Trust as an Instrument of Your Assets Protection
The trust law developed in England at the time of the Crusades, during the XII and XIII centuries. Nowadays, the trust is widely considered to be the most innovative contribution to the English legal system. Trusts are recognized internationally under the Hague Convention on the Law Applicable to Trusts and on their Recognition which also regulates conflict of trusts. In common law legal systems, a trust is a relationship whereby property is managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settler who entrusts some or all of their property the chosen trustees. The trustees hold legal title to the trust property but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiaries), specified by the settler. The trustees owe a fiduciary duty to the beneficiaries, who are the beneficial owners of the trust property. The trust is governed by the terms of the trust document (trust deed). The trustee must administer the trust in accordance with both the terms of the trust document and the governing law. In the United States, the settler is also called the trustor, grantor, donor or creator. In some other jurisdictions, the settler may also be known as the founder.
Trusts are often used for assets protection, interfamily wealth transfers, tax planning, and some other sensitive purposes. Although in most cases tax planning may be achieved by absolutely legal schemes and methods involving creation of trusts, it should be kept in mind that sometimes trusts are associated with tax evasion and money laundering. In contrast to tax avoidance, tax evasion is the illegal concealment of income from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to preserve anonymity, and they divorce the settler and individual beneficiaries from ownership of the assets. This use is particularly common across borders when a trustee lives in one country which is not necessarily bound to report income to the tax authorities of another. This issue has been addressed by various initiatives of the OECD. Tax avoidance concerns have historically been one of the reasons that European countries have been reluctant to adopt trusts. The same attributes of trusts which attract legitimate asset protectors also attract money launderers. Many of the techniques of asset protection, particularly layering, are techniques of money-laundering also, and innocent trustees such as bank trust companies can become involved in money-laundering in the belief that they are engaged in a legitimate asset protection exercise. Of course, this article will concentrate on the legitimate use of trusts in connection with business immigration and/or international tax planning.
Basic Principles of Trust
Property of any sort may be held on trust, but growth assets are more commonly placed into trust (for tax and estate planning benefits). The uses of trusts are many and varied. Trusts may be created during a person’s life (usually by a trust instrument) or after death in a will. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee’s creditors), making it “bankruptcy remote”, and leading to its use in pensions, mutual funds, and asset securitization.
Settler and Creation of Trust
Trusts may be created by the expressed intentions of the settler (express trusts) or they may be created by operation of law (resulting trusts). Typically a trust is created by one of the following:
- a written trust document (trust deed) created by the settler and signed by both the settler and the trustees;
- an oral declaration;
- the will of a decedent, usually called a testamentary trust; or
- a court order (for example in family proceedings).
In some jurisdictions certain types of assets may not be the subject of a trust without a written document.
The trustee may be either a person or a legal entity such as a company. A trust may have one or multiple trustees. A trustee has many rights and responsibilities. Trustees are usually appointed in the document (instrument) which creates the trust. A trustee may be held personally liable for certain problems which arise with the trust. For example, if a trustee does not properly invest trust monies to expand the trust fund, he or she may be liable for the difference. There are two main types of trustees, professional and non-professional. Liability is different for the two types. The trustees are the legal owners of the trust’s property. The trustees administer the affairs attendant to the trust. Being a trustee is an unpaid job. In modern times trustees are often lawyers, bankers or other professionals who will not work for free. Therefore, often a trust document will state specifically that trustees are entitled to reasonable payment for their work.
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, the beneficiaries will receive income from the trust property, or they will receive the property itself. The extent of a beneficiary’s interest depends on the wording of the trust document. One beneficiary may be entitled to income (for example, interest from a bank account), whereas another may be entitled to the entirety of the trust property when he attains the age of twenty-five years. The settler has much discretion when creating the trust, subject to some limitations imposed by law.
A protector may be appointed in an express trust, as a person who has some control over the trustee, usually including a power to dismiss the trustee and appoint another. The legal status of a protector is the subject of some debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities then the courts – if asked by beneficiaries – could order him or her to act in the way the court decrees. However, a protector is unnecessary to the nature of a trust – many trusts can and do operate without one.
Advantages and Benefits of Using Trusts:
- Asset Protection. The principle of “asset protection” is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settler may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settler may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name. One should certainly keep in mind that the above is a simplification model.
- Private Investment Vehicle. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families this alone makes use of trusts ideal. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust.
- Protection from overexpenditure. Trusts may be used to protect beneficiaries (for example, one’s children) against their own wish to spend too much and their inability to handle money.
- Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. Tax Planning (as it was pointed out earlier) should not be mixed with tax evasion and with money laundering.
- Wills and Estate Planning. Trusts frequently appear in wills. A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased’s spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
- Good Vehicle for Charitable (or Ecclesiastic) Activities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).
- Other Benefits.
There are many types of trusts used for various purposes depending on the wishes of a settler. Elma Global in cooperation with the best corporate and trust providers based in Switzerland, Jersey, Seychelles, and some other jurisdictions, is ready to provide you with the best handmade solutions for your specific needs. In our view, the best jurisdictions for trusts and private foundations are Austria, Bahamas, Dominica, Jersey, Liechtenstein, Netherlands Antilles, New Zealand, Panama, Saint Kitts & Nevis, Seychelles. In case you have your own idea where to create trust (perhaps, you think that the Cook Islands is the best), please, let us know. Feel free to contact us today