In an earlier post, we looked at how offshore bank accounts and offshore companies can provide you with a number of benefits including tax savings and asset protection. In this post, we will look at the advantages of using trust and foundation structures:
Offshore Foundations
A Foundation is a legal structure which can hold assets in its name and to which assets can be transferred. A Foundation consists of a:
▪ Founder – The person(s) who set(s) up the Foundation or on whose behalf it is set up.
▪ Foundation Council – The person(s) who administer the Foundation in a fiduciary capacity.
▪ Foundation Charter – The document that lists the rules and regulations governing the Foundation.
▪ Beneficiary / Purpose – The person(s) / purpose for which the Foundation is formed.
▪ Guardian or Protector (Optional) – Serve as a protection mechanism to ensure that the council acts in accordance with the terms and objectives of the Foundation.
Benefits of using a Foundation
▪ Succession planning for personal estate or business ownership
▪ Reducing personal net worth to minimize compensation risks
▪ Avoiding property transfer related taxes
▪ Creating a legal “person” who can own assets but will be under your control
▪ Avoiding forced heirship
In addition to the above, an offshore Foundation can protect the foundation and its property from being voided, invalidated or made defective in any manner by reference to the law of a foreign jurisdiction.
Trusts
A Trust is another example of a fiduciary legal structure. Here, an individual (the “settlor”) donates assets to a third-party guardian (the “Trustee”) who holds the assets and administers them for the benefit of the settlor or other individuals (the “Beneficiaries”). The purpose and the rules governing the Trust are recorded in the “Trust Deed”.
An estate created under the will of a deceased person is a testamentary Trust and one created by a person prior to death is called an inter vivos Trust. Most offshore Trusts are inter vivos.
Trusts can be:
Revocable or irrevocable – Revocable Trust may be terminated or its terms modified by the settlor at the end of a specified period or at any other time. Irrevocable Trusts cannot be terminated by the settlor nor can the settlor vary the terms of the Trust.
Discretionary or fixed interest – Discretionary Trusts vest the trustee with wide discretionary powers relating to the allocation of income and capital amongst the beneficiaries and to vary the membership of the beneficiary class. A Fixed Interest Trust (also known as Interest in Possession Trust) allows you to specify exactly who should benefit from the Trust and the manner in which they should benefit. Here, the trustee has very few discretionary powers reserved for them.
Accumulation and maintenance Trusts – These are typically used to benefit children or grandchildren. These are partly discretionary and partly fixed. The trustee has relative freedom to administer the Trust in the best interest of the beneficiaries; some income is used for the maintenance and education of children with surplus income being accumulated by the trust. Once a pre-determined age has been reached, the beneficiaries can receive income and capital from the Trust as detailed in the Trust Deed.
Other kind of trust structures can also be created; an example is the Shariah-compliant Trust which complies with the requirements of Shariah law.
Private Trust Company (PTC) – This is a company that can act as a trustee to a trust or a number of trusts. You can use PTCs for wealth structuring and for personal and business succession planning.
A PTC can also offer you greater control as you, close advisors and family members may serve on the board of directors of the trust company or have trusted advisors on the board to operate it.
PTCs are usually used in conjunction with a controlling trust. This trust holds the shares in the PTC. Using this kind of a trust avoids the problems of ownership of the PTC, particularly in the event of deaths occurring within a family. Without this structure, if the owner of shares in a PTC dies, the shares in the PTC form part of that person's estate and will pass according to the provisions of his or her will. This may lead to unfortunate results and can be the cause of trust disputes and litigation.
Benefits of using a Trust
▪ Asset Protection – Since the settlor does not own any assets, h/she cannot lose what h/she does not own in case of bankruptcy, divorce, damage compensation etc. Moreover, since the trust is a private agreement between you (as the settlor) and the trustee, any information regarding the nature, value and location of the assets held in trust will be confidential.
▪ Preventing Intestacy – Intestacy is when a person dies without a will. If a person dies intestate, his/her assets will be distributed by “default” property distribution rules which may work against what the person had in mind. Trusts can help avoid this situation.
▪ Avoiding Probate – Probate is the legal (and public) process of settling your estate after your death (by the Court of Probate). By establishing trust(s) you can avoid probate and your assets can pass to your chosen beneficiaries in a timely and confidential manner.
▪ Avoiding Forced Heirship – In certain jurisdictions the law may dictate that a particular proportion of your estate must be left to certain dependents. Assets held in trust will not be subject to such rules (unless trusts are not recognised in that jurisdiction) as their legal ownership rests with the trustee.
▪ Tax Planning – If you or your family members move to a new country, your tax status or that of your family members may be impacted. A trust can help mitigate any impact on your current tax liabilities and, if possible, take advantage of any favourable tax laws in the destination country.
When to use a Foundation or a Trust?
Trusts originated in medieval England when they were associated with knights making provision for their families when they went away to fight in the crusades. Trusts are more common in jurisdictions where the English common law and equity are the foundation of the legal system.
Foundations were introduced approximately a century ago in Western Europe. Their use for estate and asset planning started in Liechtenstein in the early part of the 20th Century. Foundations have become popular especially in civil law jurisdictions where the concept of Trusts is less well known. Foundations can be established in many countries including Panama, The Netherlands Antilles, the Bahamas and the Isle of Man – who introduced foundation legislation in 2004 and 2011 respectively to make them the leading common law jurisdictions for the domicile of foundations.
Comprehensive Strategy
In this and earlier posts, we've examined Offshore Companies, Foundations and Trusts and their respective benefits. You can use these solutions in isolation or combine them to come up with one single strategy. You could, for example, form an offshore trust or foundation whose trustee or founder is an IBC or LLC, or incorporate an IBC or LLC whose shares are held by a trustee or a foundation. Each vehicle can be used for carrying out a particular strategic objective.
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