Prepared by Christopher Klug - Founder, Klug Counsel PLLC. To save or read this newsletter offline, click here.
Wealthy international families are choosing U.S. situs trusts over the typical offshore trust jurisdictions. In choosing a trust jurisdiction, the extremely wealthy seek the best security, most privacy, best income, lowest taxes, and lowest costs. While the extremely wealthy often utilize these trust structures, they are in no way limited to the extremely wealthy and are often used by high-net-worth individuals (i.e., more than a million in assets). For many, it is also important to diversify their asset holdings outside their country of residence. Powerful trust laws, tax savings, asset protection and privacy, as well as solutions to political and regulatory concerns, all combine to make the U.S. the trust situs of choice.
In past decades, only international families with relatives in the U.S. would choose the U.S. as the situs jurisdiction for their trust. Recently, international families without U.S. relatives have opted for U.S. trusts for the modern trust laws, greater demand in U.S. investments, a desire for political stability, and the protection of property, as well as the desire to establish a trust in a non-blacklisted country that provides privacy. The modern trust laws in jurisdictions such as Alaska, Delaware, Nevada, and South Dakota are attractive to these international families as they provide flexibility and control, tax savings, asset protection, and privacy among other key advantages.
On January 16, 2019, the South China Morning Post ran an article titled Four Chinese Tycoons just transferred US$17 Billion of their wealth to trusts as government toughens up tax regime. The article described how billionaires Sun Hongbin, chairman of real-estate developer Sunac China Holdings, Wu Yajun, chairwomen of Longfor Group, and the wealth magnates behind food distributors Dali Foods Group and Zhou Hei Ya International Holdings transferred US$17 billion to South Dakota trusts through British Virgin Islands companies.
South Dakota is known for Mount Rushmore, but now it is quickly becoming the trust jurisdiction of choice for international families. South Dakota trusts provide the following benefits:
(1) the creator can be a beneficiary of the trust;
(2) the assets transferred to the trust are immune from creditors once two years have passed;
(3) no reporting under the Common Reporting Standards (“CRS”); and
(4) court documents relating to the trust are kept private forever. A creditor also must prevail on a fraudulent transfer claim by clear and convincing evidence which is a very high standard in the U.S. legal system.
How did the U.S. become the privacy jurisdiction of choice? In response to perceived abuses in U.S. taxpayers using foreign accounts and companies to hide income and assets, the U.S. passed the Foreign Account Tax Compliance Act (“FATCA”) in 2010. FATCA forces foreign financial institutions to inform the U.S. government of their U.S. account holders. As a result of FATCA, a number of other countries created the CRS. Under the CRS, countries agree to exchange information on the assets of each other’s residents kept in financial institutions in the other CRS reporting jurisdiction. The typical offshore trust jurisdictions agreed to report under the CRS.
While the U.S. receives extensive information through FATCA from other nations, the U.S. is either not required to report back to the other nation, or if information sharing is required with the other nation, there are typically many loopholes. For example, the U.S. does not have to look through a company created outside its borders and report the ultimate beneficial owners.
Many international families are concerned that information about their wealth could put them at risk, so privacy is a top priority. Due to certain risks in other nations and for other reasons, if the international family can have access to the stable U.S. economy and maintain privacy, the U.S. makes a lot of sense as the situs jurisdiction for their trust.
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Christopher M. Klug serves clients with domestic and international taxation, tax controversy, corporate/business planning, mergers and acquisitions, cross-border transactions, and domestic and international estate planning needs.
Klug Counsel represents companies, start-ups, private equity funds, family offices, and high-net-worth individuals. Through their strategic partnerships with law firms and other professional service firms in the U.S. and around the world, they are able to meet the tax and business needs of their clients in the U.S. and internationally.