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The essence of a trust is that one person, the grantor (in English known as one of the terms Trustor / Settlor / Grantor), transfers its assets to another person, a trustee, the trustee "(Trustee) for binding agreement, so that he possessed and managed them for a third person, the beneficiary or the beneficiary (Beneficiary).

A trustee will manage investments, keep records, manage assets and prepare court accountings, paying bills and (depending on the nature of the trust) medical expenses, charitable gifts, inheritances or other distributions of income and principal.


"DameLaw Consulting" offers to the customers:

• Individual solutions in the establishment of offshore funds
• Guardianship and related services
• Administration of trust funds.
• Trust accounting and record keeping of assets
• Reporting and archiving  


What type of Trust?

Whilst there are many different types of trust employed in the world’s common law jurisdictions, it is the discretionary trust, which finds most favour in the offshore trust areas. This type of trust not only ensures that the settlor has divested himself or herself from the requisite assets, but it can also provide significant benefits to the intended heirs/beneficiaries. The reason for this is that whilst it is known that there will be, of course, beneficiaries, a discretionary trust leaves the amount of capital and/or interest to be paid to the normally unnamed beneficiaries totally at the discretion of the trustees. In effect, this allows the trustees the ability to control when and what type of payment should be made and hence, will ensure the most favourable tax consequences for the beneficiaries. In précis, trusts can be broken down into 3 constituent types with the 4th type, an asset protection trust (APT), simply being a variation of an An 'Accumulation and Maintenance Trust'

  1. An 'Interest in Possession' Trust: As its name implies this provides for a beneficiary to have a distinct right to the income from a particular part of the trusts capital assets. The capital asset may or may not be passed on to the beneficiary.
  2. A 'Discretionary' Trust: This gives the trustees total discretion to decide, subject to their fiduciary duty, how, when and to whom the income, and perhaps capital, of a trust is transferred.
  3. An 'Accumulation and Maintenance Trust': This is basically a combination of the other two trust types. Generally, it will start as a discretionary instrument but will have provisions to change into an interest in possession trust normally when the beneficiaries have reached a particular age.
  4. An ‘Asset Protection Trust’: Unlike other trust mechanisms, an asset protection trust (APT) does not necessarily seek to reduce the settlor’s tax responsibility. In fact, for US nationals this could have significant negative consequences. Rather, ‘its purpose is to act as a form of insurance for high-risk individuals, primarily those in the medical and legal professions, in litigious jurisdictions like the USA. Before establishing such a trust for an American, it is essential to confirm that the basic mechanism would be accepted as bona tide by the I.R.S. (Internal Revenue Service). Jurisdictions, which have special APT legislation, include Cyprus and the Cook Islands.


Who Can use a Trust?

Until recently, there were virtually no restrictions on who could make effective use of a trust. However, both common law and statute have severely restricted the legal employment of trusts for those tax domiciled in countries such as the United Kingdom and the United States. In the case of the US, the one notable exception is the asset protection trust (see below). Notwithstanding these restrictions, trusts are still very valuable weapons in the tax planners’ arsenal since virtually no civil law country has any effective anti-trust legislation. In particular, they can often be used to avoid Continental ‘forced heirship’ provisions.

It goes without saying that a trust is a taxable entity, however, traditionally and logically it needs only to pay income and not capital gains or inheritance orientated taxes. Remember, in common law whilst assets may have been transferred to a trust the said assets are not owned by anyone until future dispositions have been made. In other words, it was the ideal 'holding' vehicle and could considerably postpone any tax liability.

Unfortunately, as will be shown later on, many of the advantages of trusts have been lost as a result of aggressive legislation in common law jurisdictions. However, possibilities still exist for those in some civil law countries and also for non-tax objectives such as asset protection.


Trust Applications


Onshore Application

I n common law countries the use of onshore trusts for those locally domiciled and resident, at least for tax mitigation purposes, has greatly diminished. In the United Kingdom, for example, there has been a rash of legislation in recent years (such as S.739-740 of The Taxes Act, 1988, S. 110 of The Parliament (Finance) Act, 1989 and S. 87-97 of The Taxation of Chargeable Gains Act, 1992)- which has prevented the use of tax avoidance mechanisms unless there existed a genuine commercial reason, ascribed British residence to foreign trustees and made Settlor's personally liable for their trusts capital gains. However, as will be discussed later, there can still be considerable advantages available for those not domiciled, even if resident, in countries such as the United Kingdom.


Offshore Application

Today, the majority of tax mitigation trusts are established outside of high taxation common law countries like the United Kingdom. The principle reason is that 'tax friendly' jurisdictions such as Jersey and the Isle of Man provide respectability, greater confidentiality and hence protection against the ubiquitous reverse burden of proof principle employed in most high tax countries. If one on the other hand is domiciled, or perhaps resident, in a civil law jurisdiction one must be careful that trusts are recognized.


The International Recognition of Trusts

The main problem with the international recognition of trusts is that civil law countries have difficulty coming to terms with the concepts involved. Certainly, the idea of property ownership being in limbo for a given duration is alien as is that of beneficial, or true, ownership not necessarily resting with the shareholders. In addition, most civil codes (at least in Europe) adopt the Legitima Portia Principle; a 'Principle' which seeks to prevent a free disposal of ones assets in favour of guaranteeing specific proportions to ones next of kin. These facts, together with a reluctance to tie up capital and/or property for future generations, can result in civil law countries refusing to recognize trusts. Nevertheless, as a general rule Western European civil law jurisdictions will often accept a validly constituted foreign trust so long as its enforcement does not cause a breach of indigenous law.


The Hague Convention 1984 Effective 1st of January 1992

In an attempt to introduce greater harmony between the laws of common and civil law jurisdictions an international meeting was held in the Netherlands. This set out to establish the acceptance of certain principles, which should be applied by the courts of the signatory nations. To date, it has been ratified by the United Kingdom, Canada, Australia and, more surprisingly, Italy. In respect to the latter this should provide greater certainty for those with trust assets in this jurisdiction.
The attributes to be ascribed to a trust are elucidated in Article 2, however, it will be noted that they may still differ from those of an established trust jurisdiction. For example, it is quite common for English and Irish courts to imply a trust even if there are no written documents.


Article 2 'Trust Characteristics' as laid own under The Hague Convention 1984  

(i) It is accepted that a trustee has no direct proprietary interest in a trust and that it is not part of his own estate
(ii) Notwithstanding the above, title to the trust assets can be in the name of the trustee or held on his behalf by another
(iii) A trustee has a fiduciary duty to manage, dispose or employ trust assets in the manner prescribed by both the trust instrument and applicable law .


Advantages

Can transfer legal ownership from a Settlor to trustees without giving the aforementioned direct beneficial interest in the trust property. Can provide an effective mechanism of distributing trust capital and/or income to minimize tax consequences for beneficiaries. Prevents immature or frivolous beneficiaries from dissipating family assets and, therefore, 'protecting' future generations.
May be able to prevent the application of the Legitima Portia Principle in respect of assets in civil law jurisdictions. May still be very useful for tax mitigation purposes especially for those not domiciled in a common law area where anti-trust legislation may exist. The use of 'Protectors' can significantly reduce problems caused by dishonest or incompetent trustees.


Disadvantages

Many of the traditional tax benefits no longer exist for those resident and domiciled in common law countries because of antitrust legislation. In the United States such benefits are not normally available even for those merely resident. There may be difficulty in getting a civil law jurisdiction, particularly in Eastern Europe, to accept the validity of a trust instrument even if this does not cause any conflict with indigenous laws.  By definition the employment of a trust must result in the former 'owner(s)' of the trust property losing direct control over their former assets. Whilst the settlement of a standard format trust may not be prohibitively expensive the maintenance may be if the trustees have to play an active role and/or have specialist skills.
All trusts tend to tie up capital and are generally less productive and flexible than directly controlled mechanisms. The rule against perpetuities is almost universally employed and will result in the trust having a finite duration.