Today we will talk about what are trusts, how they work and which are benefits of using trusts.
What is a trust?
Trust is commonly confused as being a corporation. Trusts are not like corporations, they’re not legal entities per se.
They are instruments, relationships between various parties.
Historically, trusts come from the time of Crusades.
Crusades gave their assets to the church to take care of upon their return, or to do certain things that have been agreed beforehand in case of their deaths.
Trust is a relationship between three parties.
It consists of a settler, in the US called the granter. This is the person who creates the trust: they take the money and put it in the trust. They do this by transferring to the trustee.
A trustee is a person who holds the assets.
The most basic example of this would be the executor of a will. Executor doesn’t own the assets, but he takes them and distributes them accordingly to the will.
The trustee holds the funds for the beneficiaries. Beneficiaries are the people who will get the funds in the end.
All this is governed by the trust deed. A trust deed is a document that describes how is trust going to be managed.
The trustee has to follow a specific set of rules on what is to be done.
Very often this will be a registered trust company, it might be a service provided by various banks or other different financial institutions.
Trust doesn’t necessarily need to be formal
There is a very famous case in the US, that created something called Quist close trusts.
This is the case where a company paid money to another company to do something with that money on their behalf.
The money was given for a specific purpose.
Before they completed that transaction, the company that the money was given to went bankrupt.
Since assets that were given to them weren’t part of their own assets, it wasn’t supposed to be distributed after bankruptcy. So clearly, this money wasn’t available to creditors.
You’ll see a similar thing if the bank goes bankrupt. Assets of people who are held in the bank can’t go to creditors because the bank doesn’t own those assets.
The way trusts get treated can vary in different places
In some places, they treat trusts much like a corporation. This is very important in relation to taxes. At which level you pay taxes in this case? Trust, beneficiaries or trustee?
Different countries will handle this in different ways.
Lots of countries don’t recognize trusts in their legislations at all. However, it is important to keep in mind that this doesn’t mean that the trust can’t operate there.
Every time you have trust you will have three different jurisdictions.
First, there is a jurisdiction of registration – where the trust is registered.
In some places, trusts don’t need to be registered at all, for instance in Nevada. This gives you a higher level of privacy.
Second, where the trust is going to be adjudicated. Whose laws this trust will be subject to?
This can be different from the place of registration.
This is a common misconception among people. Let’s say you have trust in Nevis. Many think that if some problems occur, let’s say in Australia, they will need to go to Nevis and sue there. This is NOT true!
If the actual asset is in Australia, the court will just disregard Nevis’s trust and they will operate based on Australian laws. Just because your trust is registered in Nevis, won’t mean that another jurisdiction can’t go after your asset. We will talk more about this in the article about asset protection.
The third jurisdiction is the jurisdiction of administration. This is where the trustee is. If the trustee is in a country where there are no trust laws, they can still administer a trust in another place.
For example, I can administer trusts in the UK from Bulgaria.
Two other roles that can show up in trusts are an investment manager and a protector. In theory, there can be many others, such as different types of advisors. However, these are the two most common ones.
2000 USD offer for Nevis trust? Don’t touch it!
I’ve seen many online portals selling all sorts of trust structures. I strongly recommend that you stay away from those.
A trust is a very precise instrument, that should be written very well to make sure that it’s going to hold up and adhere to the rules that you’re trying to make it adhere to in a jurisdiction where you’re operating.
Many agencies offer generic useless trust structures, that will not protect you from anything if the situation goes bad. It’s very important to keep this in mind. You’ll just be wasting money while not getting actual protection at all.
Most common variables in trusts
Trusts are most commonly used for inheritance and for asset protection purposes.
When setting up a trust for the inheritance you want to pass your assets to your children, grandchildren and so on. But you just don’t want to give them the money so they use it however they like.
Maybe you want to make sure that your kids or grandkids receive education and you’re leaving money specifically for these purposes. Maybe you have a disabled child and you want it to be taken care of with the assets you leave behind.
You don’t want your money to be spent without paying for the actual cause you left it for.
In cases of trusts have something that’s called the revocable trusts. There are also irrevocable trusts.
Revocable means that the settlor is putting the money in the trust but they have the right to take the money out of trust. This can have tax consequences.
Irrevocable means that you put your assets in a trust and you don’t have access to them anymore.
If you’re setting up a trust for inheritance purposes revocable trusts are a very common way to go.
For asset protection purposes you will want to put your assets in an irrevocable trust.
Why is this important?
Well, if you come to the situation where someone sues you your assets are put in a trust and they can’t go after them. In the eyes of law, these assets don’t belong to you anymore.
However, if your assets were put into a revocable trust they could easily go after them in case of a lawsuit.
Another common variable for trusts is discretionary and non-discretionary.
In the case of discretionary trusts, the trustee has discretion who gets how much.
When writing trusts you can specify to the exhausting level of details. Who gets what in which case, and what if it doesn’t work the way you envisioned. If the person who is passing wealth to the next generation writes in details who will get what and in which case this is non-discretionary trust. Their will will be served accordingly to what they wrote in a trust. Quite the opposite of discretionary trusts where the person who is managing trust had some general guidelines but they can decide what to do.
The trustee can also be replaced. You can appoint a protector, so in the case of trustee abusing their power they can be replaced.
The protector can also prevent distributions from happening.
All this depends on how the trust is written. Trust gives you lots of flexibility and you can potentially avoid many rules, which is the reason why trusts are so attractive and popular.
If you have any questions regarding the trust structure feel free to reach out to us.