What is a Trust?

A trust is a legal arrangement where the owner of property or other assets (usually known as the settlor) transfers ownership of those assets to a trustee to hold and administer under the terms of a Trust Deed for the benefit of other persons (known as the beneficiaries).

As the assets of a Trust are not the property of the settlor (and do not form part of the settlor’s personal estate), trusts provide significant scope for tax and succession planning, wealth management and asset protection.

The Settlor

The settlor is the person who transfers his or her assets to establish the Trust (ie. to a trustee to hold for the benefit of the beneficiaries).

The Trustee/s

In many offshore jurisdictions, the trustee must be licensed (to provide trustee services) in the country where the Trust is established. Normally, it is permissible to also appoint a non-resident co-trustee. However, for tax reasons it may be inadvisable to appoint an “on-shore” based co-trustee, and expert tax advice should be sought if you intend to appoint a co-trustee.

The trustee must operate in the best interests of the beneficiaries, and may breach its legal duty if it fails to exercise a sufficient level of care. The trustee must obey the directions in the Trust Deed and must account for all transactions. A trustee is entitled to make reasonable charges, but is not permitted to derive any advantage from the Trust (subject to fees for professional services rendered). A trustee’s actions are strictly controlled by law.

The Beneficiaries

The settlor needs to decide who he or she wishes to benefit under the terms of the Trust – who will be specified as beneficiaries, and how they are to benefit. A settlor may wish to nominate family members as beneficiaries who could benefit, for example, upon his or her death, or before that in certain situations (e.g. a distribution to a child to assist with university education, etc).

The settlor may be a beneficiary (not sole beneficiary) but this may have adverse tax implications.

Offshore “discretionary” trusts

Though there are many types of trust structure, probably the most common type of “offshore” trust is an irrevocable discretionary trust, where the trustees have full discretion in the administration and disposal of the assets in favour of the beneficiaries (subject to the terms of the Trust Deed). A discretionary trust gives the trustee a broad discretion in relation to administration of the Trust, for example, relating to distributions or to add or remove beneficiaries as guided by the settlor’s wishes.

A discretionary trust, subject to the trustee’s discretion as guided by the settlor’s wishes, enables a settlor to facilitate distribution of property (ie. trust property outside of the settlor’s ownership and estate) as he or she sees fit, such as to any particular beneficiaries and/or between “income” and “capital” beneficiaries upon the death of the settlor or on a beneficiary reaching a certain age, etc.

Settlor’s “wishes”

The trustee administers the trust at its discretion, but a letter or expression of “wishes” is provided by the settlor, setting out his or her wishes in relation to administration of the trust, including as to distributions proportions, timings, etc. In practice, the trustees will operate in accordance with the Letter of Wishes but are not legally bound to do so. It acts as a guide to the trustee.

What is a Protector?

Some settlors appoint a “protector” (often a professional advisor known to the settlor) to oversee operation of the Trust. While a protector should not “control” a Trust, the protector can be given veto power on certain trust decisions, such as in respect of addition or exclusion of a beneficiary by the Trustee. A protector may be given power to remove or appoint trustees.

Dealings through the Trustee

Once a Trust is created, the settlor should not be exerting undue control over the Trust assets as if it remained his or her own property. This is one factor a Court could consider in deciding if a Trust is valid or a “sham” (where, for example, a creditor of the settlor brings a court claim seeking to have the trust set aside, in which event the sham trust assets would be treated as those of the settlor). If there are to be dealings with trust property, these should occur via the trustee.

Popular “Dual” structure – Offshore Company (IBC) and Trust

A Trust may be used together with an offshore company. Often an IBC and Trust dual structure is used, where the IBC is the active entity and the Trust is passive in that its main role is to hold and own the shares in the IBC; with the IBC owning any property, funds or other external investments. Use of the dual structure is also one means of giving a settlor more “influence” than may be possible in relation to a sole Trust. This dual structure is commonly deployed in the offshore investment area, particularly because of strong tax planning, privacy and asset protection features.