Trusts: a most flexible financial tool
A trust is one of the most flexible existing financial mechanisms, able to handle almost any purpose, except illegal ones, of course. Its concept is based on the separation of legal ownership of the Trust assets (which rests with the Trustees) from the beneficial ownership (which rests with the beneficiaries). It has been specially designed to achieve the best asset protection.
A trust is a legal device that allows title to - and possession of - property to be held, used and/or managed by one person, the trustee, for the benefit of another different person or group, the beneficiaries.
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These are a few examples of its possibilities: it can avoid probate and inheritance taxes, invest in all kinds of securities, real estate, cash, futures, bonds, stocks, hold title of any real or personal property, business interests, insurance policies, home, boat, car, pay support in marriage, to elderly, children, medical or educational expenses... etc.
And it most frequent uses:
- To offer flexibility in the distribution of the client's assets following his or her death (particularly attractive to residents of Roman Law countries which have fixed laws of inheritance).
- Trust will avoid lengthy and complicated probate court procedures as well as inheritance taxes.
- A trust, specially if operative for several years is less probably to be legally challenged than a will, specially regarding the charge of mental incompetence so often used against will written late in life.
- To keep confidential the beneficial ownership of property.
- To hold property for those who cannot hold it for themselves, e.g. minors or bankrupts.
- To minimise taxation by means of the client divesting himself of income or assets in favour of the Trustee, who may be located in low or no tax jurisdictions.
- To protect property and other assets from legal and political actions that may be taken against the client by transferring legal ownership to the Trustees (Asset Protection).
Trusts: Financial Concepts
Basically, a trust is a special type of contract (recognised by law) between the settlor and the trustees.
The person who creates a trust, called the settlor, donor or grantor, transfers assets owned by him or her:
the corpus or trust fund
to a third person or more persons:
with specific instructions, legally binding for the trustees, that the trustees should hold the trust fund upon prescribed terms for the benefit of a named person or other:
The trustees are under a strict legal obligation to carry out the precise terms of the trust. Trustees can either be individuals or companies or even a combination of the two. Generally they are a trusted friend, a professional financial manager or a bank with a trust department.
The Trust Instrument or Trust Deed
The document in which the settlor's instructions are contained, is called the trust instrument or trust deed.
It governs all future dealings by the trustees of the trust fund. Powers and duties of a trustee can be broad or narrow, according to the trust declaration, but should carefully reflect the grantor's intentions as to how the trust is to be used. It has to provide specific details about the trust operation and its income distribution, both during the grantor's life and afterward. The trust instrument is usually signed and sealed by both the settlor and the trustees. If the settlor does not wish to be named personally in the trust instrument, the trust can be formed by a declaration of trust which is signed and executed under seal by the trustees alone.
It normally contains clauses that cover the transfer of the trust fund to the trustee from the settlor, as well as a provision whereby the trustee can accept further property as part of the trust fund. One clause will contain a statement as to the length of the trust period and another clause will include a statement that lists the beneficiaries by name and/or class.
Additionally, the deed will include a clause that will define the powers and duties of the trustee and a statement as to the law to which the trust deed is subject. It will also include a statement appointing a protector to direct the activities of the trustee and a statement of the person or company having the power to appoint new trustees and the procedure for appointing them. Furthermore, it will define the period during which income may accumulate.
Normally the fund is settled with a nominal gift and the major assets are transferred later by a gift or funded by loans.
As explained before, the trust fund can consist of a variety of assets including homes, property, investments, cash, company stocks, businesses, insurance policies or interests in other trusts.
There are numerous specific types of Trusts, in function of the many variables included in the specified instructions. The most common being:
Fixed: non discretionary. The method and proportions in which the beneficiaries are entitled to the Trust assets or income are fixed by the Terms of the Trust Deed.
Discretionary or revocable trusts. The method and proportions in which the beneficiaries are entitled to the Trust assets or income aren't fixed by the Terms of the Trust Deed but are discretionary, i.e. subject to decisions by the Trustees.
In this trust, the grantor has transferred assets but retains power during his/her lifetime to vary the trust terms, withdraw assets or even end the trust by formal revocation. Upon the grantor's death a revocable living trust automatically becomes fixed or irrevocable. In rather extreme cases the grantor, trustee and beneficiary could be even the same person as there is no legal prohibition against this arrangement. However one or more beneficiaries do have to exist at the time of the grantor's death.
Although there are real benefits with a revocable living trust, specially the grantor's ability to manage the assets, we cannot get the best of both worlds. These benefits must be balanced against some disadvantages, as happens with the somehow incestuous game of the grantor being also the trustee and beneficiary, which will seriously erode the trust credibility and may challenge its ability to provide asset protection once trust and assets are discovered by creditors.
On the contrary there are many advantages for a spouse or heirs as beneficiaries of a living revocable trust. They can acquire immediate income from trust assets, avoid judicial probate, and trust assets are excluded of the grantor's personal estate, firmly shielding them against creditor's assault.
Testamentary trust. By opposition to the living trust, created by Deed during the client's lifetime a testamentary trust is created on death by will. This trust is specially devised when the grantor is concerned about the ability of a minor or handicapped beneficiary to manage their assets. Major disadvantages of testamentary trusts are that do not avoid probate and that estate and income taxes must be paid at the grantor's death.
Living or "inter vivos" trust. Is created by the grantor to take effect immediately, while he or she is still alive. The mayor benefit is that trusts assets avoid probate completely, although they are subject to taxes.
Owning an Offshore Company Through a Trust
While an offshore company provides anonymity for the eventual ownership of bank accounts and removes money kept in such accounts from the view of tax authorities and other potential claimants, technically it creates other assets for an estate, namely the shares in the offshore company itself. Upon death, probate has to be obtained before shares can be passed on to one's heirs and there might be a liability to inheritance tax in one's country of domicile and/or in the country in which particular assets are situated. Furthermore obtaining probate invited publicity and the attention of tax authorities and invariably involves professional fees. If the shares of an offshore company are held by an appropriately structured Discretionary Trust, the following advantages can result:
- Assets can be protected from unknown creditors.
- Inheritance tax can be avoided.
- Probate can be avoided making the preparation of a Will unnecessary.
The most important countries accepting Trusts are: Australia, Canada, New Zealand, USA, Republic of Ireland, Gibraltar, Cayman Islands, Liechtenstein, Panama, Bermuda and the Bahamas. How a Trust is taxed depends entirely upon the legal jurisdiction of a Trust, the countries in which the funds are held and the domiciles of the Settlor, of the Trustee and the Beneficiaries.
The usual election is to establish an offshore trust. In these privacy aware jurisdictions there is no requirement to register with the government, and the terms of the trust agreement and the beneficiaries are protected against disclosure, they are not available in public records either. The trustees aren't allowed to disclose information about the trust unless a local court order requires it. See Singapore banking which offers excellent trust banking service.
The main advantage of non public registration is that privacy of the settlor, so the trust's activities and the identity of the beneficiaries are fully protected. Typically, the trust is created in a country which imposes no tax of any kind:
- on the settlor,
- the beneficiaries
- or in the income or capital gains earned by the trust.
Further, jurisdictions selected for forming offshore trusts should not have any requirement for the trustees to file trust accounts with the local tax authority thus further preserving the confidentiality of the trust's activities.
Depending upon the residence for tax purposes of the settlor and the beneficiaries, it is often possible to make distributions of capital or income from the trust completely free of tax. In this matter, many reporting requirements are either eliminated or vested in the trustees. Specially designed trusts can effectively protect the settlor's assets from attack by erstwhile creditors, thereby preserving the settlor's assets for the enjoyment of the settlor and his or her selected beneficiaries.
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