A trust is a company that acts as an asset manager (fiduciary) for another business. The activity of a trust is characterised by two features:
- A trust is an independent decision maker.
- A trust does not own the assets it manages.
In other words, one person gives the property to a second for the benefit of a third. A trust is a legal arrangement whereby the settlor transfers his or her assets (real estate property, dividends, savings or other assets) to another person — the trustee — so that they may be used to benefit the beneficiaries (who can be either a single individual or a group). Trusts are widely used to protect and pass down wealth through the generations.
Although generally guided by the beneficiary, a trust is ultimately an independent decision maker. A trust acts in accordance with the rules and provisions set out in the relevant agreements, and aims to obtain the best results for the beneficiaries. The strategy for achieving those results, however, is determined by the trust itself. The scope of these activities is practically unlimited, ranging from investing to donating to selling an estate.
As for ownership, a trust is limited to management, and trustees do not own any of the assets. The actual ownership of these assets will vary by jurisdiction. In some jurisdictions, e.g. Russia, the assets belong to the company or individual using the trust's services. In others, the assets acquire a special status and do not belong to the user of the services, the trust or the beneficiaries.
If you would like more specific details about these and other peculiarities of the jurisdiction of your choice, please contact Confidus Solutions.
Functions of a trust
The main function of a trust is to manage assets on behalf of their owner for the benefit of the beneficiaries. For this purpose, a trust may choose any activities it deems effective and advantageous, unless the relevant contract specifies otherwise. Some of the functions of a trust include:
- Managing finances
- Managing investments
- Paying bills
- Preparing financial reports
- Distributing profits
In addition, a trust can perform almost any other management function specified by the contract. Depending on the particular case, they may also offer financial planning, tax optimisation schemes and similar services.
Trusts can be useful to anyone who possesses considerable assets. Trusts are usually set up to secure assets and property and to optimise taxation. They also have inheritance applications: assets held in trust do not require probate as they are no longer part of the settlor’s estate, and so are unaffected by the contents of his/her will.
Benefits and features of trusts
Other than the specific purposes for which trusts can be used, there are some common benefits that apply to all types of trust:
- Anonymity. In most countries, the content of wills as well as the names of the owners of real estate or other assets are publicly available. The names of the beneficiaries of the trust usually remain unknown, and therefore using a trust to hold real estate or distribute assets allows you to maintain your privacy.
- Suppression of income. The ability to transfer all property and assets to the trust allows you to declare an insufficient availability of personal assets and to apply, for example, for a lower tax rate.
- Tax avoidance. In many offshore jurisdictions, trustees are not obliged to report the income of the trust to the tax authorities of the country in which the beneficiaries reside.
- Charity. In some countries, all property handed over to a charity is required to be managed under a trust.
- Capital preservation. Trusts can be used to protect the beneficiaries (for example, the settlor's children) from their own inability to manage the funds. The conditions of the trust can prescribe limits on the use of the money or the age when the beneficiaries acquire the authority to dispose of the funds and utilise the assets.
Types of trust
There are many forms of trust, which can be set up in various situations. However, generally trusts can be divided into two main groups:
- Beneficial trusts
- Target trusts
A trust whose beneficiaries are explicitly specified or which has a limited circle of beneficiaries.
A trust created in order to achieve some specific purpose. There are two subtypes: charitable or private (non-charitable), which is used for asset protection purposes.
A trust is an arrangement whereby one individual (a trustee) undertakes to oversee certain property (the trustee’s own or belonging to others) for the benefit of another individual. The founder of a trust (the settlor) is the owner of the assets. When the founder creates a trust, he or she loses all legal possession of those assets. The same individual can simultaneously act as a beneficiary and the founder of the trust.
Trust registration procedures vary between jurisdictions, but are generally distinguished by one key feature: registering a trust does not simply mean registering a company, because in order to act as a trust the company must be issued with a license. In other words, a business must first register as a company, and then apply for a trust license.
Usually, when initially registering the company no additional restrictions apply, and the business is registered like any other. The documents required are the same: the articles of association, the memorandum, details relating to the owners and shareholders, etc.
Applying for a trust license requires the registered business to provide some additional details. For example, many jurisdictions require proof of qualifications and/or other documents supporting the claim that the company is capable of providing trust services. Some jurisdictions also require a certain minimum share capital. There are also additional rules for ownership and management: in general, trusts are required to have more directors and/or other managing executives than a standard company in the same jurisdiction.
To find out about the requirements in the jurisdiction of your choice, please contact Confidus Solutions.
Most popular jurisdictions for trusts
The concept of the trust is derived from common law and all countries with a common-law system mutually recognise each other’s trusts. Many trusts are established in low-tax or tax haven jurisdictions, where trusts are not subject to taxation. However, it is also possible to set up a trust in a jurisdiction within the EU, which will be free of taxation in the country of registration provided that certain conditions are met.UK Trust: Establishing a UK trust is particularly beneficial when it is not appropriate or possible to use an offshore trust, due to legal regulations in the settlor’s or beneficiary’s jurisdiction of domicile or residence relating to the transfer of assets to trusts established in “black-listed” jurisdictions. Cyprus Trust: In Cyprus, trusts are largely governed by the British common-law system (1925 Trustees Act for England and Wales). Note that at least one trustee must be a resident of Cyprus. Property held by a trust in Cyprus can consist of any type of asset, including real estate located in Cyprus. The settlors, who are generally non-residents, are also allowed to move to Cyprus after the trust has been registered. Trust income is exempt from any corporate taxes, including the Cyprus defense contribution tax. Moreover, there is no inheritance tax and no real estate duty. Nevis Trust: The modern concept of an offshore trust was introduced mainly by Nevis. The structure of a Nevis trust gives you an efficient way to accumulate and protect savings, which may derive from worldwide income. Nevis is by far the preferred jurisdiction for trusts established for asset protection purposes. A Nevis trust must have a Nevis-based trustee, who is entirely protected against any foreign court orders and rulings regarding the repatriation of assets.
To learn more about the opportunities of the trust, or to ask us about other jurisdictions, please feel free to contact us.
Top three famous trusts
As of 2016, the top three trust companies in the world are:
- Sageview Advisory Group, LLC
- First Republic Investment Management, Inc.
- Genspring Family Offices, LLC
Sageview Advisory Group, LLC is an international trust company offering their services in 22 countries. The company provides wealth management services and retirement plans and manages more than 60 billion USD of their clients' assets. In addition, they offer corporate services such as the Executive Benefits programme, aimed at attracting and retaining executives through financial motivation.
First Republic Investment Management, Inc. is a private wealth management trust company. It offers both standard trust services, such as investment management, and additional services, such as brokerage, wealth transfer, business planning and financial education.
Genspring Family Offices, LLC is a trust company that specifically caters to wealthy private clients, offering investment plans, capital protection, expense management and tax planning. It places the main emphasis on structuring their clients’ finances, providing financial education and ensuring the longevity and sustainability of the wealth for which they are responsible.