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TRUST FORMATION. GENERAL COMMENTS CONCERNING TRUSTS. WHAT IS A TRUST?

Very often trusts set up in a foreign jurisdiction play an important role in asset protection planning. An offshore asset protection trust is a special form of trust created by a grantor in one jurisdiction under the laws of another jurisdiction in which the trust is domiciled and where it is controlled and operated. A foreign ("offshore") trust can overcome most of the problems connected with using a domestic trust for asset protection. Although the Trust may be seen to have its roots as far back as ancient Egypt or to Roman law, it was in Medieval England that the Trust came into its own. Arising out of the legal principle of "Equity" rather than Common Law, the English Trust prevented persons who became temporary holders of property for legal convenience from usurping the rights of the 'true' owners. Equity recognized in a trust relationship the division of property ownership into two distinct portions - legal title (who was the registered owner) and beneficial or 'equitable' ownership (who should profit from the benefits of ownership). Over the centuries the concept has been further developed and refined of course and trust may now be utilized for a variety of purposes.

In basic terms, a Trust is a private legal agreement or arrangement between two parties, the Settlor and the Trustee, whereby the Trustee holds certain assets previously belonging to the Settlor. This agreement is made for the benefit of a third party, the Beneficiary, for whose benefit the assets are held (sometimes referred to in legal documents as the 'cestui que trust'). A trust may exist in law in a variety of circumstances including simple verbal agreements, but we are primarily concerned with 'formal' trusts, in which the agreement is formalized by means of a written agreement called the Settlement, or the Trust Deed. In such an agreement, the assets held for the Beneficiary are often referred to as the Trust Fund.

Other elements may be included in the Trust Deed, and various additional documents may be exchanged by the Parties, but a Trust normally exists in the presence of the above elements. We can set up for you and your loved one's benefit various trusts such as by-pass trusts, living trusts, marital trusts, special needs trusts, charitable trusts, qualified personal residence trusts, and trusts for other purposes.

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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:

The 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;
The Trust Fund is not held for specific beneficiaries in specific proportions;
The Trust Fund is held for the benefit of all beneficiaries, either as defined in the Deed or to be added later under specific rules;
The 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:

Charitable Trusts, in which the beneficiary is a charity or charitable cause;
'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;
Testamentary Trust, which is created in a will to be effective on the death of the Settlor;
Protective 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;
Inter 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:

A brief description of the Settlor(s);
A definition of who is to act as Trustee and how the Trustee may retire or be replaced;
A definition of the powers given to the Trustee and any restrictions on his power;
A 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;
A definition of whom is to benefit from the trust.

THE SETTLOR

The Settlor is the person or persons who give their assets to the Trustee and thereby transfers the legal ownership of those assets to the Trustee. It is this transfer of ownership that provides the trust with many of its legal benefits. The Settlor will insure that the Trust Deed defines or recommends to the Trustees how the benefits of the Trust should be distributed. (Terminology note: In the U.S.A. Settlors may also be referred to as Grantors in certain contexts.)

THE TRUSTEE

The Trustee is the person or corporate entity into whose ownership the assets of the trust have been transferred. The Trustee has a duty to insure that the wishes of the Settlor as stated in the Trust Deed (and perhaps subsequently expanded upon in a Letter of Wishes or by verbal instruction) are carried out and to administer the assets of the Trust Fund in the interests of all of the beneficiaries. As noted above, the Trust Deed should provide for the removal, replacement or resignation of a Trustee.

THE BENEFICIARY

The beneficiary is the person, persons or other legal entities who will ultimately benefit under the Trust Deed. They may be specifically named by the Settlor and their benefits specifically set out. Alternatively a class of persons may be nominated (e.g. grandchildren) from which the Trustee is to chose who shall benefit and to what extent.

Normally the Trustee is guided in this choice by guidelines given to him by the Settlor (see Letter of Wishes). Obviously a charity may be one beneficiary, or the sole beneficiary of a Trust.

Almost any identifiable 'class' can be made a beneficiary of a Trust, and almost any legal and possible condition can be placed on the distribution of the assets by the Trustee. The Settlor may be a Beneficiary of the Trust, but he should not be the only Beneficiary, as this will normally invalidate the Trust.

The Beneficiaries of a Trust have legally enforceable rights and can seek a legal judgement compelling the Trustee to act in accordance with the terms of the Trust Deed.

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.

OFFSHORE TRUSTS IN THE SEYCHELLES

An offshore trust has become the best means of safeguarding and protecting the wealth of an individual or family.

The Seychelles discretionary Trust. The Seychelles Discretionary Trust is regulated by the International Trust Act, 1994. The Seychelles Discretionary Trust is a well established way of structuring a client's affairs to help protect assets against many unfavourable events. By giving away the title of assets to professional trustees, an individual (called the settlor) is able to divest himself of the ownership of his assets. The assets, once part of a trust, can be moved to a secure jurisdiction and are no longer subject to the laws of the settlor's country of nationality or residence.

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.

Some advantages of Seychelles Trusts:

There is total anonymity for the settlor and the beneficiaries of the trust.
There is no filing of the trust deed with any public registry, as a result of which no third party is able to identify the parties involved.
Seychelles trusts may be drawn up in a very flexible way to meet settlor's needs.
Trusts pay no taxes in Seychelles.
Seychelles trusts do not need to be audited nor do any statements need to be filed from year to year.
A Seychelles trust can be easily terminated.
Seychelles trusts are not subject to exchange control regulations.
Seychelles trusts have the statutory protection of the International Trusts Act, 1994.

SEYCHELLES: THE IDEAL BASE

Intershore Trust Limited based in Seychelles offers many advantages to the client. Seychelles is in the middle of the Indian Ocean and was formerly a British Colony. English is the official language. The Seychelles offers political stability and constitutional rule of law.

Seychelles provides tax exemptions for trusts and there are no tax liabilities on either income or capital gains in respect of trusts. Seychelles is an ideal trust jurisdiction because of:

Stringent trust protection;
Political stability;
No taxes on trusts;
Competitive administration costs;
Excellent communications;
A high level of legal and financial expertise;
No exchange controls for trusts;
Complete confidentiality;
Excellent time zones for Asia and Europe.

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 seek competent professional advice related to their particular situation.