Introduction to Trusts

The Common Law Trust may appear to be one of the most difficult of legal arrangements to fully comprehend. In fact the basic concept is fairly simple, as will be explained. Typically, it is evidenced by a document which includes legal terminology and which is designed to cover all acts, powers and specific objectives of each individual Trust.

Trusts were originally devised in medieval times and were developed in the English Courts of Equity. Their use is now recognized in most English speaking countries, many of which have introduced their own Trust Laws. The Courts in some other countries, particularly those dependent on Civil Law, have also recognized the existence of Trusts.

The following is intended to explain the significance and operation of the more common type of Trusts.

Explanation

In simple terms, a Trust is created when one person makes a gift of an item of value to a second person on condition that it is held for the benefit of a third person(s).

Trusts have been commonly used to achieve wide objectives such that it is necessary to set down the terms and conditions in writing. In these documents, the person making the gift is called the Settlor, the person holding the assets is called the Trustee and the persons who are to ultimately benefit from the assets are called the Beneficiaries. There can be more than one Settlor, Trustee or Beneficiary and it is not unusual for the Settlor also to be one of the Beneficiaries.

The Settlor must of course have full confidence and "trust" in the Trustee before proceeding as the trust arrangement can only be perfected if the legal ownership of the assets passes into the hands of the Trustee. As will be seen later, however, there are means whereby a Trustee’s actions can be effectively guided.

In this century, a large number of Trust companies have been formed to act as Trustee. This provides the continuity that an individual acting as a Trustee cannot offer although it is still quite usual to appoint individuals if they have special knowledge of the personal affairs of the Settlor or the Beneficiaries.

The legal document (known as the Trust Deed) may have terms and conditions that do not appear to be relevant at the outset. However, Trusts are often intended to last for many years and the purpose of including the widest range of terms and conditions is to provide flexibility for situations which may develop in the future. In addition, the use of legal terminology increases the certainty that the intended objectives of the Trust will be achieved.

Types of Trusts

The Trust Deed can explicitly set out how the Trustee is to deal with the assets of the Trust. For simplicity, this may be called a Fixed Trust.

Alternatively, some or all of the terms and conditions may be left to the judgement of the Trustee. This is known as a Discretionary Trust. In such cases, it is normal for the Trustee to seek guidance from the Settlor or some other person in what is known as a Letter of Wishes which is discussed further below.

The Trust may be created on the basis that it can be cancelled or revoked by the Settlor, the Trustees or some other person. In this way the Settlor, for example, can effectively continue to have a measure of control over the assets. However, this element of control may in some cases have adverse tax and other consequences and it is quite common for Trusts to be created on the basis that they cannot be cancelled or revoked until a specified time in the future or until a certain event takes place.

Cozier & Associates can be invariably appointed as Trustees of Discretionary Trusts.

Documents

As mentioned above, the Trust Deed (also known as the Settlement) is the written document setting out the terms and conditions relating to the Trust arrangement. It will usually be signed by the Settlor and the Trustee.

A method of avoiding disclosure of the Settlor is for the Trustee to receive the assets and to make a declaration that it is holding the assets upon the terms and conditions of the trust arrangement. This document is called a Declaration of Trust and is in common use.

The Trust Deed will usually record a nominal amount only as the initial gift passing into the Trustee’s hands. Thereafter, more substantial funds
can be added without being recorded in the Trust Deed.

The Trust Deed will normally provide for the possibility of a change of Trustee and/or location of the Trust. This is to cover the unlikely possibility of an attack on the Trustee or Trust assets by a hostile government in the country in which the Trustee is located.

It is also possible to provide for the Trust Deed to be amended at some time in the future, although the extent of any such changes may be dictated by the underlying purpose of the Trust arrangement. There may be adverse tax implications if the Settlor retains the power to amend the Trust Deed or to be a Beneficiary and advice should be sought on this point prior to the drafting of the Deed.

The Trust Deed will state the country under whose laws the Trust has been formed but again provision is usually made for this to be changed if the need arises (for example, if new tax or other regulations were introduced which would adversely affect the Trust, then it may be necessary to make the Trust subject to the laws of another country offering more advantageous conditions).

It is usual for the Trust Deed to contain wide investment and other administrative powers in favour of the Trustee to create maximum flexibility for the future. This can also add to the length of the Trust Deed and the need for complex legal terminology.

If the Trustee is to use its own judgement in making decisions then the Settlor (or person putting funds into the Trust, or some other nominated person) may write a Letter of Wishes to the Trustee. This can provide detailed guidance regarding the administration and distribution of the Trust’s assets, some part of which may be intended to take place after the death of the person expressing the wishes. The Letter of Wishes can be changed at any time and it is possible to nominate persons who can express their own wishes at some time in the future.

It should be noted that under an Irrevocable Discretionary Trust the Trustees are not legally bound to follow the guidance set out in a Letter of Wishes. However, a Trustee would at least take such guidance into consideration when making distributions to Beneficiaries.

In view of the flexibility offered by a Trust arrangement, any number of other documents may be required from time to time. However, in general, the most likely documents will relate to material changes in the Trust Deed (examples are a change of Trustee or applicable law, and the addition or exclusion of Beneficiaries).

Other Parties

There may be more than one Trustee, in which case they are known as Co-Trustees. Indeed, where individuals are acting it is normal to appoint more than one Trustee for continuity purposes. Whilst this is not so important where a Trust company or Law Firm acts as Trustee, a Co-Trustee may be added with the advantage of having personal knowledge of the Settlor or the Beneficiaries; and two or more Trustees may be appointed in different countries so that if adverse events occur in one country, the Trust can be swiftly moved to the other country.

The Beneficiaries, whether named in the Trust Deed or added later, must be clearly identifiable. A Trustee would be ill-advised not to seek advice from the Courts in case of any doubt; and this could become a matter of public interest.

Historically the courts have always been protective of the rights of Beneficiaries. In the absence of statutory Trust laws, the Courts in many other countries have been ready to develop case law in this regard. However, it should be noted that the Beneficiaries of a Discretionary Trust, whether named in the Trust Deed or added later, do not normally have any rights until the Trustee exercises its judgement and declares the extent of the individual Beneficiary’s interests.

Trusts are widely used to control the distribution of wealth within a family group. By use of a Trust an individual can protect and make advantageous disposition of assets so as to secure their protection and destination without having to wait for the death of the individual and for the future uncertainties of a Will to take effect. Finally assets can also be protected from spendthrift Beneficiaries who might otherwise dissipate the family wealth.

For example, the Trust assets may be divided into equal shares for the children of one generation; and the share for one child who dies will pass to that child’s own children again divided between them in equal shares. If the Trust exists for a considerable number of years even some of these grandchildren may die and again their proportionate shares will pass to their children in equal shares. This structure is regarded as being the most equitable and can be provided for in the Trust Deed with the term "per stirpes" (which literally means "through the roots") rather than being described in full detail.

Even though the Settlor may have full confidence in the Trustee, there may still be good reasons to appoint another person whose prior consent is needed before the Trustee can put into effect any discretionary decisions it has made. It could be particularly helpful if that person was a trusted personal friend of the Settlor and family. This person will be known by the title "Protector". It would be impractical for this person to control all of the acts of the Trustee and usually his role is to give prior consent to the distribution of assets or loans to the Beneficiaries or other such material events. This leaves the Trustee with sufficient, unrestricted power to attend to the day-to-day administration of the Trust assets.

If, however, the assets of the Trust are so diverse or involved that a Trustee cannot be expected to have the necessary expertise and time to provide full on-going management, an individual or group of individuals may be appointed known as a Manager, Management Committee, Investment Committee or similar. In the absence of such an appointment in the Trust Deed, however, the Trustee will normally have sufficient powers to appoint Investment Advisers or Managers to ensure that the Trust assets are properly administered.

Choice of Governing Law

It is important at the outset to choose an appropriate jurisdiction, the laws of which will govern the Trust. The choice will be determined by a number of factors, including:-

• The degree of certainty afforded in order to ensure that the intended objectives and activities of the Trust can be achieved in the chosen jurisdiction.

• The need to locate the Trust or Trustee in a particular part of the world.

• The advantageous tax status that some jurisdictions will offer.

• The availability of professional expertise, modern communication systems, etc.

• Confidence that the advantages and operating conditions will not be adversely changed in the long term future.

Establishment

Bearing in mind the general difficulty in understanding how Trusts function, and the specific difficulty caused by lengthy Trust Deeds with numerous legal phrases, it is strongly recommended that individuals intending to enter into a Trust arrangement receive appropriate legal advice. In this way, individuals should be able to ensure that their own special requirements have been considered and incorporated in the drafting of the Trust Deed. The proposed Trustee will often, of course, provide suggestions and comments based on its experience.

• When all the initial considerations have been made and the Trust Deed drafted, the Trustee will require the following information:-

• The name, address and nationality of the Settlor and/or the person(s) making the gift into the Trust.

• The names and addresses of the proposed Beneficiaries, whether or not they are to be shown in the Trust Deed.

• Details of the assets, which will be transferred into the Trust.

• Precise details of any special requirements not shown in the Trust Deed, and which may be included in the Letter of Wishes (including the strategy for the investment of Trust assets and the distribution of income and capital to the Beneficiaries).

The Trust takes effect when the Trust Deed has been signed by both parties and the assets shown therein transferred to the Trustee. Thereafter, the Trustee may receive additional assets and such further action as may be necessary can be taken.

Purposes

A Trust is a private arrangement between the Settlor and the Trustee. There should be no requirement or cause to register the Trust publicly or otherwise disclose the contents of the Trust Deed, accounts or other sensitive information. This provides anonymity for the parties involved and professional Trustees are well aware of the need to main confidentiality at all times.

Trusts were originally, and commonly still are, used to protect the wealth of individuals and family groups. The most likely advantages are:-

Tax: taxes differ from country to country and may be assessed on income, capital gains, gifts, wealth and on death. By transferring assets into a Trust it may be possible to reduce or eliminate taxes arising in an individual’s country of residence, citizenship or domicile. What is more likely, however, is that taxes can be eliminated in other countries in which the individual wishes to invest some part of his wealth.

Publicity: assets held in an individual’s name are often on public record. Further, when an individual dies, it is usually necessary to undergo Probate formalities before the assets can be realised. This can cause delays, raise costs and potentially expose the ownership of the assets to public scrutiny. Transferring assets into a Trust can avoid all these risks; in addition, of course, continuity in the administration of the Trust’s assets is assured.

Exchange Control: if the country of the individual’s residence, citizenship or domicile operates such controls it is a normal requirement that foreign assets be declared. However, assets that can be transferred to and held in a Trust may no longer be legally owned by the individual and need not be declared.

Inheritance Laws: if the country of the individual’s residence, citizenship or domicile has strict inheritance laws, it may be possible to transfer assets into a Trust in another jurisdiction where such laws are no longer a restraint upon the individual’s wishes in the disposition of his wealth.

Expropriation: assets may be at risk of expropriation or similar confiscatory measures in the individual’s country of citizenship, domicile or residence. By transferring assets into a Trust governed by the laws of another country these risks may be reduced or eliminated.

The advantage of a Trust should be considered particularly in the event that an individual emigrates from the country of domicile or residence or works outside those countries. It may then be possible to achieve some or all of the benefits in either or both of the countries involved.

An individual may achieve some of the benefits listed above merely by transferring assets to a private investment holding company which the individual wholly owns. The benefits will be enhanced if the shares of the private investment holding company are wholly owned by a Trust. The maximum benefits are provided by the combination of a Trust and company and in modern practice this structure is very commonly used.

The purposes and benefits of Trusts are not restricted to those discussed above. Trusts are very flexible arrangements which can and have been used to achieve many other, often unique, objectives.

Cozier & Associates

The services of Cozier & Associates are available to act as sole or co-Trustee of Trusts governed by the laws of whichever jurisdiction is chosen by the client (usually, the laws of the St. Christopher and Nevis).

In addition, and in appropriate circumstances, the senior staff of Cozier & Associates are willing to act as personal Trustees in their own names.

The Fees and Expenses and Terms and Conditions for the provision of Trustee services are published in a separate leaflet.

Cozier & Associates is willing to consider the provision of the above individuals and other wholly owned companies to act as Protector or in other managerial or administrative capacities. Special fees will be quoted on request (but will usually be on a graded time-cost basis) together with any additional terms and conditions that may be applicable.