Trusts are common law instruments under which the Settlor transfers legal title to the assets to the trustee on specified terms, who holds the assets for the benefit of the beneficiaries, who in turn hold equitable title to the assets. In short, the trustees receive assets from the Settlor, and are required to distribute them to the beneficiaries as provided for in the trust.
Trusts can be revocable, which means the Settlor reserves the power to revoke and terminate the trust, or they can be irrevocable, where the Settlor has no power to revoke or terminate the trust. In addition, trusts distributions can be at the discretion of the trustees, or fixed interest where the distributive scheme is established in the trust instrument.
The Settlor is the person who executes the Trust instrument and contributes the assets to the Trust. The Settlor may reserve certain powers over the administration of a Trust, including a beneficial interest, the power to approve distributions, change Beneficiaries, remove the Trustee, manage the Trust assets, revoke the Trust, etc. However, reserving such powers may serve to significantly reduce tax advantages and asset protection advantages.
The Beneficiaries are the individuals that are named in the deed and can benefit from the assets of the trust. They are said to hold equitable interests in the Trust. Beneficiaries may have fixed interests or discretionary interests, and typically include the Settlor, his/her spouse, children, and grandchildren, as well as third parties.
The Trustee is the party that holds legal title to the assets, and is charged with giving effect to wishes of the Settlor, giving effect to the terms of the Trust, and protecting the interests of the Beneficiaries. In a discretionary Trust, the Trustee is given wide discretion over Trust administration, including discretion over distributions to Beneficiaries. The Trustee is also obliged to keep proper accounts, etc.
The typical role of the Protector is to exercise certain powers defined in the Trust instrument, such as appointing and removing the Trustees, and appointing and removing the Investment Advisor, as well as consenting to the exercise of certain Trustee powers and discretions, such as distributions of income and principal, adding and removing Beneficiaries, amending the Trust instrument, etc. The Protector is usually appointed and removed by the Settlor.
The Investment Advisor named in the Trust instrument has the responsibility of managing the assets of the Trust. Trust instruments in modern trust jurisdictions grant the Investment Advisor the power to direct the Trustee as to investments, which directions must be followed by the Trustees.
A Letter of Wishes is normally utilized in the case of discretionary trusts, and is written by the Settlor to the trustee expressing his/her wishes regarding distributions to beneficiaries. It is intended to guide the trustee in its exercise of discretion regarding distributions, and is not legally binding.
Trust instruments typically contain express governing law clauses which stipulate the law applicable to the Trust, such as the law of England, or other common law jurisdictions, such as Cayman, Bahamas, etc.
Trusts can hold any type of assets, including financial assets held through bank accounts, real estate, yachts and aircraft, operating companies, etc.
Trusts are typically set-up for succession planning, tax planning, and asset protection.
Broadly speaking, succession planning refers to the establishment of a plan to provide for the financial needs of future generations and ensure the transfer of wealth from generation to generation. In the case of trusts, succession planning involves the use of trusts to hold and distribute assets to the family members in an orderly and predetermined manner governed by the terms of the trust the Letter of Wishes. Assets held in trust are not subject to probate on the death of the Settlor.
Depending on the jurisdiction of tax residence of the Settlor, and the characteristics of the trust, the trust may allow the deferral of taxation on undistributed trust income, and it may also allow wealth tax to be avoided.
Asset protection refers to protecting the trust assets from the reach of creditors and parties brining claims against the trust. Transferring assets to a company or trust provides a measure of protection. However, true asset protection trusts are normally irrevocable, discretionary, and with limited powers in favour of the Settlor.
The Trustee should be carefully chosen, and should be a financially solid company operating in a jurisdiction that requires licensing or supervision, that has adequate capital and insurance, that has experienced staff, with a good reputation in the industry, and that has been in the business for a number of years.
Trusts normally continue after the death of the Settlor and provide for the beneficiaries in the manner set forth in the trust instrument or letter of wishes, unless the trust is a “distribution” trust which distributes all its assets to the beneficiaries after the death of the Settlor.
The Settlor can amend the terms of the trust after it has been established provided that the Settlor has powers to do so in the trust instrument, which is normally the case with revocable trusts. In the case of irrevocable trusts, the Settlor does not normally have powers to amend the trust.
Depending on the tax residence of the Settlor, there may be gift tax on the transfer of assets to the trust, wealth tax on the value of assets held in trust, and income tax on the undistributed income of the trust, and income tax on distributions to beneficiaries.
Trusts usually hold assets through underlying companies to protect the trust from liabilities that may arise in the underlying company, and to protect the trust assets from estate taxes in jurisdictions, such as the United States, that imposes estate taxes on US situs assets, such as shares of US corporations and US real estate.
Normally the trustee charges a set-up fee to create the trust and the underlying company, open the bank accounts, etc., and an annual fee for annual trust administration. Some trust companies assess time charges for trust administration on top of the annual fees. The costs and disbursements of a trust are normally billed separately.
Company Management Services:
CISA holds a Class 1 Trust License in the BVI, which allows it to act as trustee, company administrator and resident agent.
CISA provide incorporation, resident agent and company management services for BVI companies from our offices in the BVI. CISA provides also directors services, operates the bank accounts, keeps the books and records, and provides resident agent and registered office services.
A trust licensed trust company should manage the BVI company professionally, according to the statutory requirements of the BVI, including keeping the books and records of the company, and making the required regulatory filings.
First, the client must provide CISA KYC information, and a copy of his/her passport and proof of residence. After the client acceptance process is complete, the client and CISA will execute a Mandate Agreement and a Fee Agreement. Finally, the client will chose a name for the company, and the company is incorporated.
BVI companies can conduct any lawful activity and hold virtually any kind of asset. However, as a matter of policy CISA only holds passive assets, such as portfolio investments, operating companies, real estate, yachts, aircraft, etc. CISA does not administer BVI companies that are engaged in commercial transactions.
CISA has a physical presence in the BVI and our staff are experienced administrators who are intimately familiar with the local rules regarding the creation and administration of BVI companies.
There is normally a Set-Up Fee for the work and costs of creating the company, and an Annual Fee for providing administration services which include all routine company administration, except extraordinary matters. Costs and disbursements are normally charged separately.
Wealth planning also refers to succession planning, estate planning, or generational planning, and is the process by which a plan is established to provide for the financial needs of future generations and ensure the transfer of wealth from generation to generation.
The starting point would normally be an in depth discussion with the patriarch to understand the “big picture”, that is his/her family situation, the number of children and grandchildren, their respective skills and abilities, and the state of his/her assets, whether held individually or through corporate entities, and gain an understanding of his/her objectives. The more complicated issues arise on planning for the continuity of family owned businesses.
Lawyers and tax advisors should definitely be consulted in designing an adequate succession plan for the individual in question, especially if the individual resides in a high tax jurisdiction.
The most common instruments used in wealth or succession planning are wills, trusts, foundations, corporate vehicles, life insurance, etc.
We do not charge separate fees for wealth planning services, and include wealth planning services in the fees we charge to establish and administer trusts.
The Foreign Account Tax Compliance Act (FATCA) were adopted in 2012 to require Foreign Financial Institutions (FFIs) to provide information to the IRS on the foreign financial accounts of US taxpayers.
Most leading jurisdictions have adopted FATCA.
Neither the FACTA Act nor the Regulations authorize information exchange by the US.
The FATCA Intergovernmental Agreements (IGAs) were implemented subsequently to induce cooperation, and authorize the United States to provide limited information exchange to FATCA IGA partners.
One important difference is that the Regulations require that professionally managed Investment Entity FFIs meet both the “gross income” test and the “managed by” test, but there is no “gross income” test under the IGAs, and an investment entity will be an FFI if it meets only the “managed by” test.
FATCA is an automatic exchange of information mechanism, not a taxation mechanism, whereby certain information is exchanged between the US and the foreign jurisdictions.
FFIs are required to conduct due diligence and identify accounts held by US persons. Where the accounts are owned by foreign entities, FFIs must identify equity interest holders that are US persons, and must identify the “Substantial U.S. Owners” of passive NFFEs under the FATCA Regulations, and the “Controlling Persons” of passive NFFEs under the IGAs.
In general, subject to whether the financial accounts are held individually, or through FFIs or passive NFFEs, the information provided by the Foreign Jurisdiction to the IRS includes the account balance or the value, the gross amounts of interest, dividends, and other income generated, including capital gains, as well as gross payments made to account holders.
Provided a FATCA Model 1 Agreement is in effect, the information provided by the US to foreign jurisdictions is limited, in the case of bank accounts held individually, to bank deposit interest of $10.00 or more, and in the case of financial accounts other than depository accounts, any US source income, including dividends, interest and other US source income must be reported paid to accounts held by individuals or corporations resident in the FATCA partner jurisdiction.
Clients must provide a Self-Certification Form, which include the client’s name, address, country of residence, their US status, taxpayer ID number, etc.
CRS is a multilateral, fully reciprocal, automatic exchange of information mechanism introduced in 2014, which was largely copied from FATCA.
All major financial centres have adopted CRS, except for the United States.
Like FATCA, CRS is an automatic exchange of information mechanism, not a taxation mechanism, whereby information is exchanged between jurisdictions that have adopted CRS.
Financial Institutions (FIs) are required to conduct due diligence, identify their account holders and their tax residence, and determine whether they are resident in reportable jurisdictions. If accounts are held through entities, FIs must determine whether the entities are Professionally Managed Investment Entity FIs, or Active or Passive non-Financial Entities (NFEs).
Subject to whether the account is a personal account, a PMIE, a passive NFE, or an active NFE, the information to be reported includes the balance or value of the account, the gross amounts of interest, dividends, and other income, as well as the total gross “turnover” of the account.
Client must provide a Self-Certification Form, which must include the client’s name, address, country of residence, taxpayer ID number, etc.