Many private clients heading to abroad may already have a trust in their home country or a 3rd Country.
Historically trusts have been attractive vehicles because they offer people the potential of protecting their wealth from external attacks, but it can also help lower the burden of taxation on a family group.
For those who do not have a trust as yet but who are considering establishing a trust, a great deal of thought and planning needs to go into it.
We make sure our clients understand the four golden rules of setting up a trust:
- Ensure the bank or financial advisory firm managing your money does not own the trustee company that will be the trustee of your trust. This prevents a conflict of interest.
- Understand how you can unwind the trust arrangement.
- Recognise that long-term solutions require tax contingency planning before you sign on the dotted line. As your residency can change, so can your tax position.
- Make sure you understand how you can access trust income and/or capital to pay taxes that may become due on the gains of the trust.
Before delving into some further issues associated with trust management, I will cover just a few central points about how trusts work for those who may not have worked with trusts.
How Trusts Work
A trust is an arrangement whereby a trustee has a fiduciary obligation to deal with property over which they have control for the benefit of one or more beneficiaries who are able to enforce such an obligation.
Beneficiaries may be individuals, corporations, or indeed other trusts (such as a charitable trust).
All trusts have a trust deed.
At a high level, this is a document that outlines the rules that the trustee must follow in relation to the property they control.
Common objectives for utilising trusts are to protect assets and ensure that beneficiaries are deable to benefit financially from the trust in a manner that suits the family group and in accordance with the wishes of the settlor of the trust.
The discretionary trust is the most common trust used by business owners and investors.
They are generally set up to hold family and/or business assets for the benefit of providing asset protection and tax-planning benefits for family members.
The Trust Deed: Its Importance
The trust deed is the most important document of a trust as it establishes and defines terms and conditions upon which the trust must be operated and managed.
More specifically, the trust deed sets out the beneficiaries of the trust, as well as the end date of the trust and the conditions upon which the trustee holds the property for the beneficiaries.
Actions undertaken outside the provisions set out in the trust deed can be deemed by a court of appropriate jurisdiction to be null and void.
The implications of an action being null, and void can reach further than the act simply being treated as if it did not occur.
An invalid act of a trustee can result in unwanted taxation implications for the trustee, and a breach of the trustee’s duties can lead to personal liability for damages or alternatively unwanted consequences for beneficiaries.
The best approach in dealing with trust management and planning is to treat every trust deed as unique and therefore refer to the provisions in the deed prior to taking any action.
How Are Trusts Taxed?
While a trust is regarded as a taxpayer in some countries (e.g., Australia), in other countries this is not the case.
In some countries, the beneficiary is taxed on gains accruing in the trust; in others, it is the original settlor who suffers the tax burden.
Changing Residency With a Trust
One aspect of trust management and planning to get right when you have a trust is to ensure that assets are not unwittingly ‘exported’ into certain tax jurisdictions when you change your tax residency status.
If you want to set up a trust, then before you move to a particular country it is important to understand how a trust determines its residency status under the laws of that country.
In Australia, a trust is regarded as a tax resident of Australia if one of the trustees is a tax resident of Australia.
However, in other jurisdictions, the concept of central management and control of the trust is used to determine the residency status of the trust.
It is important to work through all the residency aspects likely to impact your trust when you move around with an existing trust.
The key point to note is that it can be a useful exercise to transfer assets from an individual to a trust prior to changing residency and heading overseas.
However, like most things, this strategy has its pros and cons.
Trusts Heading Overseas: Residency Determination
In the Australian context, where an individual trustee of an Australian trust changes residence, then, often, the trust will also change its residence.
In these cases, you need to make sure that when the trustee changes its residence, the tax consequences are identified.
Before you depart you need to consider whether it is beneficial to you and your family for the trust to stay a resident in your home country where it was established or if it makes sense for the trust to move with you to your new country.
If the immediate and ongoing tax consequences of keeping the trust in its particular form are not advantageous to you then we can discuss alternative strategies with you.
Such strategies may include replacing the trustee of the trust with a company that is domiciled in the jurisdiction to which you are moving and make the trust subject to the laws of that jurisdiction.
In other situations, it may be more appropriate for a replacement trustee to be appointed in a third jurisdiction and have the trust reside in a 3rd country.
The purpose of the discussion here is to highlight the fact that planning for a departing trust is very important.
Our approach to this area is to recognise that trusts are long-term family vehicles, and just because a client may move to a new country, it does not mean that they should have to wind up their trust and forgo all the benefits that it has provided them.
Given our international tax and trust knowledge, we will be able to help our client make important decisions such as this.
Trusts Arriving Abroad
Moving around the world while being in control of trusts is complicated and should not be done lightly.
Arriving in another country with a trust and no plan is a recipe for disaster.
Where a new individual client has changed their residence and they are the trustee of a foreign trust, it is clear that this trust is also likely to become a resident of the arrival country.
In other cases, even if the client ceases being the trustee before they change their residence specific jurisdictions tax income on ‘pre-migration transfer of assets’ to foreign trusts.
It is also likely that the trust deed may need a review as some of its definitions and terms may have no meaning in the new country the trust is being exported to.
Even if the trust is residing in a 3rd country, a review of the trust deed from the perspective of the laws of the new country is warranted.
Other concepts, which might be recognised abroad, such as ‘community title’, might be used in the trust deed, but these concepts might have no application in the arrival country.
The arriving trust may still have reporting obligations in the country in which it was established.
It may also be the case that there are foreign protectors or other people who have an ongoing role in the management of the trust.
You should consider how they are affected in terms of reporting based on the country you are moving to.
This is particularly important if the arriving trust has a business or significant assets.
Often, the cost base of trust assets must be understood on the day the trust first enters a new country.
Usually this will be the market value of the assets on the day of the trust’s arrival, but not always.
While your move abroad is an exciting time for most people and full of challenges and new opportunities, considering the tax issues of how your trust would be affected by your move is essential.