What can trusts do for Estate Planning?
What makes trusts different?
Should you have a trust?
Offshore Trust India
Trusts provide solutions for a range of financial planning challenges and they offer great flexibility as part of estate and succession planning management of assets.
What makes trusts different? Their purpose. The reason for setting up the trust in the first place – is critical to understand, and that will dictate what the wording of the trust agreement will look like.
Let’s take a look at the top 10 reasons why you might consider setting up a trust.
PROTECTION OF ASSETS
The legal – as opposed to beneficial – ownership of trust assets is vested, not in the beneficiaries but in the trustees, who may be located in low or zero-tax, jurisdictions. Once created, the settlor, who is the founder of the trust, and his chosen beneficiaries have no control over the assets. This can be particularly useful where declarations of wealth have to be made by individuals in their country of residence, where exchange control laws apply, or where the political or social situation is unstable. In such cases, a trust may be a safe refuge for family or corporate assets.
PRESERVATION OF FAMILY WEALTH
Trusts may be used to own specific assets, such as land or an interest in a family company, which would not be appropriate or practical for a settlor to divide between individuals. The use of a trust enables such individuals to enjoy the assets despite the fact that they do not own them. A trust will also help to maintain the capital value of such assets for future generations.
In certain jurisdictions, trusts are essentially tax-exempt as long as the settlor and Beneficiaries are not residents of that Jurisdiction. This is naturally a very important motivation for establishing trusts in these Jurisdictions but there are several other important possible factors.
AVOIDANCE OF PROBATE
As legal title of the assets passes from the settlor to the Trustee when they are ‘settled’, there is subsequently no change of ownership when the settlor dies, thus avoiding the need for probate of a will in respect of trust assets. Grants of probate are a matter of public record, whereas a trust is a private arrangement which does not have to be registered anywhere. The use of a trust may also avoid the economic hardship sometimes suffered by a surviving spouse whilst waiting for probate to be granted. Moreover, obtaining probate in one country on a will executed in another can be a complex and time-consuming process and may add to the distress of bereaved relatives.
IMMIGRATION/EMIGRATION
When a person and his/her family move to another country, it is often an ideal time – maybe the only time – to set up a trust in order to avoid taxation in the destination country, thereby preserving the family wealth and providing flexibility in its management. Such arrangements require detailed professional advice and guidance.
FLEXIBILITY AND CONFIDENTIALITY
A trust provides flexibility in the organization and subsequent distribution of a deceased settlor’s estate. A discretionary trust created inter-vivos – literally ‘during one’s lifetime’ – usually allows a settlor to provide the trustees with guidance in respect of the way in which the trust assets are to be managed during his lifetime and dealt with or distributed after his death.
Such arrangements will usually be made privately between the settlor and the trustees and are normally set out in a carefully drafted Letter of Wishes which is retained by the Trustees for future reference. In this way, a settlor can protect the private nature of his arrangements with the trustees and ensure that not even the Beneficiaries of the trust, of which he may be one, are aware of his intentions.
A trust may also be used to hold property for those who cannot hold it for themselves, such as minors or persons declared bankrupt. It may be used to keep the beneficial ownership of property confidential.
FORCED HEIRSHIP
Residents of countries with fixed laws of inheritance may be able to use trusts to obtain the flexibility they offer in terms of distribution of part or all of their assets to beneficiaries who would otherwise not be entitled to benefit under the laws of their country of residence. Such arrangements must be made under detailed professional guidance from experts in their countries of residence or nationality.
TAX MITIGATION
Trusts can be very effective in reducing taxation on capital and income. The trust may provide effective protection for the settlor, the beneficiaries and the trust assets from punitive taxation. A frequent use for trusts is the mitigation or avoidance of inheritance tax in the settlor’s jurisdiction although this will, naturally, be subject to appropriate tax advice being obtained.
MANAGING ASSETS
Trusts can be very effective in reducing taxation on capital and income. The trust may provide effective protection for the settlor, the beneficiaries and the trust assets from punitive taxation. A frequent use for trusts is the mitigation or avoidance of inheritance tax in the settlor’s jurisdiction although this will, naturally, be subject to appropriate tax advice being obtained.
PROTECTING ASSETS
If you want to protect assets from creditors, marriage breakdown or from those who might influence your beneficiaries, a trust can be an effective vehicle.
CONTROLLING DISTRIBUTIONS
If you don’t trust your beneficiaries to directly own the assets you want them to have (perhaps because they are minors or spendthrifts), you can distribute assets to them over time through a trust.
CONSOLIDATING ASSETS
Indian trusts are being used as tools to bring a relatively large pool of assets/ investments under one umbrella, which has more scope to perform well than a series of smaller pools.
OFFSHORE TRUSTS
Offshore trust, in an Indian context, means a trust formed outside India by an Indian Resident. The primary issues in setting up an offshore/ hybrid structure arise in terms of Indian foreign exchange control compliances [Foreign Exchange and Management Act (FEMA)] and integrating that with the choice of appropriate jurisdiction.
While an Indian resident can remit funds abroad from India to set up an offshore trust, a settlement/ transfer of his offshore asset, being a capital account transaction, into an onshore/ offshore will require a prior approval from the regulatory authority i.e. Reserve Bank of India
Conclusion
Despite their reputation as a tool for wealthy families and investors, trust funds make sense in a variety of situations that occur frequently among non-wealthy people. Managing money for minor children or special needs family members, or some of the reasons mentioned above. As the population ages, living trusts can simplify the care of elderly family members as well as the transfer of their estates to beneficiaries. Exploiting offshore business opportunities, acquisition of interests and cross-border movement of family members have also triggered the need to create trust and like structures viz: onshore, offshore or hybrid.
Whatever your reason for setting up a trust we at Nexgen can help you set a Trust that meets your requirement. Whatever be your concern we can also help you take informed decision. For a no-obligation consultancy Fill the form below.
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