Establishing an offshore trust is a popular way to protect one’s assets, preserve wealth, engage in philanthropy, pass on wealth to future generations, and much more. Indeed, you may well be thinking about pursuing such an option for these reasons – but you may also be unsure about which offshore location has the best deal in store for you to set up and operate such a legal arrangement.
As a reminder, trusts are created to transfer legal title to a property (the Trust Fund) from one party (the Settlor) to another (the Trustee) for the benefit of one or more individuals (the Beneficiaries), and for both charitable and non-charitable purposes. They offer much flexibility in terms of choosing the beneficiaries and deciding when assets will be transferred to them, especially as the settlor and the beneficiary can be the same person.
There are plenty of incentives and features associated with offshore trusts that make them hugely attractive to wealthy individuals and families, such as:
- Favourable tax benefits – most of the most in-demand offshore trust locations are found in tax havens;
- Additional layers of protection for your assets – legal frameworks are adopted that prevent such threats as asset seizures and predatory litigation;
- Confidentiality – an additional layer of asset protection when anonymity is crucially important to you.
And with various global jurisdictions providing their own subtly unique but distinct set of benefits for offshore trust creation, it is worth exploring the various perks that 3 of the most highly-regarded locations can offer.
Singapore
As is the case for many wealth management structures and facilities, Singapore ranks among the world’s leading jurisdictions for establishing and operating several types of popular trusts, including:
- Private Family trusts to protect assets and transfer wealth to future generations;
- Statutory Trusts established for statutory compliance such as in the case for life insurance policy beneficiaries;
- Charitable Trusts that allow you to contribute to charitable causes;
- Unit Trusts (or collective investment trusts) in which your money is pooled alongside other investors and invested in a portfolio of assets (for example, business trusts and real estate investment trusts).
But what makes Singapore so special? For one, its trust laws are strongly based on the principles of English common law, along with additional enhancements that align with global trust standards, such as the Trustees Act and the Trust Companies Act. A 2004 revision to the Trustees Act, moreover, has introduced further fine-tuning, such as statutory standards of care being carried out for specific functions by the trustees.
Then there is the clear and transparent tax scheme, and the territorial tax system – two of the biggest draws for Singapore as a preferred offshore trust location. The trust’s income in the city-state is taxed at a flat rate of 20%. Distributions made to the trust’s beneficiaries are then deducted from the taxable income and taxed at personal tax rates.
It is worth noting, however, that while some types of income earned by the trust (such as dividends) are not taxed at the trust level; they are taxable when distributed to the beneficiaries.
Singapore trusts are also neither subject to estate duties, nor inheritance tax or capital gains tax. For more information on the income tax treatment of trusts, you can check the E-Tax Guide from the Inland Revenue Authority of Singapore.
Labuan
Located just off the North-West coast of Borneo as a federal territory of Malaysia and conveniently positioned near Singapore, Kuala Lumpur, and other major Asian financial hubs, the island of Labuan provides many of the same key advantages possessed by Singapore as an offshore trust location, in addition to some of its own unique advantages that could well position it as the ideal protective home for your assets.
Labuan was established as a special economic zone in 1990, known as the International Business and Financial Centre (IBFC). Since then, the IBFC has developed and matured to become one of the world’s leading jurisdictions for creating and operating trusts, with a thriving, sophisticated ecosystem of direct and ancillary services, such as tax professionals and legal services, are dedicated to supporting Labuan trusts created by local and international investors.
As with Singapore, Labuan can boast of a strong legal system based on English common law, along with crucial additional trust-focused legislation in the form of the Labuan Trust Act of 1996, the Labuan Trusts Regulations 2010 and the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) for Islamic trusts. This legal framework underpins the main types of trusts that can be created, including Purpose trusts, Charitable trusts, and Spendthrift or Protective trusts. The Labuan Foundation – that is, a corporate body with a separate legal entity for managing its own property for charitable or non-charitable purposes, also makes Labuan a uniquely attractive global jurisdiction for investors.
But it’s the Labuan Special Trust (LST) that is the signature trust arrangement when it comes to Labuan, and what makes this jurisdiction so appealing. As per the Labuan Trusts Act 1996 (and updated in 2010), an LST can hold shares in a Labuan holding company, which in turn may own assets. This structure crucially separates the trustees’ custodian role from the management of the company, and as such, the company can be managed by directors without the trustee exercising any power of intervention.
LSTs often prove to be the optimal trust solution for high net worth individuals or families, especially those seeking to pass wealth on to the next generation by allowing them to serve separate roles and thus allow the founders of the wealth to maintain their original legacies. Other popular LST use cases include succession planning, commercial endeavours and matrimonial settlement.
The simple, transparent and low-tax environment for covering trusts represents another undeniably appealing aspect of Labuan. A modest 3% percent tax is imposed on the audited net profits of Labuan trusts, while the distribution to beneficiaries of a trust is exempt from taxation.
Client confidentiality is also given much priority by regulators without having to sacrifice compliance with international standards and best practices. For instance, if you set up a trust in Labuan then your personal information is protected from public disclosure, as guaranteed by the IBFC’s regulator, the Labuan Financial Services Authority (FSA).
And while trusts created in Singapore (post-December 2004) are operational for a maximum period of 100 years, the duration of Labuan trusts can be unlimited, or specified by the founder if preferred. What’s more, if you are a foreign investor looking to relocate to Labuan for business reasons, you will be eligible for a 2-year visa for yourself and your family members.
Such advantages illuminate why a diverse range of financial sectors are keen to develop on Labuan, which today makes it the ideal one-stop location for potentially all your financial needs. Among them include wealth management, fund management, international commodity trading, banking, insurance, leasing, corporate secretarial services, financial exchange and Islamic financial services.
Speaking of which, Malaysia’s status as a Muslim-majority country has strongly helped to propel Labuan towards becoming the world’s prime jurisdiction for Islamic trusts. These FSA-registered trusts are designed for beneficiaries with aims and operations being in compliance with Shariah principles. In such instances, the trustee of a Labuan Islamic trust will have to appoint a Shariah adviser for consultation regarding the operations of the Labuan Islamic trust to ensure compliance with such principles. And it is worth highlighting the sheer dynamism of Labuan itself, with the FSA having established a comprehensive 5-year strategy based on 5 “Strategic Thrusts” (see the video above) to position the island today as perhaps the optimal jurisdiction in Asia, and perhaps even beyond.
Cayman Islands
An autonomous British Overseas Territory, the Caymans consist of three islands in the Caribbean with its main island, Grand Cayman, long regarded as a prime destination for asset protection. The Islands themselves have long enjoyed a politically stable environment that has been crucial in helping to develop the territory’s many trust services.
As with other jurisdictions, the adherence to English common law makes the Cayman Islands appealing to global investors, while several important legislative amendments have been made specifically pertaining to trusts that supplement those set of principles, most notably the Trusts Act (2021 Revision) which sets out the rules for trust creation and administration, and crucially protects Cayman Islands trusts against predatory legal attacks in foreign jurisdictions.
Contained within the Trusts Act, legislation has also been included to enable the creation of the Cayman Islands’ most distinct type of trust – the STAR trust (Special Trusts Alternative Regime). This type of trust can be created for both charitable and non-charitable purposes, and beneficiaries have no rights to enforce the accountability of the trustees. As such, STAR trusts are ideal in cases when beneficiaries ought to remain unaware of the trust holdings due to issues pertaining to privacy, security or conflicts of interest.
And from a family wealth perspective, STAR trusts have several uses such as holding shares in a private trust company; acquiring and protecting family artefacts and heirlooms; and philanthropic objects not strictly considered as “charitable” under Cayman Islands law.
Other major trust types permissible in the Cayman Islands include Discretionary trusts which provides the trustee with discretion over the distribution of assets among beneficiaries and thus protects assets against potential creditor claims or legal disputes; Charitable trusts for philanthropic purposes; and Private Trust Companies for managing family trusts without the need for a licensed trustee.
On the taxation front, settlors of offshore Cayman Islands trusts enjoy income not being subject to taxation, nor any inheritance tax being triggered when transferring assets to beneficiaries. Trusts in the Cayman Islands usually have a lifespan of 150 years, although depending on the terms, Charitable trusts and STAR trusts can exist indefinitely.
Summary
In conclusion, when choosing an offshore trust location, it’s imperative to consider factors such as legal frameworks, tax benefits, asset protection, and confidentiality. While Singapore and the Cayman Islands offer robust options with their own distinct advantages, Labuan stands out as the premier choice for setting up an offshore trust.
Labuan’s strategic positioning near major Asian financial hubs, combined with a strong legal system based on English common law, provides a solid foundation for trust creation. The Labuan Special Trust (LST) offers a unique structure that separates custodial and management roles, making it particularly appealing for high net worth individuals and families. Additionally, the island’s simple, transparent, and low-tax environment—coupled with an emphasis on client confidentiality—ensures that your assets are well-protected and efficiently managed.
Moreover, Labuan’s unlimited trust duration, dynamic financial services ecosystem, and the availability of Islamic trusts compliant with Shariah principles further enhance its attractiveness as a top-tier offshore trust jurisdiction. With the Labuan Financial Services Authority (FSA) ensuring compliance with international standards while prioritizing confidentiality, investors can have peace of mind knowing their personal information is safeguarded.
Given these compelling benefits, Labuan emerges as the ideal jurisdiction for setting up an offshore trust. To explore how Labuan can serve your specific needs and to get personalized advice, make an appointment with us for a detailed discussion. Our expertise will guide you in securing and optimizing your wealth through the best offshore trust solutions available.