Offshore vs Wyoming

“Almost” Offshore Protection with On-Shore Convenience and Much Less Scrutiny

The WYOMING Advantage!

Wyoming consistently ranks among the most preferred states in the nation in which to form, migrate, or resettle a trust. In the last decade, as families and wealth management professionals have begun to focus on the importance of selecting a jurisdiction with a favorable trust climate, Wyoming’s popularity as a trust situs has seen remarkable growth. Wyoming’s favored status stems from the following factors:
  • Near perpetual trusts capable of avoiding transfer taxes for up to 1000 years.
  • No income tax, and an extremely low probability of an income  tax ever being enacted.
  • Privacy, including no registration requirements and LLC protection.
An enhanced version of the Uniform Trust Code that allows:
  • Directed trusts;
  • Trust protectors, trust advisors, and special purpose entities;
  • Purpose trusts;
  • Prudent investor standard;
  • Nonjudicial settlement agreements;
  • Flexible trust modification and reformation;
  • Possible common law decanting;
  • Enhanced virtual representation; and
  • Easy trust migration and reformation.
Private trust companies:
  • One of the only states allowing for truly non-regulated private trust companies;
  • Low cost non-regulated private trust companies; and
  • Available regulation, if desired.
Powerful asset protection vehicles:
  • Self-settled spendthrift trusts allowing settlors to retain inter vivos or testamentary, special or general powers of appointment;
  • Protection of discretionary and mandatory distributions; and
  • Charging order as the sole remedy against LLCs (even single-member LLCs, the owner of which can be an asset protection trust, or the trustee of a private trust company).
  • A consistently trust-friendly and responsive legislature.
  • A fast and efficient court system.
The combination of these factors makes Wyoming an ideal jurisdiction in which to create, migrate, or reform a trust. With the imposition of unfavorable tax treatment on foreign trusts by the recently enacted HIRE Act, individuals who once relied on foreign jurisdictions should consider taking advantage of Wyoming’s superior laws.

Onerous Offshore Regulations

On March 18, 2010, President Barack Obama signed into law House Resolution 2847, the HIRE Act. As its name suggests, the Act focuses on job creation by providing tax incentives to businesses that hire and retain new employees. To offset the revenue losses created by these incentives, as well as to deal with several perceived reporting loopholes related to the taxation of offshore investments by U.S. residents, Congress included the Foreign Account Tax Compliance Act (FATCA), which increases taxation, reporting requirements, and enforcement for offshore accounts and trusts.  Most notably for the purposes of this article, FATCA affects the playing field for foreign trusts with U.S. beneficiaries by identifying a broader selection of trusts considered to have U.S. beneficiaries, increasing reporting requirements, and imposing higher penalties on taxpayers who fail to report or under-report trust income, use of trust property, or assets settled into a foreign trust. Overall, FATCA significantly narrows the appeal of offshore trust jurisdictions to U.S. investors. As the impact of the HIRE Act and FATCA reverberates through the next few tax years, more and more U.S. clients will reconsider the pros and cons of foreign trust jurisdictions, likely finding they can get many of the same benefits with fewer attendant risks by resettling their trusts in a U.S. jurisdiction.

In order to more clearly assess the impact of FATCA, a closer look at the details of the Act is warranted. With respect to foreign trusts with a U.S. beneficiary, FATCA expands the definition of what is considered a foreign trust benefitting a U.S. person, thereby subjecting more trusts to certain U.S. taxation and reporting requirements. Since 1996, the Internal Revenue Code has distinguished between foreign and domestic trusts for U.S. tax purposes by stating a trust is domestic if “(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.” Consequently, a trust created by a U.S. transferor for the benefit of one or more U.S. beneficiaries managed only by a foreign trustee is treated as a grantor trust and is subject to taxation by the United States on its worldwide income.

FATCA cuts a wider swath than the former version of the Internal Revenue Code when assessing which foreign trusts have a U.S. beneficiary. First, U.S. persons with interests in a trust contingent on a future event are now unequivocally considered U.S. beneficiaries and are responsible for the new reporting requirements. Second, if under the terms of a foreign trust any person has the discretion to make a distribution for the benefit of any person, the trust is presumed to have a U.S. beneficiary, unless “(A) the terms of the trust specifically identify the class of persons to whom the distributions may be made, and (B) none of those persons are United States persons during the taxable year.” This presumption may be overcome only if the person who directly or indirectly transfers property to a foreign trust submits information to the Secretary of the Treasury showing the trust has no U.S. beneficiaries. Third, FATCA expands the scope of foreign trust terms by stating that an “agreement or understanding (whether written, oral, or otherwise)” resulting in the income or corpus of the trust accruing to or for the benefit of a U.S. person shall be considered a term of the trust. These provisions will result in required filings by many more foreign trusts than under previous law.

Regarding the use of trust property, previous law treated a loan by a foreign trust to a U.S. grantor, U.S. beneficiary, or related U.S. person as a distribution by the foreign trust to that U.S. person unless the loan was later repaid or cancelled. FATCA stipulates any uncompensated use of foreign trust property, including a loan of cash or marketable securities, by a U.S. person who is a grantor, beneficiary, or related to a U.S. grantor or beneficiary, will be treated as a distribution to the extent of the fair market rental value of the property or amount of the loan.31 If such person compensates the trust for the use of property or repays the loan at a market rate of interest within a reasonable time, then the section does not apply.

FATCA also ups the ante with regard to reporting requirements for U.S. owners of interests in foreign trusts and increases the attendant penalties for non- or under-reporting. Any U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules must provide information about the trust to comply with reporting obligations. Exactly what information will have to be reported has not yet been determined, but this requirement erodes the promise of privacy so sought after by many of those who settle trusts in foreign locales.

For failing to report, the initial penalty is now the greater of $10,000 or five percent of the value of the portion of a grantor trust owned by a U.S. person, thirty-five percent of the value of property transferred to a foreign trust by a U.S. person who does not report the transfer, or thirty-five percent of the distribution amount to a beneficiary who fails to report distribution. Additionally, Congress retained the provision in § 6677 imposing a $10,000 penalty for each thirty-day period for which a failure to file continues after an initial ninety-day grace period beginning when the Internal Revenue Service notifies the person of the requirement to file. In no event, however, can penalties exceed the gross reportable amount.

With recent legislation in a number of states, including Wyoming, allowing for the creation of self-settled trusts, combined with the implications of the FATCA provisions, the shine of foreign trust jurisdictions is beginning to tarnish. Wyoming allows for self-settled trusts, protects the privacy of settlors and beneficiaries, and does not tax trust income, with the result that trusts settled in Wyoming are subject to the same U.S. tax as foreign trusts with U.S. beneficiaries, without exposing clients to the potential risks of unenforceable trust terms and lack of control that can arise when foreign trustees are involved.*

[Source] * Christopher M. Reimer, Partner, Long Reimer Winegar Beppler LLP; Adjunct Professor at the University of Wyoming College of Law; J.D., University of Wyoming College of Law; LL.M., taxation, University of Denver. A heartfelt thanks to Amy M. Staehr, third year law student at the University of Wyoming College of Law and summer clerk of Long Reimer Winegar Beppler LLP, for her assistance with this article.


Here's what's happening...

In 2010, the U.S. Congress passed House of Representatives bill H.R. 2847.

Hidden within this bill is a provision known as "FATCA," which stands for the Foreign Account Tax Compliance Act. This bill does several important things, as of July 1st, 2014:

1.    It forces all worldwide banks to comply with the IRS if they have any transactions in U.S. dollars.

2.    Because the U.S. dollar is still the world's reserve currency, it essentially means ALL WORLDWIDE BANKS, except for the smallest community institutions, must comply.

3.    To comply, banks can either spend a fortune segmenting, tracking, and potentially "taxing" their U.S. dollar transactions by as much as 30%... or they can simply get rid of all of their U.S. customers.

In other words, the U.S. government is saying to all banks around the world: If you deal in U.S. dollars in any way, you have to give us full, unfettered access to all of these transactions... or you have to get rid of all of your U.S. customers.

The repercussions here are enormous:

For one, it means more and more institutions will move AWAY from the U.S. dollar, accelerating the already rapid worldwide move away from the dollar as reserve currency. For another, it essentially makes it extremely difficult, if not impossible, for the average American to get some of his money out of U.S. dollars, and into more stable currencies via foreign banks.

Already, we've seen two of the largest banks in the world, JP Morgan Chase and HSBC, basically eliminate international wire transfers. Many small banks have reportedly followed suit.

And we expect many, many more banks to basically outlaw international wire transfers, the run up to this new July 1st law.

This is a clear example of Capital Controls. This is what a broke and desperate government does when they know the value of their currency is about to collapse. We've seen governments around the globe pull these stunts over and over again... right before a currency devaluation or collapse. And now it's happenings right here, in the United States of America.