The U.S. as an Offshore Jurisdiction
By: Walter H. DIAMOND

Going Offshore

Although the recent wave of criticism of offshore operations by the world's leading trade and financial organizations as well as by Government agencies has forced implementation of tight restrictions against tax avoidance, there still are numerous advantages of going offshore. While one no longer should use an offshore jurisdiction to avoid taxation, there are many other benefits, including lowering taxes, available in today's world of globalization. As the latest surveys show, here are the 30 most important reasons or vehicles that may be used for going offshore:

higher yields or return on assets
fewer Government restrictions
sophisticated banking and trust facilities
safeguards against money laundering
more confidentiality
protection from unsavory creditors
freedom from forced heirship
reduced taxation or exemptions under controlled foreign corporation acts
availability of trained officials and trustees with long-time experience
reliance on tax treaties
political stability
exchange convertibility
foreign-based insurance and reinsurance facilities reducing taxes and risks
asset protection trusts providing less risk
cost-cutting by more convenient geographical locations
foreign investment inducements
tested legal systems
fair treatment
Government cooperation
free remittance of profits and capital
customs-duty exemptions for most essential goods
territorial taxation on foreign income
bank secrecy
offshore banking units
controlled inflation
sanctity of contracts
security of property rights
selection of top-rated debt history jurisdictions
using U.S. Extraterritorial Income Exclusion Act of 2000; and
U.S. State non-resident tax exemption.

Of the 30 years that this study has been prepared bi-annually, this is the first time that freedom from forced heirship and U.S. State non-resident taxation appeared on the list.

In this era of asset protection trusts there is no more of a reason to go offshore than to rely on jurisdictions that avoid laws that require settlers of trusts to leave their assets to heirs at death. Nearly every nation in the world has incorporated forced heirship laws in their Constitution or statutes. Those areas include all of Latin America, Middle East, and Europe, although except the United Kingdom and its British Commonwealth territories that encompass the havens of Channel Islands, Isle of Man, Gibraltar, and certain other British-oriented countries. The U.S., as well as its neighbor to the North, Canada are free of this deterrent.

Among the other benefits that attract prospective investors to asset protection trusts provide:

1. higher yields or returns
2. few restrictions
3. sophisticated banking and trust facilities;
4. safeguards against money laundering;
5. more confidentiality
6. protection from unsavory creditors
7. taking advantage of reduced taxation or exemption under the U.S. and Canadian controlled foreign corporation acts
8. trained professionals abroad, who have been handling offshore business operations and trusts since the early 1920s
9. exchange of information agreements by Canada and the U.S. with offshore jurisdictions that help screen out the illegitimate fly-by-nights who run up against the laws.

An increasing demand for taxpayers to protect their assets from creditors and litigants has inspired several States in the U.S. to examine the feasibility of adopting trust laws that provide asset protection comparable to that of offshore jurisdictions while simultaneously attracting more capital and income to their State coffers. Alaska was the first to adopt an asset protection law as of April 2, 1997, followed shortly thereafter by Delaware, a State long known as a haven for United States trust operations. Idaho, South Dakota and Wisconsin also have long been recognized as 'trust friendly' with favorable treatment of trusts but without special protection of assets.

Providing attractive Trust Services

Following the wide acceptance by foreigners of the asset protection trust vehicle adopted by Alaska and Delaware, other States soon joined the ranks of those providing attractive trust services to overseas citizens, despite some controversy raised about their publicized attributes in the United States. The first State after Alaska and Delaware to emerge as a situs for foreign trusts was Montana, whose trust legislation is primarily found in the Montana Trust Code, providing numerous general provisions regarding trusts and trustees. Nevada's trust legislation is found in various points in the Nevada Revised Statutes that include the Spendthrift Trust Act, which was amended in 1998 to allow creation of asset protection trusts.

Rhode Island followed next in 1999 with its 'Qualified Dispositions in Trust Act,' which is the State's asset protection statute, in addition to the trust legislation found in Title 18 of the General Laws of Rhode Island. Although Colorado had gained considerable attention in the 1990s for its liberal trust legislation found in the Colorado Revised Statutes, specifically the use of trusts for grantors to void 'existing creditors' from making attacks on property and other assets and exceptions to the prevailing United States 'rule against self-settled trusts,' it was the 1999 Colorado Trust Company Act upholding the implication that the statute 'Trust for use of Grantor Void Against Collectors' encompassing the asset protection trust rule that is drawing the attention of foreigners. For instance, certain financial overseas institutions are now establishing banking operations in Colorado to act as trustees under Colorado banking law in order to service their clients abroad.

Dynasty Trusts

The Alaskan Trust Act of 1997 limits the availability of trust assets related to a grantor's future creditors. Under the Alaska legislation, a grantor can be his or her beneficiary and places limits on creditors filing claims of fraudulent transfer, or intent to dodge credit liability. A litigant who was a creditor before creation of the trust may sue up to four years after the assets have been transferred or one year after the transfer is or reasonably could have been discovered, whichever is later. However, if the litigant becomes a creditor after the trust was created, the claim must be filed within four years of the transfer of assets. The Alaskan law also permits the establishment of 'dynasty trusts' whereby trusts may be structured to pass assets from one generation to another to defer taxes. This provision abolishes the 'rule against perpetuities', which limits the trust's life span to 90 years. It should not be overlooked that 13 other States, Arizona, Delaware, Idaho, Illinois Maine, Maryland, Missouri, New Jersey, Ohio, Rhode Island, South Dakota, Virginia and Wisconsin have joined the list of permitting providing attractive trust services that effectively repealed the Rule Against Perpetuities. Among the warnings the settlers of Alaskan asset protection trusts should be aware of are:

they are irrevocable and may not be amended or revised by the grantor the law of the State of Alaska must apply a part of the assets must be deposited in Alaska one trustee must be a resident of Alaska or a financial institution with its principal place of business in Alaska; and the Alaska-based trustee must have authority to administer the trust, maintain records and file the income tax returns.

In addition to the 'Asset Protection Trusts Providing Less Risks,' several of the States in the U.S. have recently adopted legislation designed to attract nonresidents of the U.S. to invest funds in the U.S. The basis for this new trend is granting State tax exemptions revolving around trust operations as well as income from bank deposits, certificates of deposit, certain precious metals on behalf of customers, municipal bonds, foreign currency and other forms of personal tangible property. Blessed by Washington officials, the Treasury hopes that increased bank deposits from non-residents will help to offset some of the $6 trillion of funds that were transferred to offshore jurisdictions in recent years. The six states offering these incentives are: Alaska, Colorado, Delaware, Montana, Nevada and Rhode Island for asset protection trusts and Colorado and Montana for State income tax exemption for non-residents.

The amended Delaware Qualified Dispositions in Trust Act of 1996 contains a four-year limitation on litigants who become creditors after the trust was created. 'Dynasty trusts,' also known as 'generation trusts' in some countries, are permitted as they are in the thirteen other States listed. It should be noted that Delaware trusts, under the pre-existing legislation, include provisions that allow for waiving of public filing of trust agreements. Delaware also gives its Chancery Court exclusive jurisdiction over matters relating to qualified dispositions. T

he Montana Code, which includes the Montana Trust Code considers trust companies as 'banks' for regulatory purposes. Montana also recognizes an entity known as a 'foreign capital depository' which is in the form of a banking institution that caters exclusively to non-resident aliens of the United States. Depositories are not necessarily trust companies but they may offer non-resident aliens the trust and fiduci- ary services outlined in the Montana Code. These depositories have a number of diverse purposes, including receiving and accumulating money as well as accepting and holding securities, gold, silver and other valuable personal property. Montana taxes trusts at the same rates and manner as individual income. However, nonresidents are taxed only on that portion of their income earned in Montana. No minimum assets are required for a Montana trust and there are no requirements for most trusts or trustees.

A trust settler may be a trust beneficiary. Montana recognizes spendthrift clauses as valid against creditors in connection with trusts settled for the benefit of persons other than the settler. The State allows limited forced heirship rights in favor of surviving spouses.

Colorado's Foreign Capital Depository legislation is among the most liberal of six states offering exemption from State income taxes to non-residents. Under the revised Statutes Title 11 of the Colorado Banking Law, Colorado banks may handle transactions for non-residents that are free of State taxes covering income from bank deposits, certificates of deposit, purchases of gold, silver, platinum and other precious metals on behalf of customers, tax-exempt federal, state, county or municipal bonds for customers, foreign currency exchange for United States dollars, automated teller operations, and other forms of personal tangible property.

The Colorado Banking Code of 1957, as amended in 1999, and the Colorado Trust Company Act of 1999 permit banks to act as trustees and provide that banks acting as trustees be regulated under the law. Part 3 of Title 11, as revised, includes an attractive asset protection provision and states that, in the case of actual fraud, a plaintiff may file suit up to four years after the date of transfer or, alternatively, one year after the date on which the plaintiff discovered or reasonably could have discovered the transfer. Other significant points to be considered are:

anti-money laundering rules are included in the Code

in general, Colorado recognizes foreign money judgments pursuant to the Uniform Foreign Money Judgments Recognition Act; and

spendthrift and charitable trusts are allowed. In addition, Colorado has a farsighted State Banking Board and other Government officials who encourage prompt, confidential and fair treatment to non-resident depositors as a vital means toward helping to reduce the $ 480 billion United States current account deficit by repatriation of offshore funds to the United States.

Nevada's 1999 trust legislation creating asset protection trusts substantially repeals the United States 'rule against self-settled trusts' under Nevada's Spendthrift Trust Act. Nevada recognizes both testamentary and inter vivos trusts. Under the Nevada Constitution, any personal tax on natural persons is not allowed nor is a State inheritance tax imposed. However, Nevada imposes estate taxes and generation-skipping transfer taxes. There is no minimum asset requirement for a Nevada trust nor are there any residence requirements for settlers or beneficiaries of Nevada trusts. The State does not require registration or recording of trust instruments. A trust settler may be a trust beneficiary under Nevada law. If the trust settlement is a spendthrift trust that satisfies the criteria of the Spendthrift Trust Act and the settler's interest is subject to the spendthrift clause, generally the settler's beneficial interest is not subject to attachment by creditors. Trustees of Nevada trusts must be Nevada residents. Under the comprehensive asset protection trust legislation, a settler may set aside a written trust that allows a trustee to distribute trust principal or income and gives the settler the right to veto trust distribution as well as special appointment powers over trust payments. Nevada does not offer any forced heirship provisions in its legislation.

Rhode Island's 1999 trust legislation encompassing the Qualified Dispositions in Trust Act (Rhode Island's asset protection statute), enables Rhode Island's trustees to compete with other American APT jurisdictions, because like those other States, Rhode Island has substantially repealed the United states 'rule against self-settled trusts.' Rhode Island's APT statute is closely patterned after the 1998 version of Delaware's statute and even borrows Delaware's terminology by calling APTs 'qualified dispositions,' which is a phrase originated in Delaware in 1997. Rhode Island also has statutory provisions that govern trust recordation, charitable trusts, trust taxation termination of trusts, and the rule against perpetuities. This statutory law is supplemented with case law that further elaborates on the rights, duties and obligations of trust participants. Rhode Island recognizes both testamentary and inter vivos trusts and does not allow trusts to be formed orally, requiring all trusts to be in writing. The State imposes a minimal income tax burden on trusts having out-of-State beneficiaries and settlers. Generally, a Rhode Island personal income tax is levied on Rhode Island income of residents and non-residents, including estates and trusts. Thus, non-residents do not pay tax on income generated from activities outside of Rhode Island. There is no minimum asset requirement for any Rhode Island trust and there is no residency requirement for settlers or beneficiaries of a Rhode Island trust. Permissive recording of any testamentary trust instrument is allowed. A trust settler may be a trust beneficiary under the law. Rhode Island imposes residency requirements on trustees of qualified dispositions. Trustees who are natural persons must be residents of Rhode Island. Under the comprehensive asset protection trust legislation contained in the Qualified Disposition Act, a settler may settle a trust in which the trustee distributes trust principal and income to the settler and gives the settler the right to veto trust distributions and certain other limited powers over property. Rhode Island allows limited forced heirship rights for surviving spouses.

Although Colorado has not adopted a comprehensive asset protection law, the key to the general recognition providing a safe haven against asset transfer risk is Section 38-10-111 of the Trusts for Use of Grantor Void Against Creditors statute stating that transfers into trusts are void against a settler's creditors existing to the extent that the trust property in question is free for the 'use of' the settler. Colorado differs from true asset protection trust jurisdictions in another way. Whereas most APT jurisdictions limit creditors to fraudulent transfers relief, Colorado does not so that creditors in Colorado may invoke other theories in addition to the Uniform Fraudulent Transfer Act.

Colorado's trust legislation also is found in the Colorado Trust Company Act and the Colorado banking law that regulates banks acting as trustees. Colorado recognizes written trusts established either on a testamentary or inter vivos basis. The State imposes an income tax on non-resident trusts and non-resident beneficiaries but limits the taxable base to a non-resident's Colorado-source Federal taxable income.

Colorado has no minimum asset requirement for any Colorado trust and there are no residency requirements for settlers or beneficiaries. Colorado requires registration of trusts, with certain exceptions, by any trust or trustee with its principal place of administration in Colorado. A trust settler may be a trust beneficiary under Colorado, law. Trust companies are subject to regulation by the State Banking Board and banking commissioners. Colorado allows limited forced heir-ship rights for surviving spouses.

Comparing State-established Trusts with Offshore Trusts In comparing the advantages of United States State-established asset protection trusts with offshore trusts, the potential settler must bear in mind that in the case of an offshore trust, a creditor or litigant must obtain a judgment from the foreign jurisdiction where the trust is located, thus placing an obstacle in the way of receiving a favorable verdict. Moreover, the four-year statute of limitations on creditors' claims is twice the duration period for the two-year requirement in the majority of offshore trust jurisdictions and contrasts with the absence of a limitation clause by Belize and Niue, although the Cayman Islands has a six-year waiting period.

In view of the pitfalls some settlers have found in redomiciling their foreign trusts from overseas jurisdictions to State structuring of trusts, by depending on the family limited partnership (FLP) it should be noted that, particularly when partnerships are dissolved, problems have been created and court decisions made regarding the return of assets to partners. In a typical trust where the trust's settler is the general partner and the settler's trustee is a limited partner and the partnership is dissolved, the return of assets to partners is usually considered to be similar to a return of capital to a corporation's shareholders. However, if capital is returned to a trustee in the face of a creditor claim, the transfer of property from a FLP to a trustee may be deemed a fraudulent transfer. This problem can be sidestepped, however, through means of publicly recorded liens or other measures that create a pre-claim public notice of the trustee's interest in an FLPs assets.

Nevertheless, there are many advantages of using an Alaskan, Delaware, Montana, Nevada, Rhode Island and Colorado Trust for settlers who do not wish to face the risk of going abroad. For instance, the grantor may:

name his or herself as beneficiary
create a 'dynasty trust' whereby the estate taxes are deferred indefinitely
avoid State income tax liability; and
enjoy additional asset protection from creditors' litigation...

Although it has become increasingly more difficult for United States persons to take advantage of all the benefits of foreign trusts because of tax penalties, residents of overseas countries continue to receive many benefits of trusts formed in the U.S. as well as being exempt from taxation on certain Federal and State income earned in the U.S. such as that eligible under the Colorado and Montana Foreign Depository Acts.

The question has arisen whether the U.S. State tax incentives laws are compliant with OECD. The answer is simple. OECD has no authority over U.S. States. All its issues and decisions must be carried out with member Governments, of which there are 30. The Secretary of the Treasury has confirmed this. In fact, the OECD has provided a measure of legitimacy to offshore jurisdictions and this acceptance has given offshore operations a new status. They are now granted to be an integral part of international and commercial services in the expanding global economy. Offshore jurisdictions have opened up new lines of opportunities in investing, financing and marketing. At the same time they have listened to OECD and followed its objectives to disband the 'Harmful Tax Haven' nomenclature by quick action in tightening the veil over money laundering.

WALTER DIAMOND
Sr. Vice President, The Offshore Institute
9 Old Farm Lane
Hartsdale NY 10530 USA
Tel: +1 914 946 4089
Fax: +1 914 946 5864
E-mail: wddiamond@computer.net