Trusts

The concept of a trust originally began during the Crusades as a means for the Noblemen to transfer their estates, castles and wealth to a trusted third party for them to hold and manage exclusive of their own assets, for the benefit of the family of the owner whilst they were abroad. There has been much common law development since then but in essence the idea of a Trust remains the same; being a means for you to transfer your assets out of your name to a third party to hold for the benefit of certain beneficiaries.

A trust relies on the distinction between the legal ownership in property and the equitable interest in that property.

The trustee is given the legal ownership, which enables him to deal with those assets as if they were his own property, subject to the terms of the trust deed. The beneficiaries have an equitable interest in the property which represents the rights to enjoy the benefit of the property subject to the terms of the trust deed.

The beneficiaries can enforce the trust against the trustee and can, if necessary, take legal action against the trustees.

What are the Types of trust?

Discretionary Trusts

The most commonly used form of trust in the Isle of Man (and the offshore world generally) is the discretionary trust. The trust deed gives the trustees wide discretion to apply the income and capital of the trust assets for the benefit of a class of beneficiaries. The trustees decide which beneficiaries will benefit and how much they will receive; the beneficiaries have no right to receive a distribution, merely a hope that the trustees will exercise their discretion in their favour.

Purpose Trusts

Trusts for non-charitable purposes are permitted in the Isle of Man under the Purpose Trusts Act 1996. The purposes may be of any kind provided they are certain, reasonable and possible, and not unlawful, contrary to public policy or immoral. The trust must be created in writing and provide for the appointment of an enforcer independent of the trustees whose duty is to enforce the trust in respect of its non-charitable purposes. Purpose trusts are commonly used in conjunction with asset financing transactions, securitisations or to hold the shares of a private trust company.

Life Interest Trusts

One or more specified beneficiaries (known as life tenants) have a right to receive a fixed share of the income from the trust property for a specified period (usually their lifetime). Capital is held either on fixed interest trusts or at the discretion of the trustees for specified beneficiaries to benefit after the life tenant’s death.

Bare trust

The trustee holds property on trust. The trustee has no power or discretion to do anything other than hold the property in their name and deliver it when requested to the Beneficiary.

WHO ARE THE PARTIES TO A TRUST?

Settlor

The Settlor is the actual person (or party) that transfers assets to the Trustee to hold in Trust for the express benefit of the nominated beneficiaries.

Trustee(s)

The Trustee is the person(s) or company that receives the assets from the Settlor to hold for the beneficiaries. The Trustees hold the assets in a fiduciary capacity and do not enjoy any benefits from the Trust.

Beneficiaries

To be valid in law a trust must have clearly identifiable beneficiaries. They can be either named directly in the Trust Deed; or in the letter of wishes. They can be a defined class (e.g. your children) or individually named.

Protector

The Settlor can appoint a Protector to the Trust if they wish. The particular terms in the Trust Deed will determine when the Trustee must receive guidance and/or approval from the Protector with respect to actions taken in relation to the administration of the Trust. Often the Protector is a trusted family friend or advisor.

WHY ASTON AND THE ISLE OF MAN?

The Isle of Man offers a politically and economically stable base for the establishment of wealth protection and business succession structures.

Isle of Man trust law has its roots in and closely mirrors English common law principles, but has been enhanced and supplemented by constantly evolving legislation.

Aston International Limited is licenced by the Isle of Man Financial Services Authority for the provision of trustee services. The regulation of trustees in this manner ensures that trusts are managed by experienced and qualified trustees in compliance with relevant legislation. Trustees are generally not regulated nor monitored in the majority of onshore jurisdictions.

There are no capital gains, inheritance, gift or estate taxes on the Isle of Man. If the beneficiaries of a trust are resident outside the Isle of Man there is generally no Isle of Man taxation in terms of income.

Trusts are not registered publicly with the Isle of Man General Registry and are not required to file annual accounts.

Aston has staff qualified in International Trust Management with STEP (Society of Trust and Estate Professionals), the only qualification dedicated solely to the management of Trusts.

WHAT DUTIES DOES A TRUSTEE PROVIDE?

Within the framework of the Isle of Man Trustee Act 2001, the trustee has an absolute duty of care to the beneficiaries of the trust, to act fairly and impartially towards them at all times. It is an office of absolute faith. The trustee must administer the trust assets strictly in conformity with the trust deed, statute and his fiduciary duty to the beneficiaries.

The duties of the trustee includes being ready to provide the beneficiaries a full and proper explanation of the dealings of the trust. There is no statutory provision covering the format that the trust accounts must take. Accounts need not be audited. However, where deemed appropriate or necessary, trustees can arrange for an audit which will be paid for out of the trust assets.

WHAT ASSETS CAN BE HELD BY A TRUST?

Most types of asset can be held within a trust, however if some have higher connected risk factors , the trustees may wish to first segregate them in a limited liability company. The most common assets held are as follows:

  • Shares and stocks in both quoted and unquoted companies,
  • Investment portfolios,
  • Real and intellectual property,
  • Bank deposits,
  • Life assurance policies issued on the life of the Settlor or the Beneficiaries; and
  • Artwork

WHAT IS A LETTER OF WISHES?

This a document of guidance that is not legally binding and is provided to the trustee by the settlor. It indicates the settlor’s wishes on matters that the trustee should consider in their absolute discretion relating to the governance of the trust, such as how the assets and beneficiaries should be treated.

What is the ESTABLISHMENT PROCEDURE?

Trusts are often created and constituted at different times. The trust is created when the trustees become bound by law to hold and dispose of the trust assets in accordance with the terms of the trust.The trust is constituted when the legal interest in the trust asset is lawfully transferred to the trustees.

There are “three certainties” which must be fulfilled for a trust to be created, or the trust can be deemed to have not been formed correctly:

Certainty of Intention is a vital element of the creation of a trust. Whilst it is possible to reserve powers to either the Settlor (or Protector), case law indicated that the reservation of too much power can be taken as evidence that there was no intention to create a trust. If a trust is challenged in court, this can result in the trust property being deemed to have been the property of the Settlor at all times which may have adverse tax consequences for the Settlor or his estate. The Isle of Man does not have express reserved powers legislation.

Certainty of Subject requires that the property that is to be settled in the trust be described with “certainty and particularity”. If it proves impossible to identify the trust assets the trust will fail.

Certainty of Objects requires that the intended beneficiaries of the trust be named, identified or described with sufficient certainty as to allow them to be determined with certainty. Since the beneficiaries are able to enforce the trust against the trustees, it follows that the trust is not enforceable against the trustees, the trust will again fail.

The duties of the Trustee(s) include providing the beneficiaries with a full and proper explanation of the dealings of the trust.

FORCED HEIRSHIP AND PROTECTION FROM FOREIGN JUDGEMENTS

Some jurisdictions are subject to ‘forced heirship’ provisions, whereby the assets of a deceased person must be divided as prescribed by local law. This can create a conflict where the assets have been settled on a trust.

The Trusts Act 1995 (Amended) resolved this conflict by stating that no judgement or order of a court outside the Isle of Man is to be recognised or enforced against an Isle of Man trust.

Settlors from jurisdictions with forced heirship provisions would be advised to first take local professional advice to ensure that they can properly and legitimately transfer assets into trust.

** This is purely a brief note highlighting the basics aspects of a Trust. Should you require any additional information, please do not hesitate to contact David Griffin or Ranulf Lucas.