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The Origins of Trusts, their Benefits and the Types of Trusts.
With Governments in high tax, developed nations around the world always looking to take more away from the wealthy, it is no wonder a sophisticated market exists in solutions to these problems.
By: Jason Weatherhead
A trust is a relationship whereby a legal person (the trustee) holds property donated by a settlor (grantor in USA) for the benefit of third parties (the beneficiaries)
The essence of a trust is the transfer of legal ownership of property to a third party and the clear communication of instructions for the use of proceeds from and disposal of the property. If instructions are not strictly followed, the trust may be held to be a sham and thus invalid from inception. However, there is a great deal of flexibility in the way that trusts can be structured and there are numerous safeguards available to protect the interests of all parties.
There are three basic forms of trust:
Bare Trust: This is a simple form of trust usually involving a single item (eg ownership of shareholdings in corporate entities).
Will Trust: This form of trust is created upon death pursuant to the terms and conditions of the deceased's will. The executors of the estate are usually appointed trustee.
Inter Vivos Trust: This form of trust is created by a living person and may be either on a discretionary basis where there are wide powers available to the trustees to allocate benefits and make investments - a Discretionary Trust or a Fixed Interest Trust - where entitlements of beneficiaries are defined in detail.
The three main parties involved in a trust are as follows:
Settlor: The person or company who transfers legal ownership of the property to the trustee and in so doing "settles the trust". In the USA, this person is often called the grantor or the trustor.
Trustee: The person (usually a trust company) charged with the primary responsibility of administering the trust.
Additionally, many trusts have a Guardian and/or a Protector appointed to monitor the activities of the trustees and to ensure that the settlor's intentions are being followed. The protector usually has the power to change trustees.
The most important document in settling a trust is the Deed of Trust. This is the blueprint for the trust and must be carefully drafted. The language must be unambiguous since it will be referred to for many years. A Memorandum of Wishes is also often drafted by the settlor to indicate in a discretionary trust how the trustees should service the beneficiaries. Finally, there needs to be a transfer of legal ownership of the property to establish the trust. This should be fully documented to show that a change of ownership has in fact taken place.
All types of property may be held under trust including cash and bank balances, securities, personal and real property and shares in private companies. If personal property such as works of art, jewellery or furniture are being settled into a trust, it would be important to inventory and tag and identify these items. Ownership of the property rests with the trustees at all times, but use and day to day control may be delegated to others.
The trust itself has no legal identity (except in the USA). Rather it establishes a relationship between the trustee and the beneficiaries. The trustee has a strong fiduciary duty towards the beneficiaries.
The Benefits of Offshore Trusts
The use of an offshore trust can produce many substantial benefits. As always, proper professional advice needs to be taken in one's country of citizenship, residence and domicile before implementation.
The major advantages of an offshore trust include:
Asset protection: An increasing purpose for using offshore trusts is to protect property from attachment by creditors. Certain professionals, such as medical practitioners, company directors, accountants and lawyers may be particularly vulnerable to unexpected and costly litigation. The consequences of divorce in many countries may also be severe. Please refer to the Zetland Guide to Asset Protection for more details.
Intergenerational planning: The use of an offshore trust is an ideal tool for ensuring that property can be allocated in a manner that suits the settlor's wishes and avoids the consequences of forced heirship or inheritance laws.
Family succession planning: A trust provides great flexibility in providing for long term succession. For example, the education and maintenance of grand children or the exclusion of bankrupt or spendthrift relatives.
Privacy: A trust is a private agreement between the settlor and trustee. By establishing a trust in an offshore jurisdiction, privacy is greatly enhanced. Most offshore jurisdictions have strong privacy protection legislation and few of them have tax treaties permitting the exchange of information between governments.
Tax planning: An offshore trust may allow the reduction of liability to property, wealth or inheritance taxes in many countries and is a powerful tax planning tool for high net worth individuals. This largely depends on the nationalities of the settlor and/or beneficiaries.
Tax savings: An offshore trust set up in a tax haven or low tax jurisdiction will suffer no local taxes on income or capital gains, thus maximising the productivity of capital owned.
How do Trusts Work?
Over the centuries, English trust law has evolved some basic rules regarding the conduct of trusts including:
* A trust must have a limited (though possibly very long) life.
* The settlor cannot be a beneficiary of the trust.
* Settlement of property into the trust is irrevocable.
* Trusts cannot be used to defraud creditors.
* In recent years, many of the offshore jurisdictions have enacted legislation to ameliorate the first three of these provisions and to place time limits on a creditor's ability to prove fraud in transferring legal ownership of property to a trust.
Trustees are subject to strict legal constraints on the way they handle their responsibilities. They must show a duty of care, utmost good faith and exercise professional diligence in administering the trust for the benefit of the beneficiaries. They are also responsible for managing the investments and cash held by the trust and tend to be conservative in approach to ensure preservation of the capital base of the trust.
Trustees are generally free to engage other professionals such as investment managers to assist them. Trustees are also able to take their remuneration from the trust property held by them. In general, such remuneration is based on the value of assets held, subject to a minimum annual fee, and is often detailed in the trust deed.
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Zetland Fiduciary Group Limited was established in 1987. Based in Hong Kong, with offices in Seychelles, Singapore, Tokyo, Belize, Geneva, New Zealand and Shanghai the Group has trust licenses in a number of jurisdictions and provides corporate services such as company formation, bank account opening, nominees and managed company services. Please contact firstname.lastname@example.org for more details.