TrustsTrusts have been in common use for offshore asset protection for nearly 100 years.
The flexibility and tax saving advantages of an offshore trust could be just the ticket for the international executive or expatriate with wealth, assets and property to manage in a number of different countries worldwide.
Dividing finances not only between asset classes but between country is of course the ultimate in terms of portfolio diversification - but in reality it can be a headache for the expatriate when it comes to tax efficiency, estate planning and even the day to day management of their financial affairs. This is why offshore trusts for expatriates are proving ever more popular…
If you’re an expatriate or an international executive and you divide your time and assets between countries, one of the most trying issues you will have to deal with each year is your tax planning. Working in more than one country, having residence in more than one country and/or having money, investments, assets or property in more than one country can create an increasingly difficult taxation situation to manage. As an international tax planning solution an offshore trust is one of the most attractive and flexible vehicles for many expatriates.
An offshore trust is a legally binding arrangement whereby the settlor places assets such as cash, property or investments into the hands of the trustees to manage. The trustees then manage and assign the assets within the trust for the direct benefit of the trust’s beneficiaries. When a settlor places assets into trust he is giving up his legal right to those assets but he can retain a certain amount of say over the ongoing management of the assets through a ‘letter of wishes.’ In the letter the settlor can state which types of investment vehicles he favours for example, which beneficiaries should receive which assets and when etc., and of course the settlor states who the beneficiaries of the trust are going to be when the trust is first established.
The flexibility of allocation is another great benefit of an offshore trust - a settlor can list many beneficiaries of the trust and can control when they will each receive assets or income on a case by case basis. This means that a trust can be used for school fee payment, it can be used to grow a lump sum for payment to a beneficiary on a given birthday or it can even be used to benefit an unborn grandchild or the settlor’s children after his death.
Those unfamiliar with the concept of a trust usually express concern at the idea of transferring ownership of their property to a trustee. However, this concern can be alleviated if the trust concept and the distinction between legal ownership and beneficial ownership are properly understood and the trust is governed by sound trust law which can be enforced in a reputable jurisdiction.
The trust provides a division of ownership of the trust assets. The "legal" owner of property is the Trustee and the Trustee holds the legal title to the trust assets on the terms and conditions set out in the Trust Deed. The "beneficial" owners of the property are the Beneficiaries and they have the use and enjoyment of the trust assets. A body of legal rules that impose very strict duties on the Trustees and the way in which they administer the trust property protects the Beneficiaries including the obligation not to benefit personally from the trust assets, to act in the best interests of the Beneficiaries.
Trusts are a powerful planning tool. While each case is different and must be evaluated on its facts, some of the more common trust uses are described below. The examples below are provided simply for guidance and sound professional advice must be sought before anyone considers establishing a trust for whatever purpose.
Asset protection
Trusts can be used very effectively to protect assets. In simple terms, this feature of a trust is based on the division of ownership described above. Generally, assets transferred to a trust no longer form part of the property owned by the Settlor. Should the Settlor subsequently experience financial problems the trust assets cannot be used to satisfy the creditors of the Settlor. Those assets would be sheltered from creditors. It is vital that trusts for this purpose are established when the Settlor is financially secure and does not anticipate future creditors.
Tax planning
Assets transferred into a trust structure are, in simple terms, no longer considered as belonging to the Settlor. In theory, the income and capital gains generated by those assets should be taxed according to the rules in the country of residence of the legal owners - the Trustees. As the Trustees are often resident in an offshore jurisdiction that imposes no tax, the income and capital gains should be tax-free offshore. However you should ensure that anti-tax avoidance legislation in the country of residence or domicile of the Settlor does not operate to reduce or eliminate the effectiveness of a trust for tax planning purposes.
Avoiding probate
In most common law jurisdictions the estate of a deceased must go through a probate procedure often entailing much delay, expense and publicity in the distribution of the estate. By establishing a trust, probate can be avoided as ownership to the trust assets has been transferred during the life of the Settlor rather than on death.
Confidentiality
Generally, offshore trusts, their establishment and the assets they own are a private matter between the Trustee, the Settlor and the Beneficiaries. There are no public records or reporting of details of offshore trusts and they are often the subject of strict confidentiality rules in the relevant jurisdiction.
Avoiding forced heir ship
In some jurisdictions there will often be questions of forced heir ship to consider. This means the deceased will not be permitted to leave property to anyone he wishes on his death and the law will deem the deceased to have made certain mandated dispositions. This issue is of particular concern in continental European countries and other civil law jurisdictions as well as in countries of Islamic tradition. A trust can be used to overcome the issue of forced heir ship but care is needed in selecting a jurisdiction for the trust that has an appropriate trust law.
Estate planning
Many people do not wish their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make what they feel are more suitable arrangements. These arrangements might involve providing a source of income for a widow for life, making provision for the education of children or providing a fund to protect members of the family in the event of sudden illness or other disasters. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.
Long term care
A trust provides a vehicle by which a person can provide for those who may be unable to manage their own affairs such as infant children, the aged, the disabled and persons suffering from certain illnesses.
Preserving family assets
Preserving family assets or increasing them is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up among the heirs but retained as one fund to accumulate further, with provision for payments to members of the immediate family as the need arises while also preserving assets for later generations.
Business succession
A person who has built a business during a lifetime will often be concerned to ensure that it continues after death. If the shares in the company are transferred to the Trustees prior to death a trust can be used to prevent the unnecessary liquidation of a family company. The terms of the trust will ensure that the individual's wishes are observed. These might include provision for payments to be made to members of the family from dividend income received by the Trustees but that the Trustees retain the shares and keep the company running save in special circumstances justifying sale of control or liquidation. This approach may be particularly advantageous where the family members have little business experience of their own or where they are unlikely to agree on the way to manage the business.
Trusts Ensure a Speedy Resolution
A trust can provide flexibility during one's lifetime, while offering simple and swift distribution of assets after death because the Settlor has provided the Trustees with a confidential letter of wishes to provide this guidance. As the Letter of Wishes does not form part of the Trust Deed, it can be amended at any time. (Because trust law varies from country to country, a Trust and Letter of Wishes should not replace a Last Will & Testament, but rather should be used in conjunction with a Will.) While legal challenges to the actions of Trustees are not unheard of, the disbursement of an estate by means of a trust is usually much faster and less prone to delay than that of an estate which only uses a will. Please note that a Letter of Wishes only offers "guidance", and is therefore not binding upon the Trustees. To make a Letter of Wishes binding would risk invalidating the Trust; in fact, courts have ruled that a binding Letter of Wishes is tantamount to the Settlor exercising control over the assets.
FAQ:
Can I set up a trust without it being known that I am the settlor?
Yes.
If I put my money into a trust, can I draw an income from the trust during my lifetime, or get some of my capital back should I require it?
Yes, but you must ask to provide for this eventuality when you set up the trust.
After I have created the trust can I continue to manage the trust investments?
Yes, the trustees have the power to delegate this to an approved investment advisor, who may be you, or an independent financial advisor of your choice.
If I set up a trust, do I lose control of my assets?
The result of setting up a trust is that you cease to be the legal owner of the assets placed in trust. However, the trustees are obliged to pay heed to your wishes, provided these do not conflict with their duty as trustees.
Can my trust own assets in several different countries?
In most cases the answer is yes however, passing to the trustee the title to certain assets (such as real property) can cause difficulties in a few countries, and it is recommend that you take professional advice if you have any doubts.
What happens to my trust if I die?
Nothing at all, except that you’re personal interest in the trusts assets (if you retained one) come to an end. The trust itself continues to exist, and the trustees will distribute the assets in accordance with the instructions you gave in the Trust Deed or Letter of Wishes.
Can I use a trust to shelter my assets from bankruptcy proceedings?
Yes but only if the trust was set up at a time where no financial concerns existed.
Is it easy to wind-up a trust?
Yes, provided that the flexibility to do this was built into the trust deed. With the approval of the trustees, and providing all remaining beneficiaries are not minors, the beneficiaries can resolve to wind up the trust.
Can the government of my country compel the trust company to repatriate the trust assets?
No.
Can any type of asset be placed in trust?
There are virtually no limits on the nature of the assets that trusts can hold. However, because of local laws, there can be difficulties holding certain assets in some jurisdictions.
Can I avoid taxes by putting my assets into trust?
Yes, depending on which country you come from.
Do I have to decide now who the beneficiaries are and to how much they are entitled?
No. You can set up what is called a discretionary trust and changes can be made at a later date. In some instances you will need to list the beneficiaries by name, or title (grandchildren, children, etc) at the outset, but will be able to change the percentages (or amounts) to be distributed later.
Can I change my Letter of Wishes?
Yes. You may change this as often as you like, provided you do not contradict the terms of the trust deed.
How safe are my assets from misappropriation or misuse by the trustees or in the event of the bankruptcy of the trustees?
Trust companies can only be formed in most major offshore jurisdictions if the owners and management are of unimpeachable reputation. Any trust company operating today in these jurisdictions has had to satisfy the local authorities in this respect. Also, assets held in trust can never be used to meet the liabilities of the trustees.
What is an asset protection trust?
A trust designed to accomplish a number of estate planning goals of its settlor, before and after death, including planning for the preservation of the settlor's estate from a variety of risks which would threaten to dissipate the estate if one or more of the risks materialised. An APT is typically established in a jurisdiction other than the settlor's home country.
Where in the world should I establish a trust?
There are many jurisdictions in which it is possible to establish a trust. When choosing a jurisdiction it is important to select one which has a strong tradition of enforcing trusts, an English Common Law system, an established reputation for trust business, modern legislation which embraces the newer concepts of trusts and imposes low or no tax on the trust assets and income. A very wide choice of jurisdictions exist, certain high tax jurisdictions are unsuitable, while other jurisdictions are not recommended because of political uncertainties. Only a small number of jurisdictions are able to offer all the important elements mentioned above and can therefore be said to be the best available.
What are the costs of setting up a trust?
Many believe that the costs of establishing and administering a trust are prohibitive. It is true that many of the major banks and other financial institutions make sizeable charges for setting up a trust and receive a percentage of the trust assets in annual administration fees. It is also true that the level of fees charged by boutique trust companies are generally much more reasonable and provide access to trusts to those with relatively modest estates. Independent boutique trust companies offer a more personalised service and benefit from the fact that they are independent. As all cases are different, fees will be different, but they are probably a lot less than you thought.
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