Their Purpose, Uses, and How to Stay Safe When You Use One
A trust is a common law vehicle that was first used during the Crusades. The crusading nobleman trusted one of his friends to manage his estates for the benefit of the crusader’s family. Thus the crusader was the first trust settler, his friend was the first trustee and the family were the first beneficiaries.
Though it has many variations of form and exists in many jurisdictions, trust law is universally considered to be well-settled—stable and predictable. Were this the only consideration, an offshore trust could be created in any one of dozens of jurisdictions.
However, because of increasing concerns with issues of money-laundering, tax-evasion and terrorism, the choice of a jurisdiction becomes increasingly important. As such, Capital Conservator generally recommends to its clients that any such structure be created in jurisdictions that are neither generally considered to be tax havens, nor on international black lists.
Why Use a Trust?
Some common reasons for forming a trust are as follows:
- Asset Protection. From an asset protection standpoint, it is always sound financial planning to separate oneself from ones assets. Trusts have been used for years to protect one's assets from future and potential future claims on ones assets. One common trust structure used for asset protection is the discretionary trust.
- 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 use of trusts ideal.
- Estate Planning. Trusts are frequently used for estate planning and often appear in wills. One particular way that trusts are used for estate planning is in the case of forced heirship, which is when the law of the country dictates who gets what, regardless of the wishes of the deceased. While there are a number of solutions to this problem, one of the most popular, and the one that Capital Conservator's affiliated trust company SwiftTrust Treuhand recommends is the use of a foreign trust structure in jurisdiction not considered a tax haven to hold the assets indefinitely without ever triggering heirship rules since elements within a trust structure can be created so that they never die.
- Tax Planning and Avoidance. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases, except for US persons, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance.
- Charities. In some common law jurisdictions all charities must take the form of trusts. In most jurisdictions, charities are highly regulated. Some people are lured into creating charitable trusts that will not and substantially engage in charitable work built for the purpose of asset protection or tax avoidance. This will not work and should be avoided. However, legitimate charitable trusts and charitable remainder trusts can be a key element in successful tax reduction structures.
Types of Trusts
While the types of trusts are varied, the following are some of the more common trust types.
- Offshore Trust A trust which is in a jurisdiction other than that in which the settlor is resident. Offshore trust typically means a trust that is located in one of the offshore financial centers or well known tax havens. ("onshore trust" has come to mean any trust resident in a high-tax jurisdiction.)
- Asset Protection Trust A trust which holds funds on a discretionary basis, in an attempt to protect the beneficiaries assets - usually from taxation, divorce or bankruptcy.
- Charitable Trust Also known as public trusts, charitable trusts are entitled to special treatment under the law of trusts and also special tax treatment.
- Spendthrift trust Often established in a will and used to provide for the health and welfare of someone who is incompetent to manage their own financial affairs because of illness, addiction or simple bad habits.
- Revocable trust A revocable trust can be altered, amended or revoked by the settlor, given that the settlor is of sound mind. Revocable trusts are becoming increasingly popular in place of a will in the US to minimize
trust administration costs associated with probate.
- Irrevocable trust Unlike a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be revised or amended until the terms of the trust are satisfied. Except in rare cases, an irrevocable trust cannot be changed by the trustee or the beneficiaries of the trust.
- Tax Free trust A tax free trust is a trust where the trust itself and often the beneficiary is not taxed on particular income sources.
- Purpose trust A relatively new form of trust in which a goal or purpose replaces the traditional list of beneficiaries. For example a trust could be established “for the advancement of the musical arts”.
How to Best Use Your Trust
Any of the trusts noted above are best ultilised as passive structures that work through other offshore and onshore companies for actual operations and financial transactions. For those people living in civil law countries whose laws are hostile to trusts, SwiftTrust can also offer,
exempt trusts, a
Seychelles trust, and
Panama Private Interest Foundations, which are the civil law equivalent of trusts.