Introduction
An irrevocable trust is a legal arrangement which distinguishes between the legal ownership and the beneficial ownership of assets. It is an arrangement intended for the safekeeping, management and eventual disposal of assets.
Legal ownership is transferred to a trustee who manages and administers the property for the benefit of the beneficiaries.
Crucially, the trustees have a ‘fiduciary duty’ towards the beneficiaries and therefore are legally and morally obliged to act in the best interest of the beneficiaries. This means that for the duration of the relationship they must avoid and/or disclose any potential conflicts of interest with the beneficiaries.
This stands in contrast to the vast majority of the financial services sector which operates on a caveat emptor (buyer beware) basis. This means that they are not subject to the same fiduciary duty and may act in their own interests as long as they disclose their intentions to potential customers at the time of sale for example via a prospectus or other product disclosure documents.
Trusts terminology
The Trustees create the trust on behalf of the “settlor” of the trust whom is the owner of the assets being placed into the trust. The settlor may also be a beneficiary of the trust or can nominate other beneficiaries such as their spouse or their children.
Identifying a suitable jurisdiction for your irrevocable trust.
Whilst most countries have their own domestic firms of trustees that can form trusts, the bulk of the international financial community tends to use offshore financial centers which have well established trust laws and advantageous tax rules.
Examples of trust jurisdictions recognized as being in the top tier of international finance centers and which are typically tax neutral for trusts established for non-resident beneficiaries include:
- Jersey (Channel Islands),
- Cayman Islands,
- Singapore,
- Hong Kong.
A trust is normally documented by a trust instrument which sets out the terms on which the settlor and the trustees have agreed that the trustees will hold, administer and distribute the trust fund.
The trust instrument identifies the beneficiary of the trust, that is, the persons intended to benefit from the trust fund. The trust instrument can also specify what happens to the trust fund in the event of the death of the beneficiary.
Revocability of trusts
A trust may be revocable or irrevocable. If a trust is revocable, the settlor may terminate the trust and regain ownership of the trust fund held on trust on the date revocation takes effect. For this reason, tax authorities often argue that the settlor has always effectively controlled the trust fund and this may have implications for the tax treatment and protection from creditors. Careful advice is required if a trust is to be revocable in nature.
An irrevocable trust cannot be revoked. Generally, this is the preferred form of trust formed in many of the above jurisdictions for the reasons explained below.
Asset Protection
Transferring assets into an irrevocable trust provides important asset protection functions, so long as the trust is not established with the intention of defrauding creditors.
Transferring assets to a trustee on the terms of a discretionary irrevocable trust can serve to ensure that the assets are typically:
- protected from creditors (e.g. in the event of bankruptcy of the settlor),
- protected in the event of divorce,
- protected from governments that enforce buybacks of domestically held assets such as gold and bitcoin.
Privacy, confidentiality and anonymity
Trusts are generally created by a private document to which the settlor and the trustees are the only parties. The trust instrument typically does not have to be filed with any public body and information relating to the trust is not accessible by the general public.
Taxation of trusts
In most international trust jurisdictions, the tax rules for trusts are relatively straightforward provided that the beneficiaries of the trust are not resident in that jurisdiction and assets of the trust are located outside of the trust’s jurisdiction.
Generally the position is that irrevocable trusts are not subject to tax in the in the jurisdiction as long as there is no beneficiaries resident in, or income arising in that jurisdiction.
Disclaimer
This information is for general education purposes only and does not represent financial advice or tax advice. Readers should consult their financial advisors and/or tax advisors to determine the suitability and tax treatment of international irrevocable trusts in their home countries.
