How we use trusts
Technical briefing - 01/02/2013
What are trusts used for?
Asset protectionHistorically, trusts have been established for the principal purpose of protecting assets. In a modern context, trusts may be set up to hold assets in a secure and stable political environment. Trusts play a major role in financial planning for individuals, families and companies and are perfectly suitable to serve in the protection of assets against the potential future liabilities of a settlor.
Subject to taking appropriate advice, the use of a trust in conjunction with an underlying company can be used to convert an onshore asset into an offshore one and to interpose an additional layer of confidentiality in a chain of ownership.
The use of the trust and company structure may also enable trust assets to be held in a jurisdiction which does not recognise the trust concept. For example, such an arrangement may be attractive to a lender for the purpose of obtaining security against assets.Trusts can also safeguard assets against strategic risks, such as confiscation or expropriation by the State in the country of the settlor's domicile, residence or nationality. As a further protection, a modern trust instrument can provide for the proper law of settlement to be moved to another jurisdiction in the event of political or strategic emergency in the country of the Trustee's residence.
The ways in which trusts can be used in the commercial context are extensive. Jersey trusts have been used for the following commercial purposes:
- as a Unit Trust for the collective investment of capital;
- in off-balance sheet transactions, the share capital of an "orphan" Special Purpose Vehicle will typically be held by a Trustee under the terms of a Charitable Trust;
- in an inter-creditor agreement, the rights of one creditor group may be subordinated to the rights of other creditors and regulated under the terms of a subordination trust forming part of the overall security package;
- asset securitisation schemes have been structured to provide for mortgages and receivables to be held pursuant to the terms of a trust; and
- employee share options and executive incentive schemes (as well as regular pension schemes) will benefit from being established in a politically stable, fiscally neutral jurisdiction.
Uses of trusts
Flexibility and confidentiality are the principal advantages of using a trust. Whilst there are many other forms of legal structures designed to hold, preserve and protect wealth, trusts continue to demonstrate that they are enormously adaptable when it comes to financial planning. The ways in which trusts are used by individuals, families and companies continues to grow. However, some typical applications are as follows:
Preservation of wealth
Trusts may be used to preserve the continuity of ownership of particular assets, such as a property or commercial business, within a family. By vesting legal ownership of the assets in the Trustee, the relevant individuals may be able to continue to benefit from the assets, whilst avoiding fragmentation of ownership amongst a large number of second and third generation beneficiaries. The use of a trust avoids, on the death of a beneficiary, the risk of a share of assets becoming owned outside the family, and thus enables settled assets to be preserved intact for the benefit of future generations.
Where a settlor disposes of their assets during his/her lifetime by settling them on a trust, the trust assets will not form any part of the settlor's estate upon his/her death.
This may enable a settlor to avoid forced heirship rules which may be mandatory under the laws of his domicile, residence or nationality and which would otherwise dictate who will benefit from the settlor's estate as well as the proportions to be settled.
The purpose of a trust is to divest the settlor of ownership of the settled assets. Accordingly, upon the death of a settlor there will be no need to obtain a grant of probate or similar formalities in order to deal with the Trust fund. A Trust, therefore, provides an efficient vehicle for the transfer of beneficial ownership interests on the death of a settlor. Furthermore, because the interests of a beneficiary under a discretionary Trust will not constitute a separate asset under Jersey law, a Trust structure may assist in the avoidance of stamp duty or inheritance taxes which might otherwise be payable on the death of a beneficiary.
In addition, a trust can be used to hold shares in a company owning immovable property situated outside Jersey, such as real estate, rather than these being held directly by the company. This can present attractive opportunities for tax and financial planning. A trust may also be used to protect financially naive beneficiaries as provisions can be put in place to make financial contributions where appropriate.
Get in touch
For more information on the uses of trusts or types of structures we can set up or to arrange a meeting, please get in contact with us.
This information is intended as a general introduction to the different types of trusts and their uses and gives a broad indication of potential planning opportunities. It should not be taken as detailed advice. You should not act or refrain from acting on the basis of this general outline without taking professional advice on the specific facts of your case.
For more information, please get in touch with Julian Hayden.
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