Trust Services

Corporate Trusts

There are a number of reasons for setting a trust.

Asset Protection

Ownership of assets can be moved from the settlor to the trust, and this can be done confidentially (in most jurisdictions) Assets in a trust do not form part of the assets of the settlor, and therefore they are protected against third party claims. Most assets can be held by a trust including: shares and stocks in both quoted and unquoted companies; investment portfolios; life insurance policies issued on the life of the settlor; real and intellectual property; and bank deposits.

Estate Planning

A trust can ensure assets go to a designated beneficiaries within a specified timeframe. The flexibility of trusts means they can be structured to specific family requirements. Since assets are transferred to the trust during the life of the settlor, court probate procedures can be avoided. Provides for asset preservation and business succession, thus ensuring continuity of business after the death of the settlor.In some jurisdictions, estate duty is avoided on trust assets.

Other Considerations

Trusts can be useful in tax planning. They can be used by businesses for employee benefit plans, insurance plans and special financing arrangements, retirement and stock option schemes. They can be used for migration planning (e.g. before migrating to a higher tax jurisdiction).

What is a trust?

Trusts are arrangements by which one party (the “settlor”) transfers assets into the “ownership” of another party called the “trustee”, who is legally bound to hold the assets for the benefit of a third party, i.e. the “beneficiary”. In essence, the trust allows separation of legal and beneficial (or equitable) ownership. A trust deed specifies the terms under which the trustee is required to administer the trust assets for the benefit of specified beneficiaries. A trust, when properly used, can be used to preserve wealth, and provides more options for the management and distribution of assets. Trusts developed in England during the Crusades, as a mechanism through which knights could provide for their families while they were away. Based on these early applications, trusts developed as a concept in English common law, and later in other countries that based their legal system on the English one. More recently, several civil law countries have passed legislation providing for trust settlement in their jurisdiction. A trust can be created by a living person (inter vivos trust) or it can begin upon the death of a person as a result of his or her will (testamentary trust). Trusts can own any kind of property (real, tangible or intangible), just as an individual can. Dual ownership provides trusts with their unique appeal as tax planning mechanisms. Once the settlor has placed assets (known as the trust corpus) in a trust, he or she is no longer the owner; the trustee becomes the legal owner of the corpus, albeit in trust for the beneficiary. Trusts originally sought to ensure certain property could be left for descendants; this sometimes meant avoiding feudal dues, so trusts have been a feature of tax planning for centuries.

Different types of trust and jurisdictions given their roots in English common law, trusts tend to be settled in common law jurisdictions, such as British Virgin Islands, The Bahamas, Cayman Islands, Cyprus, Guernsey, Isle of Man, Jersey, Mauritius, Nevis, New Zealand, the United Kingdom and Hong Kong.

Types of trusts

Trusts can be discretionary or non-discretionary trust; revocable or irrevocable.

Discretionary Trust

This is the most common form of trust. The trustee has discretion to decide who should be entitled to receive trust property, and to what extent. None of the beneficiaries have a direct claim against the trust fund, since it is entirely a matter of the trustee’s discretion whether a particular beneficiary will receive anything at all from the trust. This is a very attractive feature for many settlors, and can be critical in ensuring favourable tax treatment. The settlor provides the trustee with a letter, sometimes known as a letter of wishes, expressing what they hope will happen, even though they acknowledge that the trustee is not bound to follow their wishes. One type of discretionary trust, the accumulation and maintenance trust, is primarily designed to provide for the settlor’s children. Income producing assets are placed into the trust, and the trustee is given powers to accumulate the income or to apply it for the maintenance or schooling of children.

Fixed (Non-Discretionary) Trust

In these trusts, the trust deed specifies what portion of the trust income and assets should be distributed to each beneficiary, and when. Provisions of the trust deed can be changed during the settlor’s lifetime, but it is time-consuming and costly. Provisions of the trust cannot be altered once the settlor has passed away. As of a specific date, a beneficiary of a non-discretionary trust may have an interest in, for example, the income of the trust fund or a specific amount of capital. Depending on the nature of the interest, it can be sold by the beneficiary, attacked by creditors, taxed, expropriated or otherwise interfered with by the governmental bodies of the country where the beneficiary is resident. Due to such drawbacks, the non-discretionary trust may not be suitable in many cases. At the same time, settlors may wish to restrict the trustee’s discretion.

Irrevocable Trust

As the name suggests, these trusts cannot be revoked by the settlor, though in certain cases there may be provisions for termination. Assets placed into an irrevocable trust usually constitute a completed gift and are no longer considered property of the settlor. These protections are usually important from a tax standpoint and with respect to creditor protection.

Revocable Trust

The settlor or another appointed person can revoke or cancel this trust at which time the assets immediately revert to the settlor; the power to revoke the trust ceases upon the death of the settlor. When this happens a revocable trust becomes an irrevocable trust. Many settlors choose to create a revocable trust, because it guards their rights to cancel the trust and take the assets back at any time.

Creditor Protection Trust - Asset Protection Trust

Asset protection trusts have become very popular in? highly litigious environment, such as the U.S. They allow for legitimate protection of assets against possible future claims by creditors, by transferring ownership away from a potential “target”.

For more details about this topic, please feel free to contact our professionals.

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