Your Offshore Guide

WHAT IS AN OFFSHORE TRUST?

The concept of a trust is a difficult one for many investors to understand and accept. This is because the fundamental basis of a trust means you no longer own or have control of the assets you place in the trust. Such assets may include real estate, stocks, bonds, works of art and intellectual property like patents and copyrights.

It is usually created in an English common-law jurisdiction because the law governing trusts has developed in English court cases over the centuries. This case law became a part of the English common law, not only in the United Kingdom, but also in most of the former and present British territories of Canada, United States, Channel Islands, Bahamas, and Cayman Islands. Trusts where the strategy covers more than one legal jurisdiction can therefore be administered effectively in the many offshore low tax areas that have English-based law.

Why anyone would want to separate themselves from their wealth is the stumbling factor for most investors. Some of the main reasons for this follow. The concept is doubly difficult for investors of civil law jurisdictions to understand such as the Middle East or France. Civil law systems do not generally accommodate the distinction between legal ownership and beneficial
ownership on which the existence of a trust depends, and therefore do not easily recognise the concept of a trust.

This appears to be changing, albeit slowly. While civil law courts have been willing in the past to recognise trusts formed by individuals not connected with

their jurisdiction, the increased global use of trusts by individuals, institutions and businesses means that civil law jurisdictions, such as Germany and France, are beginning to recognise trusts formed by their own nationals.

The fact that trusts have been part of common law jurisdictions since medieval times means there are many legal precedents which guarantee trusts fulfil what they set out to do. These legal precedents ensure that the people (trustees) who hold the trust assets on behalf of the people (beneficiaries) who will benefit from the trust do so according to your wishes when you (the settlor) established the trust. Trustees are governed by a strict ethical code that makes sure they always act in the best wishes of the trust letter (the rules governing how the trust is
administered). It is heartening to know that there is a growing trend for trustees to come under scrutiny if the beneficiaries feel that the trustees are being unreasonable. Offshore centres are increasingly introducing guidance rules on this that gives recourse to beneficiaries who have a valid complaint against the trustees.

Establishing an offshore trust has much the same qualities as other offshore investments in that being placed (sited) in a low or no tax regime potentially gives a performance kick on the underlying investments held in the trust.

It also gives additional financial planning flexibility, particularly if at some time in the future you are likely to become resident of a civil law jurisdiction where the distribution of your assets on death are subject to strict guidelines.

The avoidance of forced heirship is a key use of a trust in civil law jurisdictions where complete testamentary freedom is not available as a matter of public policy. Forced heirship rules should not be confused with intestacy rules that apply where the deceased has not left a valid will. Forced heirship rules give a fixed entitlement or proportion of a deceased's estate to certain of the deceased's close relatives.

Since forced heirship rules are a matter of public policy, any attempt to override them may be illegal. Following Roman and Napoleonic codes, civil law in continental Europe tends to require that children have the right to a fixed amount of their parents' estate. In certain Arab jurisdictions, the principle of combating forced heirship can apply in cases where sisters are sanctioned to inherit less than brothers do.

Expatriates resident in European civil law jurisdictions may think that the forced heirship rules do not apply to them because they are not nationals of that jurisdiction. But if you become permanently resident and there is a chance you could be deemed to have domicile status, you could be subject to forced heirship rules. By creating a trust before becoming a permanent resident then any property held in trust should fall outside the heirship rules.

In theory, establishing a trust requires a substantial amount of wealth to justify the effort and expense involved. However, increasingly simpler trust versions are being used in conjunction with offshore investment products in order to maximise tax planning opportunities. For example, offshore bonds are often written in trust to mitigate inheritance tax. In some instances, the popularity of such trust use has made them a victim of their own success and tax authorities are generally keen to close such blatant loopholes. This was recently witnessed
in the UK when action was taken to put an end to the 'dead settlor provision'.

The dead settlor provision was the ability to arrange for your heirs to avoid paying tax on the proceeds of insurance bonds by putting them in trust. When the settlor died, there was no one the Revenue could tax. It is crucial, therefore, to gain a good feeling for how the jurisdiction in
which you are resident views the different types of trust use as well as choosing a sound jurisdiction favourable to the type of trust you wish to establish. The following information will give you a good grounding for what to look out for.

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