Foreign Trusts

What is a Trust ?

A trust describes the legal relationship that is created when a person transfers the administration of property and other assets to a third party. The person initiating the transfer is known as the Settlor, the person (or persons) in charge of administering the property is called the Trustee, and the person or persons who benefit from such a transaction are known as the Beneficiaries.

The modern trust has developed over many years in those countries whose laws evolved from the common law English system, including the United States and many of the jurisdictions in the Caribbean.

A trust is unique in that while the Trustee holds legal title to the property, the Trustee must administer the trust in accordance with the instructions set forth by the Settlor. The Settlor can reserve the right to revoke or terminate the trust, as well as set forth limitations and prohibitions on the investment and use of trust assets. Furthermore, the Trustee is bound by law to manage the trust assets in the manner most advantageous to the Beneficiaries. Any profit made by the trust’s investments is for the benefit of the Beneficiaries. The Trustee faces severe penalties if he fails to carry out his fiduciary duties. (A Trustee is not liable for the normal, non-negligent business losses incurred by the trust.) Note that a Trustee is entitled to payment for providing his services to the trust, unless specified otherwise in the trust. A Trustee may waive compensation at any time.

The Beneficiaries are entitled to benefits as set forth by the Settlor. The Settlor must state or clearly establish the class of people who are to be Beneficiaries. If not, the trust will fail. The Beneficiaries may receive regular payments or the Settlor may condition the payment of the trust income on certain events. It is important to note that barring some unusual circumstance, payments are made only from the trust income, not from the trust principal. The trust principal is usually not disbursed until the trust is terminated.

Why have a Trust ?

There are many reasons for utilizing a trust. A trust, however, is especially useful for tax and estate planning. A trust can ensure that assets are transferred from one generation to the next, without unnecessary delays, in accordance with the Settlor’s wishes. This can happen because the trust assets are considered to be a separate fund, and not part of the Settlor’s estate. The tax consequence may vary, however, depending on the type of trust that has been established [i.e. if the trust is revocable or irrevocable]. Without a trust, the transfer of ownership to the intended Beneficiaries will have to take place through a last will and testament, frequently subjecting the decedent’s estate to a lengthy probate proceeding. If there is no will, the transference of ownership will take place under the laws of the appropriate jurisdiction. A trust may also ensure that the Settlor’s assets are judiciously managed in the manner that the Settlor has determined. A trust can be established to benefit a set group of people, the Beneficiaries, or to achieve a certain trust purpose, such as establishing a charitable institution.

In addition, the Settlor may seek to use a trust to protect his or her assets from creditors and potential government action. By setting up a trust in a country different from where the Settlor is domiciled, the Settlor can protect the anonymity of his or her assets.

What is required for a Trust ?

There are a few basic requirements to set up a trust. The Settlor must have trust property - that is, some asset that will be transferred to the trust. More property can always be added to the trust later on. The Settlor also needs to specify the trust Beneficiaries. The Settlor should also state who the Trustee shall be for the trust. If a Trustee is not designated, or if the Trustee dies and there is no provision for who shall succeed him, the court will appoint a Trustee.

A trust can be established when the Settlor is still alive - it becomes effective upon the Settlor’s signature of the document or upon the Settlor’s death.

Different kinds of Trust

A trust can be either revocable, which means that the Settlor can revoke the trust and/or maintain active involvement in the management of the trust, or irrevocable, in which case the trust cannot be terminated by the Settlor. There are distinct advantages and disadvantages to either type. The Settlor should discuss which kind of trust would best meet his or her needs with an attorney.

Trust Protector

A Trust Protector is frequently used in the structuring of offshore trusts to ensure that a third party familiar with the Settlor and his personal circumstances, may have a say over certain actions of the Trustees. The Settlor appoints the Protector when the trust is established.

Factors to Consider in Selecting a Trust Jurisdiction

The laws of the jurisdiction where the Trust is established will govern both the trust and the Trustee. Therefore, it is generally best to use a jurisdiction where:

  • The law is based on Anglo-Saxon principles and the trust concept is clearly developed.
  • The tax laws are favorable.
  • A body of trust law that enables the Beneficiaries to effectively enforce their rights.
  • Political and economic stability.
  • Modern trust law.
  • Good banking and trust facilities.
  • Good transportation and communication facilities.
  • A history of encouraging foreign investment without taxing it.

Freeman, Haber, Rojas & Stanham, LLP