Transcript Holding companies

Principles of international trust
law and current trends in
legislation and trust planning
Elias Neocleous
What is a trust, and why should it
be trusted?
• A flexible and beneficial asset-holding structure that separates the
legal ownership of an asset from the beneficial ownership.
• More than 2,000 years’ history – the testamentary trust dates back to
Roman times and one of the first well known cases involved the
Greek orator Demosthenes in 365 BC.
• Inter vivos trusts developed in England at the time of the Crusades.
• They are now an entrenched feature of Anglo-Saxon legal systems
around the world. Kluwer Law’s “International Trust Laws and
Analysis” widely regarded as the authority in the field, covers 57
trust jurisdictions, from Andorra to Vanuatu.
• There is a vast amount of jurisprudence and case law on trusts,
making them predictable and reliable.
The basic concept of a trust
• Separation of the formal, legal ownership of an asset from the
entitlement to enjoy the economic benefits derived from the
asset.
• Mr A owns a small apartment block producing rental income
of €100,000 per year. He has five children who he wishes to
help equally.
• He establishes a trust for this purpose. He appoints Z, a trusted
adviser, as trustee. He transfers the ownership of the property
to the trustee to manage for the benefit of the children.
• The trust can have unlimited duration. It does not end when
Mr A dies.
• In the language of trusts, Mr A is the settlor. Z is the trustee.
Mr A’s children are the beneficiaries.
A simple trust deed
I, Alfred A (hereinafter the Settlor) , give my freehold
property at 1 Acacia Avenue (hereinafter the Trust Property)
to Zebediah Z (hereinafter the Trustee) to hold in trust for the
benefit of my children Abigail A, Alan A, Anna A, Arnold A
and Arthur A.
Signed as a deed
………………..
Date
…………………
The three essential “certainties”
• Intention - to hold in trust
• Subject matter - my freehold property at 1 Acacia Avenue
• Objects - my children Abigail A, Alan A, Anna A, Arnold A
and Arthur A
I, Alfred A (hereinafter the Settlor) , give my freehold property at
1 Acacia Avenue, Anytown (hereinafter the Trust Property) to
Zebediah Z (hereinafter the Trustee) to hold in trust for the
benefit of my children Abigail A, Alan A, Anna A, Arnold A and
Arthur A.
Why go to all that trouble?
• There are many reasons to establish a trust, which
justify the modest cost of establishing it and
maintaining it. These include:
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Tax mitigation
Circumventing forced heirship laws
Preservation of family assets
Protection against spendthrifts
Provision for minors and people whose capacity is
otherwise impaired
– Protection against professional negligence claims
– Protection against family breakdown
– Philanthropy
A basic example of income tax mitigation
• In Mr A’s country of residence the personal income tax
allowance is €20,000, as it is in Cyprus. Mr A has substantial
income and his marginal rate of tax is 40%. The children have
no income.
• Without the trust the rental income of €100,000 is assessed on
Mr A and subject to tax at 40% - the annual tax cost is
€40,000.
• With the trust the rental income of €100,000 is assessed not on
Mr A, but on the beneficiaries at €20,000 each. This is covered
by their personal income tax allowance. No tax is payable,
resulting in a saving of €40,000 per year.
Other tax mitigation
• Most uses of trusts for tax purposes are far more complex and
specialised.
• For various policy reasons trusts may enjoy preferable tax
rates and treatment compared with individuals (common
examples are charitable trusts and trusts for the benefit of
disabled persons).
• Trusts can be used to reduce liability to capital gains taxes and
other capital taxes.
• As a trust can be established with an unlimited duration, the
assets do not pass to the heirs on the settlor’s death and no
liability to inheritance taxes arises.
Regaining freedom of testation
• Most countries in the world limit the individual’s freedom to dispose of his
or her estate as he or she wishes on death.
• Instead, part of the estate is reserved for the surviving spouse, dependents
and antecedents.
• This “forced heirship” regime is the norm in civil-law and Islamic countries
• The reserved proportion typically accounts for most of the estate: some
examples:
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France, up to 75%
Switzerland, up to 75%
Germany, up to 50%
Russia, up to 50%
Most South American countries, up to 80%
Most Muslim countries, two-thirds
• Assets placed in trust do not form part of the individual’s estate passing on
death, and use of a trust gives individuals freedom to decide who benefits
from their assets, and who does not.
Preserving family assets
• In the case study the trust structure makes it possible
to keep the apartment block intact and manage it
consistently and efficiently, rather than breaking it up
and giving individual units to different children.
• This is even more important with “heritage” assets
such as historic properties or art collections.
• Even if the trust has limited liquid assets it may be
possible to advance capital by borrowing on the
security of trust assets.
Protection against spendthrifts
• Especially in the case of younger people, there is a
risk that if the individual’s share of the family fortune
is given to him or her, it will be dissipated by
extravagance and inappropriate spending.
• Use of a trust enables the fabric of the patrimony to
be preserved through generations. Unreliable
beneficiaries can receive the income, with no access
to the capital.
Provision for minors and people whose
capacity is otherwise impaired
• Most legal regimes do not allow minors to own certain
types of property or enter into contractual relations. The
trust structure provides a way of holding property for
their benefit until they reach the age of legal capacity or
some other predetermined age.
• Trusts are also a good way of providing for the
maintenance of people who are incapable of managing
their own affairs. Most tax systems give beneficial
treatment to trusts for the benefit of disabled persons.
Protection against claims
• In certain professions claims may emerge only many years
after the event and may be disastrous in scale:
• Obstetricians
• Other medical practitioners
• Architects
• $100 million-plus awards are now commonplace in medical
malpractice cases in the USA, especially when juries make the
award.
• Placing assets in a trust takes them out of the ownership of the
individual and removes them from the reach of claimants or
even a trustee in bankruptcy in the event of a claim.
• It therefore provides additional protection against the
individual and his family losing everything as a result of a
claim.
Protection in the event of family
breakdown
• Courts are awarding ever-increasing amounts to exspouses, with some “wife-friendly” jurisdictions taking
on cases despite the parties having very little connection
with the jurisdiction.
• Pre-nuptial agreements provide little real protection and
negotiating them can itself cause problems in the
relationship.
• As with external claims, the use of a properly constituted
trust can remove assets from the reach of a potential
former spouse, with much less risk of creating hostility.
Variations on the theme
• The simple case-study of Mr A illustrates the basic trust
concept, but in the real world there are almost infinite
refinements and variations, including:
– The duration of the trust – finite (if so, how long) or infinite?
– Powers and benefits that the settlor may retain or reserve – to use the
trust property, to revoke the trust.
– The nature and objectives of the trust – accumulation, maintenance,
charitable, discretionary.
– The powers of the trustees – to invest, to distribute capital, to vary the
terms of the trust, to make payments and advances to beneficiaries.
– Supervision and control of the trustees – the role of the protector.
Trusts compared with foundations
Trust
Foundation
Status
No separate legal personality.
A separate legal entity.
Legal basis
Broad statute law, supplemented by almost Closely regulated by statutory rules. Limited
1,000 years’ case law.
case law.
Confidentiality
No disclosure of terms of trust. Settlor may Statutes of foundation must be registered.
also issue a private letter of wishes.
Forced heirship
Trusts can be used to regain freedom of Foundations formed in civil law jurisdictions
testation, which is a fundamental concept of are subject to civil law forced heirship
English law.
restrictions.
Powers of trustees
Trustees can have as wide or as narrow Foundations are more rigid – for example,
powers as the settlor wishes.
they cannot undertake commercial activities.
The Cyprus International Trust
• The International Trusts Law of 1992 gave Cyprus a “state
of the art” international trusts regime offering:
• excellent asset protection and tax mitigation features; and
• a means of circumventing forced heirship requirements.
• Over the ensuing years Cyprus International Trusts
achieved great popularity with settlors from Russia and
Eastern Europe.
• By 2010, while the basic structure provided by the
International Trusts Law remained sound, it required
updating to adapt it to the needs of investors today and in
the coming years.
The 2012 reform of the International
Trusts Law
• Removes any perceived prohibition on settlors relocating to
Cyprus after establishing a Cyprus International Trust;
• Makes clear that all questions relating to Cyprus International
Trusts are to be determined in accordance with Cyprus law;
• Protects against the application of foreign laws, such as forced
heirship laws, as a matter of public policy;
• Allows the settlor to reserve powers to himself, to retain a
beneficial interest in trust property, or to act as the protector or
enforcer of the trust
• Removes any limit on the duration of a trust;
• Extends trustees' investment powers and, in particular, abolishes
any prohibition on investment in immovable property in Cyprus.
Settlors’ reserved powers
• To revoke or amend the terms of the trust;
• To pay or otherwise apply income or capital or to give directions
for the making of such payment;
• To act as, or give binding directions as to the appointment or
removal of, a director of any company owned by the trust;
• To give binding directions to the trustee in connection with any
transaction relating to the trust property;
• To appoint or remove any trustee, enforcer, protector or
beneficiary;
• To appoint or remove any investment manager or investment
adviser;
• To change the proper law of the trust or the domicile of the trust.
Key features of Cyprus international trusts
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Governed exclusively by Cyprus law
Settlor may reserve powers or retain benefit of assets
Trusts may exist in perpetuity
The trustee has unfettered investment powers.
Powerful asset protection features:
• In order to invalidate a transfer of assets into the trust the
claimant must:
• bring a claim in the Cyprus courts within two years of the transfer;
• prove that he or she was a creditor at the time of transfer;
• prove intent to defraud on the part of the settlor.
• Matrimonial property or succession laws of Cyprus or any
other country do not affect the validity of transfers.
Benefits of Cyprus international trusts
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Regaining testamentary freedom
Managing family wealth
Protection against claims
Protection in the event of family breakdown
Regaining testamentary freedom
• Section 3(4) of the International Trusts Law provides
that:
No international trust, and no disposition of property to or upon such a
trust, is void, voidable, liable to be set aside, invalid or subject to any
implied term ... by reason that ... the trust or disposition avoids or defeats
or potentially avoids or defeats rights, claims, interests, obligations or
liabilities conferred or imposed by the law of any jurisdiction on any
person ... by way of heirship rights
• A Cyprus international trust allows individuals to
retain control over the disposition of their assets and
avoids succession taxes on death.
Managing family wealth
A Cyprus international trust provides an
effective structure for managing family wealth
with the following benefits:
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Formidable asset protection
Freedom from succession taxes
Freedom from forced heirship restrictions
Unlimited investment powers
Tax neutrality
Perpetual existence
Flexibility - reserved powers, choice of law
Protecting against claims
Section 3(2) of the International Trusts Law provides
that:
Notwithstanding any provision of the law of the Republic or of the law of any other
country, an international trust shall not be void or voidable and no claim may be
brought in respect of assets transferred to an international trust in the event of the
settlor's bankruptcy ……………….. or in any action or proceedings against the settlor
at the suit of his creditors notwithstanding any provision of the law of the Republic or
of the law of any other country and notwithstanding further that the trust is voluntary
and without consideration having been given for the same, ………………… unless and
to the extent that it is proven to the satisfaction of the Court that the international trust
was made with the intent to defraud the creditors of the settlor at the time of the
transfer of his assets to the trust. The onus of proof of such intent on the part of the
settlor lies with such creditors. An action against a trustee ……………… must be
brought within a period of two years from the date when the transfer or disposal of
assets was made to the trust.
Protecting against claims
• A claimant must prove that the trust was made with the intent
to defraud the creditors of the settlor at the time the assets
were transferred to the trust.
• The onus of proving fraudulent intent on the part of the settlor
lies with the claimant.
• The action must be brought in the Cyprus courts, within two
years from the date when the transfer or disposal of assets was
made to the trust.
It is not intended that the provisions …. should offer a loophole to every settlor who wishes to
cheat his existing creditors. Instead, it is intended to offer a legitimate protection to persons who
may be engaged in high risk professional activities, such as surgeons, architects or members of
Lloyds where very substantial damage awards made against them at some future time could result
in the financial ruin of their families.
Protection in the event of family
breakdown
• The “pre-nup” is ineffective in many jurisdictions.
• A Cyprus international trust can provide better
protection
• Section 3(4) of the International Trusts Law provides
that:
No international trust, and no disposition of property to or upon such a
trust, is void, voidable, liable to be set aside, invalid or subject to any
implied term ... by reason that ... the trust or disposition avoids or defeats
or potentially avoids or defeats rights, claims, interests, obligations or
liabilities conferred or imposed by the law of any jurisdiction on any
person by reason of a personal relationship to a settlor or any beneficiary.
Caveats
Proper professional advice, both in the home country
and in Cyprus, is essential in order to ensure:
• Effectiveness of the structure
• Best choice of trustees and protectors
• Overall tax optimisation
• No unforeseen pitfalls
Russian settlors must have regard for the “joint
property” provisions of the Family Code of the Russian
Federation, particularly articles 34 and 35.
Questions