An introduction to trusts
May 2008
The concept of a trust goes back to
the time of the crusades and has evolved to become an integral part
of wealth and tax planning around the globe.
A trust is a confidential legally binding
agreement (almost always in writing) whereby the original owner of
the assets (the settlor) transfers legal title of their assets to
another (the trustee) who will hold these assets for the benefit of
a defined class (the beneficiaries).
Principal
characteristics of a trust
The crucial feature of a trust is that
although legal title is passed to the trustee by the settlor, the
trustee is obliged to look after the property transferred for the
enjoyment and benefit of the beneficiaries. The trustee is a
custodian who, other than charging a reasonable fee, cannot benefit
personally from the trust assets. All the rights to the enjoyment
of those assets belong to the beneficiaries, who have legal right
to force the trustee to act in accordance with the terms of the
trust instrument and the laws governing trusts, whilst realising
that the trustees must never act illegally.
In today’s commercial world, it is more usual
to engage professional trustees, such as Fairbairn Trust Limited,
who must exercise a greater degree of diligence than would be
expected from an individual trustee. Employing a professional firm
provides settlors with reassurance and the peace of mind that the
assets settled in trust will be administered competently and
professionally in accordance with their long-term wishes, and
always for the benefit of the beneficiaries.
Why set up a
trust?
A trust is one of the most secure and flexible
financial planning vehicles available, particularly when
established offshore. Subject to the tax laws applicable to the
settlor’s estate, a trust may enable a settlor to make long-term
plans for the preservation or distribution of wealth, during or
after their lifetime, in precisely the manner required. By
transferring property into trust, settlors can ensure that the
management of that property will not be interrupted on their death
by probate or other formalities, but continue in accordance with
the trust instrument and their letter of wishes.
A trust may also be an effective tax-planning
tool, for example, in respect of estate or inheritance taxes on
assets situated outside the country of the settlor’s nationality.
It may also provide complete confidentiality and protect assets
from the imposition of exchange controls or similar political
measures as well as providing a means of protecting assets from
risk of unforeseen financial difficulty.
Taxation - By establishing
certain types of trusts, individuals may remove assets from their
estates thereby reducing their taxable wealth and limiting exposure
to income tax, capital gains tax, wealth tax, gift tax and
inheritance tax.
Asset protection - Having
worked so hard to build a valuable business or asset base, it is
everyone’s right to try to preserve that wealth for themselves and
their family. A trustee resident in another jurisdiction may act as
guardian of a family’s wealth thus offering a greater level of
protection over those assets. This may be of particular interest to
settlors living in politically sensitive areas where their wealth
could be at risk. Assets in a trust may be protected from the
imposition of exchange controls or other government regulations,
and once removed from an estate free the settlor from the threat of
confiscation or devaluation.
By passing legal ownership of trust property
to trustees, the name of the settlor is removed from title deeds
and other documents of ownership. A trust cannot be established to
defeat or defraud creditors but, provided the settlor is solvent
and expects to remain so, it is perfectly reasonable for a wealthy
individual to hedge against the unexpected by establishing a
trust.
Family matters -
- Avoiding forced heirship - The law in some
countries dictates to whom a person may leave their assets on death
and in what proportions these may be left. If this is likely to be
contrary to an individual’s wishes, they may consider transferring
assets into a trust located in a common law jurisdiction such as
Jersey, which accepts that a trust is valid, even if forced
heirship issues may arise in the settlor’s country of
nationality.
- Minimising estate administration costs - The
cost of probate upon the death of a wealthy individual can be high
and even force the unwanted sale of assets. By establishing a
trust, settlors may minimise the disruptive effects of their own
death on the family estate. Settlors can therefore rest assured
that their family will be looked after in the same way after their
death as before in accordance with the terms of a trust established
during their lifetime, and the wishes expressed to their
trustees.
- Protecting individuals - Certain family
members may be less capable of managing their own affairs than
others, or be adversely affected by the knowledge of their future
inheritance. This might apply to infant children or aged parents,
and professional trustees can be of great help in such
circumstances.
- Keeping the estate intact - Settlors may wish
to ensure that, after their death, the wealth that they had
accumulated is not immediately split up amongst their heirs but is
maintained in one fund. Distributions may be made to family members
whose needs dictate but the corpus of family wealth can be
preserved for succeeding generations.
The advantage of
offshore trustees
Not every person who wishes to establish a
trust should assume that the trust should be offshore. However,
there can be major benefits from going offshore and the following
principal factors should be considered.
Taxation - Jersey is an ideal
location for the establishment of an international asset holding
trust. There are no capital taxes in Jersey such as gift, capital
gains, wealth or estate taxes and for trusts which have no Jersey
resident beneficiaries there are no income taxes. Thus capital can
grow and income can accumulate within the trust free of all Jersey
taxation.
Government interference - Settlors may wish to
protect their estate from government interference such as the
imposition of exchange controls. It is highly unlikely that an
offshore centre like Jersey would ever introduce such controls.
Reporting requirements and
confidentiality - There is no requirement for a Jersey
trustee to disclose the names of the settlor or beneficiaries of a
trust. Similarly, there is no requirement for a trust to be
registered in Jersey or for any documents relating to the trust to
be registered, stamped or made available for inspection.
Consequently, a trust remains a private arrangement between the
settlor and the trustee where confidentiality can be assured.