Uses and Benefits of an Offshore Trust Structure

April 2000

There are many reasons for using an offshore trust. For most people, the reasons which springs instantly to mind is tax planning of one sort or another. Whilst it is true that the origins of the trust lie in the avoidance of feudal dues and therefore were concerned with tax mitigation, there are in reality many other, possibly stronger, reasons for using trusts as we will see in the text following.

However, despite the numerous advantages that may be cited for utilizing an offshore trust, many high net worth individuals have not considered the positive attributes that such a structure may offer. One of the main reasons for this is a lack of knowledge and access to up to date, accurate information with respect to the advantages of establishing a trust in a foreign offshore jurisdiction. There is a mistaken belief among some professional advisors that the disadvantages of transferring assets to a foreign offshore jurisdiction to be administered by a foreign trustee far outweigh any potential advantages. However in reality, the exact opposite is generally more accurate. If a trust instrument is properly drafted, the proper jurisdiction chosen and a reliable, professional trustee is selected, many of the perceived disadvantages become inconsequential.

Tax Planning – trusts are often a useful way of mitigating taxes, either entirely or by way of deferral. While in some jurisdictions the scope for tax planning may be limited, in other jurisdictions opportunities remain. It is always wise for a potential settlor to take tax advice in his home jurisdiction if tax planning is the motivating factor for the establishment of the trust.

Estate Planning – most wealthy people prefer to decide for themselves how their assets are to pass on death. For example, a wealthy individual will normally wish to provide income for his spouse, education for his children and perhaps to provide for the protection of any children or other relatives who suffer from disabilities. The individual will probably wish to make gifts not only to relatives but also to charities and perhaps for other public purposes. Arrangements of this kind are best made before death although they will continue to have effect after death. While a will can achieve some of these objectives, a trust involving the legal transfer of ownership of assets to trustees with defined objectives as to how and for whose benefit the assets are to be held and administered is probably the ideal medium.

There may also be special problems for certain individuals governed by laws which dictate how assets are to pass to relatives at death. This is usually referred to as ‘forced heirship’. Forced heirship occurs in most civil law countries and Moslem Countries, as well as many countries in continental Europe where the concept of a trust is not recognised. Forced heirship also occurs in other major countries such as Canada and Japan. For example in Canada, the law provides that if certain heirs, such as a spouse or dependant child, are not adequately compensated pursuant to the terms of the deceased’s will, the law will ensure that certain benefits are bestowed on these individuals irrespective of the deceased’s wishes. A trust can be a useful way of overcoming forced heirship rules although, as recent litigation in the Cayman Islands (Lemos v. Coutts Co. (Cayman) Ltd.) has shown, reliance on the provisions of local trust laws providing that forced heirship rights are not to invalidate a trust may be illusory if the assets are in the forced heirship jurisdiction or in a jurisdiction which is sympathetic to the forced heirship jurisdiction of the deceased’ domicile.

Avoiding Disruption on Death – the death of the head of a family, particularly if a wealthy individual, can and very often does, cause major disruption. In the absence of a trust, it will be necessary to obtain probate of any will, or wills, or in the case of intestacy a grant, or grants, of letters of administration. This is a bureaucratic process which normally involves considerable delay, expense and publicity. Where an individual owns assets in several jurisdictions any will has to be proved for probate purposes in each jurisdiction. Alternatively, the individual may have left separate wills dealing with assets in each jurisdiction when probate in each jurisdiction will be necessary. The problems of obtaining a grant, or several grants, of either probate or letters of administration can be overcome by the use of a trust. If properly drafted, the trust can provide for the enjoyment of income or other assets during lifetime and then the passing on of the enjoyment of the assets to other members of the family following the death of the settlor. The trust can therefore achieve continuity without the public process of obtaining a grant and also without the delay, bureaucracy and expense which so often occurs following death. Care is, however, necessary when setting up a trust designated to circumvent the need for a grant of probate because it has been held that if the ‘trust’ creates a mere agency or nominee relationship until death after which the ‘trust’ assets are to be sold, the trust deed can be set aside as an inadequately executed, and therefore invalid, will. Re Pfrimmer Estate (1936)

Protecting Certain Beneficiaries - trusts are frequently used to protect members of the family who are below the age of majority, suffer from mental or other disabilities or are thought to be irresponsible and not to be relied upon to look after assets given to them outright. Again a trust can provide a useful way of providing for the needs of such individuals.

Protection From Potential Creditors - in recent years trusts have been used quite commonly in an attempt to protect an individual from the claims of future creditors. This has been to a large extent a development peculiar to the United States because of the huge awards of damages sometimes handed down by juries in civil cases. While there has been some interest in the use of trusts to provide protection from future creditors in other jurisdictions, this remains to a large extent a development driven by widespread litigation in the U.S.A.

Preserving the Family Fortune – there is no doubt that a trust can help to preserve a family fortune by preventing later generations from dissipating it. It is however, essential to ensure that the trust is properly set up and that the assets have passed into the ownership of the trustees and are under their direct control. Failure to achieve this can result in the trust being set aside as a sham following proceedings by the second or third generation. Rahman v. Chase Bank (1991). This case has been a salutary reminder of the dangers of allowing a settlor to retain direct control of assets which allegedly have been transferred to trustees. There are many trusts where a similar situation exists and therefore these trusts are at risk not only from other members of the family who wish to obtain control of the assets but also from tax authorities or creditors who may wish to have the trust set aside for tax reasons or because it was set up to defeat the claims of creditors.

Continuing the Family Business – a successful entrepreneur who has built up a business may well wish to try to ensure that the business continues through future generations. In contrast, it may well be that the second or third generation will wish to liquidate the company, distribute the assets and then squander the proceeds. By transferring a controlling shareholding in a family business to trustees and restricting the circumstances in which the shares may be sold by the trustees, it will often be possible to ensure that a family business will continue on through several generations. The wishes of the settlor can be indicated in a non-binding letter of wishes and further controls can be imposed on the trustees by the use of a protector who the trustees must consult before taking any major decision, such as a significant change in the nature of the business, sale of the business to a take over bidder or liquidation.

Flexibility – plans made today can easily become obsolete as social, political and taxation changes occur. It can often be the case that a well drafted trust appropriate for today’s circumstances is not appropriate for those of tomorrow. However, there are ways of building flexibility into a trust so that it is possible for the trust to be adapted as times change. To some extent, this can be achieved by a non-binding letter of wishes or by giving power to review and modify the trust to a protector.

Confidentiality – one of the major advantages of a trust is confidentiality. While the legal ownership is in the trustee and this may appear on various public records, the beneficial ownership and the varying rights of the beneficiaries will not be a matter of public record because there is no public register of trusts or beneficial interests. Indeed, most records of ownership such as those at a land registry or continued in a register of members maintained by a company are usually prevented from recording details of beneficial ownership.