The key element of a trust is that it involves the transfer of assets to trustees for the benefit of the trust’s beneficiaries. The trustees and the beneficiaries are separate legal entities and trusts can therefore be useful for tax planning, such as reducing inheritance tax liabilities, and for the control and preservation of wealth.
The common law trust has served for centuries as a favourite vehicle in financial planning and asset protection. It is finding even greater life in today’s increasingly complex society as we see our privacy diminished by a wide range of international initiatives, plus the possibility of higher inheritance taxes.
Making a trust work for you
A trust is a contract. A private legal agreement. An expression of an understanding. An offshore trust is the same. The major difference is that it is constituted abroad, beyond the laws of the country where you live.
Developed over time, trusts have become a seriously effective means of minimising taxes, protecting assets and passing wealth along to heirs in privacy and without devastating tax consequences.
Some information about a trust
In general, a trust involves:
A settlor: The person, company or other entity placing property into a trust.
A trustee:The individual or company who receives the property to be managed for the benefit of the beneficiaries.
The beneficiaries:The individual/s, company, or other entities named to benefit from the trust property.
The trust deed: The agreement which sets out the duties and powers of the various parties to the trust, and lists the assets within the trust.
Letter of wishes:Though not legally binding, you can set out how you would have handled your assets if you had maintained control of them.
Advantages of an offshore trust
Avoidance of probate:As the trust is a separate legal entity from the settlor and acts as an effective alternative to a will, no probate is required on the death of the settlor and the trust’s provisions remain unaltered.
Leaving your assets to family and friends as you wish:Many countries have laws which force assets to pass to the children and prevent them being left in accordance with your wishes. A trust overcomes this problem.
Asset protection:Your assets will be protected from political and economic uncertainty, exchange control restrictions and family changes.
Confidentiality:A trust does not need to be registered and a settlor does not need to be openly connected with it.
Tax planning:Trusts can be used to avoid income, capital gains, wealth and inheritance taxes. The assets belong to the trustees and not you, the settlor. Since the assets are outside your estate they may not be taxable.
Protecting your family or making life easier for them:Trusts can protect your assets against divorce, spendthrift children, business risk etc. They can also be used to help those who are not experienced or happy with handling too much money or making financial decisions.
Consolidation:If you own assets throughout the world they can be consolidated for eventual distribution in one legal document. Trusts are often called “international wills”.
Tailoring:Trusts can be set up to meet your family’s specific needs.
The discretionary trust and inheritance tax planning
Discretionary trusts are by far the most popular in offshore tax planning and wealth management. It provides the ultimate in flexibility, in that it allows the settlor to create a trust for a number of beneficiaries without the need to decide who should receive any immediate or future benefit.
All beneficiaries have a “potential” right to benefit from the trust assets. The potential beneficiaries can include, amongst others, the settlor, the settlor’s spouse, children, other relatives, unmarried partners, friends, or a charity. A discretionary trust allows the trustees to appoint additional beneficiaries or to remove existing ones, as well as to distribute the income and capital of the trust to the beneficiaries.
If you are non-UK domiciled (for which you will need to have lived outside the UK for more than three tax years and intend to do so indefinitely) you can use a discretionary trust to avoid UK inheritance tax as well as local succession taxes.
For this reason discretionary trusts are often referred to as “golden trusts”. Assets settled into such a trust remain outside the UK inheritance tax (IHT) net for the entire lifetime of the trust, and can “tumble down” generations of beneficiaries without any liability to IHT. At the same time, you, the settlor, maintain full access to the funds as one of the beneficiaries. The IHT benefits you will enjoy as a non-UK domicile settling assets into a golden trust remain effective even if later decide to resume residence in the UK.
Without a discretionary trust, if you were to die in the UK (for example if you return for medical care or because expatriate life no longer appeals) you will be deemed to be domiciled in the UK, regardless of how long you have lived away. This would mean that you and your family were once again liable for UK IHT.
If you were to place a personal portfolio bond within a discretionary trust, there will be no income tax liability on the gains of the underlying investments on your death, and nor will there be any UK capital gains tax on the proceeds.
The trust will be one of the most flexible financial instruments and entities to ever come about if properly established. It remains one of the most important weapons in the current atmosphere of exchange of information legislation prevalent throughout the developed world.
Blevins Franks will be discussing these issues at our forthcoming seminars. See advert for further details.
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