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What is an offshore trust company?

Trust companies

Foreign trusts have been a popular tax planning tool all over the world for many years. A lot of people from United States, Canada and Europe establish them in particular in the Caribbean area and in Liechtenstein and Gibraltar, but in recent years it has become quite popular to establish trusts also in the Pacific-Asian regions (Cook Islands, Nauru, Marshall Islands) or in other jurisdictions.

Their popularity is based on the fact that assets of a certain type (real property, bank account, ships, aircraft, shares, yields, ownership interests in companies, family assets, etc.) can be transferred to a foreign trust without a taxation obligation, whereby it is possible to achieve tax savings and maximum protection of the assets. In certain cases, when the assets are burdened by a tax obligation, the transfer to a trust of the assets may be subject to a lower taxation rate than the direct sale of the assets.

In the case of the United States it was possible, before the adoption of the Tax Reform Act of 1976, to accumulate incomes from foreign resources, which arose in connection with the assets deposited in a trust, without its being subject to taxation in the United States. These trusts were usually established in tax heavens and the income resulting from the administered assets were not subject to any income tax in final consequences. Foreign trusts could accumulate incomes from foreign resources without any tax burden until these incomes have been distributed in favour of trust beneficiaries. The beneficiaries were mostly the United States citizens.

For the above mentioned reasons thus the tax position of foreign trust beneficiaries was much more advantageous than the position of domestic trusts established in non-tax-liberal jurisdictions ( U.S.A., Canada, England, etc.). The importance of international financial centres is proven by the fact that 2/3 of the existing liquid world capital is found in offshore jurisdictions, and 1/3 of the world capital is deposited or administered through trusts. International financial centres are more and more used by multinational companies, professional providers of financial services, individual investors as well as by entrepreneurs from all over the world who are searching for a safe place for their profits, savings and assets. Last but not least they are searched for also by persons with higher incomes who want to protect their assets and practise tax planning. At present it is Asset Protection Trusts that are founded most often. This type of trust is followed by Charitable Trusts serving for public benefit purposes, which are also founded quite often.

Difference between a trust company and a trust

A trust company is a licensed legal entity (in a similar manner as a bank), which provides its clients with services connected with formation of trusts and their administration, whereas a trust is a deed (contract) on the basis of which authorised persons (trustees) administer the assets of the founder (called "settlor") in favour of trust beneficiaries. In general terms it is possible to simply state that a trust is a product of a trust company (unless it is established by a lawyer skilled in these issues).

Trust companies can offer the following services to their clients:

A trust company is in a certain manner also a bank, it only provides a different type of financial services due to its focus. A bank, for example, manages accounts and deposits for its clients and provides them with banking services and products. A trust company manages for its clients for example free wills, testaments and the assets contained in the wills in favour of third legal entities or natural persons, who had a trust formed at the trust company or who have become its beneficiaries on the basis of the trust settlor's requirements. Only on the basis of these wills and instructions of the trust settlor does a trust company manage these assets, exclusively according to the wishes of the trust settlors or the persons who were nominated by the trust settlor (for example through a power of attorney). The assets are understood as the trusted property, which can be formed e.g. by ownership interests in companies, shares, bonds, bank accounts, real property, copyrights, cash, precious metals, ships, aircraft, etc. Trust companies also manage the trusted assets and wills to satisfaction of the settlors or beneficiaries of the trust in question, in accordance with the deed referred to as the Letter of Wishes. Their only income, which is, however, not negligible, is often a lump sum fee or a percentage remuneration of the value of the trusted assets. As a standard, administrators charge a fee oscillating between 0.5 and 3 per cent of the trusted assets a year.

What is actually a trust?

If a trust is to be described in formal language, then a trust is: .....a contract on the basis of which a natural person or legal entity (trustee) becomes proprietor of the assets which he, she or it administers in favour of one or more persons (beneficiaries)....

A trust is a specific contract on the basis of which the trust settlors transfer a part of their private or company assets (possibly all their assets) to a third person referred to as trustee. The trustee may be a person appointed by the settlor or a professional licensed trustee holding a license for the carrying on of these activities (usually a bank or a special company holding a license for trust administration). The assets transferred to a trust are handled on the basis of the Last Will or Letter of Wishes in such a manner which corresponds to the wished of the settlor. The settlor can also appoint a Protector, who can supervise over the activities of the trustee, whether the trustee acts in the best will and according to instructions or wishes of the settlor and persons who should have benefits from the trust (beneficiaries). A protector can be any person, such as a family friend, lawyer or any person who has the confidence of the trustee.

The clients from the Anglo-Saxon law countries or jurisdictions, which recognise trusts, in an overwhelming majority know what a trust is because trusts are very often used by a majority of citizens of these countries. The clients coming from the countries whose legislation does not recognise the legal form of trust tend to have difficulties understanding the features or statute of a trust. It is especially countries of Central and Eastern Europe, the Far East, some African and Asian countries that do not know the legal form of trust, but only certain simplified forms, such as the last Will or inheritance. This does, however, not mean that it would be impossible for these clients to make use of all advantages offered by trusts. On the other hand, where any international activities are intended (business, investments, purchase of real property, administration of bank accounts, etc.), it is very suitable to consider the possibility of establishing a trust.

The advantages of trusts result especially from the fact that settlors transfer a part of their personal or company assets (or all these assets) to a third person (trustee) and thus they avoid any execution, forfeiture, confiscation or nationalisation of the assets of the settlor by heirs at law (spouse, children, relatives) or creditors (banks, financial institutions, state, creditors, etc.), because the ownership of the assets owned in this manner will be separated from the original owner by way of transfer to a third person, in this case to a trust.

If the trust settlor dies, the trustee continues to handle the assets of the settlor as the settlor wished according to the Letter of Wishes and distributes the trust benefits (payments, shares, yields, compensations, various financial or material advantages, etc.) among beneficiaries, which can be legal entities and natural persons (for example children, spouse, parents, foundation, various groups, schools, etc.). The fact that the settlor's assets have been transferred to a trust still during the settlor's life, it was possible to eliminate worries about the execution of the Will, inheritance taxes, transfers of bank accounts to heirs at law and other heirs, etc. Especially in the cases where the settlor's assets are situated in several countries (for example a yacht in the Bahamas, a house in Spain, a cottage in Canada, shares in companies in the U.S.A., Germany, bank accounts in Grenada, Switzerland, etc.), the several years long waiting for the transfer of these assets to the heirs at law and other heirs is avoided. Legal services connected with the proving of the claims of heirs, fees and taxes are in these cases so huge that they often consume a significant part of the assets which the deceased have left. It may also happen that the assets which were not treated through a trust will be taxed by using the inheritance tax in the country where they are physically situated, and then by another tax in the country of the heir at law, unless such a fact is solved in the double taxation treaty between the two countries.

A well established and managed trust can help you in general terms in the following fields:

Asset Protection Trust is one of the best means of Anglo-Saxon law enabling the trust settlor to protect assets from a number of unforeseeable events, such as divorce, bankruptcy, insolvency, creditor claims, actions or from other stressing situations when it is necessary to protect personal or company assets from attacks of legal creditors or persons who claim assets of the trust settlor. It is also one of the most modern tools in the tax planning area because an overwhelming majority of financial centres does not impose any form of taxation on the assets which are deposited in a trust or transferred from a trust or on remuneration and payments paid from the trust to individual beneficiaries.

Current research shows that three fifths of great legal firms from the countries of Anglo-Saxon law refer their clients to the formation of an Asset Protection Trust, as the best means for future protection from such unforeseeable events as negligence actions, bankruptcy, insolvency, fraudulent conduct and other claims of creditors. By far not all professional experts, however, prefer using just (Asset Protection Trusts) as a means for protecting their assets. The supporters of Asset Protection Trusts are convinced that it is an non-understandable negligence not to protect their own assets against requirements of potential creditors, and they place the same emphasis on such a protection from various types of risks as is placed on life insurance at some commercial insurance companies.

Trust objectors on the other hand justify their position by a statement that trust is a hidden agenda to which the people transfer financial means and other assets in order to hide them from fraudulent conduct of their settlors and from legal pressure on the part of the existing or future creditors - through which the Asset Protection Trust is allegedly immoral.

A Charitable Trust is an excellent tool for tax planning or for administration of the assets which are to be used for humanitarian purposes. A number of countries of the world allow to include a part of the means which are remitted by a company to humanitarian purposes (into a trust or foundation) into the costs of the company where they can be treated as a tax-deductible item. Charitable trusts are established for example for the support of culture, humanitarian projects, literature, cultural heritage, religious matters, school system, hospitals, churches, museums and a number of similar purposes when the trust settlors transfer a part or all of their assets to these trusts and the trust benefits are distributed according to the wishes of the settlors or according to their Wills (Letters of Wishes).

As it is quite common, this type of trust can be established for purposes beneficial to the entire community, such as fighting poverty, support of education or religion, fostering, keeping and protection of human rights, protection of nature or cultural heritage. Nevertheless, this type of trust can also be established for the support of specific particular individuals or persons, including persons relative with the trust settlor. Classical trusts established for public purposes include trusts established in favour of museums, galleries, poorhouses and other not-for-profit and public-benefit organisations, foundations and other community formations or groups.

A trust can be established for a limited term (existence) according to the country where the trust is established, i.e. it can be established for a definite or indefinite time period. A number of countries make it possible to establish a trust for a period not exceeding 99 years, nevertheless there are countries where the maximum duration of the trust is not specified by the law. The settlors can decide at their discretion for how long a trust will exist and who will administer it and in what circumstances it can be cancelled. They can also decide what type of trust they will establish, for what purposes and who will have benefits resulting from the trust (heirs, family, friends, humanitarian societies or general public, etc.). Furthermore they can decide whether the trust will be revocable or irrevocable, i.e. whether the trust can be cancelled, modified or not during the life of the trust settlor.

Trusts established for a specific purpose

Trusts established for a certain purpose which do not identify beneficiaries from their essence can be established for support of a legitimate goal which is specific, reasonable and can be fulfilled without using procedures which would be immoral, non-ethic, illegal or which would be in contradiction with the governmental policy of the country where the trust is established.

This trust requires in general (there are local differences in individual jurisdictions):

  1. trustee who is appointed in the post
  2. protector, who will enforce interests of the trust in question and who can be settlor or an authorised person, but not the trustee
  3. protector's successor.

The protector is often authorised to recall the trustee and appoint another one. The conditions of the trust in question should precisely specify on which event the trust will be terminated and what is to be done with the trust assets upon such a termination.

If the trustee who is appointed in this post has suspicion that the protector does not conduct properly, he or she must notify the Attorney General of such an alleged negligence of obligations or illegal conduct, by sending the appropriate notification to the Attorney General, together with the Trust Deed. The Attorney General can ask the court to appoint another trust protector.

This type of trust is often established by a civil-law court in the Anglo-Saxon countries, when for example parents of minor children die during a tragic accident. Also minor children (descendants) are in an overwhelming majority of countries automatically heirs at law, but for their low age they are not at the moment able to deal responsibly with the assets of their tragically deceased parents. The court thus has a tool through which it can transfer the assets to the trust formed this way, which is established and managed by a credible person with appropriate experience. The trustee takes care, on the basis of the court decision in good faith and according to his or her best conscience, of the trust assets and pays out benefits to the minor children until they achieve for example 25 years of age, when they are already able to manage their financial matters by themselves. At that moment the activities of the trust can be terminated and the assets can be transferred to individual beneficiaries, in this case to the descendants who are already of age.

Law governing the trust

Although it could appear that the trust is automatically governed by the law of the country where it has been formed, it is usually not the case. It is necessary that the law which should govern the trust be uniquely defined in the Trust Deed and in the Letter of Wishes. Thus it is possible to avoid possible judicial disputes or a number of troubles which could be faced by the trust for the time of its existence. It could happen that the established trust which does not specify uniquely the law of the country, according to which the administration and activities, including its establishment are governed, will be considered as a trust established in an absolutely different jurisdiction when regard is taken, for example, to the place of residence of the settlor, trustees or even to the fact where a major part of assets is located, possibly according to the residential addresses of beneficiaries.

A number of jurisdictions make it possible that a trust which has been established in their territory can be subject to the laws of a third jurisdiction. The conditions of the trust can thus specify that its separable aspects, especially those which concern the administration of the trust will be governed by a different law than the appropriate law applicable to the trust under which it has been formed. The law governing separable aspects of a trust can also be changed from the formation country law to a law of another jurisdiction and vice versa. If it is not specified in the Trust Deed by which law the trust is governed, the trust will be governed by the law corresponding to the intent of the trust settlor, unless it is in contradiction with the local jurisdiction and legislation.

If this intent is unclear, then the trust is often governed by the jurisdiction with which the trust had the closest contact at the time of its establishment, i.e. according to the place of residence or registered office of the trustee, place of trust administration specified by the settlor, where the targets and purposes of the trust are to be achieved and where the trust has been registered. In the case when it is not clear enough it can be decided by a competent court.

Trust Companies

As it has already been stated, Licensed Trust Companies are entities which hold a license in the jurisdiction in question, that enables them to administer and establish trusts for their international clients, possibly for fiduciary services as well.

A number of leading bank companies establish trust companies in classical offshore centres as well as out of those centres, in order to be able to provide their clients with complete services from a number of classical bank services to trust and often fully specific and individual services connected with a confidential administration of onshore and offshore assets (such as share subscribers, nominee directors and shareholders, fiduciaries, etc.).

Jurisdictions:

  • Anguilla
  • Antigua
  • Bahamas
  • Barbados
  • Belize
  • Bermuda
  • BVI
  • Cayman
  • Cook Islands
  • Dominica
  • Grenada
  • Mauritius
  • Nevis
  • Panama
  • St. Kitts
  • St. Lucia
  • St. Vincent
  • Samoa
  • Seychelles
  • Swedish
  • Turks and Caicos
  • Cook Islands
  • Vanuatu

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