Trust Services

A trust is a legal arrangement which exists in many jurisdictions where typically one person (a settlor) transfers assets to a trustee, who accepts ownership of the assets not for his or her own use and benefit but for the benefit of others (the beneficiaries). Usually a trust is constituted in writing in the form of a trust deed which will set out the manner in which the beneficiaries can benefit from the trust, as well as the powers and duties which the trustees will have in administering the trust and its assets.

Not all trusts are constituted in the same way. Some of the more common types of trust are described below:

Discretionary trust

This is a form of trust where the interests of the beneficiaries are not fixed, but depend upon the exercise by the trustee of some discretion or power in their favour. As such, it is the most flexible of all trusts and the most common form of trust. An advantage is that the individual circumstances and needs of each beneficiary can be considered at any time. A trust where the interests of beneficiaries are fixed is a “fixed” or “strict” trust.

Life interest / Interest in possession trust

These terms both indicate a trust where a particular beneficiary (the life tenant) has a right to receive all the income arising from the trust fund during his or her lifetime. The trustee will usually also have a power to apply capital to the life tenant. Often, there are successive life interests, in favour of an individual and their spouse. After the end of the life interest(s), the trust fund will usually be held upon fixed or discretionary trusts for other beneficiaries, perhaps the children of the life tenant. In such circumstances, the trustee must, in investing the trust fund, balance the competing interests of life tenants and capital beneficiaries.

Purpose trust

Many jurisdictions allow the formation of trusts for a specific purpose (e.g. to hold shares in a company) but which may or may not have any beneficiaries. These are commonly referred to as purpose trusts (or STAR trusts in Cayman). These trusts can be particularly useful where a client wishes to create a trust for good causes which are not strictly charitable or as special purpose vehicles in commercial transactions.

Charitable trust

This form of trust is used when the settlor wishes the assets of the trust fund to be used for charitable or philanthropic purposes.

By transferring assets to trustees, for the benefit of chosen beneficiaries, a settlor gives up control and ownership over those assets, and therefore these assets may cease to form part of the settlor’s estate.

A company cannot fulfil this purpose: although title to assets can be transferred to a company, the shares in the company will remain part of the settlor’s estate for all purposes.

Some of the reasons for establishing a trust are as follows:

Continuity of ownership

Often a settlor will wish to ensure that a particular asset will remain in the same ownership for the foreseeable future. Examples include shares in a family company or a valued heirloom.

Protection against profligacy

Similarly, settlors may be concerned that assets should not be released to their children until they have demonstrated a responsible and mature attitude. A trust can achieve this.

Philanthropy

A charitable trust can be used to benefit certain defined causes on a discreet and professional basis.

Forced heirship requirements

Many systems of law impose upon individuals a requirement that, on their death, they must leave a proportion of their assets to certain heirs. A trust can often protect against this. For example, in the case of a Jersey trust, the Jersey courts will not entertain a claim to set aside any trust which is based upon forced heirship rights of a foreign jurisdiction.

Protection against high taxation

A trust may be a legitimate tool in limiting or postponing the incidence of taxation upon the assets placed in trust. For example, a Jersey trust, if it has no Jersey resident beneficiaries and no Jersey source income (other than bank interest), will not be subject to any taxation in Jersey.

Protection against exchange control or sequestration

Many settlors resident in politically sensitive jurisdictions find that a trust, by removing assets from their ownership, can protect against the risk of assets being seized by political means or against restrictions imposed upon the transferability of assets.

Estate duties and probate formalities

Assets transferred into trust during a settlor’s lifetime will not generally form part of the settlor’s estate upon death.