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02 September 2010
A trust is a legally binding arrangement whereby a person (a settlor) transfers assets to another person (a trustee) who is entrusted with legal title to the trust assets, not for his or her own benefit, but for the benefit of other persons (beneficiaries, who may include the settlor) or for a specified purpose.
The terms and rules under which the trustee is to hold the trust assets will normally be contained in a document called the trust instrument. This is for the benefit of all parties, as it will ensure that the settlor, the trustee and the beneficiaries know precisely what their respective rights and duties are. The trust instrument will usually provide that the trustee has the power to manage the trust assets in accordance with the terms of the trust instrument and the governing law of the trust.
In addition to the trust instrument, it is usual for a settlor to indicate to the trustee his or her wishes as to the future management and disposition of the trust fund in a less formal manner. His or her expression is often contained in a letter of wishes which, although not legally binding, will generally be considered by the trustee to be persuasive when performing his or her duties (eg, when considering whether to make a distribution out of the trust fund).
Once a trust is created, the settlor will have divested himself or herself of legal ownership of the trust assets. The settlor may be a beneficiary and, in certain circumstances, may also act as a co-trustee. The settlor may also retain a degree of control over the trust by reserving the exercise of certain powers to himself or herself (or a third person), such as the powers to approve distributions, appoint and remove trustees and revoke the trust. However, it is essential to the validity of a trust that the settlor dispossesses himself or herself of the trust assets and he or she may not, for example, simultaneously be a sole trustee and a sole beneficiary.
Legal title to the trust assets is vested in the trustee under the obligations imposed by the trust and he or she is responsible for the administration of the trust. A trustee must act with due diligence, as would a prudent person, to the best of his or her ability and skill, and must observe the utmost good faith. A trustee must exercise his or her powers solely for the benefit of the beneficiaries. However, the trust assets constitute a separate fund and form no part of the trustee's own estate.
The beneficiaries are the persons entitled to benefit from the assets held on trust. The settlor may be one of the beneficiaries. In order for a trust to be valid, there must be sufficient certainty as to the identity of the beneficiaries. However, an express power for the addition of further persons to the class of beneficiaries may be included in the trust instrument. The beneficiaries may enjoy equal or unequal benefits, as the trust instrument prescribes or, in the case of a discretionary trust, as the trustee may determine. It is also possible to include in the trust instrument a power to exclude beneficiaries from future benefit.
The trust fund
The assets constituting the trust fund may be of any type of movable or immovable property (except land, which cannot be held by a Jersey trust). At any time after settlement on trust of the initial assets, further assets may be added. A common arrangement is to establish a trust with a nominal initial amount and subsequently to add more substantial assets.
It is not essential for the validity of a trust that there be a protector. However, in order to counterbalance the wide discretionary and fiduciary powers conferred on a trustee, it is often found useful for the settlor to appoint a trusted friend or professional adviser to act as a protector of the trust. In such cases, the consent of the protector will generally be required before the trustee may exercise certain strategic powers under the trust instrument.
Forms of trust
Various types of trust have been developed and the most appropriate structure for the settlement will depend on the settlor's particular circumstances and objectives. Some of the more common types of trust are described below.
Fixed interest in possession trust
Under a fixed interest trust, the principal beneficiary will normally be granted a vested interest in the income of the trust fund throughout his or her lifetime and the discretion of the trustee regarding the disposition of the trust fund will be limited. For example, the trust instrument may specify that the trustee is required to distribute all of the income of the trust fund to a particular individual during that person's lifetime, and subsequently to distribute the capital of the trust fund in fixed proportions to named beneficiaries (eg, the settlor's children).
Accumulation and maintenance trust
An accumulation and maintenance trust is one where no beneficiary has a fixed entitlement to the benefits accruing to the trust for a certain period, during which time income is accumulated and becomes an accretion to capital. The persons who are ultimately entitled to the trust capital may thus benefit from the accumulation of capital. The trust instrument may give the trustee a discretionary power to make distributions among the beneficiaries up to a specific age for their education, maintenance and benefit, and to provide thereafter for a designated share of the trust fund to be distributed to each child on reaching a specified age. An accumulation and maintenance trust may be particularly appropriate where the settlor wishes to benefit a group of children (eg, his or her grandchildren).
A discretionary trust provides maximum flexibility and is often the most efficient structure for both settlor and beneficiaries. Under the terms of a discretionary trust, the trustee is given wide discretionary powers as to when, how much and to which beneficiaries he or she should distribute the income and capital of the trust. Such a form of trust is useful where at the time of creation of the trust, the future needs of the beneficiaries cannot be determined accurately.
The beneficiaries are not regarded as having direct legal rights over any particular portion of the trust fund, but only a right to be considered for benefit at the trustee's discretion.
Although for tax and other reasons it is generally desirable for a trust to be constituted as an irrevocable settlement, in certain circumstances the settlor may require the additional comfort of knowing that he or she has retained the power to revoke the trust and enforce the return of the trust fund. Careful consideration should be given to the possible consequences of a revocable trust because, under the jurisdiction of the settlor's domicile, residence or nationality, revocation may negate some of the expected benefits of creating the trust.
Charitable purpose trust
Generally, in order for a trust to be valid, there must be identifiable beneficiaries. In brief, the onerous duties imposed on trustees are owed to the beneficiaries, and without ascertainable beneficiaries who may enforce these duties against the trustees, a trust will not be upheld. A long-held exception to this general rule has permitted trusts to be established for charitable purposes. In such instances, a representative of the state is tasked with the role of enforcing the trustee's duties and obligations.
Non-charitable purpose trust
Jersey has amended its legislation to permit the creation and enforcement of non-charitable purpose trusts (ie, trusts in which property is held by trustees on trust to carry out specific purposes which do not qualify as charitable purposes). This new type of trust is often simply referred to as a 'purpose trust'. All the usual rules for trusts apply, except in two respects.
First, the trust deed must set out the particular purpose or purposes for which the trust has been established. Second, the trust instrument must provide for a person whose duty it is to enforce the trust in relation to its non-charitable purposes. This person is called the 'enforcer' and must not be a trustee. Although an enforcer may be likened to a protector, the role of an enforcer is essentially different.
Non-charitable purpose trusts enable the fulfilment of purposes which are not charitable in the strict sense, but are or may be beneficial in a wider sense. However, important commercial advantages may also be obtained by the use of such trusts.
The range of uses to which a trust may be put is still being developed, but flexibility and confidentiality are the principal advantages of a trust over other legal forms that are designed to hold, preserve and transmit wealth. The trust concept has proved enormously adaptable and is widely used in financial planning. Such is the flexibility of a trust that it would be impracticable to define its potential; however, some typical applications are as follows.
Preservation of wealth
Trusts may be used to preserve the continuity of ownership of particular assets, such as a business, within a family. By vesting legal ownership of the assets in the trustee, the relevant individuals may be able to continue to benefit from the assets, while avoiding fragmentation of ownership among a large number of second and third-generation beneficiaries. The use of a trust avoids, on the death of a beneficiary, the risk of a share of assets becoming owned outside the family, and thus enables settled assets to be preserved intact for the benefit of future generations.
Where a settlor disposes of assets during his or her lifetime by settling them on trust, the trust assets will form no part of the settlor's estate on his or her death. This may enable a settlor to avoid forced heirship rules which may be mandatory under the laws of his or her domicile, residence or nationality, and which would otherwise dictate the persons to whom, and the proportions in which, a settlor's estate would devolve.
In Jersey, specific legislation has been enacted to provide that where a person domiciled outside Jersey makes a lifetime transfer of assets to a Jersey trust, no rule relating to inheritance or succession will affect the validity of the transfer to the trust.
The effect of a trust is to divest the settlor of ownership of the settled assets. Accordingly, upon the settlor's death there will be no need to obtain a grant of probate or complete similar formalities in order to deal with the trust fund. A trust therefore provides an efficient vehicle for the transfer of beneficial ownership interests on the death of a settlor.
Furthermore, because the interests of a beneficiary under a discretionary trust will not constitute a separate asset, a trust structure may assist in the avoidance of stamp duty or inheritance taxes which would otherwise be payable on the death of a beneficiary. In addition, a trust can be used to hold shares in a company that owns immovable property, rather than directly in the real property itself, with the effect of transforming characterisation of an interest from immovable to movable, which can present attractive opportunities for tax and financial planning. A trust may also be used to protect financially unsophisticated beneficiaries and to make financial provisions for the improvident.
Historically, trusts have been established for the principal purpose of protecting assets from risk. In a modern context, trusts may be employed to hold assets in a secure and stable political environment. The use of a trust in conjunction with an underlying company can be used to convert an onshore asset into an offshore one and to interpose an additional layer of confidentiality in a chain of ownership. The use of the trust and company combination may also enable trust assets to be held in a jurisdiction which does not recognise the trust concept.
Such an arrangement may be attractive to a lender for the purpose of obtaining security against assets. Trusts can also safeguard assets against strategic risks, such as confiscation or expropriation by the state in the country of the settlor's domicile, residence or nationality. As a further protection, a modern trust instrument can provide for the proper law of settlement to be moved to another jurisdiction in the event of a political or strategic emergency in the the trustee's country of residence.
The variety of uses to which a trust may be put in the commercial context has only been partly realised. Offshore trusts have been used for the following commercial purposes:
It is preferable for a trust to be created by the execution of a formal written document so that all parties know their respective rights and duties. Trusts may be created in writing by a document signed by both the settlor and the trustee, or by a declaration of trust signed by the trustee alone. Following execution of the trust instrument, a trust will come into existence on settlement of the initial property, which may be supplemented later.
Political and economic stability
Jersey does not form part of the United Kingdom: it is a self-governing dependency of the British crown. By constitutional convention established over some 500 years, it has complete autonomy in all matters of internal government, including taxation. The legal system is separate but similar, derived in part from the customary laws of Normandy, but strongly influenced by English law in company and commercial matters. The UK Supreme Court remains Jersey's ultimate court of appeal.
Jersey's special constitutional position has been recognised by the European Union in a protocol (No 3) attached to the United Kingdom's treaty of accession to the European Union. The protocol provides that the Treaty of Rome shall apply to Jersey only to the extent necessary in relation to the arrangements for the free movement of goods. Accordingly, EU directives on fiscal harmonisation, financial services and company law do not have effect in Jersey; in this respect, it enjoys significant advantages over Luxembourg and Ireland.
Integrity and reputation
Jersey is a recognised jurisdiction for the purposes of the Financial Action Task Force for its anti-money laundering legislation.
Modern laws and innovative legislation
Although trusts have been established in Jersey for many years, their operation is governed by modern, comprehensive statutes. The Trusts (Jersey) Law 1984 is still in force, having been updated frequently since its original enactment. The law provides that a trust exists and will be enforced by the courts where a trustee holds or has vested in him or her assets for the benefit of a beneficiary (whether or not yet ascertained or in existence), or for a specified purpose. The law confirms that the trust assets constitute a separate fund and form no part of the personal property of a trustee. The law also imposes fiduciary duties on trustees, regulates the administration of trusts and provides rights of beneficiaries. For example, a beneficiary has a legal right to force a trustee to act in accordance with the terms of the trust instrument and the law.
Unlike the position in certain other offshore jurisdictions, Jersey trusts can be of unlimited duration. The performance of a trustee's duties will be enforced by the Royal Court of Jersey, if necessary, at the instigation of a beneficiary.
The Jersey courts will seek to ensure that a trust established under the law is administered by the trustee in accordance with the provisions of the trust instrument and the law, thus providing a high degree of protection for both settlor and beneficiaries. The courts have an acknowledged proficiency in the law of trusts and the senior UK judges who sit on the Court of Appeal provide added assurance to settlors and beneficiaries that litigation, while unwelcome, will be decided on justly, fairly and with an expertise which may be lacking in less-sophisticated jurisdictions.
There is no requirement under Jersey law to register trust documents with a government office or agency. This enables complete confidentiality of the trust arrangements to be maintained. Jersey trusts may be established by means of a written declaration signed by the trustee alone, without the requirement that the settlor appear as a party to the instrument.
The extension to Jersey in 1995 of the Hague Convention on the Recognition of Foreign Trusts gave further impetus to the expansion of trust services on the island. Under this convention, trusts which have been duly constituted under the laws of Jersey must be recognised by the signatories to the convention.(1)
Further protection for the settlors and beneficiaries of Jersey trusts is provided by the Financial Services (Jersey) Law, which imposes minimum standards on commercial trustees and requires them to be licensed by the Jersey Financial Services Commission.
Where all the beneficiaries of a Jersey trust are resident outside Jersey, the trust will be exempt from assessment both in respect of Jersey income tax on income arising outside the island and income on bank deposit interest arising inside Jersey. For practical purposes, therefore, the trustee may make distributions out of a trust fund established in Jersey without any withholding or deduction for income tax. There is no inheritance, wealth, gift or capital gains tax or equivalent form of indirect taxation charged on the creation or transfer of assets to a trust. In this respect, Jersey trusts differ from trusts created under the laws of other jurisdictions, such as Bermuda and Liechtenstein.
Good communication and access
The communications system in Jersey is first class and the legal and financial service providers operate IT systems on a par with those available in any other major financial centre. Located in the English Channel, Jersey is easily accessible by regular direct flights from London and other UK cities and is in the same time zone as the United Kingdom.
Professional and support services
Jersey has a large number of legal, accounting, banking and fiduciary service providers. Recruitment is often made from the leading firms in the United Kingdom, Australia, New Zealand and Canada.
For further information on this topic please contact Marcus Leese at Ogier's Hong Kong office by telephone (+852 3656 6000), fax (+852 3656 6001) or email (email@example.com). Alternatively, contact Steve Meiklejohn at Ogier's Jersey office by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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