USES OF A TRUSTTrusts provide solutions for a range of financial planning challenges and they offer great flexibility as part of estate and succession planning management of assets.
PROTECTION OF ASSETS
The legal – as opposed to beneficial – ownership of trust assets is vested, not in the beneficiaries but in the trustees, who may be located in low or zero-tax, jurisdictions. Once created, the settlor, who is the founder of the trust, and his chosen beneficiaries have no control over the assets. This can be particularly useful where declarations of wealth have to be made by individuals in their country of residence, where exchange control laws apply, or where the political or social situation is unstable. In such cases, a trust may be a safe refuge for family or corporate assets.
PRESERVATION OF FAMILY WEALTH
Trusts may be used to own specific assets, such as land or an interest in a family company, which would not be appropriate or practical for a settlor to divide between individuals. The use of a trust enables such individuals to enjoy the assets despite the fact that they do not own them. A trust will also help to maintain the capital value of such assets for future generations.
In Gibraltar, trusts are essentially tax-exempt as long as the settlor and Beneficiaries are not residents of Gibraltar. This is naturally a very important motivation for establishing trusts in Gibraltar but there are several other important possible factors.
AVOIDANCE OF PROBATE
As legal title of the assets passes from the settlor to the Trustee when they are ‘settled’, there is subsequently no change of ownership when the settlor dies, thus avoiding the need for probate of a will in respect of trust assets. Grants of probate are a matter of public record, whereas a trust is a private arrangement which does not have to be registered anywhere. The use of a trust may also avoid the economic hardship sometimes suffered by a surviving spouse whilst waiting for probate to be granted. Moreover, obtaining probate in one country on a will executed in another can be a complex and time-consuming process and may add to the distress of bereaved relatives.
When a person and his/her family move to another country, it is often an ideal time – maybe the only time – to set up a trust in order to avoid taxation in the destination country, thereby preserving the family wealth and providing flexibility in its management. Such arrangements require detailed professional advice and guidance.
FLEXIBILITY AND CONFIDENTIALITY
A trust provides flexibility in the organisation and subsequent distribution of a deceased settlor’s estate. A discretionary trust created inter vivos – literally ‘during one’s lifetime’ – usually allows a settlor to provide the trustees with guidance in respect of the way in which the trust assets are to be managed during his lifetime and dealt with or distributed after his death.
Such arrangements will usually be made privately between the settlor and the trustees and are normally set out in a carefully drafted Letter of Wishes which is retained by the Trustees for future reference. In this way, a settlor can protect the private nature of his arrangements with the trustees and ensure that not even the Beneficiaries of the trust, of which he may be one, are aware of his intentions.
A trust may also be used to hold property for those who cannot hold it for themselves, such as minors or persons declared bankrupt. It may be used to keep the beneficial ownership of property confidential.
Residents of countries with fixed laws of inheritance may be able to use trusts to obtain the flexibility they offer in terms of distribution of part or all of their assets to beneficiaries who would otherwise not be entitled to benefit under the laws of their country of residence. Such arrangements must be made under detailed professional guidance from experts in their countries of residence or nationality.
Gibraltar trusts can be very effective in reducing taxation on capital and income. The trust may provide effective protection for the settlor, the beneficiaries and the trust assets from punitive taxation. A frequent use for trusts is the mitigation or avoidance of inheritance tax in the settlor’s jurisdiction although this will, naturally, be subject to appropriate tax advice being obtained.