Benefits Of Setting Up A Trust
Many expats shrug off the idea of using Trusts because they feel they are complex or just for the benefit of the very wealthy. Most people are actually oblivious to the real reason why trusts are widely used by wise expats to structure and efficiently hold their valuable assets. Here, we will look closely at the most common benefits of Trusts and how exactly setting up a Trust can benefit you, and expats in particular.
First of all, what is a Trust?
A Trust is actually an agreement between the person who sets it up, called the ‘Settlor’, and the people who hold the assets, called the ‘Trustees’, for the benefit of the ‘Beneficiaries’. The overriding principle of a Trust is to gift or give away assets that you currently own. Meaning that once you have passed such assets into a Trust, you no longer legally own them, although you can still maintain control over them.
What are the benefits of setting up a Trust?
Trusts are commonly used for minimizing taxes and can offer other benefits, as part of a carefully designed estate plan.
Protection against creditors
This means that if you have any creditors chasing you they would be unable to gain legal access to the Trust assets. This would include any unwanted predators on your assets and would even extend to a spouse.
Tax deferral
The values of assets in Trust are driven by market forces and will fluctuate in price in the normal way. Growth on individually held assets could be taxable in your hands, whereas any growth on Trust assets will not be taxable to you. This is also the case when it comes to inheritance taxes (IHT) on your estate. In most cases no IHT will be payable because the Trust assets are no longer yours, the Trust deed remaining long after you.
Trust is a powerful addition to a Will
Trusts allow you to make a meaningful succession plan with a great deal more control than you may have over the use of your Will. However, having Trust doesn’t mean you can let go of a Will. A Will does things that a Trust can’t, such as naming guardians to your children. Moreover, a Will includes all of your assets, while the Trust deed only pertains to the assets you put in the Trust.
Full control over the assets held in Trust
While the assets in the Trust would be subject to administration by the trustees, as the ‘Settlor’ when you create a Trust you send a letter of wishes to the ‘Trustees’ detailing what you would like to happen under certain circumstances. You may say that if you pass away you wish your spouse to be given half the value of the assets and the remainder to be set aside and used for the education of your children. If there is any residue after that, the children may inherit the balance in equal shares. You may also specify an age or a condition like if they are or are not married etc. A letter of wishes may be changed at any time.
Trusts in succession planning
You may also specify that certain proportions of the assets be set aside for grandchildren or other similar uses. This is a succession plan rather than an inheritance plan because your wishes extend for generations to come. Whilst ‘Trustees’ need to act in a legal manner concerning the assets, there is far less possibility that the assets are subject to inheritance laws and challenges across global jurisdictions.
Simpler asset management and distribution
When making a Will it is best to have one for each jurisdiction in which you have assets. Thus, if you have a bank account in Hong Kong, property in your home country, international bank accounts offshore and maybe even investments in more than one offshore jurisdiction, you ought to have a Will for each of these countries. If assets were held in a Trust there would be no need for a Will to cover these.
Practical uses of Trusts
There are a number of benefits to setting up Trusts and having your assets protected and managed within such a shelter. Read below case studies of John and Peter to see how Trusts work in practice.
Trust to protect parents
John’s parents have retired and they did not have sufficient resources to live. So, John bought 70% of their property which gave them cash reserves. An ownership agreement was signed by them all which stated that any one of them could force a sale of the property. Of course, they all know that as a family this would only be enforced under very unusual circumstances like John being permanently disabled. However, John is married to Anne and has made a Will leaving all his worldly goods to her on his death.
If John were to die, Anne would inherit his 70% portion of the property and could force a sale. In order to protect his parents, John specifies in his Will that if he dies his portion of the property is to be written into Trust and may not be sold unless his parents’ consent. John is thus using the Trust to protect his family but Anne will still inherit when the property is eventually sold.
Trust to protect child’s inheritance
Peter and Grace have a daughter. Much of Peter’s assets are investments and he takes advice from his financial adviser to set up a Trust to protect his daughter. Peter has considered that if he and Grace die at the same time his daughter would inherit a great deal. If she was already or subsequently married someone who proved not to be such a good person, the husband would then have full access to the inheritance. However, if a Trust is set up to provide an income to the daughter, the husband will not have access to the assets as the trustees will own them.
MATCHING A TRUST TO YOUR NEEDS
It has been said that for every family problem or situation, there is a Trust that can be constructed to solve it. A Trust that might last forever needs careful planning, but the benefits can last just as long if you take specialist advice beforehand. Contact Soteria Trusts to learn more about Trusts, and how our Trusts in Hong Kong can help you manage, grow, and protect your wealth within your lifetime and create a tax-efficient legacy for your loved ones.
This article has been written by Andrew Wood. Connect with him on LinkedIn: https://www.linkedin.com/in/andrewwoodbca
