In short: What is a Trust?
A trust is a legal arrangement where the owner of assets (usually known as the settlor) transfers ownership of those assets to a trustee to hold and administer under the terms of a trust deed for the benefit of other persons known as the beneficiaries.
A trust is a separate legal entity and may only operate and hold property through a trustee. As the assets of a trust are not the property of the settlor, trusts provide significant scope for tax planning and mitigation, wealth management and asset protection.
It is believed an early use of trusts was seen around the time of the Middle Ages. As knights sought to protect and preserve their estates during their likely lengthy absence, they would transfer the legal ownership of their estate to a third party, such as a close friend, under an agreement whereby it was understood that ownership would be transferred back to the knight upon his return. This transfer of legal title empowered the transferee to manage the estate effectively and to enforce the rights of the estate against all parties while the knight was away.
In most instances, a returning knight would reclaim ownership of his estate without any difficulties. There were, however, occasions when the person who had managed the estate as the knight’s “trustee” refused to relinquish ownership, despite the agreement between the two parties, Unfortunately for the knight, the agreement he had made was not deemed to be legally binding under English common law and the Court invariably asserted that the person with legal title over the estate was indeed the outright owner.
As disputes over ownership became more prevalent, separate rules of equity developed in parallel with the English common law so that a beneficial interest in property could exist alongside a separate legal interest. While the common law rules provided for clarity and certainty of result, the rules of equity applied principles of justice and conscience. Using these new rules, the Court of Chancery began to make a distinction between the legal and equitable ownership of an asset. This meant that it was then possible for one person to legally own and manage an estate in the best interests of other persons, without the owner actually deriving any benefit (financial or otherwise) from the estate himself. This separation is the underlying concept upon which a trust is based.
Jurisdictions covered by Anglo
International trusts can be set up in many parts of the world. Anglo has chosen to specialise in these jurisdictions:
- Cook Islands
- Hong Kong
Through many years of experience we have made Seychelles the main stay among our jurisdictions. Hence Seychelles will be featured more extensively in this presentation. Our head office and international service and management companies are also located in Seychelles.
Structure of the Trust
The settlor is the person who transfers his/her assets to establish the trust (to a trustee for the benefit of the beneficiaries).
An international trust set up in the Seychelles must have a Seychelles resident trustee who holds a valid trustee services license issued by the Seychelles International Business Authority. It is permissible, and normal, to also appoint a non-resident co-trustee.
The trustees must operate in the best interest of the beneficiaries, and breaches their legal duty if they fail to exercise a sufficient level of care. The trustees must obey the directions in the trust deed and must account for all transactions. A trustee is entitled to make reasonable charges. A trustee’s actions are strictly controlled by law.
Some settlors appoint a protector (often a professional advisor known to the settlor or close member of family) to oversee operations of the trust. While a protector does not control a trust, the protector can be given veto power on certain trust decisions – the addition or removal of a beneficiary by the trustee. A protector may also be given power to remove or appoint trustees.
However, a protector is unnecessary to the nature of a trust – many trusts can and do operate without one. Also, protectors are comparatively new, while the nature of trusts has been established over hundreds of years. It is therefore thought by some that protectors have fiduciary duties and by others that they do not. The case law has not yet established this point.
The settlor decides who he/she wishes to benefit under the terms of the trust – who will be specified as beneficiaries, and how they are to benefit. A settlor may wish to nominate family members as beneficiaries who could benefit upon the settlor’s death, or to assist with school fees or university education.
The trustees administer the trust at their discretion. A letter or expression of “wishes” is provided by the settlor, setting out his/her wishes in relation to administration of the trust. In practice, the trustees will operate in accordance with the Letter of Wishes but are not legally bound to do so. It acts as a guide to the trustees.
The trust deed is the primary document for the establishment of a trust. The trust deed (or “deed of settlement”) is a written instrument or contractual agreement which sets out the fact that a trustee is holding certain property for the benefit of others (ie the beneficiaries), and also describes in detail the duties of the trustee, the names of the beneficiaries and the assets which are the subject of the trust.
Trust deeds also usually sets out the arrangements by which the trustee is to hold and deal with the trust property. It is like a contract between the trustee and the settlor/beneficiaries. Within the document the Trustee declares that he/she/it holds particular property on certain conditions. These conditions are called the “terms of the trust”. These terms may contain all the necessary detail of confidential provisions regarding how the trust assets must be maintained and managed, and how any of the trust benefits must be distributed, invested or administered. In principle, the trust deed is a unique legal document, custom-made for each individual trust situation, although certain standard wordings are usually available and often employed.
The Seychelles International Trusts Act allows for trust deeds to be drawn up in a very flexible way so that they can reflect the particular needs and circumstances of the settlor. Together with the assistance of a licensed trust service provider, settlors can custom draft their Seychelles international trust deeds to meet the most specific and particular requirements. Settlors can custom tailor the trust deed to ensure the assets handled are transferred explicitly according to their wishes and intentions, and can even be so specific as to explicitly select the governing law for their trust.
Despite the extreme flexibility provided for by the Seychelles International Trusts Act, there are a few requirements as to the structure of international trusts that must be kept in mind:
- The minimum number of trustees is one, and this must be a licensed trustee in the Seychelles.
- Every international trust must have a Seychelles resident corporate trustee, which holds a trustee service providers licence issued by the Seychelles International Business Authority. Additional non-resident co-trustee/s and/or protectors are permissible.
- Settlors are permitted to be beneficiaries in Seychelles international trusts, but may never be the sole beneficiary of a trust.
- The settlor cannot at any time during the duration of a trust be a resident of the Seychelles.
- Seychelles international trusts are permitted to exist with a maximum term of 100 years from the date of their creation. Upon reaching 100 years, the trust will automatically terminate resulting in a final distribution of the remaining trust assets to any remaining beneficiaries, or pursuant to the terms of trust termination set out in the trust deed. Termination of the trust may occur earlier that 100 years from the creation of the trust, should the terms of the Trust Deed provide so.
- The 100 year maximum duration does not apply to charitable, or purpose trusts, which may have an indefinite duration.
- Trust beneficiaries must be identifiable by name or ascertainable by reference to a relationship to another person.
Once the terms of the trust have been agreed upon, and a trust deed drafted, the Seychelles international trust must be registered.
Purpose / Object of the Trust
Common purposes for trusts include:
- Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families, this alone makes the use of trusts ideal.
- Spendthrift protection. Trusts may be used to protect beneficiaries (for example, one’s children) against their own inability to handle money. These are especially attractive for spendthrifts. Courts may generally recognize spendthrift clauses against trust beneficiaries and their creditors, but not against creditors of a settlor.
- Defenceless persons. Protection of defenceless persons incapable of managing their assets, such as minors and disabled.
- Support for family members. Provide assistance for family members or other persons (support for studies, housing, starting a business etc.)
- Family business. Protection of family business and to provide continuity to next generation.
- Asset protection. Trusts are commonly used to hold and protect assets such as: Investment portfolios, shares and stocks in both quoted and unquoted companies, bonds, bank deposits, real estate, intellectual property, royalties, art collections, life assurance policies issued on the life of the settlor and most other types of assets.
- Substitute to wills. Trusts are often used as a sophisticated substitute to wills and testaments.
- Corporations and employees. Widely used by corporations for employee benefit plans, retirement and stock option schemes.
Is an International Trust Solution right for me?
A trust is the solution for individuals who:
- Want to preserve their wealth against uncertainty, political, economic or family
- Want to transfer wealth to their heirs in a tax-efficient manner
- Want to plan their estate to maximize the benefits of their wealth for family members and others
- Want to transfer wealth to their heirs in accordance with their wishes and not in accordance with the laws of the country where they live
- Want to consolidate the ownership or assets owned throughout the world in one location
- Want to minimise or eliminate estate taxes arising on the death of the settlor
When a trust is established in a suitable offshore jurisdiction, provided that residents of the offshore jurisdiction are excluded from receiving benefit from the offshore trust, then there will be no local taxes applicable to the assets and income of the trust.
An international or offshore trust enables an individual (the “settlor”) to donate assets to a neutral third party/the “trustee”), who holds the assets and administers them for the benefit of other individuals nominated by the settlor and in many cases the settlor himself (the beneficiaries”). An offshore trust arrangement is normally recorded in a written document (the “trust deed”).
The effect of creating an offshore trust is to shift the burden of property ownership onto a trustee, while retaining the benefit of the property for the beneficiaries.
An estate created under the will of a deceased person is a trust. A trust created by a person prior to death is known as an inter vivos trust. Most trusts created offshore are formed as inter vivos trusts.
As trusts are a creation of English common law, the most suitable location for an offshore trust is a jurisdiction which has English common law and equity as the foundation of its legal system. However, the modern civil law, as currently adopted in many countries of the world (notably, most of continental Europe), has a more concentrated concept of “property”, which is largely incompatible with the concept of the trust relationship. Nevertheless, trusts continue to serve well as an asset protection and estate planning instrument for millions of individuals all over the world, regardless of their country of residence.
An offshore trust may be established as either revocable or irrevocable. A revocable trust may be terminated or varied by the settlor either at the end of a specified period or at any time. An irrevocable trust cannot be terminated by the settlor nor can the settlor vary the terms of the trust. Whether a trust is established as revocable or irrevocable will depend upon the objectives and circumstances of the settlor.
Both revocable and irrevocable offshore trusts may be either discretionary or fixed interest trusts. Under a fixed interest trust the interests of the beneficiaries are specifically fixed in the terms of the trust deed and the trustee has no power to vary those interests. A discretionary trust on the other hand gives the trustee the power to determine the allocation of income and capital amongst the members of the beneficiary class and vary the membership of the beneficiary class. The flexibility provided by the discretionary form of trust is often necessary to satisfy tax planning objectives.
In the case of a discretionary trust, the trustees will have wide discretionary powers (although they may sometimes be constrained by the requirement for the consent of a third party or the protector), the trust deed will often be supplemented by an informal and confidential letter from the settlor to the trustees (Letter of Wishes) setting out his wishes on such matters as the amount and timing of distributions, investments, employment of advisers, those who should be regarded as primary beneficiaries and so forth. While this letter is non-binding and intended for the trustees’ guidance only, the trustees will generally respect the settlor’s wishes and strive to act in accordance with them.
International Trust vs International Foundation
There are some significant differences between international trusts and foundations, which often determine the choice of financial vehicle.
|A trust does not have a separate legal
Identity from its trustees
|A foundation has an independent legal
identity and holds assets in its own name
|Trustees contract personally in their own name||Council members of a foundation contract
in the name of the foundation
|Trusts cannot be merged||Consolidations and mergers are possible|
|Lifespan is limited||Lifespan is indefinite|
|A settlor in a trust cannot assign/reserve rights, obligations and power in the deeds||A founder can assign/reserve rights,obligations and power in the charter|
|Trustees manage the trust and are not required to hold meetings||The foundation is managed by the council, and is required to maintain minutes of the meetings|
|Trust deeds are private because a trust is a private agreement not a legal entity||The foundation charter is a public document although the regulations remain private|
|Trustees have unlimited power over the trust’s assets||The powers of a foundation council are generally more limited than those of a Trustee|
|Trusts have their roots in common law||
All these differences are highly important to a person who wishes to set aside his assets to benefit his dependents in the future, but at the same time retain direct control over those assets during his lifetime. For many people handing over their assets irrevocably to a trustee is not an option.
This is not an exhaustive or definitive account of the characteristics of an international trust. It is recommended that clients arrange for a non-obligatory meeting with one of Anglo’s trust and foundation specialists to discuss in more detail the options and possibilities available, given the specific personal and financial circumstances of the client.
Call: +44 (0) 1473 249 024