Trusts are popular today as an asset protection device. The object being to protect the family assets from litigious attack, death, gift and perhaps income tax. Trusts in Nevis provide excellent protection against pursuit by creditors with tax planning as a secondary objective to be optimized.
However, the concept of trusts and their use are not a universal concept. Companies on the other hand are universally accepted and therefore are the best vehicle for holding assets or contracting obligations.
Thus the objective for a basic structure is to create a trust that is not tainted either by the settlor, beneficiaries, trustee or source of funds. This is achieved by eliminating the settlor and beneficiary from the deed of trust, having a foreign trustee create the trust by declaration and having the funds enter the structure by using an arms length third party transaction.
In most developed countries where anti-trust tax legislation has been put in place, the revenue services deem a trust’s nationality to be that of the settlor or beneficiary or both. Taxes are then assessed on income or wealth whether or not the settlor or beneficiary has received any benefit. This is a tax neutral situation, the trust only provides asset protection against creditors.
If however, a charitable purpose trust is used, the trust by its nature has no natural persons as beneficiaries and thus is not tainted by the nationality or residence of the beneficiary. A beneficiary is provided in the form of an offshore foundation. Furthermore the creation of the trust by declaration, initially funded with a nominal amount (normally the cost of the asset protection structure) eliminates the settlor from the deed of trust who therefore is unable to taint the trust.
The question is how do we get the assets into the trust without tainting it by the "donor". This is achieved by using an arms length contractual agreement called a deferred private annuity. The client transfers assets to the underlying company owned by the trust in exchange for an agreement to pay a regular annual sum for life starting from a specified date. The Company may always lend funds to the client as one of its investments secured by the annuity.
The Control Issue
A major concern for clients is the loss of control of their assets, if they are not named as settlor and the only named beneficiary is a Foundation. To address this concern a Protector is appointed, which is once again, an offshore entity. The directors and officers of this company are independent parties from the trustee and may delegate to the Foundation or the client’s legal representative the power to hire and fire the trustee and change the jurisdiction of the trust. The Protector also may enforce the provisions of the trust and on the advice of the gift committee dissolve the trust. In the event of dissolution the Protector determines who the remaindermen should be and how the assets should be distributed. This may well be to another trust, annuity arrangement for the issue of the client or payment to designated persons.
Thus we have created an offshore trust with an offshore trustee, no natural persons as beneficiaries and an offshore Protector. The funds are deposited into the trust by use of an arms length contract (annuity or other life insurance contract) and in the event of the death of the client, the assets are outside his estate. The family still has control of the assets through the Protector, the Foundation and the gift committee.
Description of Structure Components
The Protector is an international business company who acts independently to the trustee as directed by the client’s legal counsel (protected with client privilege).
The Purpose Trust is a charitable purpose trust that will donate funds of a philanthropic nature to the Foundation controlled by the client (recommended that a donation of at least US$1,000 per year be distributed). The Trust also has the purpose of owning and holding the shares of one or more underlying business companies, which companies may hold investments and carry on business. The benefit of this type of trust is that it has no natural persons as beneficiaries and thus is not tainted by their residence or nationality.
The Underlying Company is an offshore company that will enter into a private annuity agreement with the client. The Company usually has a custody account at reputable bnaks in Bermuda, the Bahamas or another offshore bank of choice. The Company signs an investment advisory contract with the client’s advisor(s) of choice. Please remember that offshore companies are foreign entities, stocks and bonds must be selected so that income is not lost in withholding taxes.
The Foundation has a gift committee, which determines the amounts that will be distributed for philanthropic purposes. The gift committee may comprise the client, his family or others designated by the client. The Foundation is nominated within the trust deed as the remainder beneficiary of the Trust on termination.
One of the added benefits of this structure other than asset protection is that it is flexible and may easily be adjusted to be tax efficient for differing situations. Therefore clients who wish to commence offshore operations with a minimum part of the structure may do so.
The content of this article is intended only to provide general guidelines related to this particular matter. For your specific circumstances, full specialist advice is recommended.