What Is A Trust?
A Trust is a legally acknowledged and binding arrangement whereby a person (or a number of people), known as the Trustee or Trustees, become the legal owner(s) of assets transferred to them by a Settlor or Settlors but only in as much as they are holding those assets for the benefit of another person or people, known as the Beneficiary or Beneficiaries.
The assets which are placed into a trust are called Trust Properties and can include anything which can be legally transferred such as:-
- Cash
- Securities
- Property
- Boats
- Cars
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- Antiques
- Copyrights
- Land
- Pension Funds
- Complete Companies
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In our experience cash (bank accounts), property and trading companies are the three most common assets to be placed in offshore trusts, for obvious reasons.
Although a trust can be a verbal agreement and implied by law, i.e., your words and actions are legally acknowledged by previous, similar precedents, it is far more common for a trust to be established by way of a written document called either a Deed of Trust or Declaration of Trust. This document describes the trust and details how it is to be administered and for who's benefit.
The person giving assets to a trust is known as the Settlor and is commonly named in the Trust Deed, but, depending upon the jurisdiction where the trust was established, not necessarily so. It is therefore quite possible to give assets to a trust anonymously (in the sense that you don't want to be linked as having given your assets to 'your' trust). This feature of certain trusts is regarded by many as one of the most valuable, for implemented correctly it can enable someone to appear to be of only modest means yet live a luxurious lifestyle, the 'trappings of wealth' all belonging (ultimately) to a trust with no legal connection to that person. Great care must be taken in such instances since otherwise tax authorities tend to 'see through' the trust and tax you accordingly - it can be mighty hard to disprove such a 'connection' with a trust!
When either periodic or terminal payments are made from a trust to either a person or people named in the Trust Deed, the recipient(s) are known as Beneficiaries, i.e., they benefit from the trust.
Background & History
Most countries have one or other of two basis for their laws, either CIVIL law, historically derived from an early Roman concept, or COMMON law, derived from an early English concept where trusts can be traced back as far as medieval times.
In countries where civil law rules, trusts are either very uncommon or are not legally recognized, thus making Offshore Trusts of great importance in tax avoidance and asset protection to residents in those countries. Common law countries recognize trusts quite freely, indeed many trusts are established 'onshore' for asset protection or inheritance purposes. However Offshore Trusts still play a significant part as far as residents of common law counties are concerned, for they are ideal vehicles for tax avoidance.
Offshore countries, with their liberal taxation laws and strict non-disclosure arrangements (usually by way of not even knowing) are ideal bases for trusts of all kinds. Some offshore jurisdictions will allow nominee Trustees, will allow assets to be settled into a trust after it is formed to protect the identity of the Settlor and the type and value of the assets placed in trust, will allow trusts to have an indefinite life (most jurisdictions insist on a specific life span for a trust) and will allow Beneficiaries to be un-named and left to the discretion of the Trustees (see next section). Indeed it is not unknown for some enlightened jurisdictions to ensure that their laws over-ride the laws of the Settlor's and/or Beneficiaries' country in any trust matters.
Types of Trusts
Beneficial Trusts
A Beneficial Trust is one in which the Beneficiaries are specifically named in the trust document, i.e., 'John Smith will receive the sum of US$100,000 on his 25th birthday'. Whilst beneficial trusts can be of value for asset protection and perhaps inheritance tax purposes, because there is a specifically named beneficiary (or several), they are all but useless for tax planning and privacy purposes, the Revenue Authorities in the country of residence of the beneficiary will soon become aware of the 'inheritance'.
Discretionary Trusts
If a beneficiary is named in a trust document, or if the beneficiary is clearly also the Settlor, Revenue Authorities tend to 'look through' such trust arrangements and regard the beneficiaries as the owners of the trust assets and income. Thus it is quite feasible that beneficiaries can be taxed on assets or income which they never own or receive - simply on the basis that the could be the owner!
To get round this problem, what are called Discretionary Trusts were established. These are arrangements where the actual beneficiaries of the trust are at the absolute description of the trustees. Since no specific beneficiaries are named in the trust document, revenue authorities cannot tax any potential beneficiaries since there is no way of knowing when, or even if, they will benefit from the trust, although tax is (in theory) payable on the receipt of the proceeds of the trust by a specific beneficiary. But you wouldn't be so foolish as to have any distributions from the trust made over directly to you anyway would you? Do so via an offshore account or via an offshore company linked to the trust. We will advise fully on such structures, including ideas such as using credit/debit cards for drawing cash 'onshore' from an offshore trust.
OFFSHORE DISCRETIONARY TRUSTS ARE, IN OUR OPINION, ONE OF THE MOST VALUABLE TAX AVOIDANCE VEHICLES AVAILABLE.
Offshore Asset Protection Trusts
An Asset Protection Trust is little more than a specific type of Discretionary Trust and, as its name implies, is generally used by either private individuals or corporations to hold their assets in a form which makes them untouchable under any court order imposed against them. Very common in the U.S.A., correctly formulated and held Asset Protection Trusts are showing signs of resisting attacks by creditors far better than Family Limited Partnerships which are widely promoted and frequently far more expensive. www.Finor-Group.com has a complete section dedicated to Asset Protection Trusts in this page.
Trust Structure & Administration
A Trust, whether onshore or offshore, and of any type, has a number of component parts, several of which have already been mentioned, but for the sake of completeness, we'll summaries them again here. In essence these are very simple and straightforward, although the Deed itself is a complex legal document and must only be written and modified by someone with detailed, in depth, understanding of the trust laws of the chosen jurisdiction. The major components of a trust (of any type) are:
- The Settlor (Grantor). This is the person or entity who formulates the trust and who settles his assets into the trust.
- Deed of Trust (Trust Document). This is the legal trust document itself and contains all the permutations and combinations of what the trust and its controlling Trustees can and cannot do according to both the wishes of the Settlor and the laws of the jurisdiction where the trust is written.
- Trust Property (Assets). The assets which the Settlor places into the trust from time to time. Depending on the type of trust, settled assets do not need to be specified in the initial Deed of Trust but may be added later.
- Trustee(s). The named individual, individuals or company appointed by the Settlor to administer his wishes according to the Deed of Trust. Frequently a professional Trust Agent within the jurisdiction of the trust, the Trustee has absolute control over the trust assets.
- Beneficiary. The person or persons to whom the Settlor wishes the trust assets or income thereof to be paid to according to circumstances dictated in the Deed of Trust. Depending on the type of trust, Beneficiaries do not need to be specified in the Deed of Trust, but can be made known to the Trustees privately.
- Protector. A Settlor can name a third-party individual to 'oversee' a trust to ensure that the Trustee is administering the trust according to his wishes.
- Letter of Wishes. A Settlor can write a Letter of Wishes alongside a Deed of Trust which spells out exactly what actions he wishes the Trustees to take under differing sets of circumstances. This Letter is totally private between Settlor and Trustee and whilst not legally binding, is an excellent guide for a Trustee to follow, especially if the Settlor is no longer in contact with the Trustee for any extended period.
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Obviously for any form of trust to work efficiently and effectively and be secure, the Settlor must have absolute faith in the Trustees, otherwise a Trustee could simply run off with the trust assets, name friends and relatives as beneficiaries or invest trust assets in a totally reckless way. There are a number of safeguards in this respect and trustees worldwide will observe both written and unwritten rules:
- Firstly, in all the offshore jurisdictions were we have handled trust work, Trustees have to be licensed by the government to carry out trust work, and these licenses are usually only given out to highly reputable and established organizations such as lawyers or accountants - if a Trustee was ever even suspected of misconduct it would be the end of his business career. To our knowledge there has not been a case of misappropriation of funds by a Trustee in over 20 years.
- Secondly, when a trust is established, the Settlor can prepare a 'Memorandum of Wishes' ('Letter of Wishes'). This document, which may be changed at any time, expresses the Settlor's wishes concerning the management and distribution of the trust. Whilst not legally binding, a Memorandum of Wishes is usually the major guide a Trustee has, and is usually observed to the letter unless there are very B and over-riding considerations which prevent a Trustee doing so. In this event, and offhand we can't think of one, the Trustee would return to the Settlor for instructions.
- Thirdly, it is also possible to appoint a Protector or Guardian to oversee a trust and control the powers exercised by the Trustees, however there are potential problems with tax authorities here, since the appointment of a protector could be construed as a thinly veiled attempt by a Settlor to influence the Trustees to his advantage.
- Finally, TCI Trust laws make specific provision to allow the Settlor, under the written authority of a Power of Attorney given by the Trustees, to act effectively as a Trust Manager. This can have major advantages for a Settlor who wishes to have tight control over a Trust and is reluctant to let any Trustee have total control..... But, and it is an important but, whilst legal under TCI law, this provision is regarded by most major tax authorities as making the trust a sham and thus giving them full legal rights (in their eyes anyway) to disregard it and over-ride its provisions and protection. Having said that, this Power of Attorney is a totally private document between the Settlor and the Trustees and if used wisely and carefully can be a very valuable tool in offshore asset management.
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General Summary
Offshore Trusts can be valuable vehicles for tax avoidance, either in a personal or a corporate role, as offshore companies can be. There are many cases where a combination of the two can be used for both tax avoidance on worldwide company income plus a means of ensuring that all those profits are centralized and can be inherited, again free of tax, by your heirs or other named people. To recap:
- Protection Against Capital Gains and Inheritance Taxes
- Protection of Assets against Bankruptcy and Creditors Generally
- In the U.S.A. Particularly, Protection Against Civil Asset Seizure
- Protection Against Alimony and Maintenance Claims
- Protection Against Law Suits for Negligence and Claims for Damages
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Setting Up Your Trust
We usually employ Belize, the Cook Islands, Panama, or the Turks & Caicos Islands for the majority of our Trust work, the legislation there being amongst the most comprehensive in the world. These Offshore Trusts are totally private, the Trust document does not have to be registered and there is no public inspection, there is no taxation of Trust income and assets can be settled after a Trust is formed and Trusts established within the above mentioned jurisdictions are governed by local law, one of which is that it can over-ride that of other countries, i.e., a 'foreign' court order that a Trust (or Trustee) should be liable for payment of damages will be overturned by the High Court of the concerned jurisdiction.
Offshore Trusts are very personal arrangements and we must have detailed information on the purpose of the trust, its Settlor, assets being transferred and the beneficiaries (if any) before we can form one. Rest assured however that any details provided will be TOTALLY CONFIDENTIAL and all details of you and your trust are held offshore themselves.
Please e-mail us if you would like further details on our Offshore Trusts, or of Panamanian Foundations, a similar type of legal structure but based on Panamanian Civil Law.
Offshore Trusts - Costs
Because of the very individual nature of trusts, we are unable to give specific Trust Formation costs at this stage, but FINOR's 'standard' Offshore Asset Protection Trust starts at under US$1,250.00. We would point out that the vast majority of Trusts we execute are 'standard'.
In addition, an annual Trust Maintenance Fee is payable to Trustees, which starts at around US$700.00 for a standard trust, however there are ways of reducing this substantially (down to US$300.00) by the Settlor acting, under a Power of Attorney, as a Trust Manager on behalf of the Trustees - an option we find utilized by over 50% of our Trust Clients. If the Settlor appoints his own Trustees, there is of course no annual Trustee Fee payable to www.Finor-Group.com.
We also have a number of standard 'Offshore Asset Protection' packages available. These packages are formulated to meet the requirements of the vast majority of clients and, as an illustration, would typically cost US$5,000.00 for a complete Offshore Asset Protection package including a Panamanian Foundation, an Offshore Trust, and an International Business Company coming with Bearer Shares, Corporate Nominee Administrators, a reference-free Offshore Bank Account with encrypted 24 hour electronic account management from any PC and an International ATM Debit Card. This package price includes all formation and incorporation costs together with all the first year company and trust management fees and represents a saving of over US$5,000 on the market price. Please contact us for further information.
Please bear in mind the privacy, financial security and freedom from taxes that an International Fiduciary Structure can bring - those are worth many times the cost!
Offshore Trusts - Asset Protection Trusts
'Onshore' Trust Problems
We have already mentioned some of the major problem areas relating to the use of Asset Protection Trusts created within the home jurisdiction. To recap, these are the high risk of compromising and penetration of both home country (domestic) Asset Protection Trusts, Family Limited Partnerships and Limited Liability Companies by the courts, especially in the U.S.A.
The main problem with a domestic APT is that in order for a Settlor to enjoy the full benefit and security of the Trust, he must renounce control or benefit from the Trust absolutely. If you are both Settlor and Beneficiary, you are leaving yourself wide open to claims by your creditors that the Trust is a sham and you are willfully seeking to defraud them.
The courts will rapidly see through such a situation and the Trust will be declared a sham and nullified. With a domestic APT you cannot safely have your cake and eat it!
'Offshore' Trust Answers
The answer to these problems can be solved by the careful use of an Offshore Asset Protection Trust. We say 'careful' however since it is still of vital importance that two major criteria are met. These are:
In this context, jurisdiction means the authority to administer justice in a specific geographical area. A correctly structured OAPT in the correct jurisdiction will be totally beyond the reach of the US courts. Comity means that the courts in one jurisdiction, even if unconnected politically with another country, will recognize and accede to a ruling made in the courts of another country. It is therefore vital that the OAPT is located in a jurisdiction where this does not apply. The offshore jurisdiction must both be able to (and do) turn round to the US courts and say "this is not our concern, there is no jurisdiction here, we do not recognize and will not implement your ruling".
Advantages
There are therefore many advantages to placing assets in a correctly structured Offshore Asset Protection Trust.
The very fact that your assets are legally held in an offshore jurisdiction outside the control of the courts makes them an unattractive target to creditors. Just imagine the hurdles that face a creditor in commencing a legal action in a jurisdiction perhaps thousands of miles from home against an entity that according to the laws of that jurisdiction has done no wrong.
It may be relatively easy for the creditor to get the Settlor into a court and have a satisfactory judgment pronounced, but being able to action and enforce that judgment in a foreign court and pursue the assets is a very different matter.
From experience, the more 'modern' offshore jurisdictions have state-of-the-art Trust legislation which has been designed knowing what may face it yet at the same time be 'Settlor friendly'. There are a number of such jurisdictions scattered about the globe, but it does pay to examine each in turn.
Jurisdictions?
Having made the decision to establish an OAPT, you must search for a suitable jurisdiction that meets your criteria.
By asking the right questions now you can, no, you will, save major difficulties later on. These questions include:
- What is the relationship with my home country?
A Settlor might decide to use a suitable offshore jurisdiction as physically far away as possible to place yet another barrier, albeit psychological, between himself and his creditors. Others might decide that for convenience, one 'just down the road' would suffice.
Always remembering the situation as regards comity between the chosen jurisdiction and 'home', there is no real 'better' here, but each Settlor must reach a decision based on the balance of convenience against psychological difficulty.
- How much is privacy and confidentiality respected?
Many Settlors will face their creditors and relying on the legal strength of their Trust say "This is where my assets are held, and these are the laws protecting them. You cannot touch them". Others will be as unhelpful and as secretive as possible.
Whichever, you must be certain that the jurisdiction your Trust is executed in will not reveal any detail about your Trust arrangements to anyone.
- What if I move or need to change the jurisdiction of my Trust for any reason?
Although it may be unlikely that you will ever need to change the jurisdiction of your Trust, you must ensure that should the need ever arise, you can do so. Such eventualities could be beyond your direct control such as a change of government in the Trust jurisdiction, which then shows signs of becoming 'friendly' with your home country and there being comity with your local courts.
There are also a number of smaller but never the less equally important questions to ask:-
- Is the jurisdiction stable?
- Is there a language problem?
- What are communications like?
- What are the legal and financial support services like (important if you link your Trust with an offshore company)?
- Can I make use of other offshore services in the jurisdiction?
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As good as they may be in many instances, domestic APTs, Family Limited Partnerships and Limited Liability Companies all have major drawbacks when it comes to the ultimate security of assets in a (especially US) court case.
The establishment of a correctly structured OAPT, whilst at first a daunting thought due perhaps to a different language and certainly due to an unfamiliarity with a foreign legal system, can bring major advantages.
There is such a mystique surrounding OAPTs that it can come as a surprise to many to find that whilst a 'do it yourself' approach is fraught with potential problems, there are a number of organizations, usually offshore based themselves, who are only too willing to help.
What Next?
Once you have decided to adopt the OAPT route, it is necessary to make the decision about which jurisdiction to write your Trust in, who to appoint as Trustees and whoto write and execute the Deed of Trust. There is also the cost factor to consider, for although many Trusts shelter funds running into millions of dollars, there is a perception that Offshore Trust formation and management costs can also be sky high - a perception unfortunately propagated by many companies within the Trust business as justification for their high profits.
Through their experience in handling a considerable number of OAPTs for clients, www.Finor-Group.com has evolved a virtually standard Deed of Trust. This document, suitable for over 95% of all OAPTs, is easily customized to individual Settlor's needs and is in full compliance with the latest Trust Ordinances of Belize, the Cook Islands, Panama, or the Turks & Caicos Islands, the jurisdictions ideally placed (yet legally remote) for OAPTs for international clients.
Experience in establishing Trusts in many offshore jurisdictions has resulted in much comparison between those jurisdictions, and Belize, the Cook Islands, Panama, and the Turks & Caicos Islands come close to the top of the league in the majority of cases.
How Much?
- Basic OAPT Fee.
A Trust can be an expensive thing to write and manage, however www.Finor-Group.com Standard OAPT, which is suitable in over 95% of Client's cases, costs a fixed sum of just $1,595.00. For this, the Client will get a customized Deed of Trust written and executed in strict compliance with the latest Trust Ordinance of the concerned jurisdiction. There is obviously a limit to the amount of customizing we can undertake within a fixed price trust, but standard variations of names, beneficiaries, trust assets etc., are all accommodated. What is not included are any variations to the legal terms and conditions, since any changes here will need to be verified for legality by our Trust Lawyer. Such work is at a standard rate of US$150.00 per hour.
The Trust will be named, assets will be scheduled, Beneficiaries detailed and local Trustees appointed, although the Settlor may, if he so wishes, appoint his own in a different jurisdiction. In addition, and included in the price, a summary Letter of Wishes outlining the Settlor's directions for the management of the Trust will be written.
2. Annual Trustee Fee.
Totally dependent on the amount of Trust Management required, there will be an annual Trustee Fee, which starts at $850.00 for a simple Trust. This fee is not payable should the Settlor provide his own Trustees and may be substantially reduced to around $450.00 should the Settlor opt for the Trustees entering into a Power of Attorney appointing the Settlor himself as Trust Manager. As previously mentioned, this option, whilst generally legally valid in principal, has potential dangers which would be discussed with Clients on an individual basis.
3. Trust Bank Account - optional but highly recommended.
As an additional but optional extra, FINOR GROUP. will also open an offshore bank account for the Trust. These accounts, which can include a secured credit or ATM debit card where required, will cost between US$300 and US$800 depending on bank and jurisdiction. Full advice is given to Clients.
4. Associated Offshore Companies - optional but highly recommended.
Finor Group will also discuss with Clients the possibility of linking their Trust to an Offshore Company should the Client so wish - most Clients who request us to execute either a Discretionary or Asset Protection Trust do so in conjunction with an Offshore Company. This would be discussed on an individual Client basis but the costs would start at around $1,00.00. For example, please see our 'BVI Companies' section for further details of the benefits of BVI companies.
Summary
There are several forms of domestic Trust and other legal entities that have been tried over time in order to protect the assets of those liable to court action. None has proved totally reliable, but the use of an Offshore Asset Protection Trust comes closest by far.
Correctly formulated, written and executed, an OAPT can enable a Settlor to have the best of both worlds. To divest himself of his assets to a Trust which is unlikely to be attacked through the US courts and to be able to still enjoy the benefit of those assets during his and his heir's lifetimes.
An OAPT is a highly specialised entity, which requires a first class knowledge and experience of both the legal framework and the specific Trust Laws of the jurisdiction involved. As such, the writing of OAPTs is best left to experts, and none come more recommended than www.Finor-Group.com.
