I have just finished explaining the use of an offshore Trust established under the laws of Jersey to my client, who wholeheartedly agrees that the Trust is an ideal entity for him, and then I wait expectantly for the question that invariably follows. “How do I control the Trust?” asks the client. “You don’t,” I reply and watch the inevitable furrow deepening on his forehead. The uphill task now begins, and with many European clients, I know that they will remain unconvinced that their interests are best served through the creation of a Trust. Somehow, even if UK individuals have never contemplated the use of Trusts or understood their nature, it is easier to show the flexibility that Trusts afford clients in their personal financial planning, and how their assets are protected.
Although the legal and tax treatment of trusts in Civil jurisdictions is still uncertain, already there has been significant movement towards the acceptance of Trusts by European countries familiar with the Code Napoleon rather than the common law of Anglo-Saxon countries. The 1985 Convention on the Law applicable to Trusts and their Recognition in the Hague accepted the basic concept of Trusts, i.e. the Trust property constitutes a separate fund to other assets owned personally by the Trustees; that the Trustees have legal ownership of such assets and that the personal creditors of Trustees have no legal recourse against Trust assets. To date, this Convention has only been ratified by two Civil law countries; Italy and the Netherlands. Court cases in France, Belgium, Switzerland and Holland, among other countries, have established that Trusts validly created under Anglo-Saxon law may be upheld in continental courts, particularly if the Settlor was resident in an Anglo-Saxon jurisdiction at the time of creating the Trust, and if the assets are outside of the jurisdiction of the European countries. Although European countries still find it difficult to classify a Trust as other than either a contract or fiduciary arrangement, I feel that legislation will be adopted in the near future accepting the validity of Trusts according to the Anglo-Saxon concept. Personal financial planning by Europeans (which includes tax planning) using the concept of Trusts should therefore become commonplace within forthcoming years.
In order to create a better understanding of the concept of Trusts and their uses, this article attempts to provide the technical information of which clients should be aware, and to allay the fears of all clients resulting from transferring assets out of their personal control.
What is a Trust?
A Trust arises when an individual or a corporation (the Settlor) transfers cash or assets (the Trust Fund) to individuals or a corporation (the Trustees) on the understanding (expressed in writing in the Trust Deed) that the Trustees will invest, administer and distribute the income and capital of the Trust Fund for the benefit of specified parties, or a class of persons (“the Beneficiaries”); the Settlor and spouse are often members of the class of Beneficiaries. The Trustee is very often a Corporate Trustee in order to ensure continuity.
Trusts have been used in English influenced jurisdictions for many hundreds of years. Their origin is believed to lie in the attempts to avoid legal restrictions imposed by the Common Law. This was achieved by the legal ownership of an asset being vested in one individual, who undertook orally or in writing to use the assets for the benefit of persons other than himself. That principle continues today to be central to the purpose behind the creation of a Trust, although its uses have developed beyond those for which it was initially created.
The Trust is an independent legal entity. The assets which are transferred to it are under the legal ownership of the Trustees, distinct from the Settlor. However, the Trust is administered in accordance with the intentions of the Settlor, and the Trust Deed can include any terms the Settlor wishes. In addition, it is usual for the Settlor to set out his wishes in a letter or memorandum to the Trustees indicating how the Trust Funds are to continue to be administered and these wishes can be varied at any time. This means that the legal control of assets can be distinctly separated from their economic enjoyment, and in effect the Settlor continues to exert moral control over the Trust during his lifetime and subsequently. This ability to have moral control but not have legal ownership results in many benefits, examples of which are below.
Main uses of Trusts
1. Preservation of Wealth or Determined Disposition of Assets
For the wealthy individual who wants to ensure that his wealth can continue for the benefit of future generations, the Trust is ideal. The Settlor can effectively lock-up the capital of the Trust and specify to whom of his family the income and capital should be paid in the years to follow. He can also give the Trustees the discretion to pay capital to the Beneficiaries if they think it appropriate. For example, the Settlor can guard against or provide for the following:
a) A spouse or parent to have the benefit of the asset for their life but for the children to have the property ultimately, so achieving a result which may not have been obtained if the property were passed directly to the spouse or parent as a gift.
b) An outright gift may result in its being dissipated, possibly because the Beneficiary of the gift is financially immature or too young. A Settlor could determine the age at which or the circumstances under which the beneficiary should be entitled to some or all of the capital thus avoiding its dissipation.
c) The Trust can be used for making gifts in the future for providing for children or grandchildren (whether born or not) either equally or unequally depending on the circumstances which prevail at that time, financial need, conduct, health, marriage, success etc.
d) To pass assets to individuals with anonymity to provide for individuals or circumstances in a confidential manner.
e) Further Beneficiaries can be added at any time and the terms under which the assets are to be held or dealt with can also be changed at any time by the Settlor issuing a fresh letter of wishes. It may well be that all the persons who are intended to benefit are not mentioned in the Trust Deed and additional Beneficiaries can therefore be added or existing Beneficiaries deleted as the case may be.
f) An example of wealth preservation is in the case of a family-controlled company which may otherwise become split between many members of a family who may not be directly interested in the business. A Trust can be used to preserve continuity of ownership and management whilst enabling the family as a whole to continue to benefit.
g) High-risk individuals may need to transfer the assets into a Trust in order to protect them against claims by third parties since following the transfers, the assets are no longer in the legal ownership of the Settlor.
h) Assets within a Trust may fall outside of any exchange control laws relevant in the country of which the Settlor is resident.
2. An Alternative to a Will
The proving and administration of a deceased person’s estate can be cumbersome, costly and often cause cashflow difficulties for the dependants of the deceased. Trusts do not require the formalities of probate administration in order to make distributions of income and capital following a death. The Trust may therefore own all of the individual’s estate and replace his Will, or else own a part of it with a view to supplementing dependants whilst the deceased’s estate is administered.
The re-writing of Wills or drafting of codicils is time-consuming and rigid in formality. A Discretionary Trust requires only a fresh letter of wishes from the Settlor for the Trustees to be able to administer the Trust in accordance with the Settlor’s revised intentions.
If Trusts are to be recognised in European countries, it will be important that they do not contravene any other laws relevant in that country relating to the disposition of assets. In particular, many European countries have adopted laws relating to what is referred to as “forced heirship”, whereby an individual is not free to dispose of all or part of his assets to any individuals other than his/her spouse or children.
3. Fiscal Benefits
Trusts, and in particular Discretionary Trusts, are generally taxed beneficially. The position will vary from country to country, but Trusts formed in Jersey can offer particularly attractive fiscal benefits as a result of placing the assets in separate legal ownership to that of the Settlor. As well as the benefits offered by foreign countries, Jersey will not itself tax the income or capital of the Trust provided there are no Jersey resident Beneficiaries.
Individuals may reduce their future inheritance tax liabilities by transferring assets into a Trust. This feature is relevant where:-
a) The assets are likely to appreciate substantially in value and can be transferred to the Trust at relatively low current values minimising any inheritance or gift tax liabilities currently due, or
b) Where the individual is contemplating a move to another country and wishes to transfer his assets prior to taking up residence in that country.
Trusts may also be useful for capital gains tax planning, with appreciating assets being owned by the Trustees and therefore being subject to capital gains tax only in the country where the Trustees are resident. If Jersey is chosen as the location of the Trust, then such capital gains will be tax exempt in Jersey. In some countries, the capital gain may then be distributed to resident Beneficiaries without further tax consequences, or may be taxed on an effective remittance basis, thus providing at least tax deferral if not tax exemption. In connection with capital gains tax savings, shares in private companies whose value may appreciate substantially in future years would be an ideal asset to be transferred to an offshore Trust when the current value of such shares is relatively low.
A Jersey Trust does not require registration or production of the Trust Deed to any authority. It is also possible to draft the Trust Deed without the name of the intended parties appearing on the Deed itself, in this case the Trust is formed by Declaration of Trust. For example, the Settlor having provided the initial property may not be readily available at the time the Deed is to be signed or alternatively may not wish his name to be disclosed in the Deed itself.
5. Repatriation or Sequestration
Because the assets of a Trust are owned by the Trustees independently of the Settlor or Beneficiaries, it is not possible to enforce repatriation procedures against the Trustees (although if the assets in question are held in the enforcing jurisdiction it is sometimes difficult in practice to prevent such repatriation). Placing the ownership of the assets in a different legal jurisdiction to that of the Settlor is an ideal way of protecting the assets from confiscation particularly if the assets are held in a stable area such as Jersey.
6. Adding, Deleting or Excluding Beneficiaries
Further Beneficiaries may be added at any time. It may well be that at the time a Trust is formed it may not be certain who the ultimate Beneficiaries are or in order to satisfy local requirements, it may be advisable not to name the ultimate Beneficiaries at the outset. The initial Beneficiary may be a recognised charity and the additional Beneficiaries, the Settlor’s family and their issue for example may be added later. In this way the Beneficiaries may also be changed or deleted. It may also be preferable to exclude a particular Beneficiary such as the Settlor. The Settlor may be a normal Beneficiary at the outset or may be added as a Beneficiary in the future.
Appointment of Protector
The Settlor may be unhappy about transferring his assets to Trustees with whom he has had no previous relationship. He may indeed realise that he may not control the assets, otherwise legal ownership will not have passed to the Trustees and the purposes for which the Trust has been created may not be achieved. However, the Settlor may have a tried and trusted friend or professional adviser in whom he has implicit faith, who may not be able to fulfil the role of Trustee because of tax laws in his country of residence or his unfamiliarity with Trusts. In such an event, the Settlor could request that an individual be appointed as a “Protector” or “Guardian” of the Trust and would wish the Trust Deed to include the requirements that some or all of the powers or discretion of the Trustees may only be exercised with the consent in writing of the Protector or Guardian. It should be clear that the Protector himself does not become an effective Trustee, but that such powers are used merely to ensure that proposed actions by the Trustees are not adverse to the wishes of the Settlor.
Particular benefits of Jersey
Because a substantial number of Trusts are administered in Jersey, there is a particular expertise in this field, with consequent support services such as investment advisers, lawyers, banks etc as well as excellent communications. Jersey is also easily accessible by air or sea. The governing body of Jersey has control over trading licenses of Trust organisations, and may withdraw them if they believe it to be in the interests of protecting the good name and reputation of the Island.
The legal obligations imposed upon a Trustee of a Jersey Trust are onerous and seek to protect the interests of the Beneficiaries and to ensure that the value of the Trust Fund is preserved for their benefit. The conduct of the Trustee and the execution of his duties under the Deed is governed by the Trusts (Jersey) Law 1984. The Trustee may be sued by the Beneficiaries if in breach of trust; the Beneficiaries’ interests are therefore protected by law. In addition, if a Beneficiary considered that a Trust was not being administered roperly he could apply to the Royal Court of Jersey to enforce the Trust either by direction of the Court or by removal of the Trustees. In deciding what action is appropriate the Court will have regard to any letter of wishes. If the Settlor is also a Beneficiary, he will as such have legally enforceable rights against the Trustees.
Additional funds or other property may be added to the Trust at any time. To establish a Trust it is only necessary to settle a nominal sum and further settled property may be added once the Trust has been established.
The other question
The client may now be satisfied as to the function of the Trust and the control that can be effected over the actions of the Trustees. The second question that is asked then surfaces. How do I get my money from the Trust?
Depending upon the terms of the Trust Deed, the Settlor could be automatically entitled to the income and capital of the Trust, under an Interest in Possession Trust’. He may have an absolute interest in relation to part of the assets and capital of the Trust by being named as one of the Beneficiaries entitled to a defined share of such income or capital. Or he may be only one of the Beneficiaries of a Discretionary Trust, in which case Trustees could appoint income or capital to the Settlor depending upon the fiscal and personal requirements of the Settlor at any future date. Instead of being specifically included as one of the potential Beneficiaries, the Settlor may not be actually named in the Trust Deed but could be appointed as an additional Beneficiary by virtue of the Trustee’s powers to appoint additional Beneficiaries. The Trust therefore provides the flexibility of enabling the Settlor to receive future amounts from the Trust according to his particular requirements at that time.
Alternatively, depending upon the laws of the country in which the Settlor is resident, it may be beneficial to specifically exclude the Settlor, and perhaps his spouse, from benefiting from the Trust. Nevertheless, even in such circumstances, the Trust may own the shares of an underlying company, whether offshore or not, which could, for example, employ the Settlor and pay a salary to the individual, or pay expenses incurred by the individual in relation to the activities of the company.
Many clients believe that their interests are best served by holding bearer shares in a Panamanian company which in turn owns the assets which they have attempted to transfer out of their ownership. Certainly, this requires a lesser degree of understanding than the utilisation of a Trust, but on a fiscal level is equivalent to a tax fraud, and may not achieve the various other benefits which a Trust legally affords.