Why use an International Trust?

Preservation of Wealth and Selected Distribution of Assets

The classic use of a trust is by an individual with substantial assets who wants to ensure that this wealth is distributed to his family in the manner of his choosing. 

With a discretionary trust the options available are numerous. The settlor may request that the trustees consider distributing the income of the trust to himself and his wife until their death, at which point the capital can be distributed to their children. Alternatively, the trust funds may be held for the settlor's children but will only be distributable upon each child reaching a predetermined age. The trustees may also have the discretion to distribute the capital and/or income to the beneficiaries, when they think it appropriate.  In addition, the settlor may issue further Letters of Wishes as his or her family circumstances change.  It is this flexibility which is one of the great attractions of a discretionary trust.

Certain countries have various laws which determine how an individual's estate should be distributed on death.  Such laws are known as forced heirship laws.  Where some of the assets of an individual are held outside that country, it may be possible to use a trust to distribute those assets in a manner which would not be possible under the forced heirship laws.

Once a discretionary trust has been created, it may be beneficial to arrange for trust funds to be held in the name of a holding company.  A holding company, wholly owned by the trust, represents an extension of the activities of the trust. The benefit of the holding company is that it can invest and enter into trading transactions in its own right. As such it is a readily recognisable commercial vehicle in jurisdictions which do not have laws providing for the establishment and taxation of trusts.

Favourable Tax Treatment

The major tax benefit in using a trust is that the assets held by a trust belong to the trustees and not to the settlor.  By taking the assets out of the settlor's estate, they would normally cease to be taxable on the settlor.  This can often be very useful for inheritance tax and for deferring capital gains.  The tax benefits will depend on the tax position of the settlor and beneficiaries, and where they reside.

Assuming that the settlor chooses to use a Guernsey, Isle of Man Malta or Nevis trust, any capital gains made by the trust or any income received by the trust will not be taxed by the authorities in any of these jurisdictions.

Creditor Protection

If an individual transfers part of his assets to a Guernsey, Isle of Man, Malta or Nevis trust, these assets cease to be part of his estate and as such any future claims by creditors will not normally be enforceable against the trustees. However, it is important to note that if the settlor creates the trust with the intent to avoid creditors, it is likely that the trust will be set aside.

Anonymity
Guernsey, Isle of Man, Malta and Nevis trusts, like trusts in most other jurisdictions, are not required to file information with the authorities, either on creation or on an annual basis.  It is also possible to create a trust through a declaration of trust without identifying the settlor in the document itself.

Continuity on Death

When a wealthy individual dies, even with a detailed Will, it can be a lengthy process before that individual's estate can be distributed.  If that estate had been placed in trust, on the individual's death there would be no such delay. The trustees would already be in possession of the assets and could continue to hold or distribute them to the beneficiaries.  By placing assets within a trust and with the Letter of Wishes, the settlor will have created a vehicle which is much more flexible to him than a Will. It is also far easier to amend to reflect a change of circumstances.

PRACTICALITIES

Location of Arrangements

It is important to locate any trust arrangements in countries which do not impose exchange control restrictions and preferably which are free from taxation (since there is a greater opportunity to increase the capital fund if there is no taxation on income or capital).

A company to be owned by a trust can be incorporated in a wide variety of tax-free jurisdictions. Consideration as to the most appropriate location of incorporation will be specific to each particular case.

Management and control of these companies can be established free of tax in Guernsey, the Isle of Man and Nevis. Dixcart is able to provide full management and secretarial facilities to holding companies operated in this way.

We generally advise that the incorporation location of the holding company should not be the same as the location of the management and control. This can provide a degree of political protection in respect of the country of incorporation and the country of management.

It must be appreciated that once the basic structure of a discretionary trust and a holding company has been established, if the holding company establishes its own trading companies elsewhere in the world, these will be subject to taxation liabilities in their country of operation.

Choice of Trustees and Directors

Dixcart provides trustee and director services. It is extremely important that a reputable professional firm, with experience in the establishment of trusts, is used to provide these services.

Dixcart can also assist in the incorporation and organisation of companies and can provide local management services and directors.

Introduction of Funds into the Trust

The trust Instrument will contain details of the initial settled funds.  It may show the initial settled funds of a limited fixed amount, with the bulk of the trust funds being introduced later as additional settled funds or the initial funds may comprise the shares in an existing company which holds the assets being transferred into the trust.

Many forms of international commercial operations can be carried out through a company owned by a trust.  Such operations can either be traditional trading or the development of asset values, such as property.  The company can, of course, also be used for normal investment holding activities.

Investment into a country which has exchange control regulations and taxation liabilities obviously involves complying with the regulations which apply to non-residents of that country.

Distributions from the Trust

The form that distributions to the beneficiaries will take normally depends on the tax position of the beneficiaries.  A trust can make a distribution of income or capital, or advance monies as loans. 

This is a general note.  Every individual’s circumstances are different and they should always seek independent legal advice.