/Grantor: The settlor or grantor in offshore trust formation is the individual or corporation that establishes the trust offshore. This is person (legal or natural) whose assets or estate would have been transferred to the trust. In trust formation offshore, the settlors exercise many rights but best enforce these rights by drawing up a trust deed or letter of wishes as the basis on which the trust operates and is managed. For safety, offshore trust formation laws make this mandatory.

Offshore trust formation should not be undertaken with the intention of hiding assets away from creditors, as this has legal implications and is considered ‘fraudulent conveyance’ and ultimately undermines the trust and puts the assets at risk even in the trust. A similar situation arises if the trust is self-settled whereby the settlor/grantor makes himself trustee in trust formation offshore. Whenever this occurs, the settlor remains the legal owner of the assets and could defeat the purpose of the trust and trust formation offshore should any action or claim be made against the trust property. Third-party settled trusts are thus recommended for trust formation offshore.

Offshore Trust Formation - Trustee: Offshore trust formation is administered through a trustee to whom the settlor/grantor’s assets or estate are transferred. Trustees become the legal owners of the trust and its estate. In offshore trust formation, though there are specific rules on the duties of trustees, settlors may exercise the right to limit the powers of the trustee in order to dictate how the trust should be administered or its estate invested. The relationship between the trustee and the settlor/grantor in trust formation offshore is one that is based on loyalty and trust. Upon offshore trust formation, trust deed may, within legal limits, seek to restrict or further expand the conventional rights and powers of the trustee.

Offshore Trust Formation - Beneficiary: Offshore trust formation is always done with a beneficiary in mind, be that beneficiary a natural person, corporation or association. Trust formation offshore is based on establishing the trust for the benefit of that particular association, person or company and as a result requires that trusts be managed in the interest of the beneficiary or beneficiaries at all times. Flexible offshore trust formation laws allow beneficiaries to be the settlor(s) or the protector(s) (if designated) of the trust.

Offshore Trust Formation: Offshore Trust Duration: Though not an element of a trust, duration is important. Offshore formation rules for offshore trusts allow offshore trusts to be perpetual or to have limited duration. The trust document/letter of wishes/deed defines the length of time that a trust is supposed to be valid or operational. The terms for the duration of a trust can be specific upon trust formation; such as upon the death of a spouse, when a child turns a certain age or the termination of a trust can be triggered by a certain event.

Upon trust formation specific instructions can be given so that the trust is ‘ongoing’ and operates for a very long time, even following the death of the settlor. In this way, settlors/grantors are able to impose ‘permanent’ ownership and control rules on the trust property.

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