Offshore Trust

The History of Offshore Trusts

Trusts, Offshore or otherwise, are originally an Anglo-Saxon institution that in recent years has been made possible in civil law countries with the 1 July 1985 signing of the Hague Convention on the Law Applicable to Trusts and on their Recognition.

Historically speaking, a trust is a legal entity born in England during the Middle Ages. It was used by the English knights who, when leaving on a crusade, would place their estate in the hands of a nobleman or another knight who was charged with managing the knight’s holdings for the benefit of his wife and children. It then spread to other common law countries as a result of colonization by the British crown.

While its original purpose is long since lost, the trust remains a very widely used structure in countries governed by Anglo-Saxon law, since it allows the creation of structures for both legal and tax purposes. A trust makes it possible to protect or pass on an estate, or for tax planning purposes.

What is a trust?

The general definition of a trust was set down by the aforementioned Hague Convention.

The Trustee is the person or management entity responsible for administering the trust. Trustees are usually overseen by a local regulatory body such as the FSC (Financial Service Commission). Oversight of the Trustee’s management of the trust can be achieved by appointing a Protector who is responsible to monitor the Trustee and internally report to the trustor and the beneficiary.

The convention defines a trust as “the legal relationships created ‘inter vivos’ or on death by a person, the Settlor, when assets have been placed under the control of a Trustee for the benefit of a Beneficiary or for a specified purpose”.

It is worth noting that as a result of political and legislative developments in the States which allow for trusts, different kinds of trusts may be created based on the intended purpose.

I.e., succession trust, corporate trust, etc.

Schematically, a trust is structured as follows:

 

Setting up a trust requires the presence of four parties.

  • Settlor. Also known as the trustor, he sets up the trust and transfers all or part of his estate to it. This may be a natural person or a legal entity.
  • Trustee. The trustee is the natural person or legal entity charged with managing the entrusted goods or assets in the interest of the beneficiary and in accordance with the instructions of the trustor. The trustee is also known as the “administrator”. Depending on the entrusted goods and the objectives of the trust, specialized trustees may be appointed.
  • Beneficiary. He who receives the benefits of the trust or the entrusted goods. He benefits from the management of the trust performed by the trustee. The beneficiary may also be the settlor himself.
  • Protector. Responsible for monitoring the assets placed in trust and to revoke the authority of the Trustee if deemed necessary.

A trust is a dual legal relationship. First, between the settlor and the trustee. Second, between the trustee and the beneficiary. These relationships are usually outlined in a governing document called the “trust deed”.

 

Note: A trust has no legal personality. It is not a company, an association or a legal structure under French law. Rather, it is a special arrangement performed under property law.

Types of trusts

There exists different types of trusts depending on the trustor’s intended goal, such as discretionary or fixed trusts, as well as revokable or irrevocable trusts.

  • Discretionary and fixed trusts: A trust is discretionary when the disbursement of the trust’s revenues or the sharing of its principal are left to the discretion of the trustee. A trust is considered fixed when the trust deed includes specific instructions for its disbursement.
  • Revocable and irrevocable trusts. A trust is considered revokable when the trustor reserves the right to reappropriate all or part of the goods placed in trust. It is irrevocable when the trustor permanently relinquishes ownership of the entrusted goods. In this case, the trustor may no longer regain ownership of the goods.

Advantages offered by trusts

Trusts hold a number of legal and tax advantages:

  • Tax optimization: Since the goods are no longer part of the trustor’s assets, he is not liable to pay taxes on them.
  • Estate planning: Creating a trust can be used to structure one’s estate for a planned succession, such as to avoid its dilution, or to skip a generation.
  • Asset consolidation: A trust may be used to consolidate assets shared by several companies, or to consolidate the assets of a group of companies.
  • Asset protection: When the trustor places his goods in a trust, he divests himself of their ownership. It is therefore impossible for creditors to seize the trustor’s asset, especially if the trust was created prior to the existence of the liability.

Assets which may be placed in a trust

In principle, assets of any kind may be placed in a trust.

I.e., planes, boats, houses, stocks and bonds, paintings, or horses…

Which jurisdiction should be used to set up a trust?

While Anglo-Saxon countries were the first to embody the concept of trusts in their legislation, civil law jurisdictions have certainly caught up.

Europe Offshore can set up your trust in the following countries (this list is non-exhaustive):

United Kingdom Jersey Singapore
Malta Hong Kong Switzerland
Gibraltar Liechtenstein

The decision of which country to set up a trust in should be based on a number of determining factors depending on the trust’s intended purpose. Depending on the applicable law, a trust may have different specific characteristics.