This will aim to give a simple guide to the different kinds of trusts for expats and how to use them briefing outlying the basic fundamental of the ranges of trust and how are used in financial planning.

What is a trust?

A trust is an old English document originated in the middle ages to pass on land and wealth Today, although many aspects have changed and elements added the fundamentals remain the same.

This agreement – known as the “Deed of Trust” – is set up and agreed upon by the first two parties. It does not relinquish control of the assets placed in the trust, but it does clearly spell out how the assets are to be used and distributed.

The most common use of a trust is to ensure that the trust assets are protected from misuse by the beneficiaries and managed according to the wishes of the Settlor of the trust.

This is the key difference between a trust and other wealth management options.

For example, having a life insurance policy alone is not enough to protect beneficiaries or their guardians from their own poor decisions or misuse. Any minors who are named beneficiaries, for instance, will need guidance on how to make the best use of the funds for their future.

A trust ensures that this is done. A will or insurance policy, on the other hand, may not.

The terminology of a trust definitions

• The settlor– This is the individual who creates the offshore trust.
• A trustee- is a person or firm that’s holds and administers property or assists for the benefits of a third party.
• Beneficiary– The person for whose benefit a trust
• A Proprietor– is a person appointed under the trust instrument to direct or restrain the trustees in relation to their administration of the trust.

Types of trust

You have 3 main types of trust Private, Corporate and Charitable. For the purposes of this article will focus primarily on Private. Although, both Charible and Cooperate can be set up legally for individual IHT planning.

Private Types of Trust

• Revocable- One that can be altered or cancelled at any time by the settlor after a certain date.
• Irrevocable trusts cannot be altered or canceled at any time by the Settlor. 
• A discretionary trust is the most flexible type of trust and allows the Settlor to provide the Trustee with a “Letter of Wishes” that offers guidance about how the Trustees should manage and administer the trust and its assets.

This ability to set the terms of the agreement makes discretionary trusts a popular choice for asset protection and tax planning.

With the stipulations laid out in the “Letter of Wishes”, the Trustee is granted greater discretion to determine what each Beneficiary receives and when. One advantage of such a setup is that Beneficiaries do not have a claim to a fixed percentage share of the trust income and, therefore, cannot be obligated to sign their shares of the trust over to a creditor.

An interest in possession trust gives at least one beneficiary an immediate right to receive income generated by the trust or to enjoy the assets in another way, minus any trustees’ expenses.

A beneficiary with such a right is known as an “income beneficiary”, “life tenant” or “having a life interest.” A beneficiary who has a right to the trust capital is known as the “capital beneficiary” or the “remainderman.”

Accumulation and maintenance trusts are a special type of discretionary trust that accumulates income that is then used for the maintenance of Beneficiaries who are typically minors. Generally, the Deed of Trust will dictate how the funds will be distributed for the maintenance of each child, payment of college tuition, and the provision of a fixed income once the child has reached a certain age.

Accumulation and maintenance trusts receive several tax benefits. For example, if all the Beneficiaries have at least one grandparent in common and they are each entitled to receive the trust assets on or before the age of 25, the assets will be given special relief for inheritance tax reasons.

In addition, no inheritance tax is charged during the life of the trust and all transfers of property to the trust are often exempt from tax as well.

What is an offshore trust for expats?

Simply put, an offshore trust is one in which the Trustee is a financial institution in a foreign country.

Foreign country = Foreign (i.e. offshore) trust.

The parties, responsibilities, end goals, and types of trust all remain the same. However, offshore trust provides additional layers of protection that are not available in your home country.

In fact, when located in a jurisdiction with beneficial wealth protection laws and lower taxes, an offshore trust is your best option for protecting 

Different Types of offshore trusts

Discounted Gift Trust

A DGT allows for the gifting of a lump sum into a trust, while retaining a lifelong income from that money, which is technically one or more withdrawals of capital.

The main aim of the trust is to reduce the eventual IHT liability for the settlor on death.

If the settlor is considered to be in reasonable health, a calculation is made about the likely total amount of income that will be paid back to him by the trustees.

This is known as the discount and it’s deemed to be retained by the settlor.

The remainder will be treated like any other gift into a trust – such as a chargeable lifetime transfer (CLT) in the case of a discretionary trust, or a potentially exempt transfer (PET) in the case of a bare trust, falling outside the scope of IHT after seven years.

If the settlor dies within seven years, one might think that his retained discount should go to his personal representatives to form part of his estate. However, the HMRC tested and accepted IHT treatment is that this right to an income for life has no value once the settlor has died, and so no money has to be returned. The effect is that the discount is deemed to leave the settlor’s estate on day one of settlement of monies into the trust.

The rest of the money will be treated like any other gift into trust, and brought back into IHT calculations if death occurs within 7 years.

As a result of this, there is an immediate IHT reduction upon creation of a discounted gift trust, making it a powerful IHT planning tool for anyone in later life whose intentions are to draw income from their investments throughout their lifetime, then to pass on the remainder to their beneficiaries.

Bare Trust

A bare trust is also referred to as a simple trust.

Income generated from trust assets in the form of interest, dividends or rent is taxed in the hands of the beneficiary, making it a tax-efficient way of transferring assets to descendants.

There is no tax implication for the settlor who sets up a bare trust. This is because he is giving up legal title to the assets when they are transferred to the trust.

A major disadvantage with a bare trust is that the beneficiaries cannot be altered once the trust has been set up.

Another negative aspect is that there may be potential capital gains tax and IHT implications in some jurisdictions.

A Gift Trust

A gift trust provides an IHT planning route for those who want to make an outright gift in a tax-efficient way.

Some individuals are averse to making substantial gifts directly to individuals who are still minors, for example if they have young children.

For example, they may want the children to inherit the money at an age when they are more financially mature, or they may want to gift away money without it affecting their spouse’s access to the funds.

Discretionary Trust

n a discretionary trust, the trustees have discretion about the distribution of trust assets, subject to the terms in which that discretion is granted, for example about which beneficiaries to pass it on to, how much each will get, and when they will get it.

Discretionary trusts are commonly used to keep wealth within families while allowing them flexibility to make decisions about where the assets go.

Discretionary trusts are the most flexible form of trust for providing for family and other loved ones.

Income Trust

An Interest in Possession Trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust as it arises.

The trustee must pass the income, less any expenses, to the beneficiary.

The beneficiary entitled to the income of the trust for life is known as a life tenant or as having a life interest, and a beneficiary who is entitled to the trust capital is known as the capital beneficiary.

Loan Trust

A loan trust enables a settlor to make a gift of the growth on a loan while retaining unrestricted access to the loan capital.

The growth on the investment is outside the settlor’s estate for IHT purposes.

Essentially, the settlor makes a loan to a trust, which then invests the money.

The trust has received a loan from the settlor, not a gift, so there is no immediate IHT liability in most circumstances.

A Split Trust

A split trust effectively combines two separate trusts in one.

A split trust does exactly what it says – it splits out the different types of cover within a single policy.

It allows a settlor to retain the benefits of an insurance policy pay out under certain specific conditions.

Split trusts are common in the case of life and critical illness policies.

Who Should look at an Offshore Trust?

Any person or company that has assets that may be subject to litigation and subsequent seizure. Generally, if you have $500,000 or more in assets outside of US real estate, you ought to consider an offshore trust for asset protection. Anyone with over 325 GBP in the U.K over the Nill band rate. Or an Estate in the U.K worth over 500,000 GBP.

Trusts, both domestic and offshore, have their specific applications. In both cases, an attorney specialized in trusts along with a financial planner or accountant should be part of your team before going through the expense of setting up a trust. This is particularly true for offshore trusts.

Costs of a Trust offshore?

At the beginning of this guide, we briefly addressed the false conception that offshore trusts – and trusts in general – are tools only available to the wealthy. In reality, setting up a simple revocable trust can start at around $750.

Depending on the complexity and value of the assets you wish to transfer to the trust, the cost will go up from there.

If you do your research and select the right offshore service providers, you can expect to spend around $5,000 for a robust offshore trust with ongoing annual administrative costs ranging from 0.5% to 5% of trust asset value.

Countries and Offshore Trust Use

The United Kingdom

In contrast to the United States, placing your assets in an offshore trust as a UK citizen will reduce your overall tax burden. The amount you can save depends on who sets the trust up, when it was established, and who the beneficiaries are.

In some cases, gains will be taxed as they arise in the trust. In other cases, trust income will be free of capital gains tax. And in other cases, it will also be exempt from income tax law.

Canada

Both Beneficiaries and Settlors must file information returns to the Canada Revenue Agency on an annual basis. Tax laws in Canada also limit the tax benefits of an offshore trust.

However, an offshore trust can still help Canadian citizens to protect and enhance their wealth, especially if they live an international life.

Australia

Before 1991, Australians could keep their wealth in offshore structures and avoid income taxation. However, since then, CFC laws and transferor trust rules have put an end to these tax advantages.

If they are considered tax residents, Australians must pay tax on their worldwide income, including income derived in an offshore trust.

Australians who have lived outside the country and plan to become tax resident once again must use caution if they have received any trust distributions. Income received in the tax year that they return to Australia will be taxed, even if they received them before they returned to Australia.

Where should you set up an Offshore Trust?

The same applies to a trust as when I suggest clients to look at offshore investment to consider.

• Law – Trusts as stated earlier were founded in England. Because of this, jurisdictions that base their legal system on English common law are usually your best option for finding an offshore trust company.
• Tax – You will lose many of the benefits of an offshore trust if you choose a jurisdiction that applies income and inheritance taxes on trusts. Look for countries with no estate taxes and that have favorable tax laws for trusts.

You should also pay attention to litigation laws. As we discussed earlier, many jurisdictions are much more defendant-friendly and will even require creditors to post a $25,000 bond before they can bring a lawsuit to court.

You want to find a jurisdiction where the legal system is on your side from the start.

Stability-One of the greatest benefits of international diversification on any level is that it enables you to have a Plan B in case things go sideways in your home country. But if you set up your Plan B – in this case, an offshore trust – in a country where things are just as likely (if not more) to become unstable, you have not removed the risk.

Look for countries that have a strong track record of stability and a healthy socio-economic foundation. Younger countries often face more instability issues, but more established countries tend to be more expensive and have more regulation and over-lawyering.

Personal top places to set up a trust

• Isle of Man
• Jersey
• Bermuda
• Cayman Islands

All these fit the stated the stability, low taxed and a solid legal set up. Plus most can be set up in these locations for a reasonable cost.