Establishing a trust can be confusing and complex, but here at A-PASS, we're committed to delivering flexible solutions to help you plan and safeguard your wealth. In this article, we learn all about trusts with Simon Fraser, who is a consultant here at A-PASS with more than 20 years experience as a legal practitioner in the UK and Hong Kong, and more than 14 years of fiduciary experience at senior level with two substantial international offshore trust companies.
1. What is a trust?
A trust is a relationship or contract between parties that takes advantage of the distinction (derived from English Common Law) between legal and beneficial ownership of assets. Essentially a trust is not a legal entity itself but rather a contract by which one party, known as the “trustee”, holds legal title to assets, not for its own benefit but for the benefit of another party or parties, known as “beneficiaries”. The original owner of the property who enters this type of arrangement with the trustee is known as the “settlor” or “grantor”.
2. What is the purpose behind establishing a trust?
A. There are many reasons why the settlor would want to set up a trust. These include:
- succession planning; trusts can provide an efficient and secure mechanism for the transfer of wealth from one generation to the next.
- confidentiality; trusts are private arrangements and in most jurisdictions there is no need to record the trust on a public register.
- asset protection; if established in a timely and correct manner, trusts can be effective in shielding assets from threats by outside parties such as creditors, plaintiffs in litigation and government expropriation.
- tax mitigation; in certain cases, a trust allows assets to be held in such a way that taxation can be legitimately reduced or avoided.
- charitable giving; trusts are frequently used by high net worth persons and families to benefit their favourite charities or projects.
- vulnerable persons; a trust can make provision for the care of vulnerable family members both during and after the life of the settlor, for example to protect and care for persons with mental or other disabilities.
- commercial trusts; trusts can be used in a commercial context such as in employment remuneration, share option and executive bonus schemes.
3. How are trusts created?
In a number of ways, including:
- In writing; the most usual way to create a trust is by way of a deed of settlement or a declaration of trust under which the trustee agrees to receive and hold the assets for the benefit of the beneficiaries under the terms of the trust instrument.
- Orally; trusts are not required by law to be in writing, although they usually are. All trusts must satisfy the three tests of certainty, namely certainty of intent to create the trust, certainty of subject matter (the assets to be held in trust by the trustee) and certainty of objects, that is, the identity of the beneficiaries must be known or discoverable.
- Under the will of a deceased person, often called a testamentary will. In such cases, the trust only comes into effect on the death of the testator.
- By order of the court, for example in divorce proceedings.
- Imposed by law in the form of a “constructive trust”, often as an “equitable remedy” to correct some wrongdoing over the ownership of assets.
4. What’s the difference between a will and a trust?
- A will “speaks” from the death of the testator whereas a trust is effective both during and after the life of the settlor.
- wills, in most jurisdictions, are subject to a process known as “probate” under which the validity of the will must be proved before assets can be distributed to the beneficiaries in accordance with the will. Probate effectively renders the will and the estate open to public scrutiny; a trust on the other hand is a private arrangement, with no necessity for probate because the assets belong to the trustee so ownership is not affected by the death of the settlor.
5. Are there different types of trust?
There a numerous types of trust covering a wide range objectives, including:
- Discretionary trusts; these are the most popular form of trust used in family wealth planning. In this type of trust the trustee, subject to the terms of the trust, may make distributions of trust assets to beneficiaries or take other action as it deems in the interest of the beneficiaries as a whole. One effect of this is that prior to any distribution no beneficiary can claim an absolute right to any particular trust assets. This has asset protection advantages. The settlor can allay any concerns over the loss of control of the trust assets by appointing a protector, if permitted by the terms of the trust, to oversee the actions of the trustee. Additional comfort that the trustee will act as the settlor intended can be achieved through a letter or memorandum of wishes, the provisions of which are not binding on the trustee but persuasive.
- Fixed trusts; this is where the entitlement of the beneficiaries under the trust is fixed in the deed itself, with the trustee having no discretion on the distribution of the trust fund e.g. to pay the interest from the trust assets to a particular person for life and thereafter to another persons. This is known as a “life interest trust”.
- Offshore trusts; these are conventional trusts (such as any of the above) which are formed in a jurisdiction different to that of the settlor. The larger international trustee companies operate in many overseas jurisdictions, known as international finance centres, such as in the Caribbean or the Channel Islands. Many of these jurisdictions have special legislation in place specifically geared to the management of trusts and generally to encourage trust business, for example by permitting tax neutrality for the trust established by non-resident parties.
6. Is it expensive to set up a trust?
Trusts established via professional trust companies, such as A-Pass, will generally give a prospective settlor or client an estimate of the cost of establishment and administration of trust. This will depend on the complexity of the proposed trust, its anticipated activity and nature of the trust assets. As a general rule of thumb it will usually only be worth establishing a discretionary trust (the most popular form) if the trust assets have a value of not less than US$5 million. More commonly the value of assets put into trust would exceed US$20 million.
Professional fees for the establishment of the trust, including those of the trustee to carry out its legal obligations with regard to client take-on procedures but excluding legal fees and opening of bank accounts, will likely be between US$5,000 and US$10,000 depending on a number of factors. Annual administration costs of a straight forward trust structure will likely run at a similar level depending the level of activity and complexity of the transactions.
No two trust arrangements are the same and the fees will differ accordingly. A-Pass is always happy to agree a basis on which to charge its trustee fees rather than follow a schedule of charges or a time spent basis. Usually clients prefer the certainty of fixed fees for defined activities. There will only be deviation from the fixed fee if the activities exceed the agreed parameters or exceptional issues arise. In such circumstances, A-Pass will always consult with the client and agree a fee before commencing the work in question.
7. What can A-Pass offer prospective settlors of a trust?
A-Pass can provide a dedicated team of experienced trust professionals and practitioners ready to guide clients through the decision-making process. The first step is an initial consultation with senior members of the team and the client and possibly his own advisers, first to establish if a trust or an alternative arrangement is more suited to the needs of the prospective client. Secondly to provide the management of the structure in accordance with best practice, applicable law and the objectives of the client. The services include the provision of a corporate trustee and administration of companies owned by the trust including the provision of directors, company secretaries and registered office in Hong Kong, accounts preparation, tax advice, work visa assistance and payroll management. If third party specialist professional input is required A-Pass can call upon its extended network of contacts both in Hong Kong and in the world’s principal financial centres.
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