ARTICLES

Trust is a three-party fiduciary relationship among three key roles: the settlor, the trustee and the beneficiaries. The settlor transfers assets to the trustee, who holds and manages the trust property for the benefit of the beneficiaries specified by the settlor. The beneficiaries have the right to receive distributions from the trust assets in the future.

Centuries of History

Originating in England and flourishing in the United States, trusts are highly significant tools for wealth succession in common law countries. In 13th-century England, most people were religious and often bequeathed their land to the church after death. However, since church land was exempt from taxes, this practice drew the displeasure of the king, who decided to forbid the donation of land to the church or the land would be confiscated. To cope with this, judges at the time established the "use" system, whereby believers didn’t directly donate land to the church in their wills but instead gifted the land to a third party, with the stipulation that the profits would belong to the church. As society developed, the "use" system gradually expanded from religious realms to public welfare and personal finance. Later, in 1886, the first professional trust institution was established. In 1925, the UK abolished the "use" system.

The trust system was introduced to the United States from England in the 18th century. The trust system in the United States further facilitated the development of trusts in the modern sense. Over the past century, trusts have steadily gained popularity as a powerful financial tool, which correctly structured can safeguard assets from potential claims and division in the event of divorce, facilitate seamless intergenerational wealth transfer and offer opportunities for tax optimisation.

When Offshore Trusts Took Root

In the mid-20th century, certain jurisdictions started offering favourable legal and financial environments to attract international investors. It was when offshore trust emerged and gradually developed.

An offshore trust is a type of trust that is established in a jurisdiction outside the residence or domicile of the settlor. It involves transferring assets to a trustee located in a different country or offshore financial centre.

Many high-net-worth individuals choose offshore trust over local trust for better asset protection, especially people residing in countries where the trusts are not recognised. By placing assets in a jurisdiction with a robust legal framework, individuals can safeguard their wealth from potential risks such as lawsuits, creditors or political instability.

In addition, offshore trusts can offer increased privacy compared to local trusts. Some jurisdictions have strict privacy laws that protect the identities of settlors, beneficiaries and the details of trust assets, providing a higher level of privacy.

Different jurisdictions offer distinctive benefits for offshore trust formation. For example, Cook Islands Trusts stand out for its remarkable feature of short time limits and burden of proof requirements, which means fraudulent claims against the trust assets are effectively limited. Furthermore, the jurisdiction's non-recognition of foreign judgments inconsistent with local laws, in addition to the protection against forced heirship and settlor's bankruptcy add an extra layer of security.

Opting for an offshore trust allows individuals to diversify their holdings across multiple jurisdictions, thus reducing the risks arising from economic or political uncertainties in a single country.

Considerations in Trust Establishment

While trust, as a financial management tool, presents numerous advantages, one must take note of the considerations highlighted below before making a decision.

First, forming a trust involves substantial fees, including the establishment fee and ongoing management fee. Have a detailed understanding of all the fees and evaluate if they align with your financial goals. You may also consider plans that can be started with an affordable amount while offering the benefits a trust can generally bring you.

It's also vital to acknowledge the complex legalities of the trust structure. Different jurisdictions have different laws and regulations regarding trusts. Instances exist where some trusts have been declared invalid or deemed sham trusts due to improper formation and administration. Therefore, choosing a trustworthy and capable trustee for your trust, who shall ensure compliance with all required formalities, is of paramount importance.

Taxation related to trust formation varies from country to country and depends on your tax residency. Trusts can serve as legitimate financial vehicles for tax optimisation purposes, but it is important to emphasise that they should not be used for tax evasion. In recent years frameworks for financial information exchange have been developed and implemented at a global level. Both the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) have been implemented globally to combat tax evasion and both require that financial information held by every country is shared with the tax authorities of foreign account holders. It is always advisable to seek professional advice to ensure compliance with applicable tax laws before establishing a trust.

With thorough research, professional guidance and a clear understanding of your financial goals, trusts can be a valuable tool for achieving your objectives, protecting your assets and leaving a lasting legacy for future generations.