In Tax Free Today we have already talked about ways to protect your assets either through offshore companies or trusts. Now, let’s introduce ourselves a little more to the world of asset protection and see how the rich protect money so that you can do the same.
Most assets are found in trusts scattered around the world, yet the concept of “trust” is largely unknown in non-English-speaking countries.
Trusts are considered the vehicle of the super-rich and, in fact, are generally only recommended for people who have several million dollars. In spite of this, in certain occasions it can make sense for less wealthy people and could be interesting to use a trust instead of a foundation.
It is estimated that around the world there are about 36 trillion dollars protected by trusts. In particular, old money, the fortunes of the British colonialists, Caribbean landowners and American businessmen have multiplied for centuries in dynastic trusts.
The old family dynasties are not rich because they show an extraordinary ability in the stock markets or when doing business, but rather because they do not allow their wealth to be taken away from them.
Here we do not only refer to theft through the State and its taxes. Large fortunes, in general, arouse envy and resentment among family members and partners.
Trusts help prevent these kinds of problems and offer protection against creditors and heirs. And well, of course it also helps keep tax offices and regulatory authorities away that can’t do much against trusts.
Trust: a misunderstood construction of the Common Law
Broadly speaking, a trust is a legal entity that divides the property into two parts: the obligations associated with the property are transferred to one party and the rights to another. The obligations fall on the fiduciary, the rights on the beneficiary.
The beneficiary can, so to speak, enjoy the fruits of his fortune without worrying about his obligations, since he is protected from all types of taxes, regulations and expropriation of goods.
This is mainly achieved by hiding assets. The trust is anonymous; its beneficiaries are not known and its whole existence is not even known publicly. Apart from the beneficiaries, only the trustee himself, who surely manages several dozen trusts, is aware of the existence of the trust.
Thus, even a highly indebted entrepreneur living in a country governed by Sharia with capital controls could use trusts and keep their creditors away, move their money freely internationally and increase their wealth thanks to interests (prohibited in Islam).
But that is not the only utility. One could also use trusts to leave one’s property to their daughter, who according to the Islamic succession would not be entitled to any part of the assets.
This situation is mainly due to the almost non-existent regulation of trusts.
Unlike what happens with companies and foundations, the trust is not a separate legal entity. The assets of the trust are transferred to the trustee in such a way that they are taxed and regulated according to the jurisdiction in which one lives.
Of course, the fiduciary always resides in a tax haven without taxes or regulations.
The preferred jurisdictions for the trusts are the British Virgin Islands, Bermuda, the Cayman Islands or the Channel Islands. Places in which the trust’s assets are not consumed little by little because of unnecessary costs for transactions, taxes and others.
In a way, therefore, creating a trust is like moving from your home without having to move. Of course, it also means having to make up your mind about giving up total control of your property and having faith in a trustee.
Unlike foundations (or associations), which still promise a certain degree of control over financial investments, the assets of a trust are administered independently by the fiduciary, who acts as a mediator between the different experts in this area.
For example, the case of a Venezuelan billionaire who lived in London for 15 years and therefore could no longer qualify for non-dom status. If he had planned a lot, he could have transferred his assets to a trust in the British Virgin Islands.
This would avoid the tax on capital increase incurred in the United Kingdom and he would not have to worry about the actions of possible envious partners, family members and unrecognized descendants.
Even if the British Virgin Islands were subject to political attack as British Overseas Territory, so that they would be forced to set up a record of the final beneficiaries of the trust, the multimillionaire could sleep peacefully and would not have to worry about anything.
His trust has an “escape clause” whereby, if necessary, the trust would automatically move to a new jurisdiction at a minimum cost.
Escape clauses are a popular concept of the offshore world, a concept that does not exist in onshore trusts. It is comparable to the redomiciliation at the business level.
Another unique feature of the offshore trust is its perpetual duration, a feature that did not always exist.
Why trusts have not always been around forever: the historical background
Trusts go back to the ancient Middle Ages and arose in the time of the Crusades in the Middle East.
British feudal lords would go to war and leave in the hands of a trusted friend the administration of their lands for several years. If they did not return, the friend who had been appointed as trustee had to distribute the goods equally among the heirs.
This was done partly in accordance with the instructions of the feudal lord, but partly also with the great flexibility that was left to the trustee.
However, since the return of the feudal lord was normally expected, the original trusts were only made for a limited period of time so that those who had returned again could fully enjoy their assets.
The time limitation also had legal reasons. It was not wanted that the assets of a trust could be exempted from taxes forever, so a maximum limit of usually 100 years was set.
For those who thought of their descendants, this had a decisive disadvantage compared to the companies and foundations that were created forever. That is why the so-called “rule against perpetuities” was finally softened, first in the offshore world and then onshore as well.
Both the escape clause and an unlimited duration are the third aspect that makes trusts so interesting, along with secrecy and poor regulation.
Trusts are very flexible because they are really just contracts that explain the relationship between two people regarding a certain property.
This “relationship” can be as flexible and free as in private life and goes beyond contractual freedom. Because in the (sometimes unlimited) life of trusts, all unforeseen events cannot and should not be calculated in the same way as contracts.
The trustee acts with a high degree of discretion and manages the assets in the interest of the beneficiaries. Loyalty goes beyond the purely contractual.
It gets to the point where many of the trustees are involved in the legislation of trusts in the tax havens they inhabit, which allows them to always react with flexibility in the face of changes in the world.
Thus, at the request of several local trustees, Nevis, another British overseas territory, ended up introducing a law that requires the plaintiff to make a deposit of $100,000 in person and in cash before a local court for each claim.
In addition, like many offshore jurisdictions, Nevis does not recognize the judgments of other states and requires that the case be opened in its jurisdiction.
Here, the foreign plaintiff faces very expensive lawyers who he will have to pay from day one. As if that is not enough, he also faces the possibility of having to pay all the judicial and legal fees of the opposing party if he loses the case, something quite probable.
The situation is similar in the Cook Islands, a New Zealand protectorate in which no Trust has ever been broken.
The security of the Trust makes even great powers like the United States think it over deeply before embarking on legal action against them.
The security of the Trust is not only based on what has been explained up to now: two other central points are the impunity with which the assets of a trust can be transferred (even during judicial proceedings) and a clause that protects it against coercion.
The criminal coercion clause, for example, establishes that if the fiduciary is under duress (due to a judicial decision), the assets of the trust are frozen.
In this way, the trustee does not have temporary access, but neither does the creditor. And at some point, when the creditor no longer wants to keep spending money and ceases their attempts, the trustee will be free again.
For whom are trusts a good option and for whom are they not?
As we have already seen, trusts are a British phenomenon. They were invented in England and are found mainly in the 48 Commonwealth countries of the former British colonial empire and in the United States of America.
It is estimated that there are several trillions of dollars in Trusts, definitely much more than if we put together the deposited money in all offshore companies, which makes it a major political issue in the UK today. For this country and its colonies and special zones, this situation benefits them extremely since it allows them to move enormous amounts of money. Brexit, some say, is mainly due to the fact that the EU wanted to declare war on profitable trusts.
Trusts are as we said a product of the Common Law.
With regard to the recognition of fiduciary structures, this is regulated in the international fiduciary agreement The Hague. All signatory States recognize their respective Trusts, which allows those who have their principal residence in a signatory State to resort to the legitimate use of Trusts.
Even for those who do not reside in one of the signatory States, Trusts can be worth the pain only because of their anonymity.
The 14 signatory states include not only countries with Common Law, but also others such as Switzerland and Liechtenstein, the Netherlands, Italy, San Marino, Monaco and Luxembourg.
In addition to Great Britain and its 12 overseas territories and colonies, Cyprus, Malta, Hong Kong, Australia, Canada and Panama also participate.
The United States of America and France have signed the agreement but have not ratified it.
The Convention on Trusts specifically determines the applicable law in the relationships ruled by the Trust.
As we have mentioned before, the fiduciary’s residence is one of the decisive points. Others may be the country in which the trust was established, the places of custody or the country closest to the purpose of the trust. Courts must take all factors into account to finally determine the applicable law.
An essential part of the Hague Agreement on Trusts is that, consciously, it does not address tax issues.
The fact that Switzerland has ratified the agreement does not mean that entrepreneurs or investors with residence in Switzerland can avoid local taxation with a Trust. In fact, the taxation of Trusts in Switzerland is similar to foundations in other German-speaking countries.
In these cases, a very important distinction is made between revocable and irrevocable Trusts. In the case of a revocable Trust, the founder has not fully handed over his assets and can recover them. Therefore, they will continue to be taxed for the assets deposited in this type of Trust.
Advanced trusts: the VISTA Trust in the British Virgin Islands and the STAR Trust in the Cayman Islands.
Trusts should not be seen as an isolated and individual option; their true strength is especially developed in combination with other structures from the offshore world.
Trusts combined with foundations and offshore companies allow for the creation of structures that are even more difficult to break.
In the British Virgin Islands (BVI) the term VISTA (Virgin Islands Special Trust Act) was coined.
It is no coincidence that the British Virgin Islands is the preferred destination of wealthy Chinese people, who generally have little faith in traditional trusts.
The VISTA-Trust allows its owners to put their companies in a Trust without losing control of the management of these structures, as would be the case with traditional Trusts.
In traditional trusts, fiduciaries are solely responsible for any mismanagement. Often they do not have the experience or, in fact, they have to sell the company in the interest of their beneficiaries. The founder of the trust can not intervene here because otherwise the trust would be declared invalid and the tax benefits would expire.
This is where the VISTA legislation comes into play, allowing one to withdraw the trustee from all obligations and responsibilities of any company it owns through the trust.
At the same time, it allows the founder of the trust to appoint a protector who, as administrator, can give instructions to the trustees and, if necessary, even replace them.
Through this intermediate position (that of the protector), the founder of the trust can give instructions on how to control his companies without the trust losing its validity.
But the BVI are not the only ones who have worked to find interesting options for their clients.
Already in 1997 the Cayman Islands created the so-called STAR-Trust. The STAR (Special Trusts Alternative Regime Law) does not need beneficiaries, but can simply pursue a specific purpose. This purpose can be, for example, to manage the actions of a company.
This was not possible in other jurisdictions unless the structure had charitable purposes. However, the Cayman Islands also allowed for commercial and political purposes.
This option, together with the option of having a Trust without any temporal limitation, makes the Trust a very interesting alternative to foundations.
The STAR-Trusts act as a kind of family foundation without beneficiaries, which protects them against the risk that a state might decide to try and link the goods to their beneficiaries.
Of course, another advantage of this type of Trust is that even if there are beneficiaries, they cannot change what is stipulated by the initial founder of the Trust.
In this way an entrepreneur or investor who is successful today can determine how the assets will be distributed in his Trust for the next thousand years. And all this without losing the tax and regulatory benefits that make Trusts so attractive.
Trusts in practice
As we have seen, Trusts increasingly resemble foundations and companies, and the latter increasingly have more characteristics than the former.
Thus, offshore family foundations (for example, those in Panama) are barely regulated and allow you a total tax exemption.
On the other hand, offshore companies from other countries as well as the Marshall Islands enjoy an almost complete anonymity thanks to bearer shares.
Be that as it may, the three structures continue being very different from one another and they can only develop their true force if they are all used together.
We’ll leave you with a practical example so that you can understand how it would work.
Let’s say that an Austrian billionaire businessman is thinking about how he can get his business to continue working for the next few centuries without family conflicts or changes of any kind in his country of origin that endanger his business.
Thus, he decides to register a family foundation in Panama.
This family foundation (1st level) belongs to itself; its creator is unknown and registered nowhere. The sole purpose of the family foundation is to hold shares of a Private Trust Company.
The PTC or Private Trust Company (2nd level) is a special type of company that together with a Trust allows the family of the employer to influence their heritage.
The PTCs institutionalize, so to speak, the management of assets.
Often it is the “family office” of an entrepreneurial family, from which the next generations can assume leading roles as directors of the family’s heritage.
The PTC owns various Trusts (3rd level), structures that it controls.
Of course, there is not just one single trust, but several. This way, it protects against debts to third parties in case of bankruptcy or the loss of certain assets.
A simplified customary assignment could consist of 3 Trusts, in which each of them would deal with operating assets, personal assets and investments.
Each Trust is in turn involved in several companies (4th level), which subdivides the individual assets (5th level).
The operating Trust holds shares in onshore family businesses, for example, in Austria.
The investment trust has several investment portfolios divided into asset classes through offshore companies in Bermuda and the Cook Islands. And two personal Trusts include, for example, a luxury yacht and real estate through the corresponding companies.
The yacht is purchased tax-free on the Isle of Man and the properties are optimized fiscally through a Cypriot holding company with local sub-companies.
This protects against inheritance taxes and judicial attacks. If one company is affected, the others remain safe.
This is a fairly simple 5-level structure.
In practice, Trusts, foundations and companies from various jurisdictions can be much more complex. But even this 5-level structure means much more asset protection than is probably ever needed.
Without a doubt, any attack on the family fortune is doomed to fail.
The costs of a 5-level structure should not be overestimated. The structure of the example costs slightly less than $100,000 per year in initial and administrative costs.
In any case, surely such a structure would not be worth it simply because it is not necessary.
Only by combining a Trust with a society have we created an almost unbreakable obstacle. And the typical two-tier structure consisting of a trust and offshore companies is available in the cheapest jurisdictions starting at only $3,000 (even in the Cook Islands).
As you can see, the Trusts are a fairly broad topic and this is just a brief introduction to the theme.
Trusts have existed for centuries and are likely to continue for much longer. The fate of the United Kingdom seems almost inseparable from that of Trusts.
In case you are interested in finding ways to protect your assets, you can request a consultation with us.
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