Gibraltar: Trusts/Form-A-Trust - A Summary of the Background and Advantages of Trusts

Last Updated: 12 May 2005
Article by Jonathan Stagnetto

As professional licensed Trustees, FORM-A-TRUST (GIBRALTAR) LIMITED have the ability to combine integrity, sound Trust knowledge, administrative skills and flexibility. FORM-A-TRUST has a fiduciary duty to its clients that must be balanced against the considerable responsibility and strict rules to be adhered to for both avoidance of any abuse of that confidence, and an application of the stringent controls imposed on us by our Regulators. As Trustees, we have a duty of care to the Beneficiaries, our actions are closely controlled by the terms of the Trust document itself; and we are obliged by the terms of our Financial Services Licence, to act with the utmost prudence for the ultimate benefit of all concerned.

Background

The concept of a Trust was first used in Anglo Saxon times and is an arrangement whereby property is transferred from one person or corporation (the Settlor) to another person or corporate body (the Trustee) to hold for the benefit of a specified list or class of persons (the Beneficiaries).

A Trust is not a corporate vehicle, joint venture or Partnership. It is an equitable arrangement between the Settlor and the Trustee represented by a set of instructions. Although a Trust can be created solely by verbal agreement it is normal and preferable for a Trust Deed to be executed which evidences its creation, sets out the terms and conditions and outlines the rights of the Beneficiaries. The similarities of a Trust, under these terms, to a Will are immediately apparent except that assets in Trust are transferred during lifetime and not on death which avoids the need for Probate and Executors and often Inheritance Tax and Estate Duty.

It is therefore a method of creating a type of Will during lifetime and separating assets for tax purposes or for protection from creditors. It is a useful vehicle for the purpose of holding shares in a family business and for affording continuity with the added possible advantages of avoiding inheritance taxes and allowing the Settlor to have planned family affairs beyond his death.

Virtually all common law jurisdictions, and now many Roman law jurisdictions, recognize and uphold the concept of Trusts and their courts rigidly enforce the terms. What is required in the chosen jurisdiction is political stability, attractive taxation and a sound legal system.

A Trust has no legal personality such as a corporate vehicle, partnership, or a joint venture. It is an equitable arrangement represented by a written set of rules and instructions that is legally enforceable. These rules and instructions known as the Settlement, represent the terms under which a Settlor appoints Trustees and into whose care he or she places assets which the Trustee administers for the eventual benefit of the Beneficiaries.

Discretionary Trusts

There are various types of Trust that may be created but, generally speaking, the greatest tax advantages and flexibility result from a Discretionary Settlement, which gives the Trustees the discretion of the amount and the timing of distributions of income or capital. This can have substantial advantages because it allows the Trustees to accumulate and take account of any changes in the situation of a given Beneficiary and to plan distributions to minimise tax.

Whilst the Trustees have this discretion, it is normal for the Settlor to indicate to them his wishes via a formal "Letter (or Memorandum) of Wishes". The Trustees are not legally bound to follow these wishes but most Trustees would be reluctant to deal with Trust property in any other way unless there was a very pressing reason to do so. The Memorandum of Wishes may be amended during the lifetime of the Settlor to take account of any changes, such as the birth of a new Beneficiary.

A Trust may be revocable but, if so, it stands to lose many of its tax and asset protection advantages.

Settlor(s)

The Settlor(s) are the person(s) placing the assets into the Trust Settlement. If so instructed, the first Trustees can declare the Settlement, in which case the Settlor(s) will not be named. The Trustees may be a "family" Company formed especially for that purpose and the Trust assets will be the net assets of that Company. But in more conventional circumstances the Trustees would hold the shares in an underlying Company. This serves to distance its ownership while giving the structure a continuity, undisturbed by death or disability.

Trustees

FORM-A-TRUST (GIBRALTAR) LIMITED has been licensed by the Gibraltar Financial Services Commission to offer services as professional Trustees. By employing the services of FORM-A-TRUST (GIBRALTAR) LIMITED as a corporate Trustee, the Settlor is afforded the peace of mind of a guaranteed continuity of Trustee services that are governed by strict regulation, and overseen by a Commission that is charged with ensuring that its licensees adhere to the highest standards of fiduciary services.

Beneficiaries

During their lifetime, the Trustees will have regard to the wishes of the Settlor(s) and a full list of Beneficiaries with supporting due diligence documentation in respect of each, is a vital component at the inception of the Trust, and at any time during the life of the Trust when any changes are envisaged.

The Protector or Counsellor

Normally, there would be no difficulty in the Settlor also acting in the capacity of Protector or Counsellor, although certain safeguards for the Settlor may be found by appointing a Protector or Counsellor who has his or her confidence. To avoid any possible adverse tax consequences which may result if the Protector (or indeed the Settlor) was seen to be controlling the Trustees, it is advisable to limit the powers given to the Protector to those of approval and endorsement of defined actions of the Trustees without which the Trustees would feel precluded from taking such action.

Advantages of a Discretionary Trust

Assets transferred into Trust no longer form part of the estate of the Settlor so that:

  1. The Settlor would not generally be taxable on the income and/or capital gains generated by those assets.
  2. On death probate and, generally, Inheritance Tax would be avoided. The Trust provides a speedy, confidential, flexible and orderly mechanism for the distribution of the trust assets.
  3. The Trust assets are substantially protected against claims from creditors of the Settlor so long as the Trust was settled properly and in a timely manner and did not in itself result in the bankruptcy or financial difficulty of the Settlor.

  4. A Settlor may feel uncomfortable with the perceived divestment of assets into a Trust and so it is important that he learns to come to terms with the differences between legal and beneficial ownership. The Trustees have the legal ownership but under very strict rules which make clear that the beneficial ownership and use remain with the Beneficiaries, whilst during his lifetime the Settlor retains a significant degree of influence and enjoyment.

Taxation

The Trust should not be subject to any form of taxation if properly structured.

It is possible that the setting up of the Trust will result in tax consequences for the Settlor and it is also possible that there may be ongoing tax consequences for the Settlor and/or the Beneficiaries in their country of residence and therefore local advice should be sought.


BASIC COSTS ASSOCIATED WITH THE SETTING-UP OF A TRUST
- Establishment of A Trust GBP £500

- Annual Trustee Services (payable annually in advance)
To cover the following services:

  • The maintenance of the Trust records, including accounting records.
  • Maintenance of any Bank Account.
  • Distribution of any income once a year (or as necessary).
  • The preparation of annual accounts consisting of balance sheets and income accounts.

GBP £500
TOTAL START-UP AND FIRST YEAR COSTS ARISING


GBP £1000
* N.B All costs appearing above may be subject to review on a
periodic basis and FORM-A-TRUST (GIBRALTAR) LIMITED
reserves the right to amend fees or services without prior
notice and as circumstances may dictate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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