Roddy Balfour outlines the key motivations Asian client may seek to establish foreign trusts.
The Asian jurisdictions which traditionally lent themselves to trust work are based on English law, low taxes (usually with no capital taxes), few management and control or controlled foreign corporation issues, and the presence of major financial and professional services communities. Asian clients have also been drawn, traditionally, to Cayman and BVI but are increasingly wishing to set up trusts elsewhere, including the USA.
Why do Asian clients choose foreign trusts?
There are a few key motivations for Asian clients seeking to establish foreign trusts:
1. Overseas diversification and sheltering existing external assets
2. Asset protection benefits
3. The succession mechanism - often for heirs abroad in high-tax jurisdictions e.g. USA
4. Sometimes a tax-efficient roll-up of income and gains is possible though such structures
Attractions of the USA for a trust
The principal driver for establishing a trust under the laws of e.g. the US state of South Dakota is the huge growth in internationalisation of families including emigration to the USA and USA investing.
It is only in the last 10 years that the USA has been appreciated as a major trust jurisdiction with treatment of trusts fully encoded by the IRS. Historically, domestic trusts in the US have been mainly will or testamentary substitutes – hence the need for many settlor-retained powers. The Law of South Dakota state in particular includes strong statutes to protect both settlors and trustees.
Not only do South Dakota trusts offer the benefit of asset and creditor protection, the USA is also more resistant to OECD attacks on private structures and confidentiality, with strict regulatory regime for client protection. The local ’directed’ trust statute also allows for family control of trust investments
The USA is often cited as being less affected by international exchange of information agreements but the US has many other laws including extra-territorial application and for that reason professional tax advice is always recommended by Equiom.
Apart from clarity from the IRS on treatment of either resident or non-tax-resident trusts, South Dakota enjoys firm but enlightened regulation adapting its laws after due consideration to meet the needs of the marketplace. Segregation of client assets, formal internal committees and accurate accounting are among those things the state regulator looks at on their regular inspections. Clients should take major comfort from this.
The team at Equiom (via Virtus Trust) were pioneers in using South Dakota law trusts to accommodate the increasing special needs in the international estate-planning and asset protection market place.
The USA has suddenly been perceived as a strong, practical and independent alternative to the traditional offshore jurisdictions for such planning. In addition, USA-connected matters often require a USA domestic solution. Through its long experience of these drivers, coupled with its US licence, Equiom is the longest-established non-bank, non-US-owned fiduciary assisting families and professional advisers in this field.
If you require further information or advice about this topic please contact Roddy Balfour.
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.