OFFSHORE TRUSTS AND PRIVATE FOUNDATION
TYPES OF 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'.
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 they could be the owner!
To get around this problem, what are called Discretionary Trusts were established. These are arrangements where the actual beneficiaries of the trust are at the absolute discretion 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. GT has a complete section dedicated to Asset Protection Trusts in this page.
TRUST STRUCTURE AND 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 summarize 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.
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.
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.
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.
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 over-riding considerations which prevent a Trustee of 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, Panama 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 Panama 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.
Offshore Trusts can be valuable vehicles for tax avoidance, (not evasion) 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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