It is difficult to imagine an issue that is so clear yet produces as much confusion as the proper U.S. tax treatment of the Offshore Trust. Despite thousands of Web sites on the Internet promoting offshore trusts as legitimate strategies for avoiding income taxes-this is not the case. The Offshore Trust does not provide any income tax advantage. All of the income of the trust is included on the tax return of the U.S. settlor of the trust. The trust is treated in the same manner as a revocable living trust. This rule applies whether the assets of the trust are located in the U.S. or in an overseas account. It also applies regardless of whether the source of the income is from the U.S. or from another country. All income of the trust is taxable on the return of the settlor in the year it is earned. It doesn’t matter when the funds are distributed or returned to the U.S. There is no strategy or technique which will alter this result without causing you to commit perjury or tax fraud.
This treatment is beneficial from an asset protection standpoint because it allows you to transfer property to and from an Offshore Trust without creating any tax consequences. No gain or loss is recognized, and no taxable income is produced by a contribution or distribution.