A trust is a legal arrangement which involves a person (the “settlor”) transferring legal title to assets to another person or body (the “trustees”) to hold for the benefit of one or more persons (the “beneficiaries”), which may include the settlor.
How do I create a trust?
The trustees and the settlor (or sometimes the trustees alone) sign a document (the “trust deed” or “trust instrument”) which sets out the terms of the trust, including the details of the beneficiaries and the powers and duties of the trustees. Trusts are generally established with a modest sum of cash, with the main assets transferred to the trustees later.
How long does it take?
The trust instrument must be carefully reviewed and fully understood by the settlor before it is signed. The creation of the trust therefore usually takes several days and our normal procedures allow for a fourteen day period.
Can I be a beneficiary?
Yes, but you should carefully review the tax consequences of doing so with your own advisers.
What assets can I put into a trust?
Trustees usually hold assets such as cash, investments, real property or works of art. They often hold shares in private companies. They can also hold other property rights such as patents or copyrights. For tax or commercial reasons, trust assets may be held by an offshore company owned by the trust, rather than directly. Further assets can be added to the trust at any time after its creation.
What safeguards are there?
Trust law imposes strict duties on trustees, who are fully accountable to the beneficiaries and are not allowed to receive any benefit at all unless the trust instrument expressly permits it. A trust can also have a protector, who is not a trustee, but whose consent is needed before the trustees exercise certain key powers, such as distributing capital. A family friend or personal adviser of the settlor may be appointed as protector, to keep an eye on the trust after the settlor's death and to advise the trustees on family circumstances.
Can I change the trustees?
The trust instrument typically contains a power to appoint new trustees. This power may be held by the settlor, the trustees or someone else such as the protector. The trust instrument should be drafted to reflect your particular requirements.
Trust law requires the trustees to manage the trust property and administer the trust themselves, and exercise their own discretion. However, you can communicate to the trustees your broad preferences for the management of the trust in a letter of wishes, which you can change at any time. This letter is usually confidential between you and the trustees. The trustees are not legally bound to act in accordance with your wishes, however they will take them into consideration. You can express other requests at any time. So while you are not in control (and this is usually important for tax and other estate planning reasons), you have some influence over the management of the trust.
Can I dictate investment strategy?
The trustees can make investment decisions, however in some cases the trust instrument may allow the settlor or a beneficary to give them directions. The settlor/beneficiary will often be consulted about investment strategy and thier views and preferences will be taken into account where appropriate. However, where investment management is required, the trustees will normally appoint a professional investment manager selected from those approved by Investec Trust.
How long can a trust last?
This depends on the governing law and the terms of the trust. Investec Trust usually recommends the use of Jersey law, under which a trust can last for an unlimited period. However, the trust instrument may state a fixed period.
What happens when I die?
The assets held by the trustees will not form part of your estate, and will remain held for the beneficiaries as set out in the trust instrument, so there is continuity. The trustees will take into account any wishes you may have expressed as to what you would like to happen after your death. You can also ask the trustees to take into account, after your death, the wishes of someone else, such as your spouse or other family member, or the protector.
How can the trust be ended?
By distributing all the assets to the beneficiaries or by the trust period expiring.
This is the most common type of trust, in which the settlor will absolutely and, usually, irrevocably gift the assets to the trustee to hold on trust. The trustee will generally have unfettered discretion regarding major decisions. A beneficiary will not have an automatic right to receive trust assets.
It is common for the settlor to appoint a trust protector and provide a ‘letter of wishes’. We believe it is important that a trustee has ongoing communication with its beneficiaries and other trust principals. This is especially true with regards to the investment of trust assets as the circumstances and needs of beneficiaries will constantly evolve.
A PTC is a popular way to retain some control over assets settled on trust. Its sole purpose is to act as trustee for a specific trust or a group of family-connected trusts. The board of the PTC, which can be made up of family members, advisers and other confidants, makes the trustee decisions. It is routine for the board to also have at least one board member provided by the offshore service provider.
A PTC enables dynastic estate planning and can involve a family’s younger generation in the management of a trust’s assets. An added benefit is that a service provider can be easily changed. Unlike a traditional trust, the trustee will not need to be replaced.
An RPT allows a settlor to retain, or assign to a third party, certain powers which would have traditionally been vested in a trustee. This enables the settlor to retain a degree of control in relation to decisions regarding the investment, distribution and administration of the trust assets but may impinge on some of the benefits that a discretionary trust would typically offer.
This form of trust is similar to a RPT as the trustee’s powers are not fully discretionary. The trustee is bound to distribute assets in a pre-determined manner as specified in the trust deed. This may include the distribution of income or the distribution of both income and capital.
This type of trust is settled for a specific charitable or non-charitable purpose and does not have beneficiaries. The right to enforce the trust rests with an enforcer who is appointed from the moment that the trust is settled. As well as charitable reasons, this type of trust may be used to incorporate and own the shares of a PTC or to own a Special Purpose Vehicle (SPV) which may hold off balance sheet finance.
Companies are separate legal entities that typically have limited liability and can be used either on a standalone basis or more commonly as part of a trust structure. They can be used to hold a variety of assets including investment portfolios, bank accounts, aircraft, yachts, real property, patents and royalties. Where a trust has an underlying company, the estate planning benefits of the trust are typically passed on to the company.
Families from civil law jurisdictions have traditionally used foundations as an alternative to trusts. They can offer similar transparency, family control and dynastic structuring. However, unlike a trust, a foundation is a legal entity in its own right which holds assets in its own name.
A foundation allows a family to have direct control over the assets transferred to the foundation but, as with trust planning, this has tax consequences. In a similar role to a trust protector, a foundation has a guardian who will monitor the foundation council’s activities and may have to provide approval for certain decisions. A foundation must also have a public charter and regulations. However, beneficiaries are not usually named in a public document.
Beneficiaries
People or entities (e.g. charities) who are capable of receiving benefit under a trust. They are either named in the trust instrument or described as a class capable of receiving benefit (referred to as a "class of beneficiaries") in accordance with the terms of the trust. Beneficiaries may be entitled to income or capital or both. This entitlement may be fixed or they may only be entitled to receive benefit at the discretion of the trustees.
Civil law jurisdiction
A country with a legal system ultimately rooted in Roman law, having as its primary source of law legislation (often in the form of lengthy codes which lay down legal principles and the rights and duties of persons in general terms), whilst the court system is usually inquisitorial and not bound by precedent. Most continental European countries are civil law jurisdictions.
Common law jurisdiction
A jurisdiction with a legal system based fundamentally on English common law.
Deed
A document which is executed in accordance with the legal requirements of a particular jurisdiction. These may stipulate that the document must expressly state that it is a deed and/or be signed and delivered. In some jurisdictions certain documents (e.g. for the conveyance of property) must be executed as deeds.
Discretionary trust
The trustees of a disretionary trust have wide powers and discretions, particularly with regard to how the trust’s assets are distributed.
Excluded person
Anyone who is expressly excluded from receiving benefit under a trust.
Forced heirship
Most civil law countries have laws which entitle the heirs of a deceased person to receive a specified portion of their estate.
Irrevocable trust
A trust which, once validly settled, cannot be revoked (terminated) by the settlor.
As joint tenants
Ownership of property by two or more people where, on the death of one of the joint owners, his/her interest in the property passes automatically to the survivor(s).
As tenants in common
A form of joint ownership where each owner has a specified share in property but is entitled to enjoyment of the property in common with others. Unlike joint tenancy, if one of the tenants in common dies his share falls into his estate and does not pass automatically to the surviving joint owner(s).
Letter of wishes
Sometimes referred to as a "Memorandum of Understanding", this is an informal document in which a settlor expresses his or her broad views on how the trustees of a discretionary trust should carry out their powers or distribute assets. Although these wishes are not legally binding, the trustees may take them into account, provided they do not conflict with the terms of the trust. The settlor may revise these wishes from time to time.
Life tenant
A beneficiary who is absolutely entitled to the income of a trust during his/her lifetime.
Proper law of the trust
The law which expressly governs the construction, interpretation and enforcement of the trust.
Protector
A person (who may be an individual or a corporate body) who is not a trustee but is given certain powers under the terms of the trust. These powers may enable the Protector to give certain directions to the trustees, or may require that the trustees obtain the Protector's consent before they can exercise certain powers or discretions. A Protector is more likely to be included in a discretionary trust, where the trustees have wide powers and discretions.
Revocable trust
A trust which may be revoked wholly or partially at any time by the settlor (in which case the trust assets will revert to the settlor).
Settlor
The original owner of the assets which are contributed to the trust. A trust may have more than one settlor.
Trust
An equitable arrangement in which the legal ownership of assets is passed to trustees, who are required to preserve, enhance and apply them for the benefit of nominated persons or a class of persons.
Trust instrument
The document which sets out the terms of a trust.
Trust period
The period for which a trust may continue in existence, according to its proper law.
Trustee
A person who legally owns assets, but holds them for the benefit of others. A trustee may be an individual or a corporate body. A trustee has strict duties, including not allowing his personal interest to conflict with the interest of the beneficiaries and accounting strictly for his dealings with the trust assets.
Our business operates in three key financial jurisdictions. The choice of jurisdiction depends on what best suits a particular individual or family’s requirements.
Specialist services for ultra high net worth individuals, families and multi-family offices*.
Fiduciary expertise in one of the world’s leading financial centres.
Mauritius has multiple double tax treaties, a low tax rate and no exchange control for non-residents.
These services are offered by the Investec Trust group of companies.
Copyright Investec 2012