Are Offshore Trusts Legal? Separating Myths from Reality

Are Offshore Trusts Legal? Myths and Facts

Why asset protection, tax transparency and financial regulation tell a very different story from the traditional image of offshore trusts.

Mention “offshore trust” and, for many people, the term immediately conjures up images of hidden money in a far away bank, tropical tax havens and nefarious activity. Are these facts or misconceptions?

In reality, offshore trusts are predominantly used for legitimate purposes. The stuff movies and public scandals are made of rarely happens.

Why is that?

Tax Transparency

Most people haven’t heard of the USA’s Foreign Account Tax Compliance Act (FATCA) or the Common Reporting Standards (CRS). These are international tax transparency regimes.

FATCA requires foreign financial institutions like banks and trust companies to identify and report asset and transaction information about U.S. taxpayers to the IRS on an annual basis. FATCA has real teeth. A financial institution that fails to maintain the required FATCA status can face 30% withholding on certain U.S. source payments.

CRS is an international framework for the rest of the world through which participating countries collect and exchange financial account information about their respective tax residents on an annual basis.

Together, these regimes make it difficult for anyone to use an offshore trust to avoid their tax obligations.

Asset Protection Against Future Risks

Based on Ora’s 25 years’ experience, the overwhelming purpose for anyone creating a Cook Islands offshore trust and transferring their personal property to it is asset protection. Some of our clients have been with us for more than 20 years. That’s a long time providing them peace of mind that trust assets are legitimately out of reach from creditors and preserving their wealth for trust beneficiaries.

The USA is one of the most active and costly litigation environments worldwide. Large U.S. jury awards over $10 million, commonly described as “nuclear verdicts”, are increasing, both in frequency and severity. It’s no wonder then that Americans are looking for ways to legitimately safeguard the wealth they have worked hard to build. For business owners, professionals, property developers and investors, exposure can come from many directions — a professional liability claim, business dispute, class action, accident or other event that may be impossible to predict years in advance. Creditor risk is not limited to lawsuits arising from business or professional activities. Divorce can also result in significant claims against accumulated family wealth. Asset protection is about planning for those risks before they arise.

Commitment to Prevent Money Laundering and Terrorism Financing

The Cook Islands takes its responsibilities to prevent money laundering and terrorism financing seriously. The Financial Supervisory Commission is an independent body responsible for the supervision of regulated entities and financial services in the Cook Islands. The Commission’s mission is to oversee an effective and efficient prudential and investigative supervision regime applying risk-based, and intelligence-led policies in line with internationally accepted best practice. You can learn more about the Commission here www.fsc.gov.ck.

Trust companies fall under the Commission’s supervision. Following applicable financial transactions reporting laws, before establishing any client relationship, a trust company must understand who the client is, where their wealth and funds have come from, and the purpose and intended operation of the trust. These responsibilities also continue after the trust is established.

Trustees are required to maintain appropriate records, monitor relationships and transactions, keep due diligence information current, and identify and report suspicious activity where required by law. Higher-risk clients, transactions and circumstances can require greater scrutiny.

There are various statutory enforcement mechanisms available to the Commission including penalties or revoking a trustee company’s licence.

The Verdict

There will always be attempts to use the legitimacy of a Cook Islands offshore trust for nefarious purposes. However, tax transparency, asset protection against future risks, and a commitment to preventing money-laundering and terrorism financing, are the real, and not-so-sexy, reasons why the Cook Islands is a renown offshore trust jurisdiction today.

If you would like to know more about our services, please Contact us. We can also provide you with the contact information for an attorney, CPA or an investment advisor to assist you.

Additional FAQs on Cook Islands International Trusts can be viewed here.