Trusts & Foundations - Protecting Your Assets

The function of both trusts*1 and of private interest foundations*2 was and is to legally separate an individual or individuals from their assets for the current and/or future benefit of disclosed and/or discretionary beneficiaries. Legally both a trust and a private interest foundation are self-owning entities with no ultimate controller or owner which is exactly what makes them so attractive to tax planners and those seeking to protect assets from either 3rd parties, fiscal authorities and/or the injudicious actions of those who might otherwise be expected to become direct beneficiaries if assets were to be distributed directly. 

*1 Primarily used in common law jurisdictions such as the UK, the USA and most ‘known’ tax havens
*2 A creation of the ‘continental’ civil law system

Trusts Overview

Protecting Your Assets

Trusts can be established in such a way that they can be used to protect assets from potential 3rd party litigation. These types of trusts are known as “Asset Protection Trusts” or APTs and are primarily used in the United States by professionals such as medical doctors, dentists and lawyers where high indemnity insurance and an extremely litigious environment mean that few successful professionals can afford not to consider establishing an APT. However, it should be noted that such APTs don’t have fiscal benefits and further should always be declared to the Internal Revenue Service (IRS).

Reducing Tax Obligations

Many ‘Tax Haven’ jurisdictions such as Jersey, Guernsey, the Isle of Man and of course most of the former British colonies in the West Indies offer trust structures (normally discretionary in nature) that are subject to little or no annual tax or annual duty. However, it would be a mistake to assume that simply because the ‘tax havens’ offer such fiscal benefits that non-tax haven jurisdictions accept their fiscal veracity. In fact, as a general rule ‘trusts’ set up by those resident and domiciled in common law jurisdictions such as the United Kingdom, Australia, Ireland, Canada etc. generally do not benefit from many tax breaks due to the advanced anti-avoidance provisions in situe. However, for those not domiciled in such countries or for those resident in a civil law jurisdiction trusts can often offer significant benefits.

Foundations Overview

Protecting Your Assets

A correctly established private interest foundation (stiftung) can be drafted in such a way that it can offer virtually all the benefits of a traditional APT. In fact, in many ways a foundation is often both the better and safer method of protecting assets from 3rd party litigation especially if the private interest foundation is located in a highly monitored jurisdiction such as Switzerland or Liechtenstein. In fact, in both of these jurisdictions – unlike their competitors in Panama – all foundation council members/administrators must be licensed and insured.

Reducing Tax Obligations

Private interest foundations, whilst not necessarily desirable for those located in civil law jurisdictions such as France or Germany, have very positive benefits for those located in common law countries, particularly the United Kingdom where there is case law which established the veracity of private interest foundations (see below under Foundations – General Principles)