Did you miss our excellent webinar tackling the taxation and regulation of international trusts in the US, UAE and beyond?
If so, don’t despair and have a look at our event’s full transcript.
A huge thank you to Gideon Rothschild, Partner, Moses & Singer LLP, New York, USA and Dr. Peter Wilson, PB First Global Tax Advisors, Dubai, UAE, for taking the time to discuss this complex issue with our network.
If you have any follow-up questions for either of the two, please make sure to submit them in the pertinent forum thread linked to below.
SUBMIT FOLLOW-UP QUESTIONS
For now, here are some of the webinar’s main highlights.
What’s currently trending in your region when it comes to trusts as asset protection strategies?
Peter Wilson: “The use of trusts is becoming more difficult for people, more expensive for families, more regulated, and there really needs to be a proper commercial reason, as well as asset protection, for families to want to use trusts…The trend that I’ve seen is trustees becoming more difficult about whether they get to take on a family. Trustees are asking for more information on the DD & KYC. Financial institutions almost always say “No” to open a bank account rather than yes. Beneficiaries are becoming more concerned about what their home countries tax authorities are going learn about them and when. More and more professional advisers are becoming reluctant to advise on establishing trusts, let alone act as either a settlor or protector. And there’s a consequence to that: there is a growing trend for the establishment of these trusts in jurisdictions where the beneficiaries are tax residents or can become tax residents, so that the financial institutional issues are much easier, which means that there’s a swing away from more traditional jurisdictions to jurisdictions like the UAE, Singapore, Hong Kong, etc.”
Gideon Rothschild: “The key issue that one also needs to be comfortable with is the fraudulent transfer issue and, that is, setting up one of these trusts at a time when they are already in the throes of litigation or about to go into litigation. Let’s say I’m in a car accident, I injured someone, and I run to my lawyer the next day to set up an asset protection trust. That would clearly be a fraudulent transfer and, although if not challenged in time, in a foreign jurisdiction, certainly in the US, that would not stand up to a challenge. So these trusts have to be established in a timely manner, in advance, before any clouds are on the horizon. Professionals who are engaging in this practice in an ethical manner and do their proper due diligence do know that folks coming to them are not looking to avoid any known or probable future creditor.”
Will the growing international trend to require companies to satisfy ‘substance’ tests kill international trust structures or simply lead to additional costs?
Peter Wilson: “I think it will just lead to additional costs because if it’s worthwhile to set up a trust for asset protection or family law protection or what have you, then the person who’s behind it is going to want to make sure that the trust itself and the entities below the trust are the whole family assets, whole business assets that they’ve chosen to cite in one country or another, which now has, I’m not going to say an excessive obligation for substance, but as a result of the European Union forcing the majority of former British territories to adopt substance rules, I just think if it’s right for the trusts to have their asset-only companies in one or more jurisdictions. If I think that’s right for their purpose, then I’ll just spend the money to put the right substance round those entities so they won’t be getting the fines or they won’t be reported.”
Gideon Rothschild: “The substance issue is more of an EU directive, it’s not something that’s probably applicable in the US for the reason that we have CFC legislation, PFIC legislation, we have worldwide taxation, and so there’s been attempts of moving IP kind of assets, intellectual property royalties offshore, and if it doesn’t meet certain rules, if you don’t have boots on the ground, we’ve had similar to these substance rules for quite a while in the US under the CFC regime, the PFIC regimes and what is explained as Subpart F rules regimes. So I haven’t really seen much impact on this from the US perspective, and I don’t think it really affects trusts because trusts are not entities that are typically doing business in these jurisdictions, they are asset holding structures but the entities underneath them, if the intention is to minimise home country taxation, then those entities would obviously need to consider the new economic substance rules.”
Is there evidence of trust structures being restructured to counter the consequences of automatic exchange of information?
Peter Wilson: “This is a particularly complex problem. What I can say is that I am aware of a trust that was settled, I believe, in 2012, and I’m aware that the settlor was a legal settlor rather than an economic settlor, and I’m aware that the legal settlor was a professional adviser and a tax resident in a country other than the country where the trust was settled and other than the country where the beneficiaries of the trust themselves were tax residents. But what I wasn’t aware of until this last week was that the legal settlor received a letter from the tax authority in his home jurisdiction asking him to complete the form listing all his foreign assets and that letter specifically mentioned this trust. The only way now that information wasn’t getting to the settlor’s home country tax jurisdiction under automatic exchange of financial account information because the trust that I’m thinking of at that junction didn’t have a financial account but it would have, I believe, got to that home country jurisdiction through the beneficial ownership register that’s set up in the country. So I have to conclude from that, that the automatic exchange of information, whether it’s financial accounts or beneficial ownership, does seem to be working from the point of view of tax authorities getting information on people that never in a million years would they have had in previous lifetimes.”
What tax-related considerations should a non-US person keep in mind when establishing a US trust?
Gideon Rothschild: “Firstly, why would a foreign person set up a trust in the US? And the answer to that could be a number of different possibilities. One is they have a US heirs, US beneficiaries that they would like to benefit at some point in the future. Second, they may have US assets that they want to protect from either state tax or income tax, the latter being more difficult to protect from. The third question might be, and this is somewhat of a controversy among practitioners in the US, they want to avoid CRS. So, for example, they might have had a trust in Switzerland all these years, their home country is Germany, all of a sudden now because of CRS, they are concerned that they haven’t reported this income to Germany, so they figure that the US hasn’t signed onto CRS so let’s move it to the US and establish a trust in Delaware and then it won’t be reportable. First of all, I think that any lawyer who is complicit in doing it for that purpose could be risking themselves to ethical violations and even worse possible criminal conspiracy for money laundering, tax evasion in a foreign jurisdiction, even though it’s not tax evasion in the US. So one needs to make sure that the purpose of setting up this trust is a legitimate non-tax reason.”