Uses of Trusts
EBC considers trusts as a useful tax-planning tool but they also have other uses to assist in protecting a client’s wealth and assets that include:
A trust is a private arrangement between the settlor and the trustee. In most jurisdictions there are no disclosure requirements and the trust agreement generally does not need to be registered with any government body. The assets of the trust and the identity and interests of the beneficiaries are kept confidential.
Trusts can be one of the most effective ways to protect assets, as assets transferred to a trust no longer form part of the Settlor’s property. This means the assets cannot normally be seized if the Settlor gets into financial difficulties. The trust is administered by the trustee, who has a duty of care to administer the trust in accordance with the trust deed. The trust is an independent legal entity and assets transferred to it are therefore legally owned by the trustee whilst the beneficial ownership rests with the beneficiaries. Assets can be protected in certain jurisdictions from claims of future creditors, using an “asset protection trust”, as long as the Settlor is solvent at the time of the transfer and does not become insolvent as a result of it. If the settlor creates the trust with the intention of avoiding creditors, it is most likely that the trust will be set aside.
A trust gives the trustee powers to react appropriately to changed circumstances. A discretionary trust allows flexibility in the administration of trust assets, who may benefit, to what extent and when. For example, a settlor and spouse (where applicable) can arrange for themselves to receive the income of the trust funds until their death, at which point the capital can be distributed to their children. Alternatively, the trust funds may be held for the settlor’s children but will only be distributable upon the child reaching a predetermined age, although the trustees may be given the discretion to distribute the capital and/or income to the beneficiaries when they think it appropriate. The settlor may issue further “letters of wishes” as his own or family circumstances change. It is this flexibility which is one of the great attractions of a discretionary trust.
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 amongst the heirs, but retained as one fund. The fund can then accumulate further with provision for payments to members of the family as necessary, while preserving some assets for later generations. You can use a trust to make financial provisions for your spouse and children or other beneficiaries during the lifetime and after death in an efficient manner. You can also use it to safeguard and promote the interests of minors or susceptible beneficiaries. When a trust is used for holding shares in a company, it also ensures business continuity.
Forced Heirship Laws
Some countries have laws which determine how an individual’s estate should be distributed on death. Such laws are known as “forced heirship laws”. Where some of the assets of an individual are held outside that country, it may be possible to use a trust to distribute those assets in a manner which would not be possible under the forced heirship laws
Favourable Tax Treatment
A correctly structured and administered trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty. The major tax benefit in using a trust is that the assets held by a trust belong to the trustees and not to the settlor. By taking the assets out of the settlor’s estate, they would normally cease to be taxable on the settlor. This can often be very useful for inheritance taxes and for deferring capital gains. The tax benefits will depend on where the settlor and beneficiaries reside. Any capital gains and income received by a trust established in most offshore jurisdictions, would not be taxed by the authorities in those jurisdictions
Avoidance of probate formalities
In most common law jurisdictions an individual’s estate must go through the probate procedure. This can cause delay, expense, publicity and upheaval. By the use of a trust, probate can be avoided resulting in reduced legal costs and the time involved in distributing assets . Death has no effect on the trust property, which will continue to be held and managed by the trustee for the benefit of the beneficiaries.
EBC is able to offer clients the following trust services:
- Forming a trust
- Provision of trustees
- Trust administration
- Provision of Protector
- Selecting a jurisdiction
- Review of existing trust structures
- Transfer of existing trust structures to EBC