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Trust Formation

Establishing an Offshore Trust

Offshore trusts can offer major benefits to many investors and other individuals with substantial capital assets. For example, a carefully established offshore trust can transfer a person's investments to a vehicle which may permit the deferral or minimization of income taxes on investment income without contravening the tax laws of the person's home country. There are other important benefits that may be derived from offshore trusts. ORCA can act as a liaison between yourself and the offshore trustee, and we have experienced professionals located in several tax havens and low tax regions. For offshore trustees, the distinction between capital and income is generally only important for tax purposes. Offshore trustees seldom need to balance the conflicting interests of income and capital beneficiaries, as in a trust where income is payable to A for life and capital is then to be distributed to B and C. Offshore trusts tend to be fully discretionary. Similarly, for investment purposes, offshore trustees seldom need to balance income and capital objectives.

Discretionary beneficiaries are normally interested in total return rather than in the balance between income yield and capital growth. However, offshore trustees may face a technical trust law problem. Discretionary trust deeds commonly provide that accumulated income should be added to capital. Strictly applied, this appears to make separation impossible. The clause may simply have been copied from older deeds when tax factors were less relevant. ORCA also offers a host of additional offshore administrative services, including: nominee directors and shareholders, invoicing, re-invoicing, handling of letters of credit and all related commercial documentation. Registration of P. O. Box, telephone and mail forwarding, email and domain facilities, accounting and bookkeeping services. We are able to offer our clients, both private and corporate, a complete range of banking facilities including corporate accounts, electronically managed accounts (via the internet), high yield savings accounts, and coded accounts. Let us know how we can help.

TYPES OF TRUSTS

Trusts may be categorized in various ways.


Revocable or Irrevocable. A Revocable Trust may be terminated or revoked on the instruction of the Settlor. For most financial planning purposes, Revocable Trusts are ineffective, as they are seen to be only temporary holding agents for the assets of the Settlor and this is insufficient to achieve the legal purposes for which most trusts are created. Offshore trusts are almost invariably Irrevocable Trusts.


Specific or Discretionary. A Specific Trust sets out clearly in the trust Deed the specific wishes of the Settlor concerning the handling and final distribution of the assets held in the Trust. Nothing is left to the discretion of the Trustee and all Parties are clear on exactly who benefits from the Trust and to what extent. The disadvantage of this is that the Trust is inflexible and cannot effectively accommodate changes in the circumstances of the Settlor or the Beneficiaries during the term of the Trust.


Most offshore trusts are Discretionary Trusts. They are by their nature very flexible and have historically proven to be most effective for the protection of family wealth. The main feature that makes a Trust discretionary is that the Settlor allows the Trustees to decide which members of the class or classes of beneficiaries is to benefit from the Trust Fund, and to what extent. In a Discretionary Trust:

http://www.ukincorp.co.uk/images/point_3.jpgThe Trustees are given wide powers in the Trust Deed to act as they see fit, but in accordance with the instructions set out in the Trust Deed;
http://www.ukincorp.co.uk/images/point_3.jpgThe Trust Fund is not held for specific beneficiaries in specific proportions;
http://www.ukincorp.co.uk/images/point_3.jpgThe Trust Fund is held for the benefit of all beneficiaries, either as defined in the Deed or to be added later under specific rules;
http://www.ukincorp.co.uk/images/point_3.jpgThe Trustee is given discretion to distribute the assets to the beneficiaries as it sees fit, providing it is in accordance with the terms of the Trust Deed. (The Trustee might be viewed as the 'Guardian' of the assets. The Trustee is appointed to act in the place of the Settlor, to allocate the Trust Fund to the best of its ability in the manner in which it believes the Settlor himself would allocate the Funds at the time of such allocation.)


The thought of surrendering the ownership of one's hard earned assets to a Trustee who has ultimate discretionary control over them is unsettling to many prospective Settlors. This is especially true of Settlors from Civil Law jurisdictions who lack any background familiarity with the Common Law / Equity concept of the Trust. It is partly to allay these fears that the concept of the Trust Protector has been introduced to Trust Law.


The Protector can be assigned a variety of powers in the Trust Deed, including veto power over the actions of the Trustee, the ability to replace the Trustee. Through these powers, the Protector has significant influence in the Trust without the necessity to be involved in its day to day administration. The Protector can also be situated in a different legal jurisdiction that the Trust and the trustee without bolstering any legal argument concerning the correct governing law of the Trust.


The Settlor can also exert some measure of influence over the actions of the Trustee through the use of a Letter of Wishes. This Letter simply contains the current wishes of the Settlor concerning the administration of the Trust – it may deal with disbursements to the beneficiaries, the nature of the investments of the Trust Fund, or a host of other matters. In addition to sending this Letter to the Trustee, the thoughtful Settlor also sends a copy to the Protector, so that he is aware of the current feelings of the Settlor.


The Letter of Wishes is not binding on the Trustee, and indeed cannot be without threatening the legality of the Trust. Nevertheless, the Trustee is likely to take the wishes of the Settlor very seriously and to carry them out as closely as he feels is legally prudent and consistent with his legal obligations to the Beneficiaries. The ongoing influence of the Protector also helps insure that the Trustee will respect the wishes of the Settlor as set out in the Letter. The Letter of Wishes may be revised and replaced at any time by the Settlor, to reflect changing circumstances.


The Trust Protector and the Letter of Wishes are discussed further in the next portion of this overview, which describes the elements of a typical Trust.

OTHER TRUST DESIGNATIONS

Various other descriptions are applied to trusts, but the preceding two sections constitute the main two categories. Some other types of trusts, which may be used for very specific purposes, are:

http://www.ukincorp.co.uk/images/point_3.jpgCharitable Trusts, in which the beneficiary is a charity or charitable cause;
http://www.ukincorp.co.uk/images/point_3.jpg'Spendthrift' Trusts, which distribute money to the beneficiaries at a regular rate but do not permit the distribution of large lump sums and are designed to protect the Trust fund from any legal actions of potential creditors of the spendthrift;
http://www.ukincorp.co.uk/images/point_3.jpgTestamentary Trust, which is created in a will to be effective on the death of the Settlor;
http://www.ukincorp.co.uk/images/point_3.jpgProtective Trusts, which attempt to shield assets from Beneficiaries creditors by causnig a beneficiary to lose their interest in the trust if a creditor attempts to reach that interest;
http://www.ukincorp.co.uk/images/point_3.jpgInter Vivos Trust, which a trust is created by a living Settlor as opposed to a Testamentary Trust. Clients for offshore trusts are typically interested in Inter Vivos Trusts and so on.


A trust may be viewed as rather like a living will in some sense, although it works as well before death as after (and is not normally subject to probate). The assets are put into the Trust Fund and the Trustee administers them, ideally in the same way as the Settlor would have. By placing the assets in the legal ownership of the Trustee, they are removed from the ownership of the Settlor. This changes their legal situation and tax situation substantially, despite the fact that the Settlor has been able to control their ultimate disposition.


Particularly in the case of Offshore Trusts, the Settlor and the Beneficiaries have also been able to preserve their confidentiality, which is often impossible with a will. An Offshore Trust does not usually have to be registered; it is a private document between the Settlor and the Trustee. In those offshore jurisdictions which do require the Trust to be registered, the identities of the Settlor and the Beneficiaries are eliminated from the Trust Deed before registration.

THE ELEMENTS OF A TYPICAL TRUST

The Trust Deed or Settlement. This agreement may be drawn up in a wide variety of ways and still constitute a valid trust. Obviously the Trust Deed should reflect the wishes and requirements of the Settlor, but should contain at least the following five elements:

http://www.ukincorp.co.uk/images/point_3.jpgA brief description of the Settlor(s);
http://www.ukincorp.co.uk/images/point_3.jpgA definition of who is to act as Trustee and how the Trustee may retire or be replaced;
http://www.ukincorp.co.uk/images/point_3.jpgA definition of the powers given to the Trustee and any restrictions on his power;
http://www.ukincorp.co.uk/images/point_3.jpgA description of the Assets of the Trust Fund, how assets may be added to the trust fund and how the assets are to be managed;
http://www.ukincorp.co.uk/images/point_3.jpgA definition of whom is to benefit from the trust.


There are typically three main parties to a Trust and maybe a fourth if you decide to use a protector which is an option:


(1) The Trust Creator, sometimes called the Grantor or Settlor, is the person who started out as owner of the property that is to be transferred to and held by the Trust.


(2) The Trustee is the person, company or financial institution (such as a bank or offshore company) that holds the legal title to the Trust assets. There may be one or more Trustees. If a Trustee is unwilling or unable to serve, then a successor Trustee steps in to hold and manage the Trust assets. The Trustee is obligated to act in accordance with the terms of the Trust for the benefit of the Trust beneficiaries.


(3) The Beneficiaries are the persons who the Trust Creator intended to benefit from the Trust . The rights of the beneficiaries depend on the terms of the Trust. Beneficiaries are said to have the "equitable title" to the property held in the Trust.


(4) The Protector. Generally, the powers granted the Trust Protector are:


  1. Ability to remove or replace the Trustee. Often this is the only power granted to the Trust Protector. In cases where the Trustee is a corporate body (bank, trust company, insurance company, or professional trustee) if the Trustee is unresponsive or not performing to the Trust Agreement for the benefit of all Beneficiaries, or changes in management, or investment choices, the Trust Protector can fire and replace the Trustee, at will, without explanation to the current Trustee.

  2. Ability to change the Trust's situs to take advantage of law changes or necessary steps to act in the best interest of beneficiaries.

  3. Ability to resolve deadlocks between co-trustees or in squabbling between the Trustee and/or Beneficiaries.

  4. Ability to control spending over a certain amount. This level of control is significant if disbursements of the Trust are in excess of pre-arranged amounts requiring two signatures of the Trustee and the Trust Protector i.e. in excess of $10,000.

  5. Ability to veto distributions to Beneficiaries. Before distributions are to occur the Trust Protector may want to investigate the financial stability of the Beneficiaries. For example, if the beneficiary is being sued, The Trust Protector may withhold distributions, or the Beneficiary is undergoing divorce proceedings, or the Beneficiary may be too young, is under duress, mentally incompetent, unable to manage, or otherwise unavailable. The Trust Protector can override/veto the Trustee and withhold distributions temporarily or permanently make other arrangements such as buy the assets necessary for the benefit of the Beneficiary (buy a house, a car, sign a rental agreement, but have the Trust own the assets, make loans or make other provisions.

  6. Ability to veto investment decisions. This checking and balancing of investment decisions are based on the Trust Protector's experience, prudence, and the Trust Agreement guidelines in protecting the assets for the Beneficiaries.

  7. Ability to sue and defend lawsuits against the Trust assets. The fiduciary duty of the Trustee and The Trust Protector as to save the assets of the Trust, at any cost, for the benefit of all classes of Beneficiaries.

  8. Ability to terminate the Trust. If in the opinion of the Trust Protector there are insufficient funds or the cost of administration is greater than available cost/benefit, the Trust Protector may terminate the Trust, as for example, if all beneficiaries have received their distributions based on age (over the age of 21) and there's one minor beneficiary currently 10 years old, and there aren't enough assets to administer the Trust for the next 11 years, the Trust Protector has the power to make the final distribution and terminate the Trust.

Trust Protector's Role

The Trust Protector's role is created by the Trust Agreement to add an additional layer of protection and is usually a person most familiar with the Grantor's long-term financial and personal goals. A Trust Protector usually is the balance of power between the Trust Agreement, the Trustee, The Grantor, and the Beneficiaries.

Neither the Trustee or the Trust Protector should be a family member, nor anyone related to the family by blood or marriage. Both positions should be independent of each other acting in the long-term interest of the beneficiaries.

THE TRUST FUND

The Trust Fund consists of the Assets of the Trust. Obviously when a Trust is in the process of being established it may be reviewed by a variety of the Settlor's advisors for legal and other reasons. The nature and location of the reviews will be related to the purpose of the Trust. They will usually include at minimum a legal review in the jurisdiction of the governing law, to insure compliance with the relevant law, and some review to consider the tax ramifications of the tax for both the Settlor and the Beneficiaries.


While these reviews are necessary in many cases and certainly prudent, not all final details of the trust need be provided to allow the appropriate review. In particular, we recommend to our clients that they establish a trust with an initial nominal Trust Fund of USD 100.00. This is certainly a sufficient amount to establish the trust. Once the trust has been reviewed to the satisfaction of the Settlor and accepted by the trustee there should be no reason for third Parties to see the Trust Deed again. At that point the Settlor may avail himself of the clause permitting additions to the Trust Fund, and add whatever additional assets he desires to complete the Trust Fund. In fact, additional assets may typically be added to the Trust Fund at any time by the Settlor, subject only to the approval of the Trustee, which is very unlikely to be withheld.

THE NAME OF THE TRUST

Although it is not legally necessary to name a Trust, in practice the associated Parties must refer it to in some way. Certainly in the likely event that the Trust at some point requires a Bank Account, a Securities Account or the like, that account must have some name.


To answer this requirement, most Trust Deeds include a name for the Trust. The initial reaction of many Settlors is to name the trust after their family. Obviously this is acceptable, and perhaps even 'normal'. Moreover, it may be somehow comforting to have the trust so named, especially in those cases of a Settlor who is less familiar with the principles of Equity and Common Law.


However, we strongly suggest that such names be avoided. If confidentiality is desirable, a name should be chosen which is unrelated to the identity of the Settlor or the Beneficiaries. This is especially true if the name of the Trust is likely to become known in any way. For this reason, we suggest names such as the "Palm Trust", the "Island Settlement" or similar. Some clients even prefer an approach which is intentionally designed to divert intention from the Settlor and beneficiaries. For example a Mr. Robert Jones establishing a new Trust as Settlor might choose a name such as the "Smith Trust" or the "Kozak Family Settlement".


The name of the trust is simply that of course - a name - and is in law unrelated to the Settlor or beneficiaries. Any name may be chosen; it is simply for convenience of reference.


Some potential benefits of creating a Trust:


Saving Taxes. Trusts can help to reduce or avoid income or capital gains taxes.


Protecting Assets From Seizure or Exchange Control. Assets held in trust in a jurisdiction may have considerable protection against claims arising in another jurisdiction.


Estate Tax-Planning Purposes. Trusts can help to reduce or avoid inheritance taxes and estate duties.


Pre-Emptive Tax Avoidance. Prior to immigrating to a new country (or returning in one's own country), a trust can protect assets that are outside the country of destination.


Protection Against Loss of Assets upon Divorce. Assets can be held in trust for specifically named beneficiaries, who are chosen, based on set criteria in the event of a failed marriage.


Anonymity. Trust deeds are completely confidential documents and can only be seen by third parties based on a Court Order and that can only be obtained in limited circumstances involving criminal activities.


Safeguarding Minors and Vulnerable Members of the Family. Assets can be held in trust for the benefit of minors and handicapped children, keeping them separate from the settlor's other assets. Should calamity befall the settlor, his creditors would be unable to seize those assets.


Avoiding Delays and Costs of Estate Administration. Assets held in trust do not form part of the estate of the settlor when he or she dies, as a result of which, the trustees are able to use them for the benefit of the beneficiaries immediately and without going through any complex and expensive legal procedures.


Protection Against Professional Risks. Trusts are especially useful for professional persons who may be sued for professional negligence, to provide for his family in the event of great financial loss or bankruptcy.


Forced Heirship. Many countries have forced heirship rules that prescribe who inherits from the settlor. The settlor may use a trust to circumvent the forced heirship rules.


ADDITIONAL ELEMENTS THAT MAY BE INCLUDED IN A TRUST


Although the preceding section dealt with the elements found in almost all formal trusts, there are some additional elements that, although unnecessary to have a properly constituted trust, are commonly found in offshore trusts. These include:


The Protector. As described earlier, the Protector is a person appointed under the Trust Deed to further protect the interests of the Settlor, especially in the case where the Trustee has discretionary powers. The Protector may be given a wide variety of powers in the Trust Deed, but three common powers are: the requirement that they approve certain transactions of the Trustee, especially any disbursements from the Trust (or at least any major disbursements); the ability to approve investment decisions made by the Trustee, and the ability to remove Trustees and appoint new Trustees.


These are obviously significant powers and give the Protector the control necessary to insure that the wishes of the Settlor are carried out. A Protector is often a trusted friend or relative. Ideally the Protector should have no direct or indirect interest in the trust as a beneficiary, as this could lead to a conflict of interests. When a Protector is included in the structure of a Trust, he becomes a necessary person for the functioning of the trust. Therefore, as with the Trustee, provision should be made in the Trust Deed for a succession of Protectors.


Letter of Wishes. A Settlor may also provide the Trustees with an informal and confidential letter of wishes that will provide some guidance as to how the Settlor might wish to see the Trustees exercise their discretion. The Letter of Wishes does not form part of the Trust Deed and can therefore be amended at any time.


It is important to remember that any Letter of Wishes is not binding upon the Trustee. Indeed to make it binding would be to risk invalidating the Trust. Courts have viewed a binding Letter of Wishes, or even 'slavish' obedience to such a Letter by the Trustee, as meaning that the Settlor continued to exercise effective control over the assets.


Continued control of the assets by the Settlor after the supposed establishment of the Trust may be seen as the biggest threat to the very existence of a Trust. If a Settlor has not actually given up control of the assets in the Trust Fund to the Trustee, then this would usually be judged to mean that the Settlor had never truly put the assets 'in trust'.


A Trust is not like a contract. A Trust does not legally exist because of the mere presence of a Trust Deed, rather it exists because of the presence of a trust situation. The Trust Deed merely sets out the rules, or contractual arrangement, by which a Trust is governed, but the Trust must exist in fact for these rules to have application. If the assets of a supposed Trust were never actually put in trust with the Trustee, then the supposed Trust would be seen as a 'sham' and no Trust would exist.


If no Trust exists, then all related matters are viewed as if the Trust had never existed from the beginning and thus the assets had remained the continuing property of the Settlor. Regardless of the original reason for establishing the Trust, this is likely to prove very difficult for the Settlor. Care must be taken by both the Settlor and the Trustee to insure that they do not to cross this line and that a Trust arrangement truly exists.


Please note that Trusts and Trust Law are complex topics, with many lengthy texts written on these subjects. Of necessity this document attempts to provide only a brief overview of the topic for general information and background purposes. While every effort has been made to provide accurate information, persons wishing to establish a trust are advised to contact us to assess the potential viability of forming a trust and also to determine the ideal locations in which it could potentially be formed.




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