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SCMP Reporter

A FAMILY emigrating to Canada with US$1 million in assets could save about $270,000 in taxes over five years by setting up an off-shore trust, according to a trust expert.

   Alternatively, they can set up a trust to protect assets against probate and inheritance tax as a tax-efficient way of distributing assets in the future, or as a means for unincorporated professionals such as lawyers or accountants, to protect assets against creditors.

   A trust is simply a device where assets are held by a trustee who administers the assets for the benefit of other parties, called beneficiaries.

     The person setting up the trust - called the settlor - needs to clearly specify his intentions when setting up the empowering document, or trust deeds. It is generally advisable to seek the help of a specialist trust practitioner, such as a lawyer, banker or accountant.

   It is also necessary to carefully choose the trustee whose role it will be to administer the deed in the interests of the beneficiaries.

   Because it is difficult to change the deeds, a settlor should appoint an independent third party, called a protector, who has special powers to intervene in the trust's administration.

   According to Barry Macdonald, partner at Coopers and Lybrand, the most common mistake individuals make is choosing the wrong trustee.

   Mr Macdonald said: ''If necessary, go out and see two or three professional trustees, such as banks or lawyers, before making a decision. I suppose it is like picking a doctor. You need someone with whom you are going to be comfortable with on an on-going basis.''    They are usually most suitable for those planning to hold assets of around $1 million. Set-up fees for a trust of this size are around $10,000 to $15,000 and there is likely to be an annual administrative fee of between $3,000 and $4,000.

  But it is an increasingly competitive market and it pays to shop around.

   According to Frederick van Tuyll, managing director of Brumby and Co, a specialist trust company, choosing the right trustee is crucial.

   Mr van Tuyll said: ''It is very important that you should be able to get on with the individual. You should be able to trust their judgment as they will have a great deal of discretion over your assets.''    The degree of discretion exercised by the trustee will depend on the terms of the trust but typically they can determine investment of assets, their distribution and could have discretion over the appointment or removal of beneficiaries.

   He stresses the importance of appointing a protector. Usually this is a trusted friend or family member of the person setting up the trust who is given powers to ensure the trustee is undertaking his duties correctly.

  Mr van Tuyll added: ''Another common mistake people make when setting up a trust is believing they can retain full control over its assets.''    Those considering a trust that will also involve the management of assets should clearly specify at the outset the investment objectives and ensure that performance is measured against some accepted benchmark, such as the Hang Seng Index.

   Those who are delegating total asset control to their trustee should also make sure that they, or the beneficiaries, are kept informed of its performance on a regular basis, at least once a year.

  For those considering emigrating to less favourable tax regimes than Hong Kong, a trust offers an ideal way of preserving assets, particularly for those heading to Canada, one of the most popular destinations for those immigrating from Hong Kong.

   ''Canada is now possibly the most suitable tax regime for use of off-shore trusts. Countries such as Australia and the US are increasingly tightening their rules,'' Mr Macdonald said.

   ''For the first five years of residence in Canada they have a tax holiday on assets held in offshore trusts. They can withdraw the assets at any time over the five-year period and the proceeds can be tax free if the trust is properly constructed.''   The alternative is facing taxes on worldwide assets which, at the top rate, are 54 per cent.

     A person with assets totalling $1 million could be earning around 10 per cent - or $100,000 - a year on their holdings.

  A Hong Kong citizen moving to Canada who did not use a trust could therefore face an annual tax bill on these assets of $54,000, or a total of $270,000 for the five-year exempt period.



Offshore trust can ensure tax savings