Formation of Trusts
When forming a trust, it is relevant to understand the history of trusts, in order to choose the correct jurisdiction and type of trust for your specific needs.
Trusts are the creation of the English common law. One of their earliest known uses was in the Middle Ages, during the 12th century, when a crusader or knight departing for battle may have left his property with a trusted third party to be used for the benefit of the family he left behind.
The legal owner would hold the land for the benefit of the original owner, and be obliged to convey it back to him when requested. The crusader was the ‘beneficiary,’ while the acquaintance was the ‘trustee.’ The term ‘use of land’ was also coined, and in time evolved into what is now referred to as a ‘trust.’
In the 19th century, ‘antitrust law’ emerged, where industries created monopolistic trusts. These trusts represented a corporation or group of corporations that cooperated with one another in different ways.
Within the monopolistic trusts, shares were entrusted to a board of trustees in exchange for shares of equal value with dividend rights. These boards could then enforce a monopoly. In this case, trusts were used because a corporation could not own other companies’ stock. As such, they became holding companies once the restriction on owning other companies’ shares was lifted.
Modern trusts have evolved as a way to ensure fair protection of assets, and to guarantee that loved ones have future financial stability. Trusts also help to avoid substantial inheritance taxes, and to ensure that the settled money, shares and equity are fairly and efficiently distributed and passed on.
A trust’s terms are typically set out in writing, though they can sometimes be expressed by verbal agreement. A written trust acts as evidence for the creation of the trust, and also sets out the terms and conditions upon which the trustees hold the trust’s assets. It also clearly outlines the rights of the beneficiaries.
While trusts typically give the settlor no right to access the money or property once settled into the trust, they do provide plenty of control over how assets are used. They can also be set up in a will with the protection of assets following your death.
Requirements of a modern trust
For a trust to exist there are three requirements, all of which must be satisfied:
- There must be a Settlor, being a person wishing to create the trust and confer a benefit on others. The exact nature of this benefit will be set out in the trust.
- There must be a Trustee, and the assets, which will be used to provide the above benefit, must be transferred under the control of the trustee. Trust assets must be segregated from those of the trustee, and cash, for example, will be deposited in an offshore bank account. Trustees must remain independent and exercise proper control over the trust property, in full compliance with the settlor’s wishes.
- There must be beneficiaries. If there is more than one beneficiary, it must be possible to ascertain at any time who these persons may be and when they will receive their benefits.
- A protector may also be appointed as an additional safeguard over the trust’s assets. They are usually given certain powers of veto over the trustees.
In more recent times, countries with different legal systems have enacted legislation permitting the formation of trusts. There have also been international conventions which provide for the recognition of trusts in countries where, otherwise, they do not exist. However, most trusts are still found in many countries, which derive their law from association with English law.
What type of assets can be held in an offshore trust?
Assets held in an offshore trust can include:
- Bank deposits
- Shares and stock
- Investment portfolios
- Real estate
- Intellectual property
- Life assurance policies
Benefits of setting up a trust
While the original purpose of trust formation was estate planning (permitting assets to be held for the benefit of persons who were not themselves capable of managing assets and enabling a simple transfer to successors), trusts have in more recent times also become instruments of tax planning.
Trusts are widely used to save on taxes and to avoid Capital Gains tax, by being established in a tax-free and/or low-regulation jurisdiction. They are therefore critical to individuals who wish to transfer their wealth to their heirs in a low-tax or tax-free way.
Trusts are incredibly beneficial to settlors who wish to specify precisely how – and when – they want their assets to be distributed. This is a highly expedient way to avoid disputes amongst family members following the death of the settlor. This is also something that is not so straightforward to achieve through the formation of a will.
Trusts provide immense flexibility, financial security and wealth/asset protection. They are recognised in all common law jurisdictions, and are an important tool in international income, capital gains and estate tax planning.
Trusts also provide a way to hold specific assets overseas, including second homes, investment portfolios and private company shares.
Types of Trusts
There are many trust types to choose from, including life interest, discretionary, accumulation and maintenance. Often, jurisdictions utilise different terminology to describe each type of trusts, as well as the components of the trust.
Over the years, there has been substantial development in trust design. Many jurisdictions and expert trust providers have been very successful in the design of creative trust products specific to a trust jurisdiction. These are invaluable in modern international structuring.
It is therefore an important aspect of trust formation to understand the purpose and design of the trust which the client wishes to establish. From there, a jurisdiction can then be selected that possesses appropriate trust rules to facilitate the establishment of the optimal trust for the client.
As you can see, there are a number of factors to take into consideration when setting up a trust. Each case is unique and each individual’s objectives are unique, therefore it’s important to obtain the advice and support of a special company, such as Chesterfield.
Chesterfield provides an array of trust services, including the formation and administration of offshore trust forms. Please contact our team of specialists today to discuss your specific requirements.