Trusts remain an attractive vehicle for high net worth individuals internationally and it is the flexibility they offer that keeps them at the forefront
Due to the versatility of trusts as a financial planning tool, they are attractive to high net worth individuals whose interests and families are often worldwide.
Before broadly looking at how trusts are used to best serve international families, it is worth revisiting just what trusts are.
In its simplest form a common law trust is a relationship established by an individual (the settlor), transferring assets to a third person or company (the trustee) to hold those assets in his name only for the benefit of a third party or parties (the beneficiaries) under the terms of a document, known as a trust instrument.
The key characteristic of the trust relationship is that legal title and beneficial title of the trust assets are separated. In other words, the control, management and possession of the assets are distinct from the enjoyment and use of the assets. Also, the assets no longer form part of the settlor's personal estate, nor do they form part of the estate of the trustees or beneficiaries.
In addition, depending on the type of trust, the beneficiaries may have no fixed interest in the trust assets, but only a hope that the trustee will, during the trust period, consider a distribution in their favour. When the settlor dies, the trust assets do not form part of the deceased estate but are managed by the trustee for the trust period. Finally, under the terms of the trust instrument, rights to income and capital in the trust assets to certain beneficiaries can be separated.
These characteristics of the trust relationship ensure that trusts are attractive to international clients and their advisers for a number of reasons.
Opportunities exist, for example, for tax advisers internationally to capitalise for their clients, on the fact that the legal title to the assets is held by the trustees. This may be even more beneficial if the trustee is based in an offshore or low tax jurisdiction.
In terms of a discretionary trust, the assets are protected from the creditors of the beneficiary, the trustee and the settlor because the beneficiary only has a hope of a distribution in his favour and no right or entitlement to the trust assets and the assets no longer belong to the settlor, or fall within the estate of the trustee.
Depending on professional advice, opportunities do remain for international clients to use trusts for succession planning. For example, as opposed to a trust established as a result of a will, a trust settled during the lifetime of the settlor affords the settlor the advantage of ensuring before his death that the trust structure is suitable for its purpose. Further, as the trust assets do not fall within the estate of the settlor, it allows for the trustee, depending on the terms of the trust instrument, to manage the properly structured trust assets in relative safety for future generations.
Trusts are also often used as a succession planning tool by individuals resident in forced heirship jurisdictions. For example, to ensure family members, who may be excluded from inheriting due to the succession laws of that particular jurisdiction, are provided for.
International high net worth clients with assets based in various jurisdictions also often prefer to use trusts to avoid proving probate in multiple jurisdictions or to avoid the cost, publicity and, often, delay caused during the administration of the probate proceedings.
Trusts are used by international high net worth individuals to preserve family wealth for future generations and as a mechanism to prevent later generations from diminishing family wealth.
For high net worth families with significant wealth, private trust companies are used as an alternative to measures used to provide settlor or family control post establishment of the trust.
In its essence a private trust company is a special purpose vehicle which does not solicit business from the public and has as its purpose the provision of trustee services to a specific trust or trusts. The settlor and/or members of the family are further able to act as directors of the private trust firm.
Trusts are also used to protect spendthrift beneficiaries from their own vices or to provide for beneficiaries who are unable to provide for themselves due to mental or other disabilities.
The trust concept has also been applied in a different way in certain jurisdictions. For example, in South Africa, due to the historical development of the law, it differentiates between onshore trusts created while the testator is alive and trusts created by will. A trust created while the settlor is alive is seen as a contract for the benefit of a third party (Stipulatio Alteri). A will trust, on the other hand, is not a contract as it is created by the formalities prescribed in the wills, and the administration of estates laws applying in South Africa must be followed as opposed to the formalities applying to a valid contract.
The trust law is therefore based on contract rather than equity as it is with common law trusts. Further, at common law a trust is not recognised as a separate legal person whereas South African law has recognised a trust to have a separate legal existence. However, the uses of trusts in South Africa are similar to that of common law trusts. Trusts created while the testator is still alive are mainly used for, among other reasons, estate planning purposes to avoid the payment of inheritance taxes or estate duty and the protection from creditors. Trusts are also commonly used in South Africa for structured finance transactions or as holding entities for trading companies.
In France, Spain, Muslim countries and other countries or states where laws of forced heirship apply, residents use offshore trusts to avoid the implication of the forced heirship laws in an endeavour to achieve testamentary freedom.
On the other hand, forced heirship laws have created a business growth opportunity for other jurisdictions. Jersey, for instance, has recently amended it trust law to protect the transfer of assets which could be in breach of forced heirship laws in the original jurisdiction in order to attract residents from these jurisdictions as clients.
Best protection in this area of trust law can, however, only be achieved if the assets, which are the subject of the settlement in trust, are outside the forced heirship jurisdiction and preferably in an offshore jurisdiction with enhanced protection for trusts set up for this purpose. To provide belt and braces it is further suggested that no person who could exercise control over the trustees or these trust assets be subject to the courts of the forced heirship jurisdiction.
Sometimes it is anonymity which is paramount to international high net worth individuals. In certain circumstances trusts allow them to capitalise on the fact that legal title in trust assets rest with the trustee and not themselves.
In countries with a high level of crime trusts are often used to hold wealth for anonymity purposes, to protect high net worth individuals or families from criminals.
In America, due to enhanced anti-avoidance legislation and an aggressive approach by the authorities in relation to offshore trusts, companies and bank accounts; offshore trusts are only used by American citizens and green card holders in exceptional circumstances.
In the UK, in certain circumstances, high net worth individuals who are resident but not domiciled in the UK still have use for offshore trusts and company structures to legitimately avoid paying tax on their international income and assets. Onshore and offshore trusts are also used in the United Kingdom for, amongst other reasons, succession, estate planning, corporate structuring and tax avoidance. This area of the law is complicated and offshore and onshore structuring should always be subject to advice from qualified tax advisors in the UK.
Fundamentally, trusts remain attractive to the international high net worth community for a variety of reasons and it is this flexibility that keeps trusts at the forefront of international financial planning. The use of trusts depends on various factors including the personal circumstances of the settlor and his family and the jurisdiction in which they are resident and domiciled. As a result there is no blanket view that can sweep across the globe. Each structure takes into account a myriad of factors peculiar to the particular and the individual circumstances for each client.
In all cases, however, tax advice should always be sought from qualified advisers before setting up offshore or other trust structures. What must always be remembered is that working with trust professionals; multi-jurisdictional specialists who have the experience and expertise to provide innovative and appropriate solutions will yield positive results for international high net worth clients and their families. Not doing so will have dire consequences.
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
Fine reduced to £60,000
Two roles created