Family Trust: A trust is a legally binding arrangement whereby a person (known as a settlor) transfers assets to another person (known as a trustee) who is entrusted with legal title to the trust assets, not for his own benefit, but for the benefit of other persons (known as beneficiaries, who may include the settlor) or for a specified purpose.
The terms and rules upon which the trustee is to hold the trust assets will normally be contained in a document called the trust instrument.
This is for the benefit of all parties as it will ensure that the settlor, the trustee and the beneficiaries know precisely what their respective rights and duties are.
The trust instrument will usually provide that the trustee has the power to manage the trust assets in accordance with the terms of the trust instrument and the governing law of the trust.
In addition to the trust instrument it is also usual for a settlor to indicate to the trustee his wishes as to the future management and disposition of the trust fund in a less formal manner. His expression is often contained in a letter of wishes which, although not legally binding, will generally be considered by the trustee to be of persuasive effect when performing its duties (for example, considering whether to make a distribution out of the trust fund).
THE COMPONENTS OF A FAMILY TRUST
The settlor
Once a trust is created the settlor will have divested himself of legal ownership of the trust assets. The settlor may be a beneficiary and, in certain circumstances, he may also act as a co-trustee. The settlor may also retain a degree of control over the trust by reserving the exercise of certain powers to himself (or a third person), such as the power to approve distributions, the power to appoint and remove trustees and the power to revoke the trust. However, it is essential to the validity of a trust that the settlor actually dispossesses himself of the trust assets and he may not, for example, be both the sole trustee and the sole beneficiary.
The trustee
Legal title to the trust assets is vested in the trustee under the obligations imposed by the trust and it is responsible for the administration of the trust. A trustee must act with due diligence, as would a prudent person, to the best of its ability and skill and must observe the utmost good faith. A trustee must exercise its powers solely for the benefit of the beneficiaries. The trust assets, however, constitute a separate fund and do not form any part of the trustee’s own estate.
The beneficiaries
The beneficiaries are the persons entitled to benefit from the assets held on trust. As stated above, the settlor may himself be one of the beneficiaries. In order for a trust to be valid there must generally be sufficient certainty as to the identity of the beneficiaries. An express power for the addition of further persons to the class of beneficiaries may, however, be included in the trust instrument. The beneficiaries may enjoy equal or unequal benefits, as the trust instrument prescribes or, in the case of a discretionary trust, as the trustee may determine.
It is also possible to include in the trust instrument a power to exclude beneficiaries from future benefit.
The trust fund
The assets constituting the trust fund may be of any type of movable or immovable property (with certain exceptions in particular jurisdictions, for example land in Jersey cannot be directly held by a Jersey trustee). Further assets may be added at any time after settlement of the initial assets. Indeed, a common arrangement is to establish a trust with a nominal initial amount and subsequently to add more substantial assets. These would therefore not need to be specified in the main trust deed.
The protector
It is not essential for the validity of a trust that there be any protector. However, in order to counterbalance the wide discretionary and fiduciary powers conferred on a trustee it is often found useful for the settlor to appoint a trusted friend or professional advisor, or even himself, to act as a protector of the trust. In such cases the consent of the protector will generally be required before the trustee may exercise certain strategic powers under the trust instrument. On the protector’s death, incapacity or resignation, his powers can be passed on to another person.
BENEFITS OF FAMILY TRUST
The use of an offshore trust can produce many substantial benefits.
As always, proper professional advice needs to be taken in one’s country of citizenship, residence and domicile before implementation. The major advantages of an offshore trust include:
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Asset protection
An increasing purpose for using offshore trusts is to protect property from attachment by creditors. Certain professionals, such as medical practitioners, company directors, accountants and lawyers may be particularly vulnerable to unexpected and costly litigation. The consequences of divorce in many countries may also be severe.
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Succession planning
The use of an offshore trust is an ideal tool for ensuring that property can be allocated in a manner that suits the settlor’s wishes and avoids the consequences of forced heirship or inheritance laws. Family succession planning: A trust provides great flexibility in providing for long term succession. For example, the education and maintenance of grand children or the exclusion of bankrupt or spendthrift relatives.
A trust can be used to hold shares in a company owning immovable property, rather than directly in the real property itself, with the effect of transforming characterization of an interest from immovable to movable, which can present attractive opportunities for tax and financial planning. A trust may also be used to protect financially unsophisticated beneficiaries and to make financial provisions for the improvident.
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Privacy
A trust is a private agreement between the settlor and trustee. By establishing a trust in an offshore jurisdiction, privacy is greatly enhanced. Most offshore jurisdictions have strong privacy protection legislation and few of them have tax treaties permitting the exchange of information between governments.
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Tax planning
An offshore trust may allow the reduction of liability to property, wealth or inheritance taxes in many countries and is a powerful tax planning tool for high net worth individuals. This largely depends on the nationalities of the settlor and/or beneficiaries. Tax savings: An offshore trust set up in a tax haven or low tax jurisdiction will suffer no local taxes taxes on income or capital gains, thus maximising the productivity of capital owned.
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If you’re interested to deepen the matter, both in Italy or Switzerland, please contact me either by phone or mail (+390230316766 – g.bellini@studiolegalebellini.eu).
