What is a Trust?

Jurate Gulbinas   |   21 Jan 2014   |   9 min read

1. What is a trust?

In essence a trust is simply a relationship where one person (the trustee) is under an obligation and holds or uses assets (trust property) for the benefit of another person (a beneficiary) for some object or purpose.
Thus, any trust has four essential elements:

  • Trustee;
  • Trust Property;
  • Equitable Obligation;
  • Beneficiaries;

To restate the above in slightly more legalistic terms “a trust is a fiduciary relationship where one person, a trustee, holds an interest in property but has an equitable obligation to use or keep that property for the benefit of another person(s) (beneficiaries) for some committed object or purpose.

There are many types of trusts, however the common ones are:

  • Express Trusts;
  • Settled Trust;
  • Discretionary Trusts;
  • Unit Trust;
  • Will Trust;

Express Trusts – are trusts created by the express and intentional declaration of the settlor. Trusts dealt with in practice usually evidence this declaration by way of a formal trust deed.

Settled Trust – one form of an express trust is a settled trust created by settlor (or director). The settlor will intentionally create a trust by gifting the initial trust property to be held on trust by a trustee under an equitable obligation.

The most common trusts we implement are a discretionary trust, unit trust and a will trust (or deceased estate).
Discretionary Trust – a common settled trust dealt with in practice is a discretionary trust. A discretionary trust, which may also be known as a family trust, allows the trustee (who is usually the head of the family) to exercise discretion on an annual basis as to which beneficiaries will receive a distribution and to what extent each beneficiary shall benefit.

Unit Trust – Unit trusts are commonly used when arms length parties wish to enter into a commercial undertaking together.

Each party’s entitlement to income and capital from the trust is proportionate to the units held.

Will Trust – A will trust or a deceased estate arises on the death of a person. Upon death, property of the deceased passes to his or her estate.

The fiduciary obligation to administer the estate and the assets therefore falls upon the executor or administrator who assumes the role of trustee in respect of the property of the deceased estate.

The beneficiaries of a deceased are those nominated in the Will of the deceased.

2. Why choose a trust?

Issues to be considered when choosing a trust are as follows;
•    Control
•    Simplicity/complexity
•    Liability limitation
•    Costs – establishment and maintenance
•    Life span
•    Formalities/adherence to rules
•    Reporting and disclosure requirements
•    Acceptability to financiers
•    Admission of new investors
•    Selling out/winding up
•    Family disharmony/asset – sheltering
•    Retirement planning
•    Ease of future restructure

Should the concept of a trust satisfy your commercial objectives, the following taxation issues will need to be considered:
Taxation issues
•    Overall level of tax;
•    Acceptability by authorities;
•    Double taxation;
•    Restructuring tax consequences;
•    Employee on costs;
•    Tax payments/tax rate;
•    Flexibility of distributions;
•    Tax losses trapped;
•    Dividend streaming;
•    Type of business to be carried on;

3. How do you set up a trust?

If you have made the decision that a trust is an appropriate structure the next step is to establish a trust.
Approaching a Solicitor
Prior to approaching a solicitor you should not only have considered the commercial and taxation issues noted previously, but you should also have determined:
•    The purpose and activities of the trust;
•    Nominated beneficiaries and future beneficiaries;
•    Who is to be the trustee and settlor;

Review and Understanding
The solicitor will draft the trust deed in accordance with the client’s requirement and at this stage it is critical that a thorough review is done to ensure that the trust deed (or governing rules) reflects your commercial and legal requirements and allows flexibility for future contingencies.
If a solicitor who specialises in trust law is consulted you will often receive an information booklet setting a basic outline of a trust for administration purposes.
At this stage also it is critical that you read through the draft deed and that questions are addressed prior to creating the trust. In this regard the family or business solicitor (if he or she did not draft the deed) may be used to add his/her comments and to provide a different perspective and extra level of comfort to both the client and accountant.

4. Parties to a trust

The Settlor

The Settlor is the person who brings the trust into being.

Typically the settlor is a family friend or business associate who will contribute initial capital to settle the trust.

For Australian tax purposes it is important that there is not any reimbursement by the trustee in respect of distributions made for children under 18 years old if a parent, who will usually act as trustee or a director of the trustee company of a family trust, settles or creates the trust.
It is also advisable that the advisers to the trust are not the Settlor, for the reason that many trust deeds contain clauses that the Settlor is excluded from any benefit or income under the trust.

The Trustee

A Trustee is the person who holds an interest in trust property for a committed trust object or purpose.
In a discretionary trust situation the trustee exercises control over trust property so the trustee can deal with it on behalf of beneficiaries.
The choice of a trustee is worth proper consideration for the reason that the trustee’s powers and duties are significant. In that regard the person who is appointed to the position must understand his/her role and responsibilities.
Trustees may be individuals but more commonly will be companies to limit liability.  In a family trust a parent or both parents will usually act as directors of a corporate trustee.

The Appointor or Protector

The Appointor or Protector is the person or persons who have the authority under the trust deed to appoint or remove the trustee of the trust. As such the appointor is often said be the controller of the trust.
Many trust deeds empower the appointer to remove the trustee and appoint a new trustee at any time in writing.
Unless specified in the trust deed or in the will of the Appointer, on the death of the Appointor, the legal personal representative of the deceased Appointer will become the Appointor.

Income Beneficiaries

These are beneficiaries who may at the discretion of the trustee receive entitlement to trust income. Most modern trust deeds are drafted very widely in this area to give the trustee very wide discretionary powers for the advantage of flexibility of distribution for taxation purposes. Common classes of beneficiaries are:
•    Family members, including children;
•    Unborn children of family members such as direct lineal descendants;
•    Eligible entities in which the abovementioned beneficiaries of the trust itself has an interest (such as a corporate beneficiary)

Capital beneficiaries

These are beneficiaries who are entitled to the corpus of the trust or the capital in the trust.
This entitlement does not usually arise until vesting day, or the day the trust is to be wound up, but entitlements to capital or corpus of the trust may occur earlier if permitted by the trust deed or agreed to by all beneficiaries.

Default Beneficiaries

A default beneficiary is simply the beneficiary to whom a distribution may default to in the absence of any other nominated beneficiary.
For example should an amended assessment be raised increasing assessable income that income will be distributed primarily in accordance with the relevant trustee’s distribution minute.

However in the absence of any guidance contained therein or in the event the resolution or minute cannot be located or was not made for the reason there was considered to be no income, the distribution may revert to the default beneficiary rather than be assessed in the hands of the trustee at the top marginal rate.
There are very few restrictions on who may be a beneficiary.  A beneficiary may be a resident or non-resident natural person (such as a company) or any legal entity.
Further, persons who have not yet been born or legal entities that have not yet come into existence may subsequently become beneficiaries.  However it is important to nominate who will be and who can become a beneficiary on drafting of the deed.

A trust, as stated above, is a fiduciary relationship.

The adding of unanticipated beneficiaries at a later stage may, in a worst case scenario, lead to a resettlement of a trust or the ceasing of the former relationship and creation of a new relationship, being the creation of a new trust.
Should there be considered to be cessation of one trust and the creation of a new trust, a myriad of unwelcome income tax, capital tax and stamp duty issues may arise.
Thus, upon reviewing the deed detailed consideration must be given to who and who might potentially become income, capital and/or default beneficiaries.

Contact us

Should you be interested in discussing further how a trust may suit your purposes please do not hesitate to contact us at our offices.

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

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EU Succession Law UK Opt Not The End of the Story

Jurate Gulbinas   |   19 Jan 2014   |   9 min read

Calls to harmonise the private international law governing succession across the EU, were enthusiastically welcomed ten years ago.

When finally enacted on 17 August 2012, the rather heftily titled “Regulation (EU) 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European

Certificate of Succession” (“the Regulation”) or “Brussels IV”, creates ambiguities and complications that may have implications for anyone with assets in countries within the EU where the Regulation is to apply. It will apply to the estates of people who die after 17 August 2015.

Regulations are the most direct form of EU law. They have binding legal force throughout every member state, on a par with national laws. As opposed to EU directives and court decisions, national governments do not have to take action themselves to implement EU regulations.

They can, however, opt out, and somewhat frustrating the purpose of the legislation, the UK, Denmark and Ireland have opted out. Even so, it will affect anyone with assets in states which have opted in, so called “Regulation States”, and it has the potential to override Wills and succession agreements.
The Regulation applies a single national law of succession to a person’s moveable and immoveable property upon death ad applies to both testate and intestate succession (i.e. whether or not the person made a Will). The applicable law is that of the country of the deceased’s habitual residence at the time of death, unless:

  • The deceased was manifestly more closely associated with another state; or
  • The deceased elected in their Will for their national law to apply, regardless of whether the state of their nationality is Regulation State or not.

Broadly, the Regulation does not apply to lifetime gifts and says little about trusts.
This may prove awkward where the assets of a testator fall within a jurisdiction which does not fully recognise trusts and the devolution of assets under their terms, such as France.

It is important for those who could be affected by the Regulation to revisit their Wills. This is because there may be an opportunity for those who die after 17 August 2015 to avoid local forced heirship rules where these currently apply, by electing for their law of nationality.

Conversely, where local laws of an EU state allow assets to pass in accordance with a deceased’s national law, the effect of the Regulation and other private international law rules may be to impose local forced heirship rules that previously did not apply.

Family law update: company’s assets taken into account in Prest v Petrodel

On 12 June 2013, the Supreme Court reversed the controversial ruling of the Court of Appeal in the family law case of Prest v Petrodel Resources Limited.
Mrs Prest sought financial relief from Mr Prest, who claimed he was £48 million in debt.
Throughout the proceedings, Mr Prest failed to adhere to court orders for financial disclosure of information and was found to be an unreliable witness.

At first instance the Judge determined that Mr Prest had ultimate control over a company structure, of which he was not formally a shareholder, having used it as his “money box”.

This finding enabled the Judge to conclude that he could make an order to transfer the companies’ properties to Mrs Prest.

The companies appealed successfully to the Court of Appeal arguing that the established legal position was that a company had a separate legal personality to its shareholders and its assets belonged to the company and not the shareholders.

It was held that, as a matter of company law, unless there had been impropriety (which was not present in this case) the company’s assets could not be used to satisfy Mr Prest’s personal obligations.

On appeal, the Supreme Court found in the wife’s favour.

They concluded that the companies’ properties were held on trust for the husband and on that basis could be transferred to the wife. To reach this decision they drew adverse inferences against the husband as he could provide no evidence or explanation to rebut the inference that he was the beneficial owner of the properties.

This was despite Mr Prest’s contentions that pursuant to an order of the High Court in Nigeria, he was prohibited from disclosing any information concerning the accounts or affairs of one of the companies, PRL Nigeria or from asserting or disclosing information showing that he was the sole owner of that company.

The Court of first instance had decided that this Nigerian order posed no genuine obstacle to Mr Prest in complying with the terms of the order for disclosure of the English Court at the time.

While on the specific facts of this case, the Supreme Court were able to find in favour of the wife, the concern is that the arguments advanced on behalf of the companies, which were based on the structure of corporate law and which were in fact upheld by the Supreme Court, will be relied upon in the future by unscrupulous spouses who try to hide assets behind a corporate structure in order to defeat their spouse’s financial claims on divorce.

However, the Supreme Court’s decision does reinforce the importance of proper disclosure; Mr Prest and his companies suffered for his non-compliance with the court orders for disclosure.

Excluded Property: IHT debt relief restricted

In the March 2013 Budget, the Government unexpectedly announced, without any consultation, a package of measures restricting the circumstances in which liabilities can be deducted for Inheritance Tax (“IHT”) purposes, which may in particular impact on the tax arrangements of individuals who own homes in the UK but are not domiciled here.

Non-UK domiciled individuals are generally only liable to IHT, whether on their death or on a lifetime transfer, on their UK property. Their foreign assets are excluded from the charge to IHT and are therefore “excluded property”.

Similarly foreign assets of a trust, which was set up by a non-domiciled settlor, are outside the scope of IHT trust charges regime and so are not subject to 10 yearly charges or exit charges when the property leaves the trust.

IHT is generally charged on the net value of a non-domiciliary’s UK assets after deducting all liabilities, such as debt or loans on property outstanding at the date of charge, although certain exclusions, exemptions and reliefs may also be available.

However, from 17 July 2013, there are restrictions on which debts are deductible against IHT.

Notably, no deduction will be allowed for a liability to the extent that it is attributable to financing (directly or indirectly) the acquisition of any excluded property, or the maintenance or enhancement of the value of any such property.

These restrictions will also apply to trusts with excluded property.

These changes may in particular affect non-domiciliaries who are considering taking homes worth more than £2million out of corporate ownership to avoid the recently introduced Annual Tax on Enveloped Dwellings (“ATED”) and the associated CGT charge on the disposal of such properties.

Some owners were seeking instead to borrow against the value of these UK properties to mitigate the resulting IHT exposure on their UK homes.

However, under the new rules, if funds are borrowed by a non-domiciliary to reduce the value of their UK home are deposited or invested offshore the debt will not be deductible, as the loan will be attributable to financing the acquisition of excluded property.

The full value of the UK property would therefore remain within the UK tax net.

More complex arrangements involving debt, for instance involving a trust structure, may also be affected. However, straightforward arrangements where a non-domiciliary takes out a commercial mortgage in order to purchase UK property will not – such liabilities should remain fully deductible.
In addition the deductibility of debts will also be restricted where the liability has been incurred to acquire assets on which a relief such as business property, agricultural property or woodland relief is due and on liabilities owes by the deceased at the time of death, which are not actually repaid from the estate after the death.

There are a few limitations to the new rules and HMRC Guidance provides some examples of how they may be applied in practice.
Any existing or proposed arrangement involving excluded property which also relies on the deduction of a debt should be reviewed and the purpose for which borrowings are acquired and applies will need to be examined closely.

In addition, if steps are taken to circumvent the new debt rules, it will be necessary to check those arrangements are not caught be the general anti-abuse rules which also came into force on 17 July!

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com.

Download our eBook “Moving To The US”

Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

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