Trusts: Explained by a Specialist

WHAT ARE TRUSTS?

what are trusts

There is no precise definition of a trust but it is an arrangement whereby a person known as a settlor transfers money or other assets, known as the trust fund, to a trustee who holds the trust fund is his own name and manages it for the benefit of the beneficiaries of the trust as appointed by the settlor.

 

english trusts

 

ARE TRUSTS RECOGNISED BY LAW?

Trusts are an established feature of the law of England & Wales and of other parts of the English speaking world. While they are generally not recognised by civil law jurisdictions, where law is created by statute only as opposed to complementary judicial decision making in common law jurisdictions, there are exceptions such as Liechtenstein where trusts have been created by statute. Trusts are a medieval creation of the common law but they are now given statutory effect and the primary legislation is contained in the Trustee Act 1925 as subsequently amended.

WHAT IS A TRUST DEED?

The terms of the trust are set out in the document creating the trust known as the trust deed. Trusts may be created in the life time of the settlor, when they are said to be inter vivos, or upon death by a will when they are said to be testamentary. Trustees are usually individuals but a company may act as a trustee and the law specifically provides for trust corporations. There is no legal requirement to do so but it is usual to have at least two trustees, if a trust corporation is not to be appointed, and they must act in unison.

WHAT ARE THE DIFFERENT TYPES OF TRUSTS?

Trusts are highly flexible and can exist in many forms but they are broadly either fixed interest or discretionary. The trust deed of a fixed interest trust sets out the terms upon which the income from the trust fund is to be distributed and the trustees are required to adhere to this. The terms will specify the time and manner in which funds are to be distributed. A discretionary trust permits the trustees to determine the time and manner in which funds are distributed and one beneficiary may get nothing while another may take everything in any given time period. However, a trustee is required to act in the utmost good faith and may not act in a capricious manner. This duty of good faith means that a trustee may not personally benefit from the trust fund although he may recover his expenses and may take fees for his work if permitted to do so by the trust deed.  

WHY USE A TRUST?

Trusts are used for a variety of purposes and may make financial provision for minors who cannot legally hold assets in their own name or who may not be well placed to manage them when they come of age. They are also used to make provision for, by way of example, a second wife whereby the estate of the deceased husband is held on trust for the benefit of the wife during her life and distributed after her death among the remainder beneficiaries, who are usually the children of the first marriage, in accordance with the terms of the trust. Trusts are also used to hold funds for the benefit of people under a disability and unable to care for themselves.

WHAT ARE OFFSHORE TRUSTS?

Of recent times, trusts have come to public attention in connection with their use in offshore jurisdictions. In places such as the Channel Islands and the Caribbean a substantial offshore financial industry operates and trusts are the vehicle used to hold the assets of the offshore client. Trusts have the advantage that they are not publicly recorded, unlike registered companies, and they afford privacy and confidentiality. Trustees are not obliged to file annual accounts and returns and the management costs are usually lower than those of a limited company. In practical terms trusts enable the ownership of assets to be concealed and, while this is the subject of criticism, it should be noted that the identity of the ultimate beneficial owner of trust assets is recorded by the regulatory authorities in reputable offshore jurisdictions to prevent money laundering and fraud. A very small number of offshore jurisdictions do not have such reporting requirements in place but they are subjected to sanction by international regulatory bodies and are not to be recommended.

OFFSHORE TRUSTS: DO YOU PAY LESS TAX?

Funds held offshore are afforded benefits in the form of tax concessions by the authorities of the jurisdictions in which they are held subject to local requirements. For example, funds held in Jersey are not subject to local tax meaning that the owner receives all of the income generated, other than for management fees, as opposed to the position in the UK where funds are specifically targeted for income tax. It is open to anyone to approach a service provider in an offshore jurisdiction and to establish an offshore trust but individuals resident and domiciled in the UK are subject to tax on their worldwide income and gains thus rendering an offshore trust ineffective from a tax perspective.

The position is different for people resident in the UK but possessing a non-domicile status. They are subject to tax only upon income and gains generated in the UK while capital sums brought onshore are free of tax provided they comply with the complex regulations. As a result, UK residents with a non-domicile status may hold their assets offshore and the income generated is not subject to local tax and can be sent to the UK each year as a capital sum thereby avoiding UK tax. This concession explains the significant number of high net worth individuals resident in the UK which is for them a tax haven.

WHAT DO HMRC THINK OF OFFSHORE TRUSTS?

The above remains the position at the present time but it is worth noting that the rules surrounding the tax treatment of non-domiciles in the UK are currently under review by HM Revenue & Customs and they are gradually becoming less favourable with the introduction of an annual levy to maintain non-domicile status. Accordingly, considerable care should be taken when considering the creation of a trust in an offshore jurisdiction.

Trust solicitor uk

The writer of this article is admitted as a Solicitor in England & Wales and as an Attorney at law in New York but does not currently practise in either jurisdiction. In a past life he was the in house solicitor for a trust company in Jersey with time in its Caribbean office and was formerly the in house counsel for trusts and estates at a trust corporation in the City of London. His company, Barton & Co Limited, is not a firm of solicitors but a niche service provider dedicated to writing wills and administering estates. The company also advises executors and writes Lasting Powers of Attorney and can be reached either at info@bartonandco.co.uk or on 020 8851 3424.