Trusts can be powerful weapons if understood but a waste of money if not properly set up for your specific purposes
Before considering either a trust or foundation it is always recommended that that our Clients become familar with the concepts involved:
The concept of a 'trust' is unique to common law or English speaking jurisdictions. Historically, it developed from the English laws of equity and sought to separate the creator of the trust, known as the Settlor, from specified real or personal property usually for the benefit of future heirs and/or to ensure that any future dispositions Would be made in a manner generally in keeping with the original intentions of the Settlor. Once a Settlor has decided what property he wishes to transfer to the hypothetical trust (normally a complex written document) he must decide upon its administrators, the 'Trustees'. It is vital to understand that these must have full autonomy to independently manage and control the transferred property in favour of either known or unknown beneficiaries. If full autonomy is not granted then it could be claimed that the trust was not settled and therefore, was not properly constituted.
If this happened then the Settlor would still be legally deemed the owner of the trust assets - defeating the-raison d' étre behind the trust in the first place. Obviously, given this requirement to totally deny the Settlor direct control over what were formally his assets demands great trust' in the Trustees. Fortunately, Trustees are not totally free of control since they must normally strictly adhere to the trust instrument unless such instrument involves an illegal act or is in breach of some current public policy. Certainly, it is normally open to interested, or potentially interested parties, to seek the assistance and interpretation of the applicable courts.
In almost all common law jurisdictions, they have reserved the right to vary, abrogate or otherwise change the terms and conditions in a deed of trust including the originally designated 'Trustees' and/or beneficiaries. Notwithstanding the above, it must be understood that the courts in, most common law jurisdictions will do everything in their ability to carry out the wishes of the Settlor and, bar some malfeasance, are unlikely to interfere with a deed of trust.
It is clear that all Trustees implied through circumstances or clearly designated, have a fiduciary duty to act honestly and in good faith for the benefit of the trust even if such responsibility denies them personal opportunities. The best analogy is probably afforded by the fiduciary duty owed to a shareholder by a company director.
However, unlike a director a Trustee must not be directly answerable to any third party since this would infer that the Trustee was in reality a mere 'nominee' acting as a catalyst for someone else. If the Settlor was the instructing party then the trust would not have legally settled ' Further, unlike most dispositions a Trustee is not the direct legal recipient of the transferred assets. In fact, whilst the Trustee has the right to deal with the aforementioned as if he was the owner - subject to the deed of trust conditions and perhaps other Trustees - he cannot use them for his own personal use and, as a corollary, no third party creditor can sequestrate trust assets simply because of a dispute with a Trustee.
In other words, proprietary title is in limbo despite the existence of trustees who are responsible for the same as if they were directors and/or shareholders in a company. At the time of the creation of the trust instrument, the deed of trust, it is common that the Settlor provides the trustees with a 'Letter of Wishes' which, as its name implies, express's the wishes and desires of the Settlor at the time of the original disposition.
This' Letter' is not meant to be slavishly followed by the trustees since to do so would threaten the independence of the trust but rather it is ‘deciphering’ documents meant to assist the trustees carry out their independent functions. Of course, it does carry weight and should be read in conjunction with the deed - these often being standardized documents - but it should never result in the Settlor having de facto control. In recent years there has also been a growing propensity to use 'Protectors' as an additional safeguard against any wrongdoing by trustees. In most cases, the protector will be a lawyer or accountant known by the Settlor who will be granted co-signatory rights, together with the trustees, over the trusts bank account facilities. Of course, a protector also should never be the Settlor or anyone else too closely connected with the trust since this could, once again, compromise the independence of the trustees. Certainly, various obiter statements in English cases appear to be ascribing 'Protectors' with fiduciary duties akin to those of trustees (See I. R. C v. Schroeder 1 983 STG 480) Therefore, for safety reasons any modern trust should, if employing protectors, ensure that they are independent from the Settlor or other relevant parties.
What type of Trust?
Whilst there are many different types of trust employed in the world’s common law jurisdictions, it is the discretionary trust, which finds most favour in the offshore trust areas. This type of trust not only ensures that the settlor has divested himself or herself from the requisite assets, but it can also provide significant benefits to the intended heirs/beneficiaries. The reason for this is that whilst it is known that there will be, of course, beneficiaries, a discretionary trust leaves the amount of capital and/or interest to be paid to the normally unnamed beneficiaries totally at the discretion of the trustees. In effect, this allows the trustees the ability to control when and what type of payment should be made and hence, will ensure the most favourable tax consequences for the beneficiaries. In précis, trusts can be broken down into 3 constituent types with the 4th type, an asset protection trust (APT), simply being a variation of an An 'Accumulation and Maintenance Trust'
1. An 'Interest in Possession' Trust: As its name implies this provides for a beneficiary to have a distinct right to the income from a particular part of the trusts capital assets. The capital asset may or may not be passed on to the beneficiary.
2. A 'Discretionary' Trust: This gives the trustees total discretion to decide, subject to their fiduciary duty, how, when and to whom the income, and perhaps capital, of a trust is transferred.
3. An 'Accumulation and Maintenance Trust': This is basically a combination of the other two trust types. Generally, it will start as a discretionary instrument but will have provisions to change into an interest in possession trust normally when the beneficiaries have reached a particular age.
4. An ‘Asset Protection Trust’: Unlike other trust mechanisms, an asset protection trust (APT) does not necessarily seek to reduce the settlor’s tax responsibility. In fact, for US nationals this could have significant negative consequences. Rather, ‘its purpose is to act as a form of insurance for high-risk individuals, primarily those in the medical and legal professions, in litigious jurisdictions like the USA. Before establishing such a trust for an American, it is essential to confirm that the basic mechanism would be accepted as bona tide by the I.R.S. (Internal Revenue Service). Jurisdictions, which have special APT legislation, include Cyprus and the Cook Islands.
