TRUSTS & FOUNDATIONS

TRUST & FOUNDATION

* TRUST & TRUSTEE SERVICES

Families have been using trusts for wealth management and wealth protection for the benefit of their heirs for centuries. Trusts provide people with a means of protecting their assets and controlling how they are used after they have been given away.

Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.

Although many of the tax benefits that were associated with trusts have been eroded by anti-avoidance legislation in recent years, they still offer great advantages – particularly for high net worth individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those whose principal motivation is not to avoid taxation but to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure.

* The ‘Trust’ concept

At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’). A trust can be created solely by verbal agreement but it is usual for a written document (the ‘trust deed’) to be prepared. This evidences the creation of the trust, sets out the terms and conditions upon which the trustees hold the trust assets and outlines the rights of the beneficiaries.

The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.

It is vital that the trustee remains independent and exercises proper control over the trust property. A trust may be deemed to be invalid if the settlor continues to exercise power over the trust assets by retaining benefit or control, or by giving directions to the trustees.

Those unfamiliar with the trust concept are often concerned at the prospect of transferring ownership of their property to a trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood and it is clear that the trust is governed by a reliable trust law that can be enforced in a reputable jurisdiction.

The trustee holds the legal ownership interest in the trust property separately and apart from his own personal property and therefore trust assets are insulated from the trustees personal creditor.

Trust law imposes strict obligations and rules on trustees. There is a basic rule that a trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust – for example, where a trust provides a professional trustee with the right to charge for its services. Full disclosure of the basis and amount of charges is required.

* Uses of Trusts

Trusts can be used individually or as part of an overall strategy. A properly drafted and managed trust can confer advantages under any or all of the following heads:

- Estate planning

Failure to plan your affairs in advance of death can mean leaving your estate in disorder. Many people seek to order their affairs by making a will but the probate process can result in lengthy delays, high administration costs (typically around 4% to 6% of the total value of the estate) and often tax liabilities. The best alternative is to set up a trust during their lifetime. Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more nuanced arrangements. These might include: providing a source of income, but not capital, for a spouse for life; making provision for the education of children but not letting them have access to capital until later in life; or providing a fund to protect members of the family in the event of sudden illness or other calamities. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.

- Tax planning

Assets and funds transferred into trust are no longer considered as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s). Inheritance tax can be eliminated because the trustee(s) continue in existence after the death of the settlor. Anti-avoidance legislation in the home country of the settlor or in the location of the trust assets may seek to counteract this outcome, but a correctly structured and administered trust may offer substantial tax efficiencies.

- Confidentiality

Proving a will is a public procedure. Domestic authorities will need to receive a complete list of all the property owned by the deceased in order to assess the amount of estate duty payable before the property can be transferred to the executors for distribution. This procedure is entirely unsuitable for those who wish to keep details of their assets confidential. The only other legal form of transfer is via a trust and this would generally save estate duty and keep the trust assets confidential.

- Asset protection

Trusts can be one of the most effective ways to protect assets. In simple terms, if you transfer property to a properly constituted trust, it will no longer form part of the settlor’s property and therefore cannot be seized by creditors if a settlor gets into financial difficulties. A court may, under certain circumstances, order the transfer into trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk-mitigation strategy. - Preserving family assets

Preserving family assets, or growing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst their heirs, but rather is retained as one fund to accumulate further. A trust offers a mechanism for preserving family assets while offering the flexibility to allow payments to beneficiaries as the need arises. This can be further enhanced with a unified fund for investment management.

* FOUNDATIONS

The objective of a Foundation is much the same as that of a trust. A Foundation is created for specific aims that can be charitable and/or non-charitable and can be to benefit people and/or to carry out a set purpose. A properly structured Foundation can offer tax and estate planning benefits, as well as a means to avoid forced heirship rules.

A Foundation is neither a company nor a trust, but has some similarities to both. It is an incorporated body that has separate legal personality and can hold assets, transact business and sue or be sued in its own name. Unlike a company, however, a Foundation has no shareholders.

A Foundation is formed by a founder, who provides the initial assets – known as the endowment. The assets are then held for the purposes set out in the Foundation’s document of establishment and are administered according to contractual rather than fiduciary principles.

The Foundation is governed by constitutional documents. These are a charter, which can be open to public inspection, and regulations, which are like a company’s articles of association and remain private. The founder can retain flexible powers over the assets in the Foundation if this is permitted in the constitution.

Whereas trust assets are held by a trustee, a Foundation has a council that administers the Foundation’s assets and carries out its aims in accordance with its constitution. It must act in good faith. It can have one or more members and is similar to a board of directors. A ‘guardian’ can be appointed to ensure that the council does what it is meant to do, similar to a trust protector.

Beneficiaries have contractual rights to enforce the operation of a Foundation in accordance with its constitution – rather than proprietorial rights to assets held by the Foundation. The people who potentially benefit under the Foundation do not normally have any rights.