Concept of trusts
The concept of a trust is that a person, who is the owner of an asset (the settlor) gives authority to another person, being either an individual or a company (the trustee) and this person agrees to hold the asset in its name for the benefit of another person (the beneficiary) on certain terms as set out in the trust deed and in accordance with the instructions of the settlor. The property under the trust is legally held and registered in the name of the trustee. In other words, the trustee has the legal title of the property while the beneficiary has the beneficial title.
Some trusts may also have a protector, who has the power to restrict some powers of the trustee and to protect the abuse of certain powers of the beneficiary. A trust is a fundamentally flexible institution and can be modified in accordance to the needs of the person seeking to create a trust.
Why use a trust/Purpose of a trust
Trusts, especially in Cyprus are used for estate planning, tax planning and asset protection. Some specific examples of using a trust are reflected below:
- To provide how the assets of the settlors shall be distributed to his family without forced heirship rules;
- To provide for the inheritance of assets while the settlor and his wife enjoy a life interest;
- To cater to a person who cannot take care of himself due to old age or mental incapacity;
- To provide benefits to minors;
- For charitable purposes; and
- To protect the assets of people with risky professions.
What property can be put under a trust
The property or assets which can be subject to a trust can be of any kind provided that the settlor is the legal owner of this property or assets. Examples of property or assets which may be subject to a trust are following:
- Money including cash or money in bank accounts;
- Immovable property;
- Paintings, art;
- Shares or stock; and
Forms of trusts
There are two types of trusts. Express trusts and implied trusts. Express trusts are created by a trust instrument and the settlor has clear intention to create it. These trusts are often used in tax and estate planning. Implied trusts are implied by law in cases that their non-recognition would create injustice. Implied trusts are divided in constructive and resulting trusts and often end up in court, which ultimately decides if there is a trust as well as its kind.
A resulting trust is an arrangement whereby one person holds property for the benefit of another, which is implied by a court in certain cases where a person transfers property to another and gives him or her legal title to it but does not intend him or her to have an equitable or beneficial interest in the property.
An example of a resulting trust would be where A gives money to B to buy an asset. If there is no evidence that A intended for B to keep the asset, then B is presumed to keep the asset as a trust for A. However if A was B's father, then there will the presumption that A intended for B to keep the asset and therefore where would be no resulting trust.
A constructive trust is not an actual trust by the traditional definition. It is a legal fiction that is used as a remedy for unjust enrichment. Hence, there is no trustee, but the constructive trust orders the person who would otherwise be unjustly enriched to transfer the property to the intended party.
An example of a constructive trust would be where A gives money to B to hold for C. If B gives the money to D, who knows that B was holding the money for C, then D will be construed as holding the money as a trust for C.
Cyprus International Trusts
Cyprus International Trusts were introduced in Cyprus by the "International Trusts Law of 1992" as amended from time to time (the "Law"). The main purpose for the introduction of this law was to attract foreign investors in Cyprus. For a trust to qualify as a Cyprus International Trust, the settlor and the beneficiaries must not be residents in Cyprus, at least for a year, preceding the creation of the trust and at least one trustee, must be a resident in Cyprus during the lifetime of the trust.
Requirements to set a trust
To set up a trust, it is imperative to exist a settlor, a trustee and a beneficiary. It is not prohibitive for one person to fall into the category of the other. Also every trust in Cyprus shall fulfill the tree certainties. These are the following:
- Certainty of intention
The certainty of intention is the requirement that the settlor must intend to create a trust and not something else like a gift, loan or a transfer.
- Certainty of subject matter
The certainty of subject matter is the requirement that the trust property must be identifiable and specific.
- Certainty of objects
The certainty of objects is the requirement that the trust beneficiaries must be identifiable and ascertainable at the time of setting up the trust and at any point during the life of the trust.
Benefits of a Cyprus International Trust
Cyprus International Trusts offer the following benefits:
- Confidentiality (as well as permitted by relevant laws from time to time);
- Difficult to challenge since the only reason it can be challenged is for defrauding creditors. The burden of proof in this case lies on the creditors.
- Tax benefits for the parties involved;
- Asset protection against creditors, forced heirship rules or legal action;
- Flexibility in relation to the powers of the trustee;
- Low costs for administration;
- Indefinite in duration; and
- No obligation to prepare or file audited accounts.
Duties and powers of the trustee
The trustee has a number of powers and duties under the trust. For example he must comply with the terms of the trust, a duty to act impartially, treat the beneficiaries equally, duty to act in good faith, to exercise reasonable care and skill as well as other fiduciary duties. Also as per the trusts law the trustee has certain powers such as the power to sale, to give receipts, compound liabilities, raise money by sale charge or otherwise, devolve the powers of the trust, insure the property, employ agents and appoint new or additional trustees.
The general rule is that the trustee does not have the power to vary the trust. The only case that the trustee will be able to do this, is when all the beneficiaries are of full age and capacity and can authorize the trustee to deal with a matter differently than what is specified in the trust. Where any beneficiary is a minor or of an unsound mind the court may vary the terms that will be in the best interest of the beneficiary.
Any action taken by the trustee that is in excess or beyond his power as stated in the trust constitutes a breach of trust and the trustee shall be personally liable for the full extend of the loss incurred as a result of the breach. In such case the beneficiaries may bring an action to court.
Powers of the settlor
In 2012, when the Law was amended, the powers of the settlor were extended to include the following:
- the revocation, amendment of the terms of the trust or any trusts or powers arising wholly or partly from the trust;
- the allocation, distribution, payment or other disposition of income or capital from the trust property or issuance of directions for conducting such a concession, distribution, payment or disposal;
- the exercise of powers of a director or officer or the issuance of binding directions regarding the appointment or removal of any Board member or officer of any company, which is owned by the trust, either wholly or partially;
- the issuance of binding directions to the trustee in connection with the purchase, retention, sale, management, loan, pledge or charge over property of the trust or the exercise of any powers or rights conferred on such property;
- the appointment or termination of any trustee, inspector for the application of the trust, protector or beneficiary;
- the appointment or termination of any investment manager or investment adviser;
- changing the applicable law governing the trust or place (forum) of management of the trust; and
- the restriction of the exercise of any power or the discretionary power of the trustee, requesting that these be exercised only with the approval of the settlor or any other person expressly mentioned in the terms of the trust.
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.