Offshore asset protection for US persons

What 'US person' means here

Under these rules, a US person means a US citizen or a US tax resident — green card holders and anyone meeting the substantial presence test included — no matter where they happen to live. The very same offshore-trust tax and reporting requirements bind a US citizen based in London and a green card holder based in California alike. We focus this page on that group in particular, since the typical offshore-planning write-up skims past the US obligations that set US persons apart as their own category.

The one tax fact that counts most

When a US person settles an offshore asset protection trust, it is treated as a foreign grantor trust. That means the settlor declares every dollar of trust income on their personal US return exactly as though the trust were not there. Where the trust sits offshore makes no difference for income tax. The arrangement will not cut your US tax bill, hide income, or postpone anything. Before settling any such structure, a US person must grasp this above all else: the benefit lies in creditor protection achieved through jurisdictional separation, not in tax. Anyone pitching offshore trusts to US persons as a way to save tax is promising what the law simply does not offer, and acting on that pitch produces the gravest kind of compliance failure.

The reporting obligations

A US settlor must file Form 3520 (covering dealings with the foreign trust) together with Form 3520-A (the trust's yearly information return) must be filed each and every year, whether or not any distributions or transactions took place. FBAR covers the trust's foreign financial accounts once they exceed the $10,000 aggregate threshold. Under FATCA, Form 8938 is required for specified foreign financial assets that pass the defined thresholds. Failing to file carries harsh penalties — the greater of $10,000 or substantial percentages of the amounts that should have been reported — assessed for each missed filing. All of these are best managed together by a CPA versed in foreign trusts.

Why CRS makes disclosure non-optional

Nevis, the Cook Islands, and other offshore jurisdictions are all part of the OECD Common Reporting Standard, under which financial account details flow automatically to the IRS. So the IRS ends up holding information on the trust account regardless of whether the settlor reports it voluntarily. When a trust surfaces in CRS data yet is absent from the settlor's Forms, that mismatch is precisely the kind of thing the IRS is built to catch. For a US person, then, voluntary compliance is not really a privacy decision — it is the only sensible stance, since the alternative leaves a plain discrepancy against records the IRS already possesses.

Getting the US compliance right

Bring on a CPA who routinely prepares Forms 3520 and 3520-A ahead of settling the trust, not once it is done. Nail down the filing calendar — Form 3520-A falls due March 15, a month ahead of the personal return. Keep the trust accounts and the CPA working to the same schedule so nothing is ever filed late. Sign a truthful solvency affidavit when the trust is formed. And regard every reporting duty as compulsory, never discretionary. A US person who follows all of this ends up with a lawful, fully-compliant offshore structure. Someone who treats the filings as optional ends up with a problem far larger than whatever the trust was set up to address.

This is general information rather than tax advice. Verify all of your obligations with a CPA experienced in foreign trust reporting before you settle anything.