"It is important to be working with professionals that you have faith in, who understand your situation, who appreciate you and any Beneficiary’s needs, and who are properly equipped to ensure the most effective use of the trust structure."
The offshore trust is as synonymous with the Island of Jersey as the Jersey Royal, the Jersey lily, and the Jersey Cow. For many decades Jersey has understood, promoted and developed the concept of the trust as a means to protect, preserve and provide wealth; protect from creditors and spendthrifts and provide for those who the Settlor of the trust.
This article is not intended to provide reference as to how to set up a trust but instead, firstly, to perhaps dispel some myths about trusts, and secondly, to provide some pointers as to what to avoid and what to look for when considering transferring significant wealth to Trustees.
What is a trust?
A trust has no legal personality. It is not an entity so the trust cannot transact any business as might a company. A trust is essentially a relationship between the Settlor, the Trustee(s) and the Beneficiaries, with the Trustee being primarily responsible for acting in the best interest of the ‘Beneficiaries’ rather than the Settlor. To add some spice, a Protector or Enforcer might also be invited to the party.
To expand, the typical fully discretionary trust comprises the person giving or settling his or her wealth to the Trustee. The Settlor gives the wealth away to the Trustee who takes legal ownership of the assets but do not own it personally. He or she must administer it in accordance with their duties as a Trustee. The trust instrument will record the terms of the trust and the people who can benefit (the Beneficiaries) from the wealth of the trust upon the exercise of the Trustee’s discretion. The Beneficiaries have the beneficial or equitable interest in the asset. There might be a Protector involved, who, being a close family friend, might have to be consulted before the Trustee does certain things, including distributing some of the money from the trust.
Why a Trust?
Trusts can have many and varied uses which can evolve from its original use to another, for example; to benefit one person first and then another; to save or defer tax liability, whether it be inheritance tax by enabling wealth seamlessly to pass from one generation to another, capital gains tax by legitimately pushing the gain offshore, or income tax. Trusts can be used to avoid forced heirship rules, protect assets from creditors, spouses and other family members, and to avoid the lengthy delay and cost of administering the estate of the successful individual who has used his skill and entrepreneurial wit to leave assets and businesses to otherwise be discovered and administered by a potentially poorly-skilled executor.
By way of example, Mr Jones might decide to leave the UK before selling a company, or his shares in a company or venture, to settle down in a more tax advantageous jurisdiction. On his way out of the UK he might sell his shares in the company ‘on trust’. The Trustees might hold these shares in one company, buy a house in the name of another, and allow Mr Jones to be the Managing Director of a third company from which he might obtain a salary. Wealth is built up in the trust. Mr Jones avoids capital gains tax and paying income tax on trust income. His only concern is his salary. Depending on the tax regime of his new country of residence/domicile, he may avoid this also. The Trustees can benefit Mr Jones' children and his wife who are part of the beneficial class (the Beneficiaries) of the trust. Upon Mr Jones' death, assuming Mr Jones has taken the appropriate advice to avoid any forced heirship rules, Mr Jones' personal legal, traditional estate is minimal, if it exists at all, yet the Beneficiaries continue to benefit from the trust.
Professional advice and administration
Of course none of this works unless the trusts and underlying companies are set up properly with the appropriate legal and tax advice and properly administered by professional and reputable Trustees. Beware the Trustee who says not to worry because they will deal with everything. Be inquisitive and ask searching questions as to the legality of the structure and its financial consequences. Beware the Trustee who says that you should not worry because you are still in control of the assets. If you are and the structure is challenged, it may be that the trust is declared invalid and all your financial objectives are set at nought or worse, and you have paid handsomely in Trustee fees to get there. For an offshore trust to operate properly, management and control needs to be with the Trustee. There is no reason why you should not play a role going forward, just be aware of what that role can be and its limits. There is also no reason why the trust should not, for example, own the freehold of a hotel or office block and you rent it back.
Many professionals are involved in the establishment and management of a trust, from tax lawyers, to accountants and administrators, and so it is important to be working with professionals that you have faith in, who understand your situation, who appreciate you and any Beneficiary’s needs, and who are properly equipped to ensure the most effective use of the trust structure.