Trust Introduction
What is a Trust?
Trust originated from the Common Law concept in England, it is a legally binding arrangement in which the owner of assets known as the Settlor transfers the right to hold the legal ownership of assets to the Trustee for the benefit of the beneficiaries in accordance with the terms of the Trust Deed. The assets held under the Trust are for the benefit of the beneficiaries during the lifetime of the Settlor and after the Settlor’s death. The trust assets constitute a separate fund which are not part of the trustee’s own assets.
A Trust may be created by a Deed of Settlement made between the Settlor and the Trustee or by a unilateral Deed of Declaration by the Trustee in which the Trustee acknowledge their appointment as trustee and receipt of the settled sum with the identity of the Settlor not being recorded in the Deed of Declaration.
The Trust can provide flexibility on succession planning and asset management. The Trustee has the discretion on deciding the timing, amount and manner in making distribution to the discretionary beneficiaries of a Trust. The Settlor can provide a non-legally binding Letter of Wishes to the Trustee as a guidance in managing the trust assets and making distributions to the beneficiaries.
The trustee has the power and fiduciary duty, in respect of which it is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed on it by law.
Parties to a Trust
Settlor
The Settlor is the person who settles assets into the Trust, he is also known as asset contributor of the Trust. The Settlor can be a Beneficiary of the Trust but he cannot be the sole Beneficiary. The Settlor may retain or to delegate certain powers to a third party e.g. to the Protector of the Trust in order to retain certain degree of control over the Trust Property.
Trustee
The Trustee is the legal owner who holds the trust assets for the benefit of the beneficiaries of a Trust. A Trustee are entrusted to make decisions in the best interest of the beneficiaries and owe fiduciary duty to the beneficiaries.
Beneficiaries
The Beneficiaries are the persons who can benefit from the Trust, usually they are the family members of the Settlor or charitable organizations. Additional persons may be added as Beneficiaries after the Trust is created.
Protector
The Settlor may wish to appoint a Protector to oversees the Trustee to exercise certain powers. The Trust Deed can specify prior consent of the Protector to be obtained before the Trustee exercising certain powers of the Trust. Usually, the protector is a family member, a close friend, relative or professional advisor of the Settlor or the Settlor can be the Protector himself.
Benefits of a trust
- Succession planning: the Trustee can hold the trust assets and distribute the trust assets to the beneficiaries in accordance with the terms of the Trust Deed. The Settlor may give a letter of wishes as a guidance regarding the timing, amount and manner of distribution to the Trustee. The Trustee can hold the shares of a family business for concentration of shareholding of family business and to ensure that the family business can pass to future generations.
- Asset protection: by transferring the assets to the trust, the Settlor segregating the trust assets with his own assets, protect the trust assets from creditor’s claims provided that the intention of setting up a trust is not to defraud creditors and the Settlor does not reserve to himself unrestricted powers to revoke the trust, a trust can serve as an important asset protection functions. In addition, the trustee can appoint the spouses of the descendants as excluded persons of the trust who cannot benefit from the trust. The Trustee may cease to make distribution to the beneficiaries who have the risk of divorce.
- Avoidance of probate: assets owned by an individual usually pass on death in accordance with the terms of a will. If the assets are held in a wide variety of countries, it may be necessary to obtain a grant of probate with respect to the will in each country where assets are located. This can be an onerous, lengthy and costly process which can last between six months to two years. Moreover, there may be estate duties and taxes payable before the estate can be settled and the assets distributed to the heirs of the deceased. If such assets are settled on trust, the trust can enable the trust assets to be passed on future generations smoothly and according to the wishes of the settlor.
- Tax planning: During the existence of the trust, under the current tax regulations of Hong Kong, Singapore, Cayman Islands, British Virgin Islands, Jersey and Guernsey, there is no tax reporting obligation for the income generated by the trust assets. However, when a beneficiary receives a trust distribution, there may be tax reporting obligations depending on the tax residency status of that beneficiary. Trust can be used to protect or exclude property settlements for UK inheritance tax purposes and foreign grantor trusts for US tax purposes.
- Avoidance of forced heirship rules: to guarantee that the trust assets can be distributed to the beneficiaries according to the wishes of the Settlor. An individual from a country with rigid legal or religious inheritance laws may implement a scheme of distribution of assets among his heirs that differs from that prescribed by his domiciliary law. By establishing a trust in common law jurisdictions such as Hong Kong, Cayman Islands, British Virgin Islands, Jersey and Guernsey, the desired distribution plan can often be implemented.
- Confidentiality: a trust does not need to be registered and it is a private legal arrangement between the Settlor and the Trustee. The information relating to the trust is not accessible by the general public. However, there are certain limitations as most major trust jurisdictions such as Cayman Islands, Hong Kong, Singapore, British Virgin Islands, Jersey and Guernsey, etc. are parties to international agreements providing both for the automatic exchange of information and exchange upon request to the relevant authorities of other contracting states of certain information held in Cayman by professional trustees and other institutions relating to the trusts they administer or for which they maintain financial accounts.
- Philanthropy: a trust can be set up for charitable purpose in which the beneficiary of a trust can includes charitable organizations or for charitable purposes.
Revocability of trusts
Revocable Trust: The Settlor may regain ownership of the trust assets from the Trustee by partly or fully revocation of the Trust Assets.
Irrevocable Trust: The Settlor relinquish control of assets as he cannot request the Trustee to return the trust assets to him. It may be advantageous in certain cases (often for tax reasons and asset protection purposes) rather than the using a revocable trust.
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Comparison
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Revocable Trust
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Irrevocable Trust
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Benefits
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1. Flexibility of revocation of trust assets
2. Succession planning
3. Protection in case of incapacity
4. Avoidance of probate
5. Preserves confidentiality
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1. Asset protection
2. Succession planning
3. Protection in case of incapacity
4. Avoidance of probate
5. Preserves confidentiality
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Limitations
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Do not have creditor’s protection.
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Relinquish control of assets.
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