Foreword:
· Many professionals in the field of finance believe that it is the potential benefits which offshore trusts can provide which has sparked the growth in offshore business as a whole and which has enabled the majority of centres to develop their finance sectors and infrastructures. The reader should not mistake an offshore company with an offshore Trust, even though they are a few similarities on the day to day running and duties but the reader will during this session realise that the trustees duties ( subject to the terms of the Trust ) expands much further than one could possibly imagine.

Definition of a Trust
A precise definition of a trust is difficult as there are so many variances but generally speaking it is the relationship which exists when a person, called the trustee, is compelled in equity to hold property, called the trust property, for the benefit of persons, called the beneficiaries.

The person who creates a trust is usually referred to as the settlor or in some countries he is called the grantor (e.g. USA). The settler could be a beneficiary and even the trustee of his own trust.

There can be more than one trustee and in some cases a trust protector may be appointed, whose role would usually be to oversee the actions of the trustees and make sure that the settlor's intentions in establishing the trust are met.

The trustee will have a number of duties and responsibilities which he will be required to fulfil and will also be granted certain powers over the property under his control. If a trustee carries out an action which he should not have done or fails to perform a task which he should have carried out, he might be in breach of trust, a situation which all trustees must try to avoid.

The trust is a common law vehicle and the trust legislation which you will find in offshore centres will be derived from UK trust statutes and precedents. Although each centre which offers trust services will have its own trust laws, many of the main principles and concepts will be the same.

Creation of a Trust
Trusts can be created in a variety of ways but students are only required to be familiar with the most common methods.

Express Trusts
An express trust is created as a result of a positive, intentional action on the part of the settler, such as him executing a trust deed or other such instrument to create an intervivos (during your lifetime) trust (which is the name given to a trust created during the settlor's lifetime). Another example of an express trust is a testamentary trust, the terms of which are contained in a person's will and which only comes into force on the testator's death.

The majority of offshore trusts are intervivos express trusts.

Implied Trusts
These are created as a result of what the law infers as being a person's intention. There are two main types of implied trust, resulting and constructive.

Resulting Trusts
This could arise following a transfer of property from A to B without any indication that a gift was intended or has taken place. The property would be held on a resulting trust for A, as on B's death the property would revert (be transferred back) to A. Similarly, A could transfer property to B to hold for C's lifetime. If there is no instruction as to what is to happen to that property on C's death the property would be held on a resulting trust for A, as on C's death the property would return to A (or A's estate if he too had died).

Constructive trusts
These are trusts which are imposed by the courts and occur where it would be inequitable for a person to be considered to hold property for his sole benefit. An example of this would be where a matrimonial home has been purchased in the name of the husband but both he and his wife contributed to the value. In such a case the husband would hold he property as trustee and he and his wife would be the beneficiaries.

Statutory Trusts
These are trusts which come into force as a result of the operation of a statute, such as those created under the intestacy succession rules in the UK.

Legal Entity
Students should be aware that a trust is not in itself a legal entity, unlike a company. It is the trustees who are the legal owners of the trust property and it is they who would be the party to a legal action involving the trust property.

It is because of this that certain types of trust assets, such as quoted investments and realty, are not usually registered in the name of a trust but instead are registered in the name of the trustees of the trust.

The Legal Requirements for a Valid Trust
For a trust to be effective and hopefully meet the objectives for which it has been created (we cover the uses of trusts in the next Section) it must meet certain legal requirements. If it fails to meet these requirements it would generally be considered to be invalid and would not take effect or be deemed to have ever existed. This could have disastrous consequences for the settlor and possibly the trustee.

The following is a summary of the requirements which must usually be fulfilled to enable a trust to be considered valid. Once again, we shall concentrate on the main areas which students should be aware of and leave some of the more 'technical' arguments and theories to other texts.

Capacity of the Settlor
Generally speaking, any person over the age of majority, which in most countries is 18 years of age, who has the capacity to manage his own affairs, can create a trust.

Purpose of the Trust
A trust must not attempt to promote immorality, restrain marriage, separate a parent and child or generally be for a purpose which is considered illegal or against public policy. It is also usually improper to make an immediate gift which is subject to a permanent restriction or alienation.

The Three Certainties
The three certainties must also be present for a trust to be valid and these can be summarised as follows:

Certainty of subject matter
The property which will be transferred into and subsequently held in the trust must be clearly identified in the trust deed. Often a trust is created with only a nominal amount of trust property, such as ?100, and additional assets will then be transferred to the trustees at a later date.

If there is no certainty of subject matter, a trust cannot be created as a proper transfer of property has not taken place between the settler and the trustees. The result is that any property which would otherwise have been used to create the trust will remain the property of the client.

Certainty of objects
It must be certain who is to benefit under the terms of the trust and also what the nature and extent of their benefit will be. The trust deed should therefore specify who the beneficiaries will be and also the nature of their benefit (e.g. discretionary, life interest etc). If it is uncertain who is to benefit, the trust will fail and the property will be held by the trustees for the settler on a resulting trust.

Charitable trusts and non-charitable purpose trusts do not have to meet this certainty as we shall see later in this study text.

Certainty of words
It must be certain from the wording of the trust instrument or deed that it was the intention of the settler to create a trust. Expressions by the settler which suggest he wished or desired to create a trust should be avoided. If there is uncertainty concerning the intention to create a trust, the transferee will take any property transferred to him absolutely as the owner (i.e. the 'trustee' would take the property which would otherwise have been held by him on trust).

Properly Constituted
The settler must make sure that he completes the transfer of the intended trust property to the trustees. If he fails to complete all that is necessary to effect this transfer, such as failing to sign a stock transfer form to transfer an investment asset into the name of the trustees, then the trust is said to be incompletely constituted and will not be valid.

Trust Duration
In most centres there is a requirement (Panama and the Turks and Caicos being the notable exceptions) that trust property must vest (or be transferred to or held for a beneficiary) within what is termed the perpetuity period. If the property is not vested within that time the trust would generally fail.

The maximum period for which vesting may be postponed is usually referred to as the perpetuity period and starts from the creation of the trust. Some trust deeds refer to this period as the trust duration period.

The length of the perpetuity period of a trust will vary depending upon the offshore centre chosen. However, many centres have chosen the options available under English trust law which is either the period of a life in being plus 21 years or, as is more usually the case, a specific number of years not exceeding 80.

Possible Uses of an Offshore Trust

Possible Tax Planning Opportunities
In theory the main tax planning opportunity which a trust creates is that the settler would cease to be the owner of the trust property and therefore not subject to tax on those assets. Instead, it would be the trustees who, in theory, would be liable to pay tax on the trust's income and realised gains.

If the trust is located in an offshore centre (which will impose either no or low rates of tax) there can therefore be considerable tax saving opportunities available.

Family Succession Planning
A trust can be used to enable a settler to make financial provisions for himself, his spouse and his family (or indeed others) during his lifetime and also after his death.

Provision for Those Who Cannot Manage Their Affairs
A trust can also be used to make provision for those who, through whatever reason or incapacity, are unable to look after their own financial affairs. The individuals concerned would usually be included in the trust deed as beneficiaries but would only receive distributions at the discretion of the trustees.

Similarly, a trust can be used to protect family funds from spendthrift members of the family. The person concerned would usually be entitled to receive the income from the trust fund but with no entitlement to the capital.

Asset Protection
A trust can be used to protect a person's assets from local government agencies or authorities who might have the power to freeze or expropriate assets of citizens or residents of that country. If the assets are not held by a citizen or resident of that country (i.e. they are owned by offshore trustees) they could be protected from this particular line of attack.

A trust can also be used to protect property from the claims of forced heirs and in some cases from future creditors, both uses we shall return to in Unit 11.

In addition, a client might own a particular asset which he would like future generations of his family to enjoy or benefit from. Such as asset could be the family home, a valuable work or art or shares in the family business. A trust can be created to hold the asset with restrictions imposed relating to the disposal of the property.

To Avoid Probate Problems
A trust can also help solve the probate problems which we discussed when looking at the use of companies. Although at this time, the assets would be in the name of the trustees instead of the company.

Protection from Creditors
Some offshore trusts can be used to protect an individual from the claims of future, unknown creditors.

To Cover Emergencies
A trust could be used as a contingency planning vehicle to provide cover in the event of an emergency. For example, a client could put in place the paperwork and transfer of assets to create a trust which would only be activated on the happening of a particular event, such as his incapacity or perhaps kidnap!

Once activated, the client's assets would be managed by the trustees and his family would continue to be provided for.

To Provide Greater Confidentiality
A trust is a confidential arrangement between the settler and the trustees with minimal or, in the majority of cases, no reporting requirements. Indeed, often the beneficiaries will not know of the existence of the Trust under which they have given an interest.

Some trusts are created without the settler being party to the trust deed which increases the secrecy element. This would usually involve the trustee executing a deed under which he would declare that he was holding the specified trust property in accordance with the terms as set out in the deed. This is commonly referred to as a declaration of trust.

A variation of this theme, although not necessarily advisable is the situation where a trust deed is executed by a person who is referred to as the settler in the deed but who is in fact acting on the instructions of another party. The person who creates the deed is essentially a nominee or 'dummy settlor' whose purpose is to conceal the true identity of the settler.