Wills – Estate Planning and Trusts

What is a Trust?

The trust concept has evolved under English common law over a period exceeding six hundred years. It has been explained as “the gifting of a sum of money or item of property (the settlement) by one person (the settlor) to another person or corporation (the trustee) to be held and administered for a purpose or for the benefit of a class of persons (the beneficiaries) in accordance with specific instructions (the trust document or deed)”.

As trusts are a creation of English common law, the most suitable location for an international trust is a jurisdiction, which has English common law and equity as the foundation of its legal system.

The Power and Flexibility of a Trust

A trust may be established as either revocable or irrevocable. A revocable trust may be terminated or varied by the Settlor either at the end of a specified period or at any time. The Settlor cannot terminate an irrevocable trust nor can the Settlor vary the terms of the trust. Whether a trust is established as revocable or irrevocable will depend upon the objectives and circumstances of the Settlor.

Both revocable and irrevocable trusts may be either discretionary or fixed interest trusts. Under a fixed interest trust the interests of the beneficiaries are specifically fixed in the terms of the trust deed and the trustee has no power to vary those interests. A discretionary trust on the other hand gives the trustee the power to determine the allocation of income and capital amongst the members of the beneficiary class and to vary the membership of the beneficiary class. It is however common to provide some form of control over the trustee’s discretionary powers through the use of a Protector or co-trustee.

Why use an international Trust?

A properly structured international trust is the most flexible product available for international financial planning, particularly for the wealthy private client. International trusts are a proven vehicle for establishing the legitimate ownership of both offshore and onshore assets. They are particularly useful in regulating the succession to family wealth, and to protect assets from a wide variety of contingent risks. For residents of some countries international trusts may provide a structure through which estate duties and income taxes can be minimised.

The principal benefits to be gained from an international trust include:

  • Minimisation of tax liabilities on income derived by the trust
  • Reduction of liability to asset or wealth taxes, such as estate or gift taxes and capital gains taxes
  • Enhanced privacy and confidentiality
  • Ability to develop a flexible asset protection plan
  • Flexibility in planning of family or marital asset allocations
  • Enhanced environment for diversification of investment portfolios
  • Flexibility of income or capital distributions amongst family members
  • The flexibility of an international discretionary trust enables income to be spread amongst family members, or to be accumulated internationally according to the Settlor’s requirements. This will allow income to be distributed without the need to pass direct equity or ownership of assets to individual family members. Interim distributions of trust capital or assets may be made on a similar basis. It is usual for the Settlor of discretionary trust to provide the trustee with a memorandum expressing his wishes in regard to income and asset distribution policy of the trust. Such a document has no legal force but is an aid to the trustee when exercising its discretionary powers under the trust.
    An international trust may be used to:
  • Own shareholdings in international based corporate entities
  • Hold investment portfolios either through personal family trusts or private investment unit trusts
  • Facilitate the conversion of international income to capital
  • Hold accumulated international cash funds
  • Own life assurance policies issued on the life of the Settlor
  • Provide a mechanism for accumulation of tax effective retirement benefits under a personal or employer sponsored pension, superannuation or provident fund
  • Facilitate the tax effective accumulation of income and capital for a charitable or non-charitable purpose (a purpose trust)
  • Provide employee share ownership, medical or other benefits to expatriate and local employees on a global basis
  • Protect offshore assets and liquid onshore assets from claims against the Settlor or beneficiaries.
    For income tax and estate planning purposes international based trusts can offer significant benefits for many clients. Similarly a trust can be a flexible and protective structure for international tax and financial planning. An international domiciled pension or superannuation fund or employee benefits fund may be another tax effective form of international trust structure, particularly for executives employed overseas by global business corporations.

Why are Trusts Growing in Popularity?

The use of international trusts for asset protection planning has increased significantly over recent years. This is due to the massive escalation of risk factors that adversely affect the preservation of wealth. These risk factors include civil litigation, expropriation or nationalisation as a result of political instability, marital or family disputes, contingent creditors, mismanagement of investment or asset portfolios, and punitive estate or wealth taxes.