There is a great deal of mystique surrounding trusts – much of it, no doubt, created by the very substantial industry that now promotes and manages them as part of tax avoidance schemes. Clarity does not always serve their purposes and if you think it’s simple you may not use their services.
Trusts are an extremely useful tool when used in the right circumstances. They do not need to be complicated. They do not need to be expensive. Most important of all, they do not need to be aimed at saving tax.
What is a Trust?
A Trust is a legal structure used to manage property – money, investments, land or anything else. It separates the official legal ownership of the property from the person who has the right to use it or benefit from it.
The people involved in a Trust
There are three main people or groups of people involved in any Trust.
The Settlor is the person who originally puts the property into the control and ownership of the Trust. There could be one or more Settlors.
The Settlor can put all of the assets into the Trust at the same time or – in most cases – add to them as the years go by.
If you and some neighbours give a piece of land for use by a local church and you choose to do so so that it is owned and administered rather than the church directly, you will be the Settlors of the Trust.
If you have a disabled child who is incapable of looking after their own affairs and you want to look after their interests after you have died, you may put property into a Trust for their benefit. You would be the Settlor of the property.
The Trustee is the person who manages the Trust. The Trustee will also usually be the legal owner of the property that has been put into the Trust – though this can sometimes be via a company or other body under their control.
There can be one or more Trustees. The Trustees can (subject to the rules set out in the Trust) either be volunteers or paid.
The Beneficiary is the person for whose benefit the Trust has been set up.
In the examples above, the Beneficiary would be the church in the first example and your disabled child in the second example.
There can be one or more Beneficiaries under a Trust.
What are Trusts used for?
Trusts can be used in a huge range of circumstances:
- To protect family assets
- To provide for somebody incapable of handling their own affairs
- To give the use of property to someone too young legally to own it
- As part of a will
- By operation of law – for examples, in England when someone dies without making a will
- To reduce or redistribute tax liabilities. See below.
Today, the use of Trusts for tax and inheritance planning is extremely common amongst the wealthy and even the not so wealthy.
Do all countries have Trusts?
There are some countries that recognise Trusts fully and for all purposes. There are some that recognise them for limited purposes and there are some that do not recognise them at all.
What is the legal basis of a Trust?
The legal basis of a Trust is that of fairness or, as it was then known, ‘equity’.
If land had been put into the legal ownership of your brother when you went off to war so that your brother could look after it, collect rents etc, it was not fair – equitable – if he refused to return it to you when you returned from the war.
On this very simple basis the vast edifice of modern Trust law has been constructed.
A brief history of Trusts
The concept of the Trust – or something very similar to it – goes back to before the time of the Romans. As a result, the Trust – or the Roman equivalent known as the fidei commissum – was recognised throughout the entire Roman world. A variant of the Trust is also recognised under Islamic law – the waqf – but only for limited purposes, mainly charitable in nature.
Modern Trust law began in England in the 1100s. It developed, partly, to deal with the long absences of land owners on crusade.
At that time, Trusts were recognised throughout most of Europe. This remained the case until the French revolution. Napoleon, when he produced his greatest legacy – the Napoleonic code, which has provided the basis for the legal systems not only in almost all European countries but also in many countries far beyond Europe – abolished Trusts. He and his advisers considered them to be counter-revolutionary and abusive. Although French law did not permit the creation of Trusts, it gradually began to recognise the validity of foreign Trusts for certain purposes and in certain circumstances but the position was always very patchy.
This was reflected in the law of many of the countries that later adopted the Napoleonic code as the basis for their own law.
It remained the situation in France until 2011 when a new law – Loi de Finances Rectificative introduced legislation to deal with the issue of Trusts which, by then, had become a major and very useful tool for all sorts of planning all over the world.
The countries that adopted the English legal system (such as the US and all of the countries in the British Commonwealth) instead of the Napoleonic code have always recognised the law of Trusts.
Many so-called Napoleonic law countries now recognise Trusts for some or all purposes. See our country-specific guides for more details.
Creating a Trust
A Trust is usually created by a Deed of Trust. This can be a simple document explaining that the assets in question are held in Trust by the Trustees for certain specific purposes set out in the Deed of Trust. It also sets out the rules that will govern what the Trustees must use the assets for (“the purposes of the Trust”) and any rules about how they must conduct their affairs.
The precise form of the Deed of Trust or other document creating a Trust will vary from country to country. Again, see our country-specific guides.
The duties of the Trustees
The Trustees have a legal duty (within the scope defined by the Trust) to do their best to look after the interests of the Beneficiaries. For example, if Trustees hold property – let’s say a bank account, land and investments – for the benefit of a mentally disabled person, they will be required to use those assets in a sensible way for the benefit of that person. They might allow the person to live in the house, arrange for investments to top up the bank account and pay a certain amount each month towards the living expenses of the person concerned. They do not have a duty that go beyond the scope of the Trust.
If they fail to perform these duties satisfactorily, they can be removed by the courts or, in certain circumstances and jurisdictions, by the ‘Protector’, who is a type of super-Trustee designed to monitor and regulate the Trustees.
Types of Trusts
In this guide I am only going to consider the six types of Trust most likely to be of use to people living in a foreign country.
A Trust looking after your assets back home
This goes right back to the original purposes of the Trust. If you are going to be living and working in a remote part of the world, possibly doing a job where there is considerable danger, you might decide to put all of your assets under the control of (say) your brother or your lawyer so that they can deal with them on your behalf.
In your Deed of Trust you might direct that the assets were to be held and used for the benefit of your children.
These Trusts have become less common as communications have improved. Often, you would these days simply grant your brother or your lawyer a Power of Attorney (see our Global Guide to Powers of Attorney) to look after things for you. This has the advantage of not changing the legal ownership of the assets whilst still allowing them to be managed in your absence.
A Trust providing for a person with difficulties
If you have a child who suffers from personal difficulties – for example, mental incapacity or drug or alcohol addiction – you may create a Trust so that they will be provided for during your lifetime and after your death but they will not get their hands on the capital or other assets behind the Trust.
Such a Trust can be created either during your lifetime or in you will. If it’s created in your will, the will itself becomes, in effect, the Deed of Trust.
In these circumstances, you might appoint your other children to be the Trustees – either on their own, assisted by your lawyer or accountant or by a Trusted friend.
As they get older, many people wish to do good and have the money with which to do so. Some will contribute funds to charities whereas others, usually the richer people, will set up their own.
Charitable Trusts can be set up for any purpose recognised by the law as a charitable purpose. This will vary somewhat from country to country.
Strangely enough, charitable Trusts (and their close relatives, charitable foundations) can often offer as many tax and other benefits to the person creating them (the Settlor) as they do to the charities created. You will, no doubt, have seen references to the Rockefeller Foundation, the Kennedy Foundation and the Gates Foundation.
Trusts for tax planning
The key to these Trusts is that, in almost every country, the tax consequences of something being done by a Trust are often different from the tax consequences of the very same act being done by a private individual. This is in the same way that the tax consequences of an act carried out by a company will often be different from the tax consequences of the same act being carried out by a private individual.
A large part of tax planning, therefore, involved deciding how various things should best be owned and how various things should best be done: by the real person, by a company or by a Trust.
The financial impact here can be huge.
This is definitely an area which requires specialist advice. This will typically come from a specialist financial adviser, a tax adviser, an accountant or a lawyer.
Trusts for asset protection
Trusts can be used to protect assets from your creditors. In some cases, this is a perfectly legitimate strategy but in others – particularly if the Trust is created at or shortly before the time when the Settlor gets into difficulties – these Trusts can be highly controversial and/or completely ineffective.
They are, however, widely used – particularly in the US where many perfectly ordinary people live in terror of losing everything through litigation. So, for example, a dentist could create a Trust to provide for his wife and his children and put substantial sums into it. It might even be possible for the Trust to also offer him some income and protection.
If this is done properly then, legally, those assets no longer belong to the dentist and so if somebody – years later – sues him because they’ve swallowed their false teeth, those assets will not be available to them if they are successful.
Trusts regulating inheritance
Some countries impose strict rules about who can inherit what when you die. For example, they might say that 75% of all of your assets must be given to your children and leave you the freedom to do what you would like with only the other 25%.
Some countries make it very difficult to deal fairly with the respective claims of the children of a first marriage and the children of any later marriage or who were born outside marriage.
Some countries allow you to leave your assets to whomever you would live but impose severe tax penalties if you leave them to people outside your immediate family.
In these places a Trust can be a very useful tool for tackling these problems.
If you create a Trust whilst you’re still alive and give your assets to Trustees, they no longer belong to you and they will therefore not fall to be dealt with as part of your inheritance. Thus they will not be subject to the restrictions on freedom of inheritance and they will not be subject to inheritance tax.
So, for example, if you are living with someone to whom you’re not married and have children together or if you are in a gay relationship or if you want to exclude one or more of your children from inheriting your estate, these Trusts are something that you should be thinking about carefully.
Needless to say, it’s all a bit more complicated than this and in some places there are mechanisms to stop what they would see as abuse of the system. If you’re thinking of going down this route then, once again, you need good legal advice.
This is not a particular type of Trust but merely a statement as to where the Trust is located. Technically, an offshore Trust is simply a Trust that is based in a country other than that where the Settlor lives. However, these days it usually means a Trust that is based in some sort of tax haven.
Different countries have different rules as to how Trusts must be managed and as to the degree to which they can be attacked by creditors of the Settlor.
Some jurisdictions create an almost complete barrier between the assets and someone wanting to take them; they also impose strict privacy rules on the Trustees.
Creating a Trust in such a jurisdiction can have disadvantages as well as advantages. For example, sometimes jurisdictions have a slightly disreputable image and using them for business purposes can create barriers to progress. Typical offshore Trust jurisdictions would be Belize, many of the Caribbean islands, the Channel Islands and Gibraltar.
Each is very different and by mentioning them here I do not wish to suggest that any of them is ‘dodgy’.
Ending a Trust
In most cases, the Trust can be brought to an end if all of the people who are entitled to benefit from it ask for it to be brought to an end.
Otherwise, the Trust will continue for as long as is stated in the Deed of Trust. In some countries there is a maximum period for which a Trust can continue in existence. For example, in the UK it is now 125 years.
Professional advice for Trusts
If you are thinking of getting involved in the world of Trusts, you really will need to seek good, professional advice. This is an area where getting it wrong can be completely disastrous.