Most people prefer not to think about what will happen to their property on their death. However, failure to make proper plans can create real problems and cause great expense, including tax liabilities, for next of kin. They will be forced to sort out such problems at a time when they are emotionally upset and most vulnerable.
Making a will is a sensible way for an individual to put his or her affairs in order. However, the administration of a deceased's estate can be costly. One alternative to making a will is to set up a trust during one's lifetime. With careful planning, this can eradicate delays, costs and taxes and provide other benefits such as protecting assets from future creditors or providing anonymity.
What is a trust?
Unlike a company, a trust is not a legal entity. It is best described as a relationship; an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who holds the property for the benefit of specified people or objects (the beneficiaries).
A trust deed sets out the terms and conditions upon which the trustees must hold and administer the trust assets. The trust deed also sets out the rights and interests of the beneficiaries.
A trust can also be created by a will, but if assets are "transferred" to trustees during lifetime, they should be unaffected by the subsequent death of the settlor. Another word for "transfer" is "settle"; hence, the transferor of the assets is called the settlor and the trust is often referred to as a "settlement".
Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a trustee. However, the duties of trustees have been developed over centuries through English equity and common law and are now in many cases codified in statute law.
This law distinguishes between legal ownership (trust assets are held in the name of trustees) and beneficial ownership (only the beneficiaries may benefit from the assets). Further, even greater duties are imposed on professional trustees who, in reputable and well-regulated jurisdictions such as Gibraltar, for example, are required to be licensed.
Where can I set up a trust?
Virtually all low-tax or zero-tax common-law jurisdictions have some form of trust law. Gibraltar is at the forefront of best practice development in the area of trusts and was one of the first jurisdictions to introduce the regulation and supervision of trust companies. Professional trustees must be licensed under the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC).
Gibraltar trust law is derived from English common law and the rules of equity, supplemented by certain legislation. Gibraltar's Trustee Ordinance is based on the Trustee Act 1893.
"Asset protection trusts" are also permitted although all trusts provide some element of asset protection.
Are there concerns regarding confidentiality?
Regulations require trustees to know the identity of the settlor and ultimate beneficiaries of a trust. This information is kept completely confidential. Disclosure to third parties is only required in very particular circumstances and must be accompanied by a court order. In the case of asset protection trusts, the register maintained by the Registrar of Dispositions to record the transfer of assets to asset protection trusts is closed and its contents are privileged.
What about tax liability?
The vast majority of Gibraltar trusts are set up as discretionary trusts so that beneficiaries only have a contingent interest. The beneficiaries can, therefore, avoid any tax liability until assets are distributed to them.
Trust income is exempt from tax in Gibraltar if the trust is established by a non-resident, has no Gibraltar beneficiaries and derives no income locally (other than bank interest). The terms of the trust must expressly exclude Gibraltar residents from being beneficiaries.
Asset protection trusts (APTs) are permitted in Gibraltar. These must be registered with the Register of Dispositions.
Only professional trustees licensed by the FSC can act as trustees of APTs and an application fee of £300 (around Dh1,785) is payable upon registering the trust and £100 is payable annually to maintain the registration.
What are the main advantages of a trust?
Trusts can be a very useful means of tax planning. They can be very flexible; even the settlor can continue to benefit from the trust assets.
Trusts offer asset protection and confidentiality. There is no public register of trusts or trustees, so the ownership of trust assets can remain entirely confidential in most circumstances.
They help avoid forced heirship. They also facilitate estate planning, protecting those who may be unable to manage their own affairs such as children, the aged or persons suffering from certain illnesses.
If a company's shares are transferred into a trust prior to the owner's death, the unnecessary liquidation of the family business can be prevented.
In some circumstances, depending on the local laws, a "local company" may be required to sit under the trust (for instance, it's common for a Jebel Ali offshore company to hold Dubai property and have a trust acting as a shareholder of the company).
While every effort has been made to ensure that the details contained herein are correct and up to date, this information does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.
John D Hanafin is the managing director of Sovereign Group
