A trust is a special relationship created when one person (the “settlor”) transfers legal title to property (the “trust fund”) to another person (the “trustee”) in trust. This is for the benefit of persons (the “beneficiaries”) specified by the settlor, to be held and administered according to the settlor’s specific instructions as contained in a written agreement (the “trust deed”).

The trust deed specifies the terms and conditions under which the trustee holds title to the trust fund, including certain duties and obligations of the trustee that are the highest imposed by law. In general, these require the trustee to administer the trust fund for the sole benefit of the beneficiaries, who have a beneficial interest in the trust fund.

Generally, the owner of property has both the legal title and the beneficial interest in the property. Legal title is that part of ownership which enables the owner to control the property. Examples include the power to open or close bank or investment accounts, or to buy or transfer property. The holding of legal title is generally shown by the owner’s name on the ownership documentation (e.g. investment account forms, title deeds, share certificates or registers, etc.).

The beneficial interest in property is the entitlement to the property’s economic benefits. Examples include interest, dividends, rents or proceeds from the sale of property. While the beneficial interest is not set out in any title documentation such as a title deed or share certificate, the beneficiaries under a trust can still protect their interests by a claim in an appropriate court to require the trustee to carry out its fiduciary duties under the trust.

When property is transferred to the trustee, the legal title and beneficial interests are separated. Legal title is held by the trustee and the beneficial interests by the beneficiaries. This separation of legal title from the beneficial interests is what makes the trust such an effective estate planning tool, since it enables the beneficiaries to enjoy the benefits produced by the trust fund without any of the burdens of legal ownership. In some cases it also gives the trustees flexibility to decide who should receive the economic benefits when there are a number of beneficiaries.

A trust offers many significant advantages including confidentiality, continuity, security, flexibility, tax savings, pre-mortem estate planning, reduced sovereign risk and asset protection. More

Because trusts can be designed to fulfil the many different objectives and needs of the settlor, there are many different kinds of trusts. For the international investor the most important trusts are the revocable trust, the discretionary trust and the interest in possession trust. More

Other types of trusts include charitable trusts, purpose trusts, accumulation and maintenance trusts and US grantor trusts.

The fiduciary duties of a trustee are some of the highest responsibilities imposed under law. The purpose of these rules is to protect the beneficiaries. Many of these duties are stated in the trust deed, and additional protection is provided by trust law.

While the trustee’s duties are too numerous to list in full here, several are worth mentioning. One of the most important duties requires the trustee to hold and administer the trust fund for the sole benefit of the beneficiaries. Under no circumstances whatsoever can the trustee deal with the trust fund for its own benefit. If the trustee violates this duty, severe penalties and sanctions can be imposed.

Another important duty requires the trustee to exercise reasonable care in managing the trust fund. Sometimes referred to as the “Prudent Man” rule, this duty requires the trustee to act as a prudent and reasonable person would under the same circumstances. A trustee who fails to fulfil this duty can be held financially responsible for the resulting loss suffered by the trust fund.

The trustee may also have a duty to provide the beneficiaries with periodic accounting. This enables the beneficiaries to ensure that the trust is being administered in accordance with the terms of the trust deed and applicable trust law.

This will depend on the particular trust company. Where Rosetrust is the trustee the signatures of at least two authorised members of senior management are required for any action taken by the trustee. Similarly two signatories are required on all bank accounts as a matter of policy.

Generally, a trust can hold any type of asset. As a practical matter, however, assets held directly in the trustee’s name should only be passive financial investments. Assets such as real estate, an interest in an operating business or a trading account, should be held indirectly by the trustee through a private investment company (PIC), which in turn holds the assets directly. The assets would be managed directly by the directors and officers of the PIC rather than the trustee. As shareholder of the PIC, the trustee selects the PIC’s directors who in turn select the officers. All these selections are made only after giving due consideration to the wishes of the settlor.

Yes. Some international trusts are structured so that the settlor is the primary beneficiary during the settlor’s lifetime, with the trust fund to be distributed or held for the benefit of the other beneficiaries thereafter in accordance with the terms of the trust. It is also possible to make a trust revocable during the settlor’s lifetime.

This depends on the terms of the trust deed. Because a trust is very flexible it can be tailored to meet the settlor’s needs for control over the trust and the trust fund.

Under a typical revocable trust the trustee has no independent discretion over certain decisions such as the investment or distribution of the trust fund. Instead, the settlor designates someone else to make these decisions and instruct the trustee who then follows those instructions.

Under a typical discretionary trust and other irrevocable trusts, the trustee has wide discretion in managing and distributing the trust fund. Although this discretion is guided by the settlor’s purpose in establishing the trust, the trustee has both the exclusive power to direct the use of the trust assets and the ultimate responsibility for ensuring that the trust fund is managed and distributed in accordance with the trust deed and trust law.

In most cases, a discretionary trust with a protector is the most effective arrangement for the purposes of tax savings, confidentiality, and asset protection. Designated by the settlor, the protector’s consent is required for certain actions taken by the trustee, typically investments and distributions. Since the protector can be a trusted friend or adviser, or even a relative, careful selection of the protector will enable the settlor to maintain a significant degree of confidence in relation to the use of the funds, while still keeping a safe distance between him- or herself and the trust fund.

There are many other possibilities, all depending on the particular needs of the settlor. In deciding how much unfettered power and control to give the trustee, the settlor should be aware that certain tax and other benefits may not be as secure when the settlor retains too much de facto control over the trust assets.

Stated simply, trust and fiduciary services involve the establishment and administration of trusts and private investment companies (PICs) to hold investment assets for the benefit of the beneficiaries.

Yes. This is strongly recommended for any revocable trust where the settlor may not be available him- or herself (e.g. incapacity, death), or for any discretionary trust where the settlor cannot communicate directly with the trustee for tax or other reasons. Because this person (often known as a “protector”) is usually someone familiar with the settlor’s family and circumstances, he or she can provide valuable assistance to the trustee to ensure that trust distributions or the investment of trust assets are consistent with the settlor’s intentions and goals in creating the trust. However, the protector is not a reserve trustee, so this role is oversight, not management.

This depends on the nature of the trust. In the case of an irrevocable trust (e.g. a discretionary trust) the declaration of trust can be made by the settlor directly or by the trustee in relation to assets provided by the settlor. If the latter route is chosen, there will be no mention of the settlor in the trust deed.

Yes, but not by the settlor and not always directly. A protector will invariably have the right to either replace a trustee or add trustees so that the original trustee loses control of the assets. In practice, a trustee will usually listen carefully to the opinions of the settlor and often voluntarily withdraw from office if suggested by the settlor, although under no legal obligation to do so.

Rosetrust AG in Zug will set up and manage offshore trusts and Swiss and offshore corporate entities for clients. We offer efficient and personal service combined with detailed expertise in the area of international estate planning.

More questions? Please contact us.