Trusts

The concept of a trust is not one which is widely understood and is, indeed, one which has always proven difficult to define. A simple definition of a trust might read as follows:

A trust is a relationship whereby a party called a trustee holds property, either real or personal, for the benefit of other parties or persons, or for some purpose permitted by law.

The Purpose of a Trust: 

A trust may be used for a variety of personal, estate, financial, tax and business planning objectives, and is often utilized in combination with an underlying offshore company.   The objectives may include: 

• Protection of assets from future personal liability 

• Tax Planning - minimising estate/inheritance, capital gains and income tax.

• Provision for spouses and other dependants, especially those who may be unable to manage their own affairs (young children, the elderly, the disabled or sick).

• Efficient and timely distribution of assets upon death

• Confidentiality

• Mitigation of the effects forced heirship

• Preservation of family wealth

• Continuity of family business

• Ownership of assets and investments

• Establishing pensions or employee stock option plans

• Protection of lender in corporate financing transactions

• Creating or making provision for Charities.

The Structure:

A trust is a legal relationship (originally developed under English Common Law) whereby a person (the Settlor) gives property (the Trust Fund) to professional administrators (the Trustee(s)) to hold for the benefit of certain persons (the Beneficiaries).   Many Trust arrangements also include another person, known as the Protector. What must be clearly understood is that for a Trust to be valid, all assets settled into a Trust are no longer the property of the Settlor, are no longer under his control and he will not be able to reclaim them.

The Trust arrangement is usually encapsulated in a written instrument known as a Trust Deed.

• The Settlor (who may also be a beneficiary and a co-trustee of a Trust) may indicate to the Trustees how the assets would have been handled had he/she maintained control of them, and this letter is known as the Letter of Wishes. 

• The Trust Fund may be any property (cash, personal effects, real estate, securities, other tangible and intangible assets). 

• Trustees have stringent duties imposed upon them by law and are obliged to administer the Trust in such a way as to safeguard the best interests of the beneficiaries. 

• The Beneficiaries may be individuals, companies, groups, charities, etc. 

• The Protector, usually a trusted friend or adviser of the Settlor, (but may also be a committee or company) is sometimes appointed in exceptional circumstances.  The Protector has the right of veto and is sometimes used to give the Settlor comfort.

The underlying principle of a trust is that the trustee(s) hold the property, not for their own use, but are instead bound in equity to administer the trust and its property in such a way as to benefit the beneficiaries. The trustee(s) are said to be the legal owners of the trust property, while the beneficiaries are the equitable owners.   When a trust is formed, a fiduciary relationship is created, such that certain obligations are owed by the trustee(s) to the beneficiaries.

Parties to a Trust

• Discretionary Trusts
• Fixed Interest Trusts
• Accumulation and Maintenance Trusts
• Purpose Trusts

Discretionary Trusts allow trustee(s) wide discretion in the distribution of both income and capital either to specifically named beneficiaries, or among a class of beneficiaries. The settlor identifies the beneficiaries or class of potential beneficiaries who should benefit from the trust, and the trustee(s) exercise their discretion in deciding who should benefit and to what extent. No beneficiary has a defined right to any of the trust property, but, instead, the trustee(s) will have a duty to manage the assets properly in accordance with the terms of the trust instrument and specifically to exercise their discretion for the purposes for which it was given to them.

A letter of wishes is often provided by the settlor to the trustee(s), in order to give them some guidance in the manner in which they exercise their discretionary powers. This is not a legally binding document, but, in practice, will assist the trustee(s) with their decision making.

A discretionary trust is often chosen for the flexibility it affords and therefore its ability to adapt to changing circumstances.

An employee benefit trust is a specific type of discretionary trust established to afford employees the opportunity to hold shares or share options in their employing company or to provide cash incentives, with a view to facilitating the recruitment, retention and motivation of staff.

Fixed Interest Trusts are drafted in such a way that one or more beneficiaries have a predetermined entitlement to a specified portion of the income or capital of the trust. At least one beneficiary will have a present right to the income of the trust and may also have a future right to capital. Equally, the future right to capital may vest in someone else entirely. Whatever the terms, the trustee(s) will generally not have any discretion as to who may benefit from the trust and to what degree; therefore, a letter of wishes is not usually required.

Accumulation and Maintenance Trusts cater principally for minor beneficiaries. Under the terms of such a trust, the trustee(s) have discretion to make payments towards the maintenance, education or benefit of the beneficiaries. Any income not paid out is accumulated until the beneficiaries reach the age of majority, when they may become absolutely entitled to it. This type of trust can be particularly effective in inheritance tax planning.

Purpose Trusts have no beneficiaries, but, instead, are created for a specific purpose which is recognised by law. Charitable trusts are an example of this type of trust.

Benefits of a Trust

Flexibility in providing for family needs and future security - by setting aside a proportion of capital to provide for one's family, it is reassuring to know that the property in the trust is separate from the rest of one's estate and may remain thus, despite what may occur in the future in respect of one's own personal financial position.

Anonymity and confidentiality- many people live and work in uncertain or sensitive environments and have particular requirements for confidentiality which can be met by the creation of a trust and the consequent transfer of ownership of assets.

Ensuring a smooth devolution of assets on death, without the complexities or formalities of probate

Mitigation of the effects of forced heirship legislation- certain countries have laws which dictate how and to whom individuals must bequeath their property on death. A properly structured trust may mitigate the effects of such legislation and allow an individual the freedom to allocate assets in whatever manner he chooses.

Potential to defer or reduce taxation, particularly when used as part of a broader tax planning structure- the tax advantages to be gained from a trust will depend on many variables, such as the residence and domicile status of the settlor and intended beneficiaries, the type of trust used and the assets which are settled. There may be possibilities to defer or avoid completely direct taxes such as income, inheritance and capital gains tax.

Professional advice on the tax implications for a particular individual, in either setting up or being a beneficiary of a trust will almost always be required.

A specialist team of staff attends to all the formalities involved in the formation and ongoing
administration of a trust, including, but not limited, to the following :

• Preparation of the trust instrument.
  
• Arrangement of trustee(s) meetings and preparation of minutes/resolutions.
  
• Preparation of documentation required to appoint new beneficiaries to the trust.
  
• Administration of all aspects of the trust's affairs, including making distributions to beneficiaries, operating bank account(s) and purchase and sale of trust assets.
  
• Maintenance of accounting records and production of periodic accounting information, tailored to the beneficiaries requirements.
  
• Preparation and submission of tax returns, where applicable.
  
• Periodic review of the assets held and the operation of the trust to ensure compliance with legislation and the terms of the trust instrument.