Basic Features of Trusts

A trust is a legal relationship whereby a legal person (the trustee) holds property donated by a settlor (grantor in USA) for the benefit of third parties (the beneficiaries). Originating from medieval England, trust law has developed over centuries into an essential tool for tax and estate planning. Common law jurisdictions like the USA and Hong Kong have comprehensive laws governing trust creation and management, ensuring clarity and protection for trustees and beneficiaries. Civil law countries, such as France and Switzerland, recognize trusts but generally lack specific legislation, relying instead on civil codes that may require additional legal structures to achieve similar outcomes. Overall, the application and regulation of trusts vary between common law and civil law systems, affecting their use in estate planning, asset protection, and commercial transactions.

The core of a trust is the transfer of legal ownership of property to a third party and the clear communication of instructions regarding the use of proceeds from and disposal of the property. If instructions are not strictly adhered to, the trust may be deemed a sham and therefore invalid from the outset. However, there is considerable flexibility in how trusts can be structured, and numerous safeguards are available to protect the interests of all parties.

Trusts are flexible tools that are useful for managing family wealth, structuring corporations, supporting charitable activities, and protecting assets from creditors or legal disputes. Given their adaptability, they play a key role in long-term strategic financial planning, especially in international settings.

Basic Features Of Trusts Image

Basic Forms of Trust

Revocable Trust

Also known as Living Trust, this is created during the lifetime of the settlor and can be changed or revoked anytime. The settlors often serves as the initial trustee and retains control over the assets. This trust offers lower protection because the assets are still part of the taxable estate and accessible to creditors.

Irrevocable Trust

In comparison with the revocable trust, this trust cannot be modified or revoked without the beneficiary consent or court approval. This however, offers higher protection from creditor and potential tax benefits. The assets are removed from the settlor's estate.

Testamentary Trust

This is created through a will and only takes effect after the settlor's death and this is subject to lengthy and potentially costly probate. It lacks privacy that a trust can offer but it allows for structured asset management for beneficiaries especially those who are minors or special needs dependents.

Discretionary Trust

A discretionary trust is a flexible legal arrangement where trustees have complete authority over how and when to distribute assets to beneficiaries. This setup allows trustees to adapt their decisions based on the beneficiaries' changing needs and circumstances. It offers significant benefits, including enhanced asset protection, which is a way to safeguard assets from future claims or creditors and the ability to provide personalised support tailored to each beneficiary's unique situation. Overall, a discretionary trust combines flexibility with security, making it a valuable estate planning tool for managing and protecting family assets.

Main parties involved in a trust

Each trust involves clearly defined roles—settlors transferring assets, trustees managing assets, and beneficiaries receiving benefits under the trust structure.

Settlor IconSettlor

The person or entity transferring ownership of assets to a trustee, thereby establishing the trust. Known as the grantor or trustor in some jurisdictions.
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Trustee IconTrustee

The trustee, often a professional trust company, administers and manages trust assets in accordance with the trust deed, acting in beneficiaries' best interests.
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Trust Parties

Beneficiaries IconBeneficiaries

Individuals or entities designated to benefit from trust assets, receiving distributions or income as specified by the settlor in the trust arrangement.
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Guardian Protector IconGuardian / Protector

Additionally, many trusts have a Guardian and/or a Protector appointed to monitor the activities of the trustees and to ensure that the settlor's intentions are being followed. The protector usually has the power to change trustees.
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Basic Forms of Trust

Revocable Trust

Also known as Living Trust, this is created during the lifetime of the settlor and can be changed or revoked anytime. The settlors often serves as the initial trustee and retains control over the assets. This trust offers lower protection because the assets are still part of the taxable estate and accessible to creditors.

Irrevocable Trust

In comparison with the revocable trust, this trust cannot be modified or revoked without the beneficiary consent or court approval. This however, offers higher protection from creditor and potential tax benefits. The assets are removed from the settlor's estate.

Testamentary Trust

This is created through a will and only takes effect after the settlor's death and this is subject to lengthy and potentially costly probate. It lacks privacy that a trust can offer but it allows for structured asset management for beneficiaries especially those who are minors or special needs dependents.

Discretionary Trust

A discretionary trust is a flexible legal arrangement where trustees have complete authority over how and when to distribute assets to beneficiaries. This setup allows trustees to adapt their decisions based on the beneficiaries' changing needs and circumstances. It offers significant benefits, including enhanced asset protection, which is a way to safeguard assets from future claims or creditors and the ability to provide personalised support tailored to each beneficiary's unique situation. Overall, a discretionary trust combines flexibility with security, making it a valuable estate planning tool for managing and protecting family assets.

Fixed Trust

A fixed trust is a type of trust where beneficiaries' entitlements to income or capital are clearly defined in advance by the trust deed. In this setup, trustees have limited discretion over distributing assets and must follow the specified allocations. This structure provides greater predictability and certainty for beneficiaries, as they know their entitlements upfront. Fixed trusts are commonly used in family or charitable arrangements to ensure specific beneficiaries receive particular benefits, offering a transparent and reliable way to manage and distribute trust assets.

The most important document in settling a trust is the Deed of Trust. This is the blueprint for the trust and must be carefully drafted. The language must be unambiguous since it will be referred to for many years. A Memorandum of Wishes is also often drafted by the settlor to indicate in a discretionary trust how the trustees should service the beneficiaries. Finally, there needs to be a transfer of legal ownership of the property to establish the trust. This should be fully documented to show that a change of ownership has in fact taken place.

All types of property may be held under trust including cash and bank balances, securities, personal and real property and shares in private companies. If personal property such as works of art, jewelry or furniture are being settled into a trust, it would be important to inventory and tag and identify these items. Ownership of the property rests with the trustees at all times, but use and day to day control may be delegated to others.

The trust itself generally lacks a distinct legal identity; however, in the United States, it is recognized as establishing a legal relationship between the trustee and the beneficiaries. In this context, the trustee assumes a significant fiduciary duty, meaning they are legally and ethically obliged to act in the best interests of the beneficiaries, ensuring responsible management of the trust assets.

An important class of trust is the charitable trust where the beneficiaries are generally unrelated to the settlor and the reason for setting up the trust is altruistic in nature. In many countries charitable trusts are treated favourably for tax purposes and are therefore not often set up offshore.

Offshore Trust

An Offshore Trust may be defined simply as a trust established in a jurisdiction different from the domicile of the settlor. However, it is generally taken to be a trust established in one of the offshore trust jurisdictions like Belize, BVI, Cayman Islands, Cook Islands, New Zealand and Jersey to name a few. Offshore based trusts are proven vehicles for establishing the legitimate ownership of both offshore and onshore assets. They are particularly useful in regulating the succession to family wealth. In most developed countries the taxation of trusts has become extremely complex due to their ability to be used for favourable tax planning. In general and depending upon the domicile of the settlor and beneficiaries, offshore trusts enable income and gains to be accumulated with minimal local taxation.

Over the centuries, English trust law has evolved some basic rules regarding the conduct of trusts including:

  • A trust must have a limited (though possibly very long) life.
  • The settlor cannot be a beneficiary of the trust.
  • Settlement of property into the trust is irrevocable.

Trusts cannot be used to defraud creditors. In recent years, many of the offshore jurisdictions have enacted legislation to ameliorate the first three of these provisions and to place time limits on a creditor's ability to prove fraud in transferring legal ownership of property to a trust.

Trustees are subject to strict legal constraints on the way they handle their responsibilities. They must show a duty of care, utmost good faith and exercise professional diligence in administering the trust for the benefit of the beneficiaries. They are also responsible for managing the investments and cash held by the trust and tend to be conservative in approach to ensure preservation of the capital base of the trust.

Trustees are generally permitted to engage other professionals such as investment managers to assist them. Trustees are also able to take their remuneration from the trust property held by them. Traditionally, trustee remuneration is based on the value of assets held, subject to a minimum annual fee, and is often detailed in the trust deed. Zetland does not charge the traditional fee charging methods commonly used by financial or legal service providers. Instead, it operates on a fixed fee structure, meaning that clients pay a predetermined, set amount for services rendered. The settlement arrangements can be made either directly by the settlor himself or through the trust assets, provided this is explicitly detailed in the deed.

Trust Formation and Asset Strategies

The core of a trust lies in the transfer of legal ownership of property from a settlor to the trustees. The settlor must ensure that the property is properly safeguarded and that his wishes are observed. There are several considerations, including the following:

Settlor Icon Settlor

A settlor is an individual or organization that creates a trust by transferring assets into it, often remaining anonymous within the trust document.

Typically, a third party like a corporation establishes the trust to maintain confidentiality and protect assets.

Trustee Icon Trustee:

Trustees have a fiduciary duty to act in accordance with the trust deed and for the benefit of the beneficiaries. The trust may continue for many years and there needs to be confidence that the trustee will continue to provide good service. It is advisable to appoint an experienced and professional trust company as trustee.

Although numerous large international banks have trust company subsidiaries, many settlors prefer to deal with the smaller specialised trust companies. The appointment of a trustee is often revocable and an unsatisfactory trustee can be replaced.

Choice of Domicile Icon Choice of Domicile:

While most offshore jurisdictions will function well from a tax planning point of view, some are distinctly superior in their asset protection features. The choice of domicile and governing law for an offshore trust is usually not final with most trust deeds incorporating so called "flee clauses" allowing for redomiciliation in the event that certain events such as civil disorder occur in the initial domicile. Redomiciliation may also take place to benefit from a better legal environment.

Appointment of Director Icon Appointment of Protector:

The protector is often an individual who is a friend or confidant of the settlor. The protector has watchdog role acting as a link between the trustee, settlor and beneficiaries. The protector can usually veto actions by the trustee and generally has an unfettered power to remove or appoint a trustee. It is important to delineate the powers of the protector carefully to avoid any attack on the trust as being a sham. The protector may usually nominate a successor in the event of death or incapacity or if he is unable or unwilling to continue with the role.

Initial Documentation Icon Initial Documentation:

The trust deed needs to be carefully drafted in accordance with current best practices. This document outlines how the trustees should administer and manage the trust assets and how they distribute and dispose of trust assets during the lifetime of the trust. Typically, the trust assets includes cash, real estate and shares in companies, but could be extended to include ownership of any movable or immovable assets and ownership of intellectual property. Most trust companies use standard trust deed which they will customised to suit the client's need.

Since an offshore trust is likely to be established in a jurisdiction unfamiliar to a client's professional advisers, obtaining a legal opinion from a local lawyer regarding the trust's validity is often advisable as a safeguard. In the case of a Discretionary Trust, it is important that the provisions of the Letter of Wishes are clearly articulated.

Captive Trust Company Icon Captive Trust Company:

In certain cases, establishing a trust company under the settlor's control can be advantageous. However, this approach usually incurs additional costs and requires careful consideration of shareholding arrangements for the captive trustee. Moreover, there is a rising trend of government oversight of trust companies, often including minimum capital requirements, which means this option is now only accessible in a limited number of jurisdictions.

Use of Offshore Companies Icon Use of Offshore Companies:

It is common for offshore trusts to own companies in the same or other offshore jurisdictions. From the settlor's point of view, this may be a method to maintain influence or control over a business or to draw income from the company.

Most trust deeds will absolve the trustee from responsibility for the operation of companies owned by the trust. However a recent English legal decision implies that trustees do have a duty to enquire into and intervene in the operation of underlying companies. The BVI has enacted specific trust legislation (VISTA Trusts) to disengage and place solely in the hands of the directors the operations of a BVI company owned by a VISTA Trust. It may be expected that other jurisdictions will follow suit.

Zetland establishes companies in most offshore jurisdictions and administers them from Hong Kong. Please refer to Zetland's Guide to Effective Offshore Operations for further details.

Liechtenstein Foundation Icon Liechtenstein Foundation:

Although not a trust, a Liechtenstein Foundation has a combination of trust like features together with those of a corporation. Liechtenstein is also reckoned to be one of the best jurisdictions in the world in terms of confidentiality and safety of the legal environment. Liechtenstein is an independent principality situated between Austria and Switzerland and is regarded as politically and economically stable.

A foundation is a good holding structure for high net worth individuals who may continue to exercise complete control over the property and also make a determination as to the passing of control upon death or disability. Foundations are more expensive to establish and administer compared with most offshore trusts. A Panamanian Foundation is a lower cost alternative and details can be provided by Zetland on request.

No asset owning structure offers complete protection against a determined and well-funded legal action. In particular, a trust may be attacked on the grounds that it is a sham ie that the settlor effectively retains full control of assets and the trustees are compliant with his wishes. However this can be quite difficult to prove and a properly and clearly constituted trust that is well run should be safe from this avenue of attack.

Although a trust may be held to valid, the trust and the assets it controls may be subject tolegal action. In many jurisdictions, family courts have increasingly gained the authority to modify trust deeds in cases involving divorce or inheritance disputes. However, courts in the jurisdiction where the trust is domiciled must also recognize these court decisions, which is not always guaranteed.

Assets owned by a trust can be classified as a 'resource' and may be allocated to a party involved in a dispute by the courts. For example, if such an asset is a property located in the same area as the court issuing an unfavorable judgment, it may be lost. A notable case in English law, Charman v Charman (2007), involved a divorce where 37% of the assets of a Jersey trust, valued at $120 million, were awarded to the wife. Its legal impact clarifies that offishore discretionary trusts can be treated as marital resources if the settlor retains control.

The choice of an offshore jurisdiction is important. Although most offshore jurisdictions may seem fairly similar, there are important legal differences between them. For example, a few jurisdictions require registration of trusts usually in a confidential register maintained by the government.

Investment Issues

The discretionary investment of trust assets is probably the single greatest area of difficulty for trustees. As noted, trustees have a duty to preserve trust assets for the beneficiaries and will therefore tend to favour conservative investments with appropriate returns.

It is common practice to engage third party banks or investment managers to look after substantial trust portfolios but it always desirable to have an agreed investment strategy and for this to be monitored closely and on a timely basis by trustees. Issues include:

  • Appropriate investment benchmarks to use.
  • Actual adherence to a laid-down strategy by investment managers.
  • Comparative performance compared with alternative strategies.
  • Liquidity and safety of investments.
  • Costs of investment management and dealing.