The main characteristic of trusts, which have their origin in English common law, is that the legal right to handle the trust assets is separate from the right to benefit from them. The settlor of a trust (also know as the grantor of donor) transfers land, money or other property to the trustees, who acquire the legal ownership of these assets but are bound by law to manage and supervise them in the best interests of the beneficiaries, who have the beneficial ownership.
A trust is established by au trust deed or by a will. The trust instrument definies the law applicable to the trust, the extent of the trustees’ powers, the rules governing the administration of the assets, the maximum duration of the trust and the final distribution of the assets. The settlor may make the validity of certain decisions by the trustees subject to the prior agreement of a third party (protector), who exercises control over their activities. The beneficiaries, whose rights may relate to the income from the assets and/or the assets themselves, are usually named in a letter of whishes from the settlor to the trustees. While this letter imposes no obligation on the trustees, the latter will nevertheless respect the whishes of the settlor in practice.
A trust can be revocable or irrevocable, discretionary or fixed. The most common form is the disrcetionary trust, which defines a class of beneficiaries and leaves the trustees free to designate the people who are to be the actual beneficiaries.
Unlike a trust, which is purely a contractual instrument, a foundation is a separate legal entity which the founder endows with assets for a particular purpose specified in the foundation deed and articles. A foundation does not have shareholders, but beneficiaries. Like the settlor of a trust, the creator of a foundation may be one of its beneficiaries. The purpose of a foundation is usually to provide benefits for members of a family. This type of foundation is normally set up in Liechtenstein, mainly because of the flexibilty it offers. A foundation is run by a board appointed by the founder. The board is responsible for managing the assets and providing the beneficiaries with benefits in accordance with the foundation’s articles and by-laws. It may be assisted by a supervisory committee, whose prior consent is required for certain decisions.
The articles are supplemented by confidential by-laws detailing the composition and powers of the supervisory committee, as well as the names and/or classes of beneficiaries. Like trusts, foundations can be revocable or irrevocable, discretionary or fixed. Beneficiaries have no direct rights vis-à-vis the foundation, whose duration is not limited.
Both trusts and foundations enhance protection of the private sphere by strengthening the confidentiality of certain operations or safeguarding the ownership of certain assets. The opening of a bank account by an irrevocable discretionary trust also enables the beneficiaries to remain anonymous, as long as no beneficiary has actually been named.
These vehicles can also help to protect certain assets against future claims of creditors or political risks. Socalled asset protection trusts were frequently used during the 1980s to guard against the risk of a military intervention in Europ.
For estate planning purposes, use of a discretionary trust or foundation enables a family fortune to be preserved for the benefit of several generations. It is possible to limit the rights of the first beneficiaries to income and/or a portion of the assets, and to hand them down to successive generations of other beneficiaries. The settlor of founder can rest assured that his wishes will be respected by the trustees or the foundation board, particularly if a protector or supervisory committee has been appointed. Another objective may be the protection of minors and young adults ; in this case the cost of maintaining and supporting them is borne by the trust or foundation, which defers their right to receive a share of the assets until they have reached a certain age.
For tax purposes, use of a trust or foundation allows the elimination of wealth tax that would normally be imposed on the assets placed therein, as well as tax on capital gains resulting from their subsequent sale. Income tax is deferred or eliminated as long as the assets are kept within the trust or foundation and no distribution is made.
Transmission of the assets to the beneficiaries does not give rise to inheritance tax on the death of the settlor or founder, or if new beneficiaries are substituted for those no longer alive. However, the property vested in the trust or foundation is generally subject to gift tax, unless the trust or foundation is revocable. This tax may be reduced by applying for the more favourable rate charged on donations to the donor’s children. It is also possible to sell the assets to an underlying offshore company controlled by the trust, if the resultant capital gain or profit tax is lower than the gift tax.
To sum up, trusts and foundations offer excellent opportunities for estate planninf, provided they are used properly. In particular, the powers of trustees and members of the foundation board as well as the rules governing the administration of assets must be definied very carefully. The setting-up of a trust or foundation calls for a detailed needs analysis, clearly formulated objectives and a thorough assessment of all the parameters involved, particularly the tax aspects. In this respect, the jurisdiction applicable to the trust or foundation, the rights of the settlor or founder and the beneficiaries, their place of residence and the location of the assets are of the utmost importance. Bearing in mind alle these factors, it is essential to seek advice frome reputable companies with the requisite know-how and expererience in this field.
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