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Advantages of a trust

Trusts are a powerful tax planning tool but they also have many other uses which are of equal if not greater importance. It may be particularly important for those who have set up confidential offshore accounts or companies to consider using a trust to transfer those assets after death. A fact which is not well publicised is that Swiss banks hold vast assets in suspense accounts because those assets cannot be claimed by their legal heirs. Accounts were set up and maintained in strict confidence in order to avoid taxation. On death it can be highly inconvenient, if not impossible, to claim those assets under the probate procedure of a will because to do so would reveal the existence of the assets and may trigger a charge to inheritance tax, many years of avoided income tax interest and other penalties. These amounts due to the taxman may come to more than the value held within the account! The same considerations can apply to the shares of an offshore company. A trust can be used to hold a bank account or the shares of an offshore company and these problems can then be avoided. A properly drafted and managed trust can confer advantages under any or all of the following heads:-


Trusts can be used very effectively to protect assets. In simple terms, assets transferred to a trust no longer form part of the property owned by the settlor and therefore if the settlor experiences financial problems the trust assets cannot be grabbed by the creditors of the settlor. Those assets would therefore be protected if the settlor experienced financial difficulties due to bankruptcy, dissolution of marriage or a court award made as a result of, for example, a professional negligence claim. Thus, although the settlor may be declared insolvent a portion of his assets might be safeguarded by the trust structure and could therefore be used to maintain the family of the settlor otherwise. This premise is legally correct but is an over-simplification of the law. Under certain circumstances it is possible for an aggrieved creditor to have the transfer of the assets into trust set aside by showing that the settlor set up the trust with the intention of avoiding a current or future liability or because the relevant debt arose within a specified time after the transfer into trust. In effect, it has hitherto been difficult to know that the assets transferred into trust are completely safe from creditor attack. It was for this reason that many of the more astute offshore jurisdictions created what is generally referred to as the concept of the "asset protection trust" by initiating legislation which provides that as long as the transfer into trust is made at a time when the settlor does not have notice of any impending claim against those assets then as soon as the assets are correctly placed into trust they are absolutely safe from future attack. By choosing an offshore jurisdiction which has initiated "asset protection legislation" it is possible to gain a degree of additional protection over and above the already considerable asset protection inherent in a normal trust structure. It is therefore important to set up the trust in an offshore jurisdiction which has initiated such legislation in order to guarante the maximum security for the trust assets.


Assets transferred into a suitably drafted offshore trust structure are, in simple terms, no longer considered as belonging to the settlor and therefore the income and capital gains generated by those assets are taxed according to the rules in the country of residence of the legal owners - the trustees. Inheritance tax would normally be eliminated because the trustees would not die upon the death of the settlor. Anti-avoidance legislation in the home country of the settlor or in the situs of the trust assets may operate to reduce the effectiveness of a trust for tax planning purposes but, generally speaking, trusts can be extremely effective for tax planning purposes and a correctly structured and administered trust will produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.


The death of the head of the family will usually result in major disruption of the family estate whether or not there is a will. In most common law jurisdictions the estate must go through the probate procedure with much consequential delay, expense, publicity and upheaval. By establishing a trust probate can be avoided because the fact of death will have no effect on the trust property which will continue to be held and managed in confidence by the trustees in accordance with the terms of the trust.


The probate procedure mentioned above is, essentially, a public procedure. The relevant home country tax authorities will need to receive a complete list of all the property owned by the deceased in order that that property can be assessed for estate duty and in order that the property can be legally transferred to the executors who may then distribute to the legal heirs of the deceased according to the will. This procedure is therefore entirely unsuitable for those who wish to keep details of their assets confidential. If a confidential offshore structure has been set up during lifetime then revealing the existence of that offshore structure during the probate procedure may have considerable negative tax consequences. It may therefore be wholly inappropriate to include those offshore assets within the will. If a will is not to be used to transfer assets then the only other legal form of transfer is via a trust which would generally serve to save estate duty and to keep the trust assets confidential.


In non-common law jurisdictions there will often be questions of forced heirship to consider i.e. the deceased will not be permitted to leave his property to anyone he wishes on his death. This is a particular problem in continental European countries and other civil law jurisdictions as well as in countries of Islamic tradition. A trust can be used to overcome the problem of forced heirship but care is needed in selecting a jurisdiction for the trust which has an appropriate trust law.


Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more complicated arrangements. These might involve providing a source of income for a widow for life, making provision for the education of children or providing a fund to protect members of the family in the event of sudden illness or other disasters. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.


A trust provides a vehicle by which a person can provide for those who may be unable to manage their own affairs such as infant children, the aged, the disabled and persons suffering from certain illnesses.


Preserving the family assets or increasing them is often a motive for setting up a trust. Thus, an individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs but retained as one fund to accumulate further, with provision for payments to members of the family as the need arises while preserving some assets for later generations.


A person who has built up a business during a lifetime will often be concerned to ensure that it continues after death. If the shares in the company are transferred to trustees prior to death a trust can be used to prevent the unnecessary liquidation of a family company. The terms of the trust will ensure that the individual's wishes are observed. These might include provision for payments to be made to members of the family from dividend income received by the trustees but that the trustees retain the shares and keep the company running save in special circumstances justifying sale of control or liquidation. This may be particularly advantageous where the family members have little business experience of their own or where they are unlikely to agree on the correct way to manage the business.


The best laid plans can, in a changing world, rapidly become obsolete. A discretionary trust can, however, be structured to provide for a system of management of property that is capable of rapid change as circumstances demand.