Trust and Trustee Services
Families have been using trusts for wealth management and wealth protection for the benefit of their heirs for centuries. Trusts provide people with a means of protecting their assets and controlling how they are used after they have been given away.
Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.
Although many of the tax benefits that were associated with trusts have been eroded by anti-avoidance legislation in recent years, they still offer great advantages – particularly for high net worth individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those whose principal motivation is not to avoid taxation but to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure.
The ‘Trust’ Concept
At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’). A trust can be created solely by verbal agreement but it is usual for a written document (the ‘trust deed’) to be prepared. This evidences the creation of the trust, sets out the terms and conditions upon which the trustees hold the trust assets and outlines the rights of the beneficiaries.
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.
It is vital that the trustee remains independent and exercises proper control over the trust property. A trust may be deemed to be invalid if the settlor continues to exercise power over the trust assets by retaining benefit or control, or by giving directions to the trustees.
Those unfamiliar with the trust concept are often concerned at the prospect of transferring ownership of their property to a trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood and it is clear that the trust is governed by a reliable trust law that can be enforced in a reputable jurisdiction.
The trustee holds the legal ownership interest in the trust property separately and apart from his own personal property and therefore trust assets are insulated from the trustees personal creditor.
Trust law imposes strict obligations and rules on trustees. There is a basic rule that a trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust – for example, where a trust provides a professional trustee with the right to charge for its services. Full disclosure of the basis and amount of charges is required.
Disadvantages of a Trust and Solutions
The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust, and their costs.
In fact trusts can be made revocable, but revocable trusts generally has negative consequences in respect of tax, estate duty, asset protection and stamp duty. Revocability is a matter to be discussed when the terms of the trust are considered.
Many potential settlors are reluctant to transfer assets to trustees because they fear relinquishing control. For those who wish to continue to exercise effective control over the trust assets after the transfer, careful planning – together with an understanding of the fundamental legal requirements of a trust – is required if the trust is to remain valid or useful for its intended purpose.
If a settlor retains too much control, there is a risk that the trust will not be effective and the settlor will continue to be regarded as the legal owner. If this happens all the advantages of having the assets held in trust may be lost. There are, however, varying degrees of control and information rights that may be retained to give comfort to a settlor:
Types of Trusts
Trusts are inherently flexible. They can take many legal forms and have multiple practical applications. The following legal forms are among the most commonly encountered:
Where to establish a Trust
There are a number of different countries worldwide that have enacted trust legislation but the quality and suitability of that legislation can vary. When selecting the best jurisdiction for establishing a trust it is important that it should offer:
- A strong tradition of enforcing trusts
- An English common law system
- An established reputation for trust business
- Modern legislation, including contemporary trust concepts
- Low or no taxation for trusts.
Some jurisdictions are not recommended due to legal or political uncertainties or because their courts or professionals have limited trust experience. Other jurisdictions, whilst being noted for their expertise, have not kept pace with the modern trust legislation that offers additional benefits and protection to trust assets or are unsuitable because of high tax regimes.
Sovereign generally recommends that Gibraltar, Hong Kong, Guernsey, Malta, Singapore, Cyprus, the United Kingdom and the Isle of Man are among the best available options and Sovereign is fully licensed to act as professional trustees in all these jurisdictions.
Why use a professional Trustee company?
There are many reasons why a client may wish to appoint a corporate trustee rather than rely on advisers, a family member or friend. The day-to-day management, record keeping and reporting obligations of trusts have grown exponentially over recent years, even for simple trusts, and have the potential to take up significant time. More complex trusts require in-depth legal and fiscal knowledge.
Corporate trustees provide a professional service that is simple and easy to use, removing the burden from lay trustees trying to fulfil this role. They will carry out trust administration, whilst ensuring the settlor’s and the beneficiaries’ interests are balanced appropriately, and the trust reporting, tax returns, accounts and registration.
Licensed corporate trustees must adhere to certain standards and meet various statutory obligations. They are are also impartial and discreet. Importantly, they can serve as a neutral party in the event of a dispute by considering the views of all parties in equal measure.
It is often assumed that the costs of running a trust are prohibitive. It is true that many of the major banks and other financial institutions charge substantial fees for setting up a trust, while also charging a percentage of the trust assets in annual administration fees together with basis points fees for the underlying trust’s cash investments.
The fees charged by independent trust companies are generally more reasonable and make trusts affordable even to relatively modest estates. As specialists, independent trust companies offer a more tailored approach that will allow settlors and beneficiaries to achieve their objectives. It also means they can be consulted on technical matters and are free to select the best investments for the trust without being under pressure to place trust money with in-house investment advisers to secure disguised remuneration.
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Please contact us if you have any questions or queries and your local representative will be in touch with you as soon as possible.
