Presentation on theme: "Principles of international trust law and current trends in legislation and trust planning Elias Neocleous."— Presentation transcript:
Principles of international trust law and current trends in legislation and trust planning Elias Neocleous
What is a trust, and why should it be trusted? A flexible and beneficial asset-holding structure that separates the legal ownership of an asset from the beneficial ownership. More than 2,000 years’ history – the testamentary trust dates back to Roman times and one of the first well known cases involved the Greek orator Demosthenes in 365 BC. Inter vivos trusts developed in England at the time of the Crusades. They are now an entrenched feature of Anglo-Saxon legal systems around the world. Kluwer Law’s “International Trust Laws and Analysis” widely regarded as the authority in the field, covers 57 trust jurisdictions, from Andorra to Vanuatu. There is a vast amount of jurisprudence and case law on trusts, making them predictable and reliable.
The basic concept of a trust Separation of the formal, legal ownership of an asset from the entitlement to enjoy the economic benefits derived from the asset. Mr A owns a small apartment block producing rental income of €100,000 per year. He has five children who he wishes to help equally. He establishes a trust for this purpose. He appoints Z, a trusted adviser, as trustee. He transfers the ownership of the property to the trustee to manage for the benefit of the children. The trust can have unlimited duration. It does not end when Mr A dies. In the language of trusts, Mr A is the settlor. Z is the trustee. Mr A’s children are the beneficiaries.
A simple trust deed I, Alfred A (hereinafter the Settlor), give my freehold property at 1 Acacia Avenue (hereinafter the Trust Property) to Zebediah Z (hereinafter the Trustee) to hold in trust for the benefit of my children Abigail A, Alan A, Anna A, Arnold A and Arthur A. Signed as a deed ……………….. Date …………………
The three essential “certainties” Intention - to hold in trust Subject matter - my freehold property at 1 Acacia Avenue Objects - my children Abigail A, Alan A, Anna A, Arnold A and Arthur A I, Alfred A (hereinafter the Settlor), give my freehold property at 1 Acacia Avenue, Anytown (hereinafter the Trust Property) to Zebediah Z (hereinafter the Trustee) to hold in trust for the benefit of my children Abigail A, Alan A, Anna A, Arnold A and Arthur A.
Why go to all that trouble? There are many reasons to establish a trust, which justify the modest cost of establishing it and maintaining it. These include: –Tax mitigation –Circumventing forced heirship laws –Preservation of family assets –Protection against spendthrifts –Provision for minors and people whose capacity is otherwise impaired –Protection against professional negligence claims –Protection against family breakdown –Philanthropy
A basic example of income tax mitigation In Mr A’s country of residence the personal income tax allowance is €20,000, as it is in Cyprus. Mr A has substantial income and his marginal rate of tax is 40%. The children have no income. Without the trust the rental income of €100,000 is assessed on Mr A and subject to tax at 40% - the annual tax cost is €40,000. With the trust the rental income of €100,000 is assessed not on Mr A, but on the beneficiaries at €20,000 each. This is covered by their personal income tax allowance. No tax is payable, resulting in a saving of €40,000 per year.
Other tax mitigation Most uses of trusts for tax purposes are far more complex and specialised. For various policy reasons trusts may enjoy preferable tax rates and treatment compared with individuals (common examples are charitable trusts and trusts for the benefit of disabled persons). Trusts can be used to reduce liability to capital gains taxes and other capital taxes. As a trust can be established with an unlimited duration, the assets do not pass to the heirs on the settlor’s death and no liability to inheritance taxes arises.
Regaining freedom of testation Most countries in the world limit the individual’s freedom to dispose of his or her estate as he or she wishes on death. Instead, part of the estate is reserved for the surviving spouse, dependents and antecedents. This “forced heirship” regime is the norm in civil-law and Islamic countries The reserved proportion typically accounts for most of the estate: some examples: France, up to 75% Switzerland, up to 75% Germany, up to 50% Russia, up to 50% Most South American countries, up to 80% Most Muslim countries, two-thirds Assets placed in trust do not form part of the individual’s estate passing on death, and use of a trust gives individuals freedom to decide who benefits from their assets, and who does not.
Preserving family assets In the case study the trust structure makes it possible to keep the apartment block intact and manage it consistently and efficiently, rather than breaking it up and giving individual units to different children. This is even more important with “heritage” assets such as historic properties or art collections. Even if the trust has limited liquid assets it may be possible to advance capital by borrowing on the security of trust assets.
Protection against spendthrifts Especially in the case of younger people, there is a risk that if the individual’s share of the family fortune is given to him or her, it will be dissipated by extravagance and inappropriate spending. Use of a trust enables the fabric of the patrimony to be preserved through generations. Unreliable beneficiaries can receive the income, with no access to the capital.
Provision for minors and people whose capacity is otherwise impaired Most legal regimes do not allow minors to own certain types of property or enter into contractual relations. The trust structure provides a way of holding property for their benefit until they reach the age of legal capacity or some other predetermined age. Trusts are also a good way of providing for the maintenance of people who are incapable of managing their own affairs. Most tax systems give beneficial treatment to trusts for the benefit of disabled persons.
Protection against claims In certain professions claims may emerge only many years after the event and may be disastrous in scale: Obstetricians Other medical practitioners Architects $100 million-plus awards are now commonplace in medical malpractice cases in the USA, especially when juries make the award. Placing assets in a trust takes them out of the ownership of the individual and removes them from the reach of claimants or even a trustee in bankruptcy in the event of a claim. It therefore provides additional protection against the individual and his family losing everything as a result of a claim.
Protection in the event of family breakdown Courts are awarding ever-increasing amounts to ex- spouses, with some “wife-friendly” jurisdictions taking on cases despite the parties having very little connection with the jurisdiction. Pre-nuptial agreements provide little real protection and negotiating them can itself cause problems in the relationship. As with external claims, the use of a properly constituted trust can remove assets from the reach of a potential former spouse, with much less risk of creating hostility.
Variations on the theme The simple case-study of Mr A illustrates the basic trust concept, but in the real world there are almost infinite refinements and variations, including: –The duration of the trust – finite (if so, how long) or infinite? –Powers and benefits that the settlor may retain or reserve – to use the trust property, to revoke the trust. –The nature and objectives of the trust – accumulation, maintenance, charitable, discretionary. –The powers of the trustees – to invest, to distribute capital, to vary the terms of the trust, to make payments and advances to beneficiaries. –Supervision and control of the trustees – the role of the protector.
Trusts compared with foundations TrustFoundation Status No separate legal personality.A separate legal entity. Legal basis Broad statute law, supplemented by almost 1,000 years’ case law. Closely regulated by statutory rules. Limited case law. Confidentiality No disclosure of terms of trust. Settlor may also issue a private letter of wishes. Statutes of foundation must be registered. Forced heirship Trusts can be used to regain freedom of testation, which is a fundamental concept of English law. Foundations formed in civil law jurisdictions are subject to civil law forced heirship restrictions. Powers of trustees Trustees can have as wide or as narrow powers as the settlor wishes. Foundations are more rigid – for example, they cannot undertake commercial activities.
The Cyprus International Trust The International Trusts Law of 1992 gave Cyprus a “state of the art” international trusts regime offering: excellent asset protection and tax mitigation features; and a means of circumventing forced heirship requirements. Over the ensuing years Cyprus International Trusts achieved great popularity with settlors from Russia and Eastern Europe. By 2010, while the basic structure provided by the International Trusts Law remained sound, it required updating to adapt it to the needs of investors today and in the coming years.
The 2012 reform of the International Trusts Law Removes any perceived prohibition on settlors relocating to Cyprus after establishing a Cyprus International Trust; Makes clear that all questions relating to Cyprus International Trusts are to be determined in accordance with Cyprus law; Protects against the application of foreign laws, such as forced heirship laws, as a matter of public policy; Allows the settlor to reserve powers to himself, to retain a beneficial interest in trust property, or to act as the protector or enforcer of the trust Removes any limit on the duration of a trust; Extends trustees' investment powers and, in particular, abolishes any prohibition on investment in immovable property in Cyprus.
Settlors’ reserved powers To revoke or amend the terms of the trust; To pay or otherwise apply income or capital or to give directions for the making of such payment; To act as, or give binding directions as to the appointment or removal of, a director of any company owned by the trust; To give binding directions to the trustee in connection with any transaction relating to the trust property; To appoint or remove any trustee, enforcer, protector or beneficiary; To appoint or remove any investment manager or investment adviser; To change the proper law of the trust or the domicile of the trust.
Key features of Cyprus international trusts Governed exclusively by Cyprus law Settlor may reserve powers or retain benefit of assets Trusts may exist in perpetuity The trustee has unfettered investment powers. Powerful asset protection features: In order to invalidate a transfer of assets into the trust the claimant must: bring a claim in the Cyprus courts within two years of the transfer; prove that he or she was a creditor at the time of transfer; prove intent to defraud on the part of the settlor. Matrimonial property or succession laws of Cyprus or any other country do not affect the validity of transfers.
Benefits of Cyprus international trusts Regaining testamentary freedom Managing family wealth Protection against claims Protection in the event of family breakdown
Regaining testamentary freedom Section 3(4) of the International Trusts Law provides that: No international trust, and no disposition of property to or upon such a trust, is void, voidable, liable to be set aside, invalid or subject to any implied term... by reason that... the trust or disposition avoids or defeats or potentially avoids or defeats rights, claims, interests, obligations or liabilities conferred or imposed by the law of any jurisdiction on any person... by way of heirship rights A Cyprus international trust allows individuals to retain control over the disposition of their assets and avoids succession taxes on death.
Managing family wealth A Cyprus international trust provides an effective structure for managing family wealth with the following benefits: Formidable asset protection Freedom from succession taxes Freedom from forced heirship restrictions Unlimited investment powers Tax neutrality Perpetual existence Flexibility - reserved powers, choice of law
Protecting against claims Section 3(2) of the International Trusts Law provides that: Notwithstanding any provision of the law of the Republic or of the law of any other country, an international trust shall not be void or voidable and no claim may be brought in respect of assets transferred to an international trust in the event of the settlor's bankruptcy ……………….. or in any action or proceedings against the settlor at the suit of his creditors notwithstanding any provision of the law of the Republic or of the law of any other country and notwithstanding further that the trust is voluntary and without consideration having been given for the same, ………………… unless and to the extent that it is proven to the satisfaction of the Court that the international trust was made with the intent to defraud the creditors of the settlor at the time of the transfer of his assets to the trust. The onus of proof of such intent on the part of the settlor lies with such creditors. An action against a trustee ……………… must be brought within a period of two years from the date when the transfer or disposal of assets was made to the trust.
Protecting against claims A claimant must prove that the trust was made with the intent to defraud the creditors of the settlor at the time the assets were transferred to the trust. The onus of proving fraudulent intent on the part of the settlor lies with the claimant. The action must be brought in the Cyprus courts, within two years from the date when the transfer or disposal of assets was made to the trust. It is not intended that the provisions …. should offer a loophole to every settlor who wishes to cheat his existing creditors. Instead, it is intended to offer a legitimate protection to persons who may be engaged in high risk professional activities, such as surgeons, architects or members of Lloyds where very substantial damage awards made against them at some future time could result in the financial ruin of their families.
Protection in the event of family breakdown The “pre-nup” is ineffective in many jurisdictions. A Cyprus international trust can provide better protection Section 3(4) of the International Trusts Law provides that: No international trust, and no disposition of property to or upon such a trust, is void, voidable, liable to be set aside, invalid or subject to any implied term... by reason that... the trust or disposition avoids or defeats or potentially avoids or defeats rights, claims, interests, obligations or liabilities conferred or imposed by the law of any jurisdiction on any person by reason of a personal relationship to a settlor or any beneficiary.
Caveats Proper professional advice, both in the home country and in Cyprus, is essential in order to ensure: Effectiveness of the structure Best choice of trustees and protectors Overall tax optimisation No unforeseen pitfalls Russian settlors must have regard for the “joint property” provisions of the Family Code of the Russian Federation, particularly articles 34 and 35.