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TRUST

ORIGIN

In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers some or all of his or her property to a trustee. The trustee holds that property for the trust’s beneficiaries. Trusts have developed since Roman times and have become one of the most important innovations in property law. The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty developed by the Hague Conference on Private International Law on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of March 2011 ratified by 12 countries. The Convention aims to harmonize not only the municipal law definitions of a trust, but also the Conflict rules for resolving problems in the choice of the lex causae. The key provisions of the Convention are: each signatory recognizes the existence and validity of trusts. However, the Convention only relates to trusts with a written trust instrument. It would not apply trusts which arise (usually in common law jurisdictions) without a written trust instrument. the Convention sets out the characteristics of a trust (even jurisdictions with considerable legal history relating to trusts find this difficult) the Convention sets out clear rules for determining the governing law of trusts with a cross border element.
ISTITUTION

The istitution af a Trust is based on Article 2 For the purposes of this Convention, the term “trust” refers to the legal relationships created – inter vivos or mortis causa – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.

A trust has the following characteristics

a) the assets constitute a separate fund and are not a part of the trustee’s own estate;

b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;

c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust. A trust is created when assets are transferred to a trustee. The trustee becomes the legal owner and is responsible for managing the assets and distributing them to the beneficiaries of the offshore trust (which could include the person or corporation which transferred the assets to the trustees) in accordance with the terms of the trust deed. The terms on which the trustees administer the trust assets are detailed in a trust deed and trust legislation to govern trusts has been enacted in many common law jurisdictions.

What are the different types of Trust?

Bare Trust

A Bare Trust is the same thing as a “simple Trust.” It is one where the beneficiary gains immediate, absolute right to the assets in the Trust and the income generated. A settler (the person placing funds into trust) creating a Bare Trust is certain that the assets in the Trust go directly to the beneficiary or beneficiaries they choose. Once this Trust has been set up, the beneficiaries can’t be changed.

Discretionary or Accumulation Trust

A Discretionary, or Accumulation Trust lets Trustees have discretion about how the Trust’s income is used. In a Discretionary Trust, the Trustees are legal owners of the assets in the Trust. They must run the Trust to benefit the beneficiaries. In accumulation Trusts, Trustees can accumulate the Trust’s income until the beneficiary is legally entitled to the property or the income generated by the Trust.

Heritage or Charitable Trust

A Heritage or Charitable Trust is a business-related Trust to benefit a charitable or historic cause. Heritage Maintenance Funds are created to maintain historic buildings. Charitable Trusts are set up for a cause that will benefit either a class of people or society at large rather than specific beneficiaries. Charitable Trusts get tax relief that private Trusts do not.

Interest in Possession Trust

An Interest in Possession Trust entitles the beneficiary to the Trust income as it is generated. The Trustee must pass all income received (minus Trustee expenses) to the beneficiary. If the beneficiary is entitled to the income for the duration of his or her life, he or she is known as a “Life tenant.”

Mixed Trusts

Mixed Trusts are a mixture of multiple types of Trusts. Some of the assets in the mixed Trust may be set aside as an interest in possession Trust, while other assets may be treated in the manner of a Discretionary Trust. These Trusts may be used for the benefit of sibling beneficiaries who attain the age of majority at different times.

Non-Resident Trusts

Non-Resident Trusts are run by Trustees who are not UK residents for tax purposes. The tax rules for non-resident Trusts are quite complex. In some non-resident Trusts, only some of the Trustees are UK residents, and the settlor of the Trust was not a UK resident when the Trust was set up or when assets were added to it.

Parental Trusts for Minors

Parental Trusts for Minors are Trusts for the settlor’s minor unmarried children in which the child’s Trust income is treated as if it were the settlor’s income for tax purposes.

Settlor-Interested Trusts

Settlor-Interested Trusts are Trusts in which the settlor, or the settlor’s spouse or civil partner may also benefit from the Trust. An example of this would be a Trust in which the settlor knows he or she will be incapacitated (e.g. by illness) and sets aside assets in a Trust for his or her own future income or for income for his spouse, civil partner, or child. Vulnerable Beneficiaries Trusts Trusts for Vulnerable Beneficiaries are set up for someone who is physically or mentally disabled, or someone under the age of 18 whose parent has died. With these Trusts, Trustees can claim special treatment for capital gains taxes and income taxes if it is a “Qualifying Trust.” A Qualifying Trust is one where the person who creates it does not receive any benefit from it.

What are the limits of a Trust?

Trust CAN NOT be used for (art.15 c.1, art.16, art.18)

art.15

The Convention does not prevent the application of provisions of the law designated by the conflicts rules of the forum, in so far as those provisions cannot be derogated from by voluntary act, relating in particular to the following matters

a) the protection of minors and incapable parties;

b) the personal and proprietary effects of marriage; c) succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives;

d) the transfer of title to property and security interests in property;

e) the protection of creditors in matters of insolvency;

f)  the protection, in other respects, of third parties acting in good faith. If recognition of a trust is prevented by application of the preceding paragraph, the court shall try to give effect to the objects of the trust by other means

 

FAQ

What assets can be held by an offshore trust?

  1.     Investment portfolios
  2.     Real and intellectual property
  3.     Shares and stocks in both quoted and unquoted companies
  4.     Bank deposits
  5.     Life assurance policies issued on the life of the Settlor
  6.     Most other types of asset

 

What are the advantages of an offshore trust?

 

  1.     Private relationship
  2.     Wealth protection
  3.     Tailored to specific family requirements
  4.     Recognised in all common law jurisdictions
  5.     Increasing recognition in important civil law jurisdictions
  6.     An important tool in international income, capital gains and estate tax planning
  7.     Used by corporations for employee benefit plans, retirement and stock option schemes, insurance plans and special financing arrangements

 

What are the common use of a trust?

 

A trust is the solution for individuals who:

  1.     Want to preserve their wealth against uncertainty, political, economic or family
  2.     Want to transfer wealth to their heirs in a tax-efficient manner
  3.     Want to plan their estate to maximize the benefits of their wealth for family members and others
  4.     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
  5.     Want to consolidate the ownership of assets owned throughout the world in one location
  6.     Want centralised reporting
  7.     Want to minimise or eliminate estate taxes arising on the death of the settlor

 

For what cannot be used for?

 

Art.15

a) the protection of minors and incapable parties;

b) the personal and proprietary effects of marriage;

c) succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives;

d) the transfer of title to property and security interests in property;

e) the protection of creditors in matters of insolvency; f)  the protection, in other respects, of third parties acting in good faith.

The provisions of the Convention may be disregarded when their application would be manifestly incompatible with public policy (ordre public). art.18
Nothing in the Convention shall prejudice the powers of States in fiscal matters. art.19

 

Why use an offshore trust?

 

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.

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