Caterpillar Employees: Offshore Trusts

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'For Caterpillar employees, setting up an offshore trust can provide some protection from the unexpected tax consequences - but it should be done with planning and the help of professionals like [Advisor Name], a representative of the Retirement Group.'

The offshore trust process is expensive and legal for Caterpillar employees trying to protect their assets, 'said Sullivan. Working with a trusted Advisor like [Advisor Name], a representative of the Retirement Group, is key to ensuring the strategy is in line with your long-term financial goals.'

In this article, we will discuss:

The basics of offshore trusts & their role in asset protection. Legal & financial considerations when setting up an offshore trust. Potential advantages & disadvantages of offshore trusts for retirement planning.

What Is an Offshore Trust?

A number of our Caterpillar customers want to know more about offshore trusts. A foreign trust is also called an offshore trust. The vast majority establish an offshore trust to protect their assets from present and potential creditors. The trust usually will be created outside of a country that does not recognize U.S. court judgments. Others look for countries with more protective (for the debtor) statutes regarding fraudulent conveyances.

So now some Caterpillar customers may ask: What is a fraudulent conveyance? Fraudulent conveyance - Transferring property with intent to hinder, delay or defraud creditors. The United States has a statute of limitations under which a creditor or bankruptcy trustee may contest a transfer. In almost all foreign countries where such offshore trusts operate, the statute of limitations on fraudulent transfers is extremely short or null. Probably the most common countries that financial and estate administrators work in are the Bahamas, Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein and the Cook Islands.

So it may be very difficult for a creditor or a bankruptcy trustee to claim assets in one of these offshore trusts. To attack the assets of the trust a creditor or bankruptcy trustee typically files a separate action in the country where the trust was established. And foreign litigation is often very expensive and slow. It could involve large discovery costs, large travel and communication costs, expensive local attorneys, and other costs not normally incurred in the United States when litigating a case.

Some of those foreign nations also recognize self-settled trusts with spendthrift provisions. This means the trust grantor can shelter the assets from creditors while retaining a beneficial interest in the trust. Should you need principal or income from the trust in the future, the trustee can be authorized by the trust deed to make those distributions. The cost and compromise of creating an offshore trust are high.

Their costs may be much higher than American trusts. The local attorneys in the country where the trust is located usually have to draft trusts. A foreign custodian may have physical possession of the assets, an investment manager may be required to invest the assets, a U.S. counsel must be retained, and a U.S. agent may be needed for tax reasons. Some countries require you also to go there to get them approved. There may also be large annual fees to keep the trust in a foreign country.

An additional disadvantage of an offshore trust is that typically you will be naming a foreign person or organization as the trustee (such as a trust company). Almost always, the foreign trustee will have sole custody of the trust assets. People are nervous about giving up control of the trust when the trust, trustee and assets are all domiciled in a country outside the United States.

Others will also name a protector, which is a group of one or more people authorized to direct the distribution of assets from the trust or to replace the trustee. You, the creator of the trust, retain some control over its assets, but you also risk a court or bankruptcy trustee in the United States ordering you to return assets to satisfy a judgment or creditor. This would be counterproductive to establishing a foreign trust.

Aside from the expense and hassle of creating an offshore trust, these Caterpillar customers should also know that there could be significant tax implications. Many of those offshore trusts are grantor trusts for US income tax purposes. This designation requires that you, as the creator of the trust, report all income earned by the trust, whether it is distributed to you or not. And if you are a U.S. citizen, you are obligated to report all of your worldwide income, including revenue from one of these offshore trusts, under Internal Revenue Service (IRS) regulations.

The trust cannot avoid U.S. taxes on income. Most offshore trusts also are established to avoid gift taxes on transfers to the trust. So when you die, your aggregate estate must include the trust's assets for estate tax purposes. This is why an offshore trust gives the grantor no income or estate tax advantages.

Caution: And we want our clients from Caterpillar to know that in recent years the IRS has enacted complicated rules to discourage U.S. citizens from setting up these offshore trusts. Some situations require you to declare a taxable gain when you pass appreciated property to the offshore trust. You also must report to the IRS how an offshore trust was created, how assets were transferred to an offshore trust and how the grantor of an offshore trust died.

There are serious penalties for not reporting any of these occurrences. When you die, all distributions to beneficiaries of the trust become foreign capital gain, which is taxed as ordinary income. In conclusion, an offshore trust has no income or estate tax benefit. In fact, there may be added income and estate tax liabilities and other large costs associated with setting one of these trusts.

But How Are Offshore Trusts Regulated?

Offshore Trust Must Be Established Under the Laws of the Country in Which the Trust Is Established.

You must follow the laws of the country where the trust is established to establish an offshore trust. These Caterpillar clients will almost always retain a local attorney with offshore trust document experience. The attorney should also draft all necessary documents and give an opinion that the trust is valid, free of creditors and exempt from local taxes. The local attorney will usually also confirm that local legal requirements have been met.

Example(s): You consult with your financial planner and estate planning attorney in the United States and decide to create a trust abroad. Your attorney suggests setting one up in Belize. Hire an attorney in that country who has experience drafting such a trust document. You'll probably have to sign in Belize.

A Foreign Trustee Must Be Selected.

Such Caterpillar employees have to pick a trustee in the country where the trust is established. A bank or trust company experienced in handling these types of trusts usually serves as trustee. Occasionally a person - usually the attorney who wrote the trust - is appointed trustee. Some might be hesitant about giving the trust's assets to a foreign trustee. Most countries permit the appointment of a protector (or protectorate) to ease this concern. One or more protectors can distribute the trust's assets, replace the trustee or even move the trust to another country.

Caution: Keep in mind these Caterpillar employees: U.S. citizens are not protectors. Or a U.S. court or bankruptcy trustee could order the protector to return assets to the United States. For the same reason, the grantor should not be a protector.

The Foreign Custodian Must Be Selected.

These Caterpillar customers may also have to pick a trustee in the foreign country - and a custodian to handle the trust's assets. In some offshore trusts, the assets may be held by a custodian in a country other than the trust domicile. Usually, assets are parked in one of the traditional banking capitals - London, Geneva or Zurich. A bank, trust company or independent custodian may actually keep the assets. If they are actively managed, you might have to get a foreign money manager to invest the assets on your behalf.

Example(s): After establishing your offshore Belize trust, you decide a Geneva, Switzerland, custodian will actually hold the assets you have transferred to the trust. You have chosen one of the big, established banks in Switzerland as custodian. The bank in turn employs a professional money manager in Geneva to invest the assets in the trust.

US Advisors May Need to Be Hired.

Such Caterpillar customers could even be asked to engage attorneys, accountants and agents in the United States to set up an offshore trust. A U.S. estate planning attorney may be necessary to integrate the offshore trust into your estate plan and help you move assets abroad. The trust may need a tax attorney or tax accountant to file tax returns and handle other tax matters. Third, you may need to designate a U.S. agent for some income tax purposes.

The Grantor Must Prove That a Transfer Into a Trust Is Not Fraudulent.

Nearly all foreign countries which allow such trusts to exist require the trust creator to attest that the transfer of an asset to the trust was not fraudulent. So basically, the countries want assurances that the trust will not defraud your existing creditors.

Example(s): Your business partner has sued you and got a USD 3 million judgment against you. So you immediately try to establish an offshore trust to which you intend to transfer all of your assets to shield them from your judgment creditor. But the foreign country where the trust is located asks that you sign a representation that the transfer of assets to an asset protection trust is not fraudulent. And here you could not actually sign such a representation. If you set up and transferred assets to the offshore trust many years earlier, however, your assets would most likely be protected from the judgment creditor.

Why Use an Offshore Trust?

An offshore trust may protect assets from creditors.

Some of our Caterpillar clients might ask why offshore trusts are necessary. The only real reason most people create a foreign trust is to protect their assets from judgment creditors or in the case of personal bankruptcy. A foreign trust may in many cases be a huge obstacle to the collection of a debt by a creditor in the United States.

As mentioned earlier, such trusts are created in countries that do not recognize U.S. court judgments. Your creditor must sue you in the country where the trust is located for the assets. A lawsuit might be hard to file and expensive in another country. So maybe even a US bankruptcy trustee would not be able to collect on the trust's assets.

Most Foreign Countries Have Debtor-Friendly Fraudulent Conveyance Laws.

Most states in the United States have fraudulent conveyance laws that let a creditor set aside a transfer and recover the asset. It is relatively long in most states before a creditor can claim a fraudulent transfer. However, most foreign countries have very short statutes of limitations or none at all. Should you be worried about being sued in the future, you might consider transferring your assets to one of these offshore trusts.

Many Foreign Countries Have Strong Secrecy/Confidentiality Laws.

Almost all foreign countries where offshore trusts are established have strict secrecy and privacy laws. If one of your creditors tried to get trust information, local laws would almost certainly ban the trustee from disclosing trust information. Rather, once a suit is filed in the United States, someone might find it easier to get information about the trust or its assets.

Angered Heirs May Have a Tougher Time Challenging Offshore Trusts.

If one of your cranky heirs attempts to challenge your sanity when you set up the offshore trust, he or she may have a harder time than with a US trust. A wrathful heir must sue that foreign country to show you were not of sound mind. They would have to hire an attorney in that country, fly witnesses there and pay many other high costs. In some countries, you must post a bond to cover court costs before you can sue.

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In addition, many offshore trusts can be written so that the trust and its assets may be transferred to another country immediately. Suppose one of your expected heirs was successful in his or her attack, you could just transfer the trust to another country and have your expected heir chase you there. But a cranky heir might have trouble contesting your mental state when you created a trust in the United States. If you win, your beneficiary could force a United States trust to dissolve.

Added Fact:

Outbound trusts might benefit retirement planning, according to a study in 2022 by the Society of Actuaries. For Caterpillar workers retiring soon, an offshore trust may be an added layer of asset protection and estate planning. Placement of some retirement assets in an offshore trust may help people avoid creditors or legal action and help them retire more safely. Yet you should always consult with an attorney and/or financial advisor regarding the legal and tax implications of offshore trusts and compliance with laws and regulations. (Source: Offshore Trusts for Retirement Planning, Society of Actuaries, 2022).

Added Analogy:

Some difficult concepts are best explained using analogies. Here's an analogy to summarize the article on offshore trusts for our audience:

Think of an offshore trust as a vault on a remote island. The owner puts his or her assets in this vault. Laws of the island protect you from danger. Inside the vault, your assets are safe from local storms (creditors) and from prying eyes on the mainland (heirs, creditors or legal disputes). The vault is hidden so no one can get your assets or contest them - giving you peace of mind as you age and retire. But remember that managing this offshore vault requires planning, international help (local attorneys, trustees and custodians) and knowledge of the laws and regulations in place. Just like you'd consult with professionals before you build and secure your secret vault, setting up an offshore trust requires professional advice on how to safeguard your future wealth.

Sources:

1. Georgetown Trust. 'Prepare for Retirement with Offshore Investments.' Georgetown Trust, 2024.
https://www.georgetowntrust.com/blog/prepare-for-retirement-with-offshore-investments

2. American College of Trust and Estate Counsel (ACTEC). 'Offshore Trusts as Tools & Strategies for Estates of U.S. Residents.' ACTEC, 2020. https://actecfoundation.org/wp-content/uploads/Offshore-Trusts-As-Tools-And-Strategies-For-Estates-Of-U.S.-Residents-ACTEC.pdf

3. Blake Harris Law. 'Maximize Retirement Security with Offshore IRAs.' Blake Harris Law, 2024. https://blakeharrislaw.com/blog/maximize-retirement-security-with-offshore-iras

4. Holborn Assets. 'Best Practices for Setting Up Offshore Trusts.' Holborn Assets, 2025. https://holbornassets.com/blog/financial-planning/best-practices-for-setting-up-offshore-trusts

5. SmartAsset. 'How Do Offshore Trusts Work?' SmartAsset, 2021. https://smartasset.com/estate-planning/how-do-offshore-trusts-work