Why Establish a Trust?
Trusts can play an important role as vehicles for estate planning, asset protection and tax mitigation. While China's nascent trust sector will likely see growth in the future, major offshore trust jurisdictions such as Bermuda, the Cayman Islands and Jersey already have well established trust industries, and offer high net worth individual's stable and dependable environments in which to create trusts.Major offshore trust jurisdictions also offer experienced professional trustees who specialize in providing trust and trust-related services and can provide practical and efficient advice.
Understanding Trusts.
A trust is a legally binding arrangement in which a person (the settlor) transfers assets to another person (the trustee), who becomes the owner of the assets and is obligated to administer them in a specified manner for the benefit of specified persons (beneficiaries).
Estate planning is the primary reason for establishing offshore trusts. Trusts can be used to hold assets in a way that allows families to consolidate their worldwide wealth in a single coherent structure that allows long-term ownership and does not depend on a particular individual.
Establishing offshore trusts may also help in asset protection, as assets in a trust are legally registered to the trustee not the settlor; in this way, offshore trusts can shield assets from potential creditors. In addition, offshore trusts can also help minimize estate taxes and shift income tax burden to beneficiaries, who may be in lower tax brackets.
In considering where to establish offshore trusts, it is helpful to familiarize with the regulations governing trusts in different offshore jurisdictions. Below is a selective guide to the main provisions affecting trusts in key offshore locations.
Bermuda.
In Bermuda, trusts can be set up as soon as a trust document is signed and the settlor transfers property to the trustee. In addition, trusts set up in Bermuda do not have to be registered, except for trusts that have assets that include Bermuda land.
There is no requirement for trustees to be resident in Bermuda and there are no restrictions on who may act as a trustee. It is recommended, however, that Chinese who plan to create a trust in Bermuda have at least one trustee who is resident in Bermuda to ensure that Bermuda courts will accept jurisdiction over the trust should the need arise.
Generally, no tax is levied on Bermuda trustees if the trust they administer holds non-Bermuda currency or non- Bermuda real estate assets. According to Bermuda's Stamp Duties Amendment Act of 2008, however, trusts that contain Bermuda-assets such as real estate or local currency do incur stamp duty.
Cayman Islands.
There are no specific procedures or regulatory requirements needed to establish trusts in the Cayman Islands; trusts can be established as soon as the settlor and trustee have executed the trust document and the settlor has transferred the initial trust property to the trustee. Setting up trusts in the Cayman Islands does not require a resident trustee, and there are no restrictions on who may act as trustees.
There is no direct taxation in the Cayman Islands, so neither trustees, nor settlers nor beneficiaries are charged income tax, inheritance taxes or other taxes on trust income, regardless of whether or not they are resident in the Cayman Islands. The only fee levied on most trusts is an approximately $50 duty that is payable whenever a trust is established. For further protection, a trust can be registered as an "exempted trust," which means that for a period of up to fifty years, no law enacted in the Cayman Islands imposing any income capital or taxes will apply to any property comprised or income arising under the trust. Only trusts with no beneficiaries in the Cayman Islands can be registered as exempted trusts.
Cook Islands.
Trusts established by foreigners in the Cook Islands have to be registered. An application for registering a foreign trust must be made by a Cook Islands licensed trustee company and usually takes a day to complete after the parties to the trust agree to the terms of the trust and provide all the information needed. The fee to register a trust is $200, which is the same amount of money required for the annual renewal of a trust's registration. Fees charged by licensed trustee companies to register the trust will vary according to the rates of each trustee company.
Foreign trusts established in the Cook Islands should have at least one trustee that is a Cook Islands licensed trustee company, a Cook Island company or a foreign company registered in the Cook Islands. There are no restrictions on having non-resident trustees as long as they act alongside one of the types of trustees mentioned above.
As along as a foreign trust establishedin the Cook Islands maintainsits registration as a foreign trust, any foreign trustee and all other parties to the trust will not be subject to any form of taxation. Cook Islands residents are liable to local taxation if they receive a distribution from a Cook Islands trust or from a trust established anywhere else.
Guernsey.
In Guernsey, trusts may be created through a declaration by the trustee or through an agreement between the settlor and the trustee. Trustees in Guernsey do to have to be registered unless they are professional trustees and there are no restrictions on having nonresident trustees.
Although there is no expressrequirement that private trusts be set up in writing, this is the usual practice in Guernsey. According to the Guernsey Charities and Non-Profit Organizations Law of 2008 charitable trusts have to be registered with the Guernsey Director of Income Tax and certain details about them will be made publicly available. Charitable trusts are not required to be registered if their capital is less than £10,000 ($16,126), their income is less than £5,000 ($8,063) or they are administered by institutions that are under the regulation of the Guernsey Financial Services Commission. All charitable trusts that wish to solicit donations from the public must be registered.
Guernsey residents are liable to income tax on trust distribution on a receipts basis. When the whole of the income of a trust is payable to beneficiaries resident outside Guernsey, the tax liability of the trustee is restricted to t rus t income that comes f rom Guernsey, apart from Guernsey bank interest. In cases in which one or more beneficiaries are resident in Guernsey, the tax liability of the trustees is restricted to income to which the beneficiaries that are resident in Guernsey are entitled.
Hong Kong.
Trusts are private arrangements under Hong Kong Law. Hong Kong trusts are therefore not registered and entering into trust arrangements only requires the agreement of the settlor, the trustee and any other parties involved. There are no requirements related to the residency of a trustee in Hong Kong and no other restrictions as to who may act as a trustee.
Hong Kong does not tax capital gains and does not levy gift tax; therefore, trusts holding mainland assets established by mainland residents in Hong Kong have no tax liability. There is, however, a stamp duty imposed on the transfer by gift or sale of Hong Kong real estate and on Hong Kong securities. This stamp duty may be levied on mainland trusts that hold Hong Kong assets.
Isle of Man.
There are no registration or maintenance requirements for the setting up of trusts in the Isle of Man. All that is required is the imposition of trust terms on identifiable property, meaning that a trust is usually constituted as soon as property is transferred to the trustee. However, charitable trusts should be registered with the Isle of Man General Registry, trusts that receive taxable income should be registered with the Income Tax Division and trusts that are may be levied on mainland trusts that hold Hong Kong assets. Isle of Man There are no registration or maintenance requirements for the setting up of trusts in the Isle of Man. All that is required is the imposition of trust terms on identifiable property, meaning that a trust is usually constituted as soon as property is transferred to the trustee. However, charitable trusts should be registered with the Isle of Man General Registry, trusts that receive taxable income should be registered with the Income Tax Division and trusts that are pension schemes should be registeredwith the Insurance and Pensions Authority.
Manx law does not require trustees to be licensed or registered in the Isle of Man in order for a trust to be valid. In addition, there is no general rule prohibiting non-resident trustees under Manx law.
Non-Manx resident trustees and Manx resident trustees are not liable to tax on non-Manx source income that is distributed to non-Manx beneficiaries, but they may be liable to taxation on Manx source income. Taxes may also be imposed when the beneficiaries of a trust include Manx residents.
Jersey.
There is no requirement under Jersey law to register trust documents. As such, trusts in Jersey may be established by means of a written declaration signed by the trustee alone without the requirement that the settlor appear as a party to the instrument.
All income from outside Jersey that goes into a trust is tax exempted. In addition, Jersey levies no gains, gift or inheritance tax or any other form of capital taxation on trusts. However, when a Jersey resident receives income from a trust, the individual will be assessed Jersey income tax.
In Jersey, a settlor maybe a beneficiary, and in certain circumstances, also act as a co-trustee of the trust. A settlor may not be the sole trustee or the sole beneficiary of a trust.
Malta.
Trusts in Malta can be created through verbal or other agreements. There are no Maltese statutory restrictions, no formalities and no registration requirements related to the setting up of a trust, meaning that trust can be set up with relative ease.
According to Malta's Trusts and Trustees Act, which was extensively amended in 2004, a trustee is allowed to be a beneficiary of the trust the trustee administers, as long as the trust has other beneficiaries. Trustees are not entitled to make a profit out of being a beneficiary, however, and should avoid situations giving rise to a conflict of interest.
Under Maltese law, there can only be two kinds of trustees: professional trustees that have the authorization of the Malta Financial Services Authority and private trustees, who are persons related to the settlor or who have known the settlor for over 10 years. Although private trustees do not need authorization from the Malta Financial Services Authority, they are required to use the services of a depository notary to hold the records of the trusts that they administer. Persons who are licensed to act as trustees in another jurisdiction do not have to obtain additional licensing in Malta; all they have to do is to notify the Malta Financial Services Authority of their intention to act as trustee in Malta at least 45 days prior to commencing their trusteeship.
Malta's Trusts and Trustees Act also recognizes and gives effect to trusts established according the law of another country.
New Zealand.
No form is required when creating a trust in New Zealand except for trusts that have land or property assets, in which case the trust must be recorded in writing.
There are no licensing requirements for New Zealand trustees and there is no restriction on having non-resident trustees of a New Zealand trust. However, at least one trustee must be a New Zealand trustee.
New Zealand's Income Tax Act of 2007 stipulates that a foreign trust is a trust whose settlor is not resident in New Zealand in the period between when the trust is set up and when the final distribution is made. A trustee of a foreign trust is not liable to pay tax on the overseas income of the trust. A trustee of a domestic trust is liable to pay tax on its worldwide income, however.
Significantly, though, havinga beneficiary that is or might become a resident of New Zealand does not compromise the tax neutrality of a foreign trust. New Zealand law also allows for settlers to become beneficiaries of trusts once the trust has been established.
New Zealand law allows for trust arrangements in which there are custodian trustees and managing trustees. Such arrangements can be useful for Chinese settlors, who can appoint a custodian trustee on an "execution only" basis in which they implement instructions given to them by managing trustees based in mainland China. Provided that the settlor remains outside New Zealand, the trust could still be regarded as a New Zealand foreign trust and retain its tax neutrality in New Zealand.
US.
It is fairly easy to establish trusts in the US, as all that is needed is a settlor, a trustee and the terms of the trust. Trusts do not have to be funded by the settlor at the time that the trust is established, and trusts do not need to be registered or filed in any office at the time of their formation.
Trustees of US trusts must be US residents. Non-US residents can only serve as co-trustee with a US resident. There are no other restrictions on having non-resident trustees.
Taxation of a trust and its beneficiaries in the US depends on whether or not the trust is considered a US trust or a foreign trust and whether or not important decisions related to the trust are made by a US citizen or resident. US trusts are subject to federal income tax and state income taxes on worldwide income. A foreign trust is subject to federal tax only on income from US sources.
For US tax purposes, a trust is treated as a US trust only if the trust is established in the US and if substantial de c i s i ons o f the t rus t inc luding distribution arrangements are made by a US citizen, a person who has applied for permanent residency in the US or if a person has been present in the US for at least 183 days over the past three years, including 31 days in the current year.
Until an individual becomes a US resident for income tax purposes, he or she is not taxed on the contributions he or she makes to the trust using non-US income. As soon as he or she becomes a US citizen or resident, however, the individual will be taxed on contributions to the trust, regardless of whether or not he or she receives any distributions from the trust and regardless of the source income of the trust.
Chinese citizens who choose to take up US citizenship can reduce taxation by ensuring that they have little or no de facto control over decisions related to the trust. If a trust is set up in a way that the settlor up can decide to change the distribution of the trusts, to control investment and to remove and replace a trustee, then the trust would be considered part of the settlor's estate and estate taxes will be levied on it.
Those who retain Chinese citizenship will pay the least taxes on their US-based trust, but some taxes will still be levied on distributions from the trust made to US citizens or residents. To avoid income or gift tax to a trust's beneficiaries, the trust should be set up in such a way that specific property will be distributed to beneficiaries at some point in the future, distributions are paid to beneficiaries in no more than three installments or the trusts' rules state that the distributions can be made from sources of income outside the trust.
