Offshore trust

An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.

Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring (or 'settling') assets (the 'trust property') on the trustees to manage for the benefit of a person or class or persons (the 'beneficiaries').

However, a number of offshore jurisdictions have modified their laws to make their jurisdictions more attractive to settlors forming offshore structures as trusts.

Also, two civil jurisdictions, who are sometimes considered to be offshore, Switzerland and Liechtenstein have artificially imported the trust concept from common law jurisdictions by statute.

Rule against perpetuities

Trusts in general are subject to the rule against perpetuities which, in practical terms, puts limits on the length of time within which all trust property must be distributed. Because of the strictures of the rule, a number of trusts have been struck down in wildly hypothetical circumstances because of possible infringement of the rule (see, e.g. the fertile octogenarian).

Most offshore jurisdictions which have sophisticated trust laws have modified their laws relating to perpetuity to allow settlor to select lengthy, fixed, perpetuity periods, to avoid the use of "Royal lives" clauses. Many have also adopted "wait and see" laws, which mean that trusts which might potentially infringe the rule against perpetuities are no longer automatically but invalid, but instead the trust remains valid unless and until the perpetuity period is breached.

Management of subsidiaries

Trusts in general are subject to the rule in Bartlett v Barclays Bank which provides (briefly) that where trust property includes the shares of a company, then the trustees must take a positive role in the affairs on the company. The rule has been criticised, but remains part of trust law in many common law jurisdictions.

A number of offshore jurisdictions (notably the Cayman Islands, with STAR trusts, and the British Virgin Islands, with VISTA trusts) have created special forms of trust that may be expressly settled without imposing an obligation of the trustees to interfere in management in this way.

Paradoxically, these specialised forms of trusts seem to infrequently be used in relation to their original intended uses. STAR trusts seem to be used more frequently by hedge funds forming mutual funds as unit trusts (where the fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest) and VISTA trusts are frequently used as a part of orphan structures in bond issues where the trustees wish to divorce themselves from supervising the issuing vehicle.

Critics in onshore jurisdictions have suggested that these specialised trusts have provisions that so fundamentally undermine the nature of a trust that they should not be recognised in an onshore jurisdiction, but whatever the view of onshore tax authorities and regulators, it seems unlikely that the courts in onshore jurisdictions would be prepared to derogate from the Hague Convention on the Law Applicable to Trusts and on their Recognition.

Asset protection

Certain jurisdictions (notably the Cook Islands) have provided special trusts which are styled as asset protection trusts. Whilst all trusts, to a degree, have an asset protection element to them some jurisdictions have enacted laws trying to make life difficult for creditors to press claims against the trust (for example, by providing for particularly short limitation periods). In practice the effectiveness of such trusts is limited as the bankruptcy and/or divorce laws in the settlor's home jurisdiction will usually operate to set aside transfers to the trusts, and most jurisdictions (including offshore jurisdictions) set aside transactions entered into defraud creditors.

Powers of investment

Most traditional jurisdictions only permit trustees to make very conservative financial investments. Most offshore jurisdictions permit (or allow the settlor to specify in the trust instrument that they are permitted) a wider range of investments, including higher risk investments such as derivatives and futures contracts.

Purpose trusts

Whilst in most common law jurisdictions, trusts must either be formed for the benefit of persons, or charitable purposes, many offshore jurisdictions have also amended their laws to permit trusts to be formed for non-charitable purposes. Such trusts need to enforce a "protector" to be able to enforce the terms of the trust, but doubt remains as to who should be treated as the beneficial owner of the trust funds for tax purposes prior to its distribution.

Interestingly, no offshore jurisdiction yet appears to have made a serious effort to expand upon the flexibility of trusts in relation to certainty of objects, as expounded in McPhail v Doulton. This may be because the common law rules are now considered to be sufficiently flexible to make no widening necessary to attract trust business.

Use of offshore trusts

Official statistics on trusts are difficult to come by as in most offshore jurisdictions (and in most onshore jurisdictions), trusts are not required to be registered. The perception is that offshore trusts are predominantly used by wealthy individuals and families as part of their tax planning, and whilst this may be true, there are also other purposes that offshore trusts are used for.

Offshore trusts are also sometimes formed as unit trusts to operate as a mutual fund.

Offshore trusts are often used as part of an orphan structure in capital markets or trade finance transactions.

Pan-national non-governmental bodies are sometimes established as offshore trusts. For example, the International Cricket Council is formed in the British Virgin Islands.