How Trust Funds Protect Your Assets & Ensure they End Up in the Right Hands
- Last updated on . Written by Offshore Protection.
Trusts as financial vehicles are exceptionally flexible. They are one of the most useful devices you can employ to effectively manage your asset & wealth. Whether you are looking for asset and wealth protection or simply looking for a more efficient way to manage your taxes, the formation of a trust fund may just be the resolution you are looking for.
Table of Contents:
- What is a Trust Fund?
- What is the Mechanism of a Trust Fund?
- Why Should You Think About Setting Up An Offshore Trust Fund?
- Which Offshore Trust Jurisdiction is the Right One for You?
- Features Offered by Different Offshore Trusts
- Cook Islands & Nevis
- Cayman Islands
- Trust Funds FAQ
What is a Trust Fund?
The owner of a property (the Settlor) transfers the said property to a trusted person (the Trustee). The Trustee acts as the owner of the entrusted property and holds, protects, and uses it solely to administer the trust. The purpose of a trust can be to protect the interests of a loved one of the original owner (the Beneficiary) or a specific purpose that is close to the heart of the original owner (in the case of charitable trusts).
What is the Mechanism of a Trust Fund?
The basic mechanism of forming trust is similar in most countries. A Trust Deed needs to be executed between the owner of the property and the Trustee. However, in some countries, especially the ones that are preferred destinations for setting up offshore trusts, the formation of a trust may differ slightly – for example, some countries require that trust administrators be made a party to the trust deed, while some others allow the Settlor and the Beneficiary to be the same person.
The best part, though, is the fact that once a trust is formed in a country, the assets entrusted to the trust become subject to the laws of the country in which the trust has been formed, irrespective of which country the assets are located in. This is especially helpful if bypassing inheritance laws of the domicile country is a key concern.
This brings us to our next point.
Why Should You Think About Setting Up An Offshore Trust Fund?
Trusts create an extra layer of protection around your assets and wealth and shield them from a variety of assaults. Whether used for together in family office planning, risk minimisation from lawsuits, or tax planning, trusts help you achieve better asset security, tax savings, and increased foreign investment capacity.
Several countries around the world have specifically designed their asset protection laws so as to protect the privacy and privilege of these entities. Oftentimes these safe havens are used to form offshore entities, tax-saving vehicles, and asset protection trusts.
Some of the most popular and well-regarded trust locations are:
- Cook Islands
- Cayman Islands
- The British Virgin Islands
Which Offshore Trust Jurisdiction is the Right One for You?
It will depend primarily upon what you seek to achieve through your trust, and some other basic, but key, considerations, like:
- the size of the trust property or trust funds;
- the level of litigation risk you carry;
- the beneficiary of, or purpose of forming, the trust.
Based on the above, you would need to consider some crucial parameters, like:
- Trust Laws: Each country has its own set of laws to govern the trusts formed within its jurisdiction. It's important to have modern, up-to-date, investor-friendly legislation in the country you decide to form a trust in.
- Tax Laws: Whether the trust shall be a vehicle for estate planning, succession planning, or tax planning, you will need to find out if the tax regime in your preferred offshore trust jurisdiction is favourable for your objectives. Would the trust, for example, be subject to income tax? At what rate? Whether inheritance tax or estate tax would become payable? At what rates?
- Confidentiality Laws: One of the most common considerations while choosing an offshore trust is to protect the privacy and confidentiality of your assets and wealth. Some countries like Cook Islands and Nevis have some of the most private confidentiality laws in the world.
- Exchange Laws: How easy would it be to move the trust funds from the country of origin?
Features Offered by Different Offshore Trusts
Cook Islands & Nevis
Approximately 10% of the Cook Islands’ GDP comes from forming trusts. The government, therefore, is very committed to guaranteeing confidentiality and ease of business. Nevis has a similar structure.
Benefits of a trust formed in the Cook Islands or Nevis
- A Settlor can also be the Beneficiary.
- Complete anonymity for the Settlor and the Beneficiary.
- A wide variety of assets can be held by a trust, like bank accounts, investments & land.
- In Nevis, trusts are also permitted to be split or joint.
- Foreign judgments compelling seizure of any assets held by a trust are not recognised.
- In the Cook Islands, creditors must prove, in a local court, that the assets were transferred to the trust to specifically defraud the claimant creditor, and that too within one year of the transfer.
- In Nevis, the limitation to prove fraudulent transfer is two years. However, to file a claim against the trust, a creditor must first post a 100,000 USD bond, which is liable to be forfeited if the case is proved to be false.
- Trusts formed in these countries are tax neutral.
- Stringent and well-developed trust legislation ensures that trustees cannot defraud the Settlor or the Beneficiary/ Beneficiaries.
Belize’s Trust Laws have been the industry standard for a long time. The Trust Act of Belize, which was first introduced in 1992, has since been revised in 2007.
Benefits of forming a trust in Belize
- Private trusts are restricted to 120 years. Charitable trusts can go on forever.
- Protection from seizure of assets pursuant to foreign judgments.
- Complete privacy, anonymity, and confidentiality.
- Incorporation costs are lower than in Nevis and Cook Islands.
- Estate planning provisions to eliminate inheritance taxes.
The Cayman Islands has a sophisticated, well-developed trust infrastructure comprising modern legislation and effective judicial systems. The Financial Services Division of the Grand Court handles trust matters, and ultimate appeals go to the Privy Council in the UK.
Benefits of forming a trust in the Cayman Islands
One of the reasons why many prefer the Cayman Islands is the “STAR Trust”. An alternative trust regime, the STAR Trust is exceptionally flexible and allows the formation of:
- Charitable and non-charitable trusts.
- Mixed trusts, for purposes as well as persons.
- Perpetual trusts even if they are non-charitable.
- trusts that restrict Beneficiaries from enforcing the trust or obtaining information about it from the Trustee.
- Trusts that cannot subsequently be varied through a judicial mechanism, etc., following the death of the Settlor.
STAR Trusts must:
- have an enforcer,
- at least one of the Trustees must be a licensed trust company or registered as a private trust company in the country.
Other features of a Cayman Trust include:
- Revocability: The Settlor may terminate the trust and regain ownership of the trust funds held by the trust as on the date of revocation.
- Protectors: A third party, known as a Protector, may be appointed per the terms of the trust to control and/or supervise the core powers of the trustees, like the trustees’ power to appoint new trustees, addition and removal of beneficiaries, and distribution of capital from the trust fund.
- Reserved Powers: Per the Cayman trust legislation, the Settlor is allowed to reserve certain powers for him/herself, like the power to add and remove trustees, make changes to the beneficiaries, alter the jurisdiction of the administration of the trust, direct the trustees on how to invest the trust funds, distribution of income generated by the trust fund and also, withhold consent from specific actions of the trustees.
- Tax Neutrality: Cayman trusts are generally exempt from any kind of gift, estate, income, or capital taxes.
Trust Funds FAQ
What are the benefits of using trusts?
Trusts are used as a way so that a grantor can give money to a person with conditions such that there is an element of control that can be used to distribute the funds to the intended beneficiary. This allows for the assets to be used in a specific way according to how the grantor intended
How do trust funds payout?
Trust funds payout in a number of different ways. There are really no set rules as each can be made according to the stipulations of the trust itself
How much does a trust fund cost to start?
There is no one fixed price, but can cost anywhere from 1,000 USD to 30,000 USD and up. The cost will be dependant upon where the trust is located and the type of trust that you form. Domestic trusts are much cheaper, whereas offshore trusts can get quite expensive.
How can you start a trust fund?
Anyone is allowed to start a trust fund. Though everyone may not need one. Trusts are used in many different ways but are primarily used as a legal means to give assets to another under certain conditions. They are also often used as a means of privacy and protection for those involved.
Once you have decided why you need to trust you can figure out who the parties of the trust are to be and under what conditions is the trust to be used. The legal process of starting a trust is usually done by a law firm or lawyer as they often can involve complicated arrangements that otherwise might be established wrongly. Once the trust deed is made and signed funds can be transferred.
Different types of trust funds
Revocable Trust - The trust can be easily changed while the grantor is still alive. Assets are transferred at the time of death to beneficiaries. These types of trusts are also called living trusts and are held privately.
Irrevocable Trust - These are inflexible trusts that are hard to change or amend once they have been made and are used for tax and inheritance benefits
Asset Protection Trust (APT) - They have strong privacy and protection mechanisms that make it hard for outside forces to break into it.
Charitable Trust - These are created for a specific purpose usually involving a social or charitable cause and have tax benefits
Individual Retirement Account (IRA) Trust - An account that is usually opened for retirement planning and are used in such a way to help minimize the tax burden of the one holding it.
Land Trust - This type of trust is best suited to hold physical property where one party holds the title for another party
Medicaid Trust - A Trust that is irrevocable that is often used for elderly individuals to avoid tax and probate
Marital Trust - A trust that is irrevocable that is used to transfer assets to a surviving spouse after death which can be used to shield and protect assets.
Spendthrift Trust - A trust that has specific instructions that indicate how the trust assets are to be used and prevent beneficiaries from misusing the assets.
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Whether or not you need a trust fund will depend on what you are looking for. What works for others may not work for you. Get in touch to find out.
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