DAPT and FAPT Account Tax Incentives

When planning an estate, trust, or will, taxation is primary concern. Indeed, planned giving specialists and estate planners have long assisted investors in the formation of vital trust vehicles for purpose of protecting financial assets from taxation while they are still living. U.S.-based estate owners have the option of offshore or onshore trust formation. Offshore tax-exempt Foreign Asset Protection Trust (“FAPT”) of trusts are another customary “institution” dating several centuries still offered to investors in Belize, the Cayman Islands, Cook Islands, Isle of Man, or Luxembourg. Onshore Domestic Asset Protection Trusts (“DAPT”) are an alternative for U.S. high net worth investors, though offshore trust formation remains an option for those seeking protection of liquidity and other financial assets. Read on to compare the trust benefits of offshore versus onshore investment trust formation.

Offshore Trusts, Reporting Obligations

Rule to offshore investment instituted by President Trump’s tax reforms in 2017, have changed insofar that foreign bank accounts of $10,000 or more, failure to file a Foreign Bank Account Report (“FABR”) with the Internal Revenue Service (“IRS”) does not subject the account owner to “delinquency” penalties. Nevertheless, transfer of wealth to a FAPT account for purposes of tax-exemption, does not entitle the account holder universal protection from penalties if established by a court that transfer of assets to a FAPT account qualify for fraud conviction under federal rules of conveyance. U.S.-based account owners can transfer income from offshore FAPT by giving a gift to a nonprofit 501(c)3 for purposes of tax-deduction, instead.

Onshore Trusts, State-by-State Rules

Some U.S. states have enhanced legislative asset protections for DAPT within their trust statutes. Example is Wyoming’s enactment of limited liability company (“LLC”) reforms similar with Bermuda’s offshore statutory provisions for trust accounts. Although not all states offer identical protections, trustees can elect to transfer bank or brokerage accounts, or other investments and properties to a trust in another state jurisdiction if at least one designated trustee resides in that state. As with proceeds from FAPT, an estate held DAPT account permits a trustee to reinvest those funds or to donate residual tax reported income to a charitable recipient for IRS tax deduction.

Planned Giving Coordination

Traditionally, estate owners sought tax-exemption from philanthropic donation to a nonprofit charitable giving scheme. While planned giving strategies continue to be a good bet for investors seeking tax deduction, the opportunity to create more tax-free wealth with a DAPT or FAPT is a benefit for both charitable concerns, and the estate where the trust is held. Tax-free protection of beneficiary assigned assets is one of the main reasons a high-net-worth individual seeks to transfer their wealth to an FAPT offshore account. More recent implementation of LLC trust protections for DAPT in some U.S. states, gives investors the option of forming a trust at home. By transferring financial assets to an onshore trust LLC or to an offshore trust, beneficiaries are exempt from future estate taxation.

Establishment of an offshore FAPT or domestic U.S.-based DAPT account protects estate or trust financial assets for future generations, or for purposes of tax-deductible donation.

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