High reputation for trusts

PUBLISHED : Thursday, 20 July, 1995, 12:00am
UPDATED : Thursday, 20 July, 1995, 12:00am

TRUSTS have developed under British-based legal systems to provide an investment instrument for people who no longer want to directly own property.

The Isle of Man has become a world centre in trusts because of its compatible legal and taxation systems.

When a trust is set up, control is passed from the former owner of the property - the settlor - to the beneficiaries chosen by the settlor.

Legal ownership of the trust assets passes to the trustees who hold assets on behalf of beneficiaries and manage the trust on terms outlined in the trust document.

As trusts are often used for tax purposes, there are some concepts which appear odd to those who are not tax specialists.

The central tenet of trust theory is that the settlor no longer has legal title to the assets bound over into the trust on behalf of beneficiaries.

But this is not quite the same as giving one's money away since the terms of the trust are agreed by the settlor in setting up the trust.

A common form of trust on the Isle of Man is the discretionary trust.

The 'discretionary' aspect means the trustees can decide how and by how much the beneficiaries of the trust are to gain from assets.

Under this, beneficiaries have no legal right to any part of the trust fund.

However - and here it probably helps to be a tax lawyer - the settlor usually writes an 'expression of wishes' which can offer guidance as to how and to what extent the beneficiaries should be paid.

A 'protector' or 'nominator' can be inserted into the discretionary trust hierarchy with the power of veto over the trustees' decisions.

Trustees working with a protector are only allowed to use discretion in favour of a beneficiary with the protector's written consent.

At the other end of the scale is the fixed trust, where trustees have no discretion and distribute assets to beneficiaries according to terms laid out in the trust deed.

For example, trustees in a fixed trust might be required to pay an amount to one beneficiary as long as he or she lives, then distribute the remainder of the trust's assets in fixed proportions to other beneficiaries.

Combinations of fixed and discretionary trusts are also possible.

The most common reason for setting up a trust is tax minimisation.

For those in Hong Kong, where the tax system is fairly undemanding, it is worth remembering that, in high tax regimes, vast resources are committed to finding an escape from the tax man.

Trusts have long been a central part of tax planning in Britain, which imposes a tax on capital.

People living in politically unstable locations use trusts to hold assets which could be seized by an unfriendly government.

They can be used where there are exchange controls to minimise the amount of wealth an individual has to declare.

The head of a family could set up a trust to ensure that a family member is well provided for but does not have the opportunity to squander the wealth.

A settlor might also use a trust to provide for a mentally or physically disabled person following his death.