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Asset Protection: Cayman Islands Trust Versus the IRS |
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Offshore trust has always been the most convenient asset protection method available in the world. United States citizens have been using banking institutions in the Cayman Islands, Bahamas and the British Virgin Islands to protect accumulated wealth. But at the same time, the US Congress and the IRS has been too eager in the past years to target such financial activities claiming that its purpose is to reduce and eliminate income or estate taxes.
The IRS is not wholly wrong about this idea. There are trust arrangements created for the sole purpose of avoiding taxation by the U.S. Government. Because of this, the IRS and Congress itself launched a massive campaign to limit the taxation benefits derived from offshore trusts. This basically comes as a reaction to abusive trust schemes that has been formulated throughout the years.
Some international business companies (IBCs) in the Cayman Islands or the Bahamas has been established for the sole purpose of creating an offshore trust to avoid or escape from U.S. taxation. Some of these businesses are even illegal or bogus. Its only purpose is to escape taxation. This is an example of an abusive trust scheme that the IRS wants to nail.
Some US citizens even make use of loopholes in the US laws concerning trusts. There is a rule that lets U.S. citizens avail income coming from trust financed outside the States tax-free. Because of this, some US citizens would make loans from offshore institutions that then use the loan to set up a foreign trust. What comes after this is the benefit from a foreign trust, free from U.S. taxation. To avoid this, the IRS requires all offshore trust loans and repayment to be properly documented and reported.
But even though the IRS has been very strict and skeptical regarding offshore trust, it still does not diminish the fact that offshore trust is still a very efficient method of asset protection. As a result, offshore trust lives on amid ferocious campaigns by the IRS and US congress.
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