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Trust
What is a trust?
A trust is a legal vehicle and arrangement where a Grantor or Settlor creates the trust and transfers assets to this trust to be managed by a Trustee in accordance to the Truste Deed, in the benefit of a Beneficiary.
Trust as an asset protection vehicle
From an asset protection perspective, a Trust provides the highest level of asset protection, as once the assets are transferred to the trust, they no longer belong to the Grantor, nor they belong to the beneficiary, they belong to the trust and are managed in benefit of a beneficiary.
For example, if you transfer a house into a trust for the benefit of your children, both you and your children can still use the property. However, neither your creditors nor your children's creditors can seize the house, because it technically belongs to the trust, not to you or your children.
That said, creditors may attempt to seize what the trust distributes to the beneficiary. If one of the trust's assets is a corporation that pays dividends to the beneficiary, creditors could try to seize those dividends. However, they cannot directly seize the assets held by the trust. Nonetheless, there are several ways this can be avoided.
Parties of a Trust
Settlor
The Settlor is the individual or group of individuals, or entities, that form a trust and transfer assets to the trust.
Trustee
The Trustee is a company or an individual who manages the trust in accordance to the trust deed rules and in benefit of the beneficiary.
Depending on the jurisdiction, a Trustee can be a licensed or non-licensed individual or company.
Private Trustee Company
For example, in some jurisdictions a Private Trustee Company can be formed to act as a corporate trustee without the need of a license for up to a certain amount of Trusts.
Beneficiary
The Beneficiary is an individual or group of individuals who benefit from the Trust Assets and Income.
Protector
The role of protector is a role that exists in certain jurisdictions. The Protector is an individual or organization that co-exists with the Trustee, where, for example, the Trustee would need the Protector’s approval for any decision or action to be taken.
Trust for Inheritance planning
In addition to asset protection, Trusts are a great vehicle for Inheritance planning, including tax optimization, and control over how these assets are managed in benefit of the beneficiaries.
Tax Benefits:
Certain types of trusts, like irrevocable trusts, can reduce estate taxes and provide other tax advantages, such as avoiding capital gains taxes in some cases. Trusts are also great tools for inheritance and estate taxes, as for example, if you transfer a real estate asset to a Trust, the Trust will be the owner, and if you pass away, the Trust will remain the owner of the Estate, if you so wish, and there will not be a change in ownership name of the Estate
For example, if you transfer a real estate asset into a trust, the trust becomes the owner, so in the event of your passing, the trust can continue to hold ownership of the estate without any change in the property's title, without triggering inheritance or capital gains tax as there is no change in the ownership title.
Avoiding Probate
Assets held in a trust bypass the probate process, allowing for quicker, more efficient distribution to beneficiaries without the need for court involvement, reducing legal fees and delays.
Privacy
Unlike wills, which are subject to public record, the terms of a trust remain private, keeping asset details and beneficiary information confidential.
Control Over Asset Distribution
A trust allows the grantor to specify how and when assets are distributed. For example, the grantor can set conditions for beneficiaries to receive funds at certain ages or for specific purposes, such as education or healthcare.
Protecting Family and Generational Wealth
Trusts can preserve family wealth for future generations, preventing assets from being dissipated due to poor financial decisions, lawsuits, or divorce.
Types of Trusts
Irrevocable vs Revocable trust
Irrevocable trusts are trust where the Settlor does not have the power to revoke the Trust (terminate it), or to revoke the transfer of assets given to the Trust.
Grantor trust or Non-Grantor Trust
Some jurisdictions call a “Grantor” Trust a trust which is a revocable Trust, or a trust where the Settlor retains some control over the trust assets, power to appoint or remove the Trustee, or to amend the Trust Deed Terms.
Non-grantor trust is a trust where the Settlor does not retain control over the trust assets, or the power to appoint or remove the trustee, or the terms of the Trust Deed
Domestic or Foreign Trust
A domestic trust is a trust considered domestic in the eyes of a specific jurisdiction. For example, it is a Trust where the Settlor, Trustee, or Beneficiary is a tax resident there, even if the Trust is formed in a foreign jurisdiction.
It will depend on the specific jurisdiction the specific on which party of the Trust has to be a tax resident there to be considered a Domestic Trust, as some jurisdictions only determine if a Trust is domestic if the Settlor or Trustee is a tax resident there, and ignore the residency of the beneficiary.
A foreign trust, on the other hand, is a Trust formed in a foreign jurisdiction and the Settlor and Trustee are foreign individuals.
Living Trust VS Testamentary Trust
A Living Trust is a trust that is created during the lifetime of a Settlor, while a Testamentary Trust is a trust that is created under a Testament where the assets go into Trust after the Settlor’s death.
In a Testamentary Trust, assets go under probate after the Settlor’s death and before the Assets are transferred to the Trust.
Taxation of an Offshore Trust
Trusts formed Offshore are generally not taxed in the jurisdiction of formation, hence they are not subject to income or capital gains tax, inheritance tax, estate tax, etc.
In spite of the above, a trust income could be subject to taxes depending on the source and type of income, residency of the beneficiaries, and much more.
As this varies from jurisdiction to jurisdiction, we strongly suggest you to obtain our International Tax Planning Counseling Service in order to get a better understanding on the tax implication of setting up a trust for your specific situation.
Difference between Principal and Income in Trust Law
In Trust Law jargon, Principal is the asset itself, and Income is the income generated by the Principal.
For example, Principal could be a real estate property, and income could be its rental income. Stocks is the Principal and dividends are the income.
Illegal Conveyance of Assets
Let’s say you foresee that you or your company is going to be sued in about 3 months, and you hurry up and create a Trust or an Offshore Company and transfer all or any asset to this trust, in order to “empty” the company so when the Creditor sues you or the company, you don’t have assets under your name or the company’s name.
While the above might work in some jurisdictions, some other jurisdictions have laws in place to avoid the “Illegal Conveyance of Assets” where a Debtor transfers its assets in order to defraud Creditors.
These illegal conveyance of assets law depend from jurisdiction to jurisdiction, and they state which type of transactions would be subject to this regulation, for example transactions with the debtor’s relative, transfers under market value, or transfers to other entities owned or controlled by the debtor, which took place in a 2 years period before the suit is filed (this period varies) might fall under the illegal conveyance of assets.
Counseling Service
If you need counseling in regards to the content on this page, and also about Offshore Companies Formation, International Tax Counseling, Offshore Bank Accounts, Asset Protection, and much more, you can hire our Counseling Services.
Our counseling rate goes from US$200 to US$300 per hour.
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