Trust is well known as an ancient instrument for wealth protection and asset protection, especially used in English influenced jurisdictions, in order to avoid legal restrictions imposed by Common Law. The functionality of the Trust continues today - a legal ownership of an asset being invested in one individual, who undertook orally or in writing the use of the assets for the benefit of persons other than himself - although its uses have developed beyond those for which it was initially created.
A trust is raised when the Settlor (an individual or a corporation) transfers cash or assets (which represent the Trust Fund) to individuals/corporation - hereby named Trustees, on the basis of a Trust Deed (written by the Settlor) that the Trustees will invest, administer and distribute the income and capital of the Trust Fund for the benefit of mentioned parties, or a certain class of persons, named Beneficiaries. The Settlor will set out his wishes in a letter or memorandum to the Trustees indicating how the Trust Funds are to continue to be administered and these whishes can vary at any time. That indicates that the legal control of the assets can be distinctly separated from their economic enjoyment, and in effect the Settlor continues to exert moral control over it during his lifetime and afterwards.
If you need more protection of your assets transferred to the Trust, then you can use a Protector of the Trust - which can be a trusted friend or a professional adviser in whom you have implicit faith. You can include in the Trust Deed the requirements that some or all of the powers or discretion of the Trustees may only be exercised with the consent in writing of the Protector.
We will try to explain better how you can benefit from using such an entity type, in the following situations:
1. Preservation of wealth/Determined disposition of Assets
The Trust is ideal entity for the Settlor (usually wealthy individual) to lock-up the capital of the Trust and specify to whom of his family the income and capital should be paid in the following years. By his power, the Settlor can decide for a spouse or parent to have the benefit of the asset for their life but for children to have the property ultimately - so achieving a result which may not have been obtained if the property were passed directly to the spouse or parent as a gift. Also the Settlor may decide the age at which or the circumstances under which the beneficiary should be entitled to some or all of the capital thus avoiding its dissipation.
Therefore the Settlor can even decide the circumstances under which the gift will be provided: time, financial needs, conduct, health, marriage, success and other details.
Another situation is when high-risk individuals may need to transfer the assets into a Trust to protect them against claims by third parties - in this situation the legal owner won't be any more the Settlor.
The Trust may also protect the assets of any exchange control laws relevant in the country of which the Settlor is resident.
2. An alternative to Will
As we all know, the providing and administration of a deceased person's estate always is costly and often cause cash flow difficulties for dependents of the deceased.
Using a Trust in a deceased situation does not require the formalities of probate administration in order to make distributions of income and capital following a death.
If the Trust owns the entire individual's estate and replace the Will, or just a part of it, with a view to supplementing dependents whilst the deceased's estate is administered. Therefore the Discretionary Trust is easy to refresh regarding the wishes at any moment just by a new letter from the Settlor for the Trustee compared with the formality of re-writing of Wills.
If we are talking about European countries then we have to take into consideration the local laws in accordance with the Trust functionality relating to the disposition of assets. But we also have to consider that most of the European countries have adopted laws relating to what is referred to as "forced heirship" , whereby an individual is not free to dispose of all or part of his assets to any individuals other than his/her spouse or children.
3. Fiscal Benefits
Usually the taxation system for Trust and particular for Discretionary Trusts is beneficially. The Trust remains still a good option for asset protection and wealth protection but this aspect varies on a country base.
You can benefit from a Trust also regarding capital gains tax planning, with appreciating assets being owned by the Trustees and therefore being subject to capital gains tax only in the country where the Trustees are resident. Or in some countries, the capital gain may then be distributed to resident beneficiaries without further tax consequences, or may be taxed on an affective remittance basis, thus providing at least tax deferral if not tax exemption.
4. Repatriation or Sequestration
It is advisable to place the ownership of the assets owned by Trustees in a different legal jurisdiction to that of the Settlor to protecting them from confiscation, since the assets of a Trust are owned by the Trustees independently of the Settlor or Beneficiaries.
5. Adding, Deleting or Excluding Beneficiaries
This procedure can be carried at any time, since that at the time a Trust is formed it may not be certain who the ultimate Beneficiaries.