Puai WichmanAug 25, 2023,
Puai Wichman, CEO and Founder of Ora Partners – an international trustee and wealth solutions firm.
While many Americans might not be familiar with international cross-border planning, they might be familiar with the term “offshore banking,” which usually attracts connotations of something out of a James Bond movie or something illegal in nature. In fact, cross-border planning is a common and completely legal technique used by compliant and law-abiding individuals to safeguard their hard-earned assets and investments.
Often referred to as “offshore planning,” the objective of such planning is to protect wealth and business holdings and to shield and maintain retirement savings, an inheritance or an emergency fund. Such planning is not designed as an underhanded device to “hide” money or evade taxes; to the contrary, it is a legal strategy that has long been used by investors and wealthy families to secure their wealth by not only diversifying their investment portfolios but also diversifying the jurisdictions where their wealth and investments are held. Jurisdictional diversification is particularly important in the current geopolitical climate.
As an example, an important feature of working with a non-U.S. custodial bank is the comfort of knowing that, unlike many investment firms in the U.S., depositor funds are not permitted to be included as part of that bank’s balance sheet. This means your investment funds are not regarded as the bank’s assets, which is the common structure for U.S.-based bank deposits.
If you are looking to implement an “all-seasons” approach to wealth management and protection, then it’s important to understand the potential benefits and drawbacks of cross-border planning. As someone working in this space, I encourage anyone who is considering international cross-border planning or offshore banking to do so within the context of an increasingly volatile global financial landscape. This includes armed conflicts, inflationary pressures and the recent liquidity issues that struck banks such as Silicon Valley Bank and First Republic Bank.
Exploring The Cook Islands For Offshore Asset Protection
Individuals who explore asset protection solutions often find their search leads to one place: the Cook Islands. As a self-governing nation in the South Pacific located about 2,000 miles to the northeast of New Zealand, it has gained prominence over the past 30 years as a preferred asset protection jurisdiction.
Over this time, the country has built a reputation on delivering high-quality trustee administration services. One reason for this is because trustee service providers within the jurisdiction are staffed and managed by experienced practitioners, most of whom, in my experience, are qualified attorneys who are trust law specialists. If you are an advisor to high net worth individuals or a family office, they can partner with you to put together comprehensive solutions for your clients’ needs.
Clients interested in international cross-border services will need experienced advisors on their team. A trusted partner will offer financial expertise through wealth managers, as well as lawyers who understand how to properly structure offshore trusts. Today, it’s also important to collaborate with firms that are actively looking for solutions to cater to the digital age, including cryptocurrency services.
Risks And Challenges Of Cook Islands Trusts
Like any other investment strategy or vehicle, Cook Islands trusts carry risks and challenges. Here are a few things individuals contemplating a Cook Islands trust or other entity should consider:
One challenge is relinquishing control. With a Cook Islands trust, the settlor (the person with the assets) must give control of the assets to an offshore trustee, which is a licensed company established in the Cook Islands for the purpose of providing offshore trust services. For people accustomed to managing their own wealth, it can give them pause to entrust someone else with power over a substantial amount of money or property. While there can be a risk of a trustee mismanaging a client’s funds, Cook Islands trusts are heavily regulated, and appointed trustees have a fiduciary duty to act in the best interests of the beneficiaries, which generally aligns with the grantor’s wishes.
Cook Islands trusts are also relatively more costly to create and maintain. There are multiple costs such as bank account fees, trustee expenses, IRS reporting procedures and other annual or one-time costs. They also generally require the services of an attorney with specialized asset protection skills to draft an appropriate trust instrument that caters to the objectives and investment strategies of the settlor. While the expense may be negligible for very wealthy clients, these costs may be more of a consideration for small-business owners who should gauge the percentage of their in-trust wealth that will go toward the related costs.
Lastly, individuals should consider the tax implications. A Cook Islands trust, or any foreign entity for that matter, requires a couple of extra forms to be filed with the IRS. While these entities are generally tax neutral, that is to say they neither increase nor decrease one’s tax burden nor increase the likelihood of an audit, they must however be reported. While these forms are strictly advisory, they are nonetheless required, and penalties can be harsh for failing to do so. This is another reason why it is important to work with a CPA or attorney who is familiar with these requirements.
Do Your Homework
Advisors and individuals should do their due diligence to gauge the transparency and trustworthiness of any potential offshore trustee company or for that matter any financial service provider they work with. Just because you or your family have used the same advisor for generations does not necessarily mean that they are the best fit to navigate in today’s financial minefield. Be prepared to seek the advice of others and to think differently from the masses.
Offshore trusts and offshore banking offer numerous potential benefits to explore as part of a wealth retention and growth strategy. However, these services and benefits need proper legal structures and expertise to ensure they remain rock solid and protected for generations to come.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.