Trusts and Wealth 1 - Goldman Law

Trusts & Wealth

Success Using Trusts For Wealth

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30 Years of Global Trust Practical Expertise

The Use and Evolution of Trusts and Foundations is a Special Interest. 

The Use and Evolution of Trusts and Foundations is a Special Interest. 

Historical Evolution Of Trusts 

There are a wide variety of trusts with many common names but the essence of the trust lies in the principles of equity which were developed in the Courts of Chancery. This was a court set up separately from the existing court system by the King.

The court would listen to claims based on fairness or what was equitable. These maxims gradually became to be known as the principles of equity and the concept of a trust was established in England.

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Testamentary Trusts

What are They?

Many People Use Testamentary Trusts as Part of Their Succession & Wealth Planning.

A testamentary trust is a discretionary trust established under a Will. The testamentary trust does not come into operation until your death.

Instead of assets passing directly to an individual, they pass to the trustee of the testamentary trust.

The most underrated use of trusts is in our view are will trusts or testamentary trusts. Doing a simple will does not make sense with the amount of intergenerational wealth transfer. It is easy to establish a testamentary trust as part of your will & wealth plan. Ask us how?

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We Expose Global Trust Planning!

30 years Practical Experience With Trusts & Foundations

25 of the Most Common Uses & Types of Trusts. Our Experience Extends to On-shore & Off-shore trusts.

In reading the table below, please note that many jurisdictions in the United States offer revocable trusts. The trust you have when you don’t have a trust. Some of these features are not recognised in other countries but are fantastic to use within that jurisdiction. 

We have not listed foundations which are civil law (European) creatures and are based on a charter with no particular beneficial owner. This is important when we look at control and beneficial ownership in terms of taxation and asset protection.

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From Real Family Law FFAQ's (Further Frequently Asked Questions)

Trust Secrets - First Global List Of The Types of Trusts & Their Uses!
No. Name What is it? Typical Uses
1
Asset Protection Trust
Ring fences your assets from creditors and insolvency risk
Prevents clawback of assets transferred to the trust using say the Cook Islands law or by limitation periods via the effluxion of time.
2
Bare trust
The most simple type of trust With one beneficiary and one trustee
Where the trustee is usually just a nominee of the beneficiaries. For example, X holds this asset in trust for Y and there is no deed or property owners written obligations. Commonly used to split income or assets.
3
Charitable trust
A trust where the capital or income is to be used for a charitable purpose
Charities are usually the residual beneficiaries of many trusts, but maybe used to obtain a charitable registration
4
Constructive or Implied trust
Imposed by law – typically a court order
A court may find that it would be unconscionable to deny one party a beneficial interest in an asset held by another. Origins in dishonest trustees.
5
Discretionary trust
A trust where the trustee has discretion to distribute capital or income and the beneficiaries have no right to receive anything, but it is enough to be simply to be considered for a distribution from the trust.
Used for tax and asset protection purposes, whereby a beneficiary is considered not to have any entitlement. However, the trustee can decide to distribute all or nothing to one beneficiary or a class of beneficiaries and can also segregate in separate types of income streams.
6
Family Trust
The trust with the beneficiaries are family members
Used to protect assets within the family or bloodline where the class of members may include even unborn children. Sometimes refers to a discretionary trust set up for tax planning purposes or asset protection purposes in Australia and New Zealand.
7
Fixed trust
A trust where the entitlements are the beneficiaries are fixed
Fixed entitlements commonly used in high net worth family situations where the rights of the family members are fixed.
8
Grantor trust
Commonly used in the USA whereby the person who transfers the assets of the trust retains control over the trust and not the trustee
If the grantor retains control over the trust and the assets of the trust, then the grantor is still considered the owner and may be taxable for estate duty purposes in the USA. In other jurisdictions, the grantor is also known as the settlor.
9
Hybrid trust
A trust that combines various elements of fixed entitlements and discretionary entitlements
A combination of a fixed unit trust whereby beneficiaries have fixed entitlements for say land tax purposes, but discretionary entitlements for streaming of income. Can combine various aspects of all other types of trusts.
10
Life interest trust
A trust that gives an interest to a beneficiary for their lifetime.
For example, X may live in this house rent-free for life, but it is granted in ownership to Y. A life interest is a interest and even though the house may be unwise name, it is a lifetime interest trust.
11
Next Gen Trusts
Estate planning trusts for future generations of family
Common in New Zealand and may be implemented via wills or whilst the settlor law is alive.
12
Listed property trust
Listed on the stock exchange and the structure used. Is a unit trust with units of entitlement as opposed to shares
Common used or commercial and other properties to be held via such a structure as unit holders have beneficial interests in the property which does not arise if they have shares, ie. allows for depreciation write-offs for example.
13
Non-resident trust
A trust where the trustees are non-resident
The general principle is that the residence of the trust is usually determined by the residence of the trustees. The structure commonly used in the UK. Where there are multiple trustees, then ae the majority of them non-resident?
14
Philanthropic trusts
Trust established for charitable purposes
May qualify as a charity with tax and other benefits or as a non-profit. Interchangeable with charitable trusts, although the purpose of philanthropic trust may be more directly a charitable purpose.
15
PTC
Private trust company , as opposed to a public trustee company
The company that specifically acts as a trustee for your trust that is but not a public trustee company.
16
Resulting trust
A trust that comes into operation by operation of law or court order, i.e., the result is a trust
There is a presumption that a trust exists by virtue of the nature of the transaction; for example, the money is provided by one person, but the property is put in another person’s name. A rebuttable presumption on evidence.
17
Revocable trust
A trust that may be revoked by the grantor settlor
This type of power usually negates the purpose or intention of the trust, however, certain US states allow for this power to exist within a valid trust for inheritance tax and other purposes, such as Nevada. This effectively allows you to say you don’t own the assets and then reclaim them later on. By revoking the trust. Considered ineffective in many other jurisdictions.
18
Service trust
A trust that provides services to another trust
Commonly used to split income, for example, personal exertion income is not considered transferable to another, but if you set up a service trust which provides you with desks and property for a mark-up over cost. This effectively allows some of your income to be transferred to a service trust as it now becomes income from property. Common in Australia for lawyers and other professionals.
19
SMSF
A superannuation trust which accumulates retirement benefits for family members
The trustee is essentially a company of the family members themselves, who can then manage their own funds for retirement as opposed to having a public trustee or third-party do this on their behalf. May be used to leverage, or invest in art of crypto assets.
20
S.T.A.R. Trusts
STAR trusts – A Cayman Islands regime for trusts
Gifting your assets to a trustee but allowing you to maintain control over the trustee via an enforcer or protector or with the trust deed. Very useful but may be seen as an ineffective transfer of rights over the assets from the viewpoint of other jurisdictions
21
Testamentary trust
All will trusts – trusts that are created for beneficiaries of your assets or a your will
Clauses in your will create the trusts and these are very effective for estate planning purposes; for example, my children to inherit once they are 25 or for my grandchildren to inherit and my children only to be able to have the income.
22
Unit trust
A trust where the beneficiary’s rights and entitlements comprise of units which may be tradable or quantifiable
Commonly used in commercial situations where you may have a number of beneficiaries that come together as opposed to shareholders and where the units are redeemable or transferable; i.e. a commercial property that is divided into 100 units and held by a unit trust is then sold or provided to beneficiaries in terms of the proportion of contribution to the 100.
23
VISTA trusts
Virgin Islands special trust arrangements – unique features
The British Virgin Islands (BVI) by law allows these trusts and the trustee to have as trust assets operating businesses, which typically is against the nature of the trust as the trustee should only be there to protect trust assets and not do business with them. Removes the trustee from responsibility in this area and where there are commercially operated activities, this is extremely useful.
24
Will trust
A trust that is set by operation of the will – once you die – also known as testamentary trusts
These trusts are created in your will and operate the same way as trust that may be considered via a deed of trust while you are alive – contrasted with living trusts
What are the Rights or Benefits of the Trustee Exercising Discretion to Distribute Income? How can I Control What the Trustee does?

Beneficiaries of a discretionary trust have no claim or legal entitlement to any portion of the trust income (nor capital in some cases). They only receive a benefit when the trustee exercises their discretion and distributes the income.

The essence of a discretionary trust is that the trustee’s legal obligation is to consider beneficiaries for a distribution; not to actually make a distribution.

This means that you can have a list of beneficiaries which may be a family for example all related companies, but you will decide in any particular year depending on the type of income and the amount of income who if any person is to make distributions to.

If the trustee distributes the income the trustee generally pay tax on that income. The trustee retains an income and the trustee many jurisdictions impose penalty rates for undistributed income or if the income is distributed to minors.

However, the uses tax planning vehicles is diminished and they are more important as asset protection vehicles. This means that no beneficiary has a vested present entitlement. I could be bankrupt for example and have all my assets validly in the trust, subject to clawback provisions and depending how it was done, the assets remain protected, and I may STILL receive distributions.

The net effect is that a person’s status as a beneficiary does not result in a tangible gain or proprietary interest in the trust property. As there is no claim to the property, you are not subject to tax implications if you do not receive a distribution.
Disadvantages can include that the trustee can stop distributions to a particular beneficiary at any time. Likewise, a beneficiary can do little to change this arrangement. This can present a problem should a dispute arise with the trustee, for example, a family fallout. This is a key reason why you should exercise great care when selecting a trustee.

Of course in the United States there are revocable trusts in some states (e.g. Nevada) There are also letters of wishes. There are also protectors that control the trustee or enforcers and so on. It also set up your own trustee company and is a private trustee company there are many ways to have some control but if you have too much control you will be considered not to have divested the asset it will be considered to be a sham trust.

What are Some Classes and Types of Beneficiaries?
Companies and individuals can be beneficiaries of a trust, and they’ll fall into one of the following categories:
Primary Beneficiaries
The primary beneficiaries are those whom the trust names explicitly. In a trust set up for a family, this will most often be the husband and wife, de facto partners, etc. The relationship with the primary beneficiaries will typically define the classes of the beneficiaries (see below).
General Beneficiaries
These are the people that fall within a particular class of beneficiaries depending on their relationship with the primary beneficiaries. For example, if a trust deed states that general beneficiaries include brothers, sisters, children, grandchildren or other descendants, whether a person falls into the class of general beneficiaries depends on their relationship with the primary beneficiaries.
Income Beneficiaries
Money that the trust generates, for example, through interest earned on trust money in a term deposit or rent earned from a residential property owned by a trust, can be distributed to a beneficiary.
Capital Beneficiaries
Capital beneficiaries may receive capital from a trust but not any income earned by trust assets.
Default Beneficiaries
Distributions are made by default to these beneficiaries unless the trustee decides they would like to distribute them to others.
Can People Under 18 Be a Beneficiary? What gifts can I make to a trust?

Yes, but you should be aware that if a trustee distributes income to someone under 18, they will be subject to a substantial amount of tax. Aside from tax, people under 18 are not legal persons in most jurisdictions while distribution is made to them their parent or guardian will be the controller. 

Yes of course. Trusts are gifted any property you may so choose or trading trust may acquire property.

Of course, of its real property taxes and transfer charges. It may be better to sell the property and make a gift of cash.

If you set up a new trust, you can transfer property that you already own into it. You should know that the transfer of property into a trust will generally be classed as a sale. This can be an expensive exercise as, in addition to the appropriate sales contracts/agreements, this can incur Capital Gains Tax and stamp duty. Ensure that you speak with an accountant if you’re looking to establish a trust and transfer existing property.

Can a Trust Trade as a Business?

Approximately 5% of all businesses in Australia operate through a trust structure. If you are going to run a business through a trust, you will require a Australian Business Number. As with all trust property, the trustee will own the business’ assets.

Legally this is an interesting question.

You will need to speak to us to get all the answers.

The primary duty of the trustees is to protect trust assets.

Consider how a trustee may then be breaching its obligations by engaging in trading?

And what if the trust trades through a wholly owned company? who will be the directors of the trustee as a director of the trading company, is that a conflict of the trustee’s duties?

Don’t be fooled into thinking that this simple.

This is why the British Virgin Islands created “Vista trusts” that provide a legislative authority trustees to engage in trading, without breaching the duties of the trustee.

Watch this space when insolvencies happen.

Family Trust vs Discretionary Trust: Do All Beneficiaries Have To Be From The Same Family?

Another frequently asked question about trust concerns whether the beneficiaries of trust all have to be from the same family. A family trust and a discretionary trust are essentially the same. The trustee maintains the discretion to distribute income as they see fit. It is more likely, however, that the beneficiaries are all members of the same family. A family trust is simply a commonly used term, rather than a requirement that the beneficiaries all be from the same family. Therefore, there is no restriction on you listing people outside your family as a beneficiary.

However, if you do list people outside your family, you may not be able to make a family trust election for tax purposes. This means you will lose access to certain concessions and benefits you would otherwise get if you made the family trust election. Further, if you make distributions to people outside your family, the trustee might need to pay tax on these distributions at the highest marginal tax rate. This is if you have made a family trust election to the Australian Taxation Office for that trust.

Leaving aside the tax obligations, you can have unborn beneficiaries and it all depends on your definition of “family” within the trust deed.

What are fiduciary obligations the “Fiduciary” relationship?

A trustee is considered to have a fiduciary relationship in administering the assets for the sole benefit of the beneficiaries. The scope of a fire Nutri relationship is vast and complex is the subject of many books and cases.

Fiduciary obligations are a set of conduct rules which a trustee must follow. The reason why a trustee must hold true to their fiduciary obligations is to ensure they act in an honest and reasonable way, and do not use their position as trustee to benefit themselves.

A fiduciary relationship exists when a person (the ‘fiduciary’) is in a position of significant trust and confidence over another. The fiduciary relationship arises in circumstances where the fiduciary is required to place the other person’s interests before their own. The trustee-beneficiary relationship is one of the prime examples of a fiduciary relationship.

There are also many other circumstances where a fiduciary relationship exists.

Fiduciary relationship

Some factors below indicate that a fiduciary relationship exists

The factors that indicate that a fiduciary relationship exists include:

  • trust and confidence placed in a person;
  • an undertaking by that person to act on behalf of another;
  • the other person is vulnerable as a result; and
  • there is an inequality in bargaining power between the two parties.

A fiduciary such as a trustee will owe the beneficiary certain obligations.

These include:

  • The trustee must not enter into transactions which give rise to a conflict of interest between the trustee’s personal interests and their duty owed to the beneficiary.
  • Example: The manager of a share portfolio must buy and sell those shares which will be of the most benefit for the trust and its beneficiaries, not just those from which the manager might earn a bigger commission.
  • The trustee must account to the beneficiary for any improper gain obtained as a result of a conflict of interest. Such as proceeds gained by the trustee as a result of selling a car held on trust for the beneficiary; and
  • knowledge or opportunity gained as a result of their position.

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