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The concept of Trusts was developed, both through common law and statute, during the 11th
and 12th Century AD in England and is an arrangement whereby the legal ownership of assets
is transferred from one person (the Settlor) to another (the Trustee) for the benefit of a
defined class of persons (the Beneficiaries). From these early origins much precedent case
law has further refined the concept of Trusts and it is now usual for Trust arrangements to
be reduced to written form (the Trust Instrument) clearly defining the powers and discretions
of the Trustees and detailing the Beneficiary classes.
As a legal concept Trusts are recognised almost without exception in common law countries and
tailored legislation has been enacted in others to provide specific recognition of the concept.
Offshore Trusts are in the main no different from their onshore counterparts save in respect
of the way in which they are treated for tax. In certain circumstances where a Trust is
established in an offshore jurisdiction, and the Trust instrument excludes Beneficiaries
resident in that jurisdiction, there will be no local liability to tax on the Capital
Gains or the Income of the Trust - the Isle of Man is such a jurisdiction.
Elements of a Trust
Settlor
An individual, or corporation, who, having full title of the assets to be settled, creates
a Trust. In some instances the Settlor can also be a Trustee and/or a Beneficiary of the
Trust although this may have adverse tax implications.
Trustee
The Trustee may be an individual or a corporation. The Trustee is charged with executing
the Trust in the best interests of the Beneficiaries and overseeing the assets of the Trust.
In many jurisdictions, and the Isle of Man is one, the law imposes strict obligations and
rules on Trustees and there is a fundamental rule that Trustees may not benefit from the
Trust save for reasonable professional fees incurred. The powers and discretions of the
Trustee are governed by the Trust Instrument which, if properly drafted, should clearly
set out the powers of administration in respect of the Trust assets and the rights of the
Beneficiary classes. Failure to adhere to the terms of the Trust instrument could lead to
an action against the Trustees for their removal and damages for breach of trust.
Beneficiary(ies)
Beneficiaries are those persons who are entitled to the capital and the income (or both) of
the Trust. In some instances this may take the form of the use of Trust assets such as
living in a property owned by the trust or having the use of other assets for
example works of art. Generally, Beneficiaries will be named in the Trust instrument either
by name or by relationship (son of..., spouse of...).
Protector
The Settlor may wish to appoint a Protector to oversee the decisions and actions of the
Trustees. The powers of the Protector are usually written into the Trust Instrument and
are generally used to veto certain decisions of the Trustees e.g. distributions and investments.
Care must be taken when appointing a Protector as his appointment may have serious implications
so far as control is concerned leading to adverse tax consequences and difficulties with
administration.
Trust Instrument
A written document setting out the powers, duties and discretions of the Trustee. A Trustee
will make reference to and seek guidance from the Trust Instrument prior to making any
decisions in respect of Trust assets.
Letter of Wishes
In addition to the Trust instrument the Settlor may well be asked by the Trustees to provide
them with a Letter of Wishes. This letter is intended to help the Trustees to consider the
manner in which the Trust should be administered or identify a person from whom the Trustees
should seek assistance in the event of the death of the Settlor. A Letter of Wishes may be
redrawn at any time and although, it must be emphasised, the contents are not legally binding
conscientious trustees would, nevertheless, give it due consideration.
Assets
When a Trust is established the Settlor settles (transfers) Assets to the Trustees.
Assets may be in the form of money, property, an investment portfolio, insurance policies
or shares in a family business or offshore company - the list is endless. Assets may be
added after the date upon which the trust is settled should the Settlor so desire.
Types of Trust
The tax treatment of Trusts and their Beneficiaries varies from country to country and is
dependent on the type of Trust settled. When considering which Trust is most suitable for
your own circumstances professional tax advice must be sought.
Some Trust types are detailed below:-
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i)
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Interest in Possession Trust (Life Tennant)
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ii)
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Accumulation and Maintenance Trust
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iii)
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Asset Protection Trust
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iv)
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Purpose Trust
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v)
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Charitable Trust
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vi)
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Discretionary Trust
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