By Sovereign.
Most people prefer not to think about what will happen to their property on death. However, failure to make proper plans can create real problems and cause great expense (including tax liabilities) for next of kin, problems that they will be forced to sort out at a time when they are emotionally upset and most vulnerable.
Making a will is a sensible way for an individual to put his or her affairs in order. However, the administration of a deceased’s estate can be costly (often around 4% of the total value of the estate), result in long delays (normally at least one year, even for a simple estate) and very often involve a large tax bill (inheritance tax or estate duty rates are often extremely onerous).
One alternative to making a will is to set up a trust during one’s lifetime. With careful planning this can eradicate delays, costs and taxes and provide other benefits such as protecting assets from future creditors or providing anonymity. For many reasons the use of trusts as a means of holding and passing on family wealth, even for modest estates, has increased dramatically in recent years.
So what is a TRUST?
The Concept:
Unlike a company, a trust is not a legal entity. It is best described as a relationship; an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who holds the property for the benefit of specified people or objects (the beneficiaries). A trust deed sets out the terms and conditions upon which the trustees must hold and administer the trust assets. The trust deed also sets out the rights and interests of the beneficiaries.
A trust can also be created by a will but if assets are “transferred” to trustees during lifetime they should be unaffected by the subsequent death of the settlor. Another word for “transfer” is “settle”; hence the transferor of the assets is called the settlor and the trust is often referred to as a “settlement”.
Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a trustee. However, the duties of trustees have been developed over centuries through English equity and common law and are now in many cases codified in statute law. This law distinguishes between legal ownership (trust assets are held in the name of trustees) and beneficial ownership (only the beneficiaries may benefit from the assets). Further, even greater duties are imposed on professional trustees who, in reputable and well-regulated jurisdictions such as Gibraltar, for example, are required to be licensed.
Where Can I Set Up a Trust?
Virtually all low tax or zero tax common law jurisdictions have some form of trust law. Gibraltar is at the forefront of best practice development in the area of trusts and was one of the first jurisdictions to introduce the regulation and supervision of trust companies. Professional trustees must be licensed under the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC).
Gibraltar trust law is derived from English common law and the rules of equity, supplemented by certain legislation. Gibraltar’s Trustee Ordinance is based on the Trustee Act 1893. “Asset protection trusts” are also permitted although all trusts provide some element of asset protection.
Confidentiality
Regulations require trustees to know the identity of the settlor and ultimate beneficiaries of a trust. This information is kept completely confidential. Disclosure to third parties is only required in very particular circumstances and must be accompanied by a court order.
In the case of asset protection trusts, the register maintained by the Registrar of Dispositions to record the transfer of assets to asset protection trusts is closed and its contents privileged.
Taxes
The vast majority of Gibraltar trusts are set up as discretionary trusts so that beneficiaries only have a contingent interest. The beneficiaries can therefore avoid any tax liability until assets are distributed to them.
Trust income is exempt from tax in Gibraltar if the trust is established by a non-resident, has no Gibraltar beneficiaries and derives no income locally (other than bank interest). The terms of the trust must expressly exclude Gibraltar residents from being beneficiaries.
Asset Protection Trusts
Asset protection trusts (APTs) are permitted in Gibraltar. These must be registered with the Register of Dispositions and require that:
The settlor is an individual
The settlor is not insolvent at the time of the disposition
The settlor does not become insolvent in consequence thereof
The disposition is registered.
If these requirements are satisfied the disposition will not be voidable by any creditor of the settlor and the application of the Fraudulent Conveyances Act and the Bankruptcy Ordinance are excluded.
Only professional trustees licensed by the FSC can act as trustees of APTs and an application fee of £300 is payable upon registering the trust and £100 is payable annually to maintain the registration.
So What Are the Main Advantages of a TRUST?
Trusts can be very useful means of tax planning. They can be very flexible, even the settlor can continue to benefit from the trust assets, and have many other advantages including:
Asset Protection
All trusts provide some element of asset protection but specifically see APTs above.
Tax Planning
A properly established trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.
Avoiding the Expense and Delays of Probate
In common law jurisdictions the need to obtain a grant of representation (probate or letters of administration) before a deceased’s estate can be wound up and distributed can cause delay, expense, unwanted publicity and upheaval.
Confidentiality
There is no public register of trusts or trustees. The ownership of trust assets can remain entirely confidential in most circumstances.
Avoiding Forced Heirship
Forced heirship is a particular problem in continental Europe and other civil law jurisdictions, as well as in countries of Islamic tradition. A trust can be used to overcome forced heirship claims.
Estate Planning
Many settlors prefer to make complex arrangements for the distribution of their assets. They may wish to provide a source of income for a spouse or make provision for the education of children. A trust is a very convenient and flexible method of making such arrangements.
Protecting the Weak
A trust allows a person to provide for those who may be unable to manage their own affairs such as infant children, the aged or persons suffering from certain illnesses.
Preserving Family Assets
Preserving family assets against mismanagement or spendthrifts is a common motivation for establishing a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not dissipated or divided up but is preserved as one fund. The fund can then accumulate further with provision for payments to members of the family as necessary, preserving some assets for later generations.
Continuing a Family Business
A settlor may want to ensure that the business he has built up will continue after his death. If the company shares are transferred into a trust prior to death the unnecessary liquidation of the family business can be prevented.
If family members have little business experience, the trustees could be instructed to retain the shares, keep the company running and provide payment to members of the family from dividend income.
Flexibility
A discretionary trust can provide a structure that is capable of rapid change as circumstances demand.
Property Holding
A portfolio of international property can all be held under one single Trust. In some circumstances, depending on local laws, a “local company” may be required to sit under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai property, and have a Trust acting as a shareholder of the company).
