Trusts have their origins in medieval England when they were associated with knights making provision for their families when they went away to fight in the Crusades.
An offshore trust enables an individual (the "settlor") to donate assets to a neutral third party or guardian (the "trustee"), who holds the assets and administers them for the benefit of other individuals nominated by the settlor and in many cases the settlor himself (the "beneficiaries"). An offshore trust arrangement is normally recorded in a written document (the "trust deed").
The effect of creating an offshore trust is to shift the burden of property ownership onto a trustee, while retaining the benefit of the property for the beneficiaries.
An estate created under the will of a deceased person is a trust. A trust created by a person prior to death is known as an inter vivos trust. Most trusts created offshore are formed as inter vivos trusts.
As trusts are a creation of English common law, the most suitable location for an offshore trust is a jurisdiction which has English common law and equity as the foundation of its legal system.
An offshore trust may be established as either revocable or irrevocable. A revocable trust may be terminated or varied by the Settlor either at the end of a specified period or at any time. An irrevocable trust cannot be terminated by the Settlor nor can the Settlor vary the terms of the trust. Whether a trust is established as revocable or irrevocable will depend upon the objectives and circumstances of the Settlor.
Both revocable and irrevocable offshore trusts may be either discretionary or fixed interest trusts. Under a fixed interest trust the interests of the beneficiaries are specifically fixed in the terms of the trust deed and the trustee has no power to vary those interests. A discretionary trust on the other hand gives the trustee the power to determine the allocation of income and capital amongst the members of the beneficiary class and to vary the membership of the beneficiary class. The flexibility provided by the discretionary form of trust is often necessary to satisfy tax planning objectives.
In the case of a discretionary trust, the trustees will have wide discretionary powers (although they may sometimes be constrained by the requirement for the consent of a third party or the protector), the trust deed will often be supplemented by an informal and confidential letter from the settlor or grantor to the trustees setting out his wishes on such matters as the amount and timing of distributions, investments, employment of advisers, those who should be regarded as primary beneficiaries and so forth. While this letter is non-binding and intended for the trustees' guidance only, the trustees will generally respect the settlor or grantor's wishes and strive to act in accordance with them.
Most offshore trusts fall into four broad categories:
Modern offshore trust deeds can be tailored to meet your specific requirements. Generally they are worded in the widest possible terms to allow a trustee scope to respond to changing circumstances and requirements.
- Private: including discretionary, accumulation and maintenance, life interest and fixed interest trusts.
- Corporate: including pension and employee benefit trusts.
- Charitable: solely for the benefit of charitable organisations.
- Purpose: trusts with no beneficiaries that are established for purposes that are certain, reasonable and possible
The most flexible form of offshore trust and used in wealth protection and tax planning. A discretionary offshore trust will normally allow the Trustees to appoint additional beneficiaries or to remove existing beneficiaries, and will usually also allow the Trustees to distribute the income and capital of the trust to the beneficiaries in varying amounts and at various times. When a Settlor establishes a discretionary offshore trust he will generally provide the Trustees with a Letter of Wishes, which provides guidance to the Trustees on how he would like them to administer the trust and manage the assets.
Interest in Possession Trusts
These differ from discretionary trusts in that the beneficiaries will be entitled to receive income and capital from the trust as detailed in the trust deed.
Accumulation and Maintenance Trusts
Almost always established for the benefit of children. The offshore trust deed will specify that the trust fund be used for the education and maintenance of the children up to a certain age with surplus income being accumulated by the offshore trust. Once a predetermined age has been reached the beneficiaries will be entitled to receive income and capital from the offshore trust as detailed in the trust deed.