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IN001 - International Trusts

Introduction

In countries with a legal system based on the Anglo-Saxon common law principles, trusts have long been recognised as a valuable and flexible vehicle for the holding and maintenance of many types of assets. The 1985 Hague Conventions on private and international law relating to the recognition of trusts, and the Hague Convention on succession to the estates of deceased persons in 1989, made residents of civil law and Muslim countries increasingly aware of the potential benefits of this type of asset holding vehicle.

Trust Structure Outline

The trust concept basically involves the separation of legal ownership from beneficial ownership. A person wishing to create a trust (the "Settlor") transfers ownership of the property to be held by the trust (the "Settled Property") to the trustees. The trustees, who may be individuals or corporations, become the legal owners of Settled Property but have a duty to act in good faith to hold those assets for the benefit of third parties (the "Beneficiaries") who may be named individuals, or members of a specified class contained within the agreement drawn up to record the arrangements for the trust ("the Trust Deed"). The Trust Deed contains all relevant information regarding the operation of the trust, including the powers and duties of the trustees, the settled property, and the beneficiaries.

Uses of International Trust Structures



Many individuals create wealth through hard work and good judgement and are not always confident that their heirs share the same amount of financial acumen. They are often keen, therefore, to seek to protect their hard earned wealth from being squandered by their children. Also, their children may not yet have reached the age of majority or be unable, through physical or mental disability, to fully look after themselves. Professional trustees are an effective means of ensuring that a families’ wealth is used responsibly to look after all members’ interests with objectivity and restraint where appropriate.


An international trust may serve as an alternative testamentary disposition enabling trust property to be distributed to the beneficiaries named in the trust, on the death of the Settlor. This process does not result in delays often associated where executors are involved and where probate must be obtained to gain legal control over the estate. In addition, various death taxes and duties may be avoided on the transfer.


Legislation over the years has reduced the potential advantages of the use of international trusts in connection with the mitigation of income and capital gains tax in many jurisdictions. However, certain countries particularly those where the trust concept is still only beginning to be recognised (e.g. civil law jurisdictions) opportunities for reducing future tax liabilities still exist.


Creditor litigation, originally in the United States but increasingly elsewhere, has lead to a vast increase in the use of international trusts to shelter assets from future, as yet unknown, creditors.


The use of an international trust to hold assets ensures complete confidentiality regarding the settled assets as the trust documentation is not a matter of public record.


In many civil law and Muslim countries there are statutory provisions governing the disposal of a person's estate on their death. The use of an international trust gives freedom of disposition of most classes of assets on death.


Clients moving to countries where exchange controls are maintained may not wish to take their assets into the country to find at a later date they are unable to take them back out. In such circumstances the use of an international trust vehicle can ensure that the assets remain in a jurisdiction which will not give rise to any restrictions on the movements of capital.


An individual migrating to a high tax country can benefit from the establishment of a pre-migration trust prior to taking up residence in the new country. This is due to the assets leaving the ownership of the individual before he enters the new country.

Conclusion

Often many, if not all, of the benefits detailed above are attractive to potential settlers of trusts.

In spite of increased legislation to combat certain tax planning aspects of international trusts, in particular in common law jurisdictions, there are still many circumstances in which the well planned and managed use of an international trust can provide benefits to clients. Trusts set up in such circumstances, can either stand alone or, more often, be used to hold shares in an underlying investment holding, or trading company.


Further Information

For further information please speak to Alan Corlett in our Guernsey office or your usual Dixcart contact.