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Estate planning has many facets to an effective structure. Offshore trusts and universal insurance can play an important part in creating an efficient overall structure taking in the benefits of offshore legislation, confidentiality and special situation tax advantages. Front Street Private Bank offers expert trustee services and will assist in setting up insurance structures.
For long term wealth preservation few instruments are more suitable than an international Trust established in Barbados.
A trust allows a client, known as the Settlor, to place assets in the keeping of a trustee who is legally obliged to hold them for the benefit of specified beneficiaries, or for specific purposes, in accordance with the terms of the trust. A trust is a highly flexible arrangement allowing for complete confidentiality of the settlor and the beneficiaries. Each trust is tailored to the individual requirements of the settlor and the beneficiaries.
Trusts are often used for comprehensive international estate planning and may mitigate income, capital gains and inheritance taxes, depending on the circumstances of each client. In addition, trusts established in Barbados law may offer a level of protection against unforeseen financial claims often not available in other jurisdictions.
While Barbados does not impose any income or capital gains tax for assets held in an international trust, clients are advised to seek independent tax or legal counsel as each client’s circumstances are unique. Front Street Private Bank provides the expertise to work with clients’ professional advisors and to act as trustee for the ongoing administration.
Some of the uses of trusts are as follows:
- Asset Protection & Confidentiality
- Estate & Succession Planning
- Immigration Trusts (under the Canadian tax regime)
- Inbound and Outbound Trusts
- Purpose Trusts
Asset Protection & Confidentiality
Asset protection trusts are used to protect assets from third party claims, which may include matrimonial, inheritance or litigation issues, together with protection against economic or political risk. This type of trust is generally tax neutral, offering no particular tax benefits, however a Barbados offshore trust provides significant benefits compared to a similar onshore trust:
- Under the Barbados International Trust Act, creditors must bring an action within 3 years of the creation of the trust and must also prove an intent to defraud otherwise claims will be barred.
- Under the Act, the Barbados courts may not set aside or vary an international trust with respect to the laws of another jurisdiction. This is useful to protect forced heirship laws common in civil law jurisdictions.
- Barbados has strict laws against disclosure of information ensuring that the trustees maintain confidentiality of the trust document.
- From a practical point of view, it is more costly and difficult for creditors to pursue claims in a different juridisction.
Persons taking up permanent residence in Canada are subject to Canadian income tax on worldwide income, however, Immigrants to Canada are allowed to set up an offshore trust (Immigration Trusts) to hold assets which will not be subject to Canadian tax on any income or capital gains up to a maximum of 5 years.
- Immigration Trusts can be set up any time before an immigrant accumulates 60 months of residency in Canada – i.e. Can be set up after emigration to Canada, but tax may be incurred on disposition of assets into trust.
- Trusts must be established outside of Canada.
- International Financial Centers such as Barbados provide for International Trust legislation under the terms of which income and capital gains can accumulate tax free.
- Tax free payments from the trust can be made to the Canadian resident beneficiaries.
- Flexibility – the greatest amount of beneficiary flexibility is achieved through a ‘discretionary trust’. Typically the beneficiaries would be the client and the immediate family with discretion to make payments at any time, in varying amounts to any one or more of the beneficiaries.
Inbound & Outbound Trusts
Inbound and Outbound trusts are commonly used terms for trust structures where the settlor of the trust and the beneficiaries are domiciled in different jurisdictions, the result of which can create tax advantages. This will depend on the tax laws of the respective jurisdictions and the circumstances of the parties involved.
Purpose trusts differ from conventional trust in that they do not need to have a beneficiary, but they are used for a particular purpose as the name implies. The purpose must be legal, reasonable and practical and typical purposes include the following:
- Taking transactions off balance sheet
- Providing ownership for private companies or Hedge Funds
- Commercial transactions used to isolating assets in financial deals
- Voting trusts
Offshore Life Insurance
Universal Life Insurance policies combine many factors of estate planning including asset protection, life insurance combined with management of assets, succession planning and confidentiality. Typically there is a single premium payment, a small portion of which is used to fund the insurance component and the balance is invested in a portfolio. Universal Life Insurance is available both onshore and offshore, but there are significant advantages to offshore structures.
- The cost is generally much less due to lower overhead and marketing/sales expenses.
- Generally, onshore insurance providers limit the selection of investment vehicles available. With offshore insurance there is complete freedom to choose portfolio managers, investment selection and strategies.
- Income and capital gains accumulate in the policy tax free.
- Policies are exempt from Canadian foreign property reporting rules.
- Tax free policy loans may be made.
- Death benefits are completely tax free.