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Offshore Trust vs. Foundations

In years past, setting up offshore trusts was common practice in the world of offshore business, but the increasing scrutiny and reporting requirements imposed on offshore trusts by European and American countries has made them much less attractive.

Sovereign has found a Panama Foundation to be a much better, equally flexible and much lower profile alternative (read more about the benefits and uses of a Panama Foundation here).

However, we also realize there are people who are willing to abide by the reporting requirements, but still require one or more trusts to take care of the disposition of assets. There are others still, who may be lucky enough not to live in countries with such onerous reporting requirements. This article covers offshore trusts.

Trusts do have the unique advantage of essentially being a contractual arrangement, which can be easily changed and transported to another jurisdiction, in most cases without the requirement to register it. A Panama Foundation can be transported as well, because more and more countries have passed foundation laws, but there will be more requirements for registering the foundation in its new domicile then with a trust.

A component of Sovereign's International Fiduciary Structure is the Testamentary Trust, which is a trust that is only settled automatically at a certain event (usually death) in the future and therefore has no current reporting requirements, since no assets have been settled into it. A Testamentary Trust is an invaluable tool for estate planning and adds an extra layer of protection on top of the Foundation, to insure that assets are held and/or distributed according to very specific instructions, in a way that only a trust can achieve.

However, Sovereign can set up any other type of special purpose trust, once we have a complete understanding of the needs of the current holder of the assets that are to be settled into a trust. We can also assist in the re-domiciling of existing trusts to Panama.

Definition of a Contractual Trust

What exactly is a trust? To state it in the simplest terms: “A trust is a right of property, real or personal, held by one party for the benefit of another.”

A trust, then, is a Contract in which an individual (variously called the Settlor, Creator, Trustor, or Grantor) transfers property, either real or personal, to one or more Trustees, to be held or managed for one or more Beneficiaries. There are many types of trusts in use today for a variety of purposes. The only trusts we are interested in and set up are the pure common law trusts as originally perfected under British Common Law in the nineteenth century and recognised under favourable international trust ordinances enacted by former British colonies now in the top tier of tax havens.

These Contractual Trusts had their modern day beginnings in 18th century England. The first recorded trusts originated from the time of the Crusades in the 12th century when knights leaving for the Holy Land would set up trusts and convey their properties into them. Their goal was to protect them from appropriation or seizure while absent or in case of their death to ensure their chosen heirs inherited their estates. Two famous early nineteenth century contractual Trusts in England were Lloyds of London (1811) and The London Stock Exchange (1802).

The trust has been employed in nearly every field of human activity. Recently it has been utilised in the field of commerce and trade in combination with the corporation or limited liability company.

Characteristics of a Contractual Trust

A Contractual Trust must be a non-grantor trust formed under the common-law right of contract. (This common law right was enshrined into the U.S. constitution). Most trusts formed by attorneys today are statutory in nature, mainly because most attorneys and accountants do not receive training in Common Law trusts and therefore do not understand or know that such a legal arrangement is possible.

A trust must avoid those corporate attributes, which could cause it to be treated and taxed like a corporation under statutory provisions regulating corporations. This assumes that the jurisdiction of domicile does not provide for exempt offshore trusts.

The four main corporation attributes are:

  1. Centralised management
  2. Continuity of life
  3. Limited personal liability of trustees
  4. Easy transferability of beneficial interest in the trust.

If the trust possesses any three of these attributes, it will be taxed as a corporation. However, since we are only interested in establishing the trust in countries with an English Common Law background, or in a country such as Panama, which has a territorial system of taxation, taxes are not an issue here. Again, these countries have specifically gone out of their way to create favourable laws that encourage and protect the inviolability of such trusts and exempt them from any registration and tax, as long as any income derived is from outside their borders.

Such countries as Panama and Nevis are excellent examples of secure offshore domiciles even though Panama inherited a system of law based on the Napoleonic Code, in keeping with its Spanish colonial past. Such countries, of course, also provide the same protection and favourable treatment for corporations.

A Contractual Trust of the type described herein is referred to by many names such as a "Pure Trust", "True Trust", "Contractual Company", "Common Law Trust", "Unincorporated Contractual Organisation (U.B.O.)." These are all one and the same, so long as they follow the description above and are truly irrevocable trusts.



Please contact us with your any trust requirements you may have.

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