Choosing the Right Trustee: Who Can Protect Your Assets in the Best Way?

Our clients often ask us how they should go about choosing the right trustee when creating a trust. After all, the trustee becomes the legal owner and the manager of the assets put in trust, so this question is important indeed. Should you hire a physical person or a company to fulfill the role of the trustee? We discuss this and some other issues below.

Who can manage a trust in the most professional manner?

This is not a simple question and the answer will depend on several factors. Actually, you can act as the trustee and the trustor at the same time but then you won’t be able to protect your assets efficiently. Sometimes, a family member is appointed the trustee, or a close friend, or a professional lawyer that the trustor has been in cooperation with for a long time. At other times, the trustor and the trustee do not know each other in person. 

You have to realize that the trustee is responsible not only for keeping the records but also for making important management decisions, protecting the assets held in trust, filing tax reports, and finding specialists to deal with special tasks. It is often more reasonable to hire a company to manage your trust rather than an individual person.

Without doubt, you have to take into account the structure of the assets that you are putting in trust and the nature of the trust beneficiaries. In some instances, it may make sense to appoint a friend or a relative the trustee. In other instances, you may be able to save on trust maintenance costs by appointing a legal entity the trustee.

Reasons why you should make a company the trustee

We recommend that you request a consultation from professionals if you want to decide who should be your trustee. The choice is yours, of course, but below we point out several factors that make hiring a company to be your trustee a better idea than hiring a person.

Trust maintenance costs

The trust maintenance costs directly depend on who manages the trust, that is, who acts as the trustee.

• Suppose your trustee is a physical person. It may well happen that he or she will have to involve other specialists, custodians, lawyers, etc., in the asset management process. One person cannot be a specialist in all areas at a time so your trustee may need some professional assistance at some point. This means that the trust maintenance costs are going to increase because the hired specialists need to be paid. 
• If you hire a company to act as your trustee, the monthly (yearly) payment may be higher but the company will normally have all the required specialists on the staff. Thus, you are not going to incur any additional costs as far as management of the assets in trust is concerned.
• The citizenship and residence of the trustee has a direct bearing on the amount of taxes that the trust will have to pay. If you live in a country where taxes are high and you appoint a friend, for example, the trustee, you won’t be able to save on taxes because your friend is a citizen of your high-tax country in all likelihood. 
• Your corporate trustee can be domiciled anywhere in the world and some countries are more friendly than others when it comes to taxing trusts. For instance, you can legally avoid paying capital gains and inheritance taxes in some places. Thus, hiring a company to act as a trustee rather than an individual person can actually help you save on the trust maintenance costs.

Making management decisions

The trustee has a scope of authority that is limited only by the relevant laws and the terms and conditions spelled out in the trust deed. If an individual person acts as the trustee, the risk of his/ her making subjective decisions is high.

The trustee distributes the income generated by the trust to the beneficiaries and applying pressure to an individual is a simpler task for a beneficiary than applying pressure to a company. Thus, the probability of personal conflicts between the trustee and the beneficiaries increases if the former is a physical person.

The company acting as the trustee is going to be less emotional when distributing profits to the beneficiaries. It will use solely the following factors as guideline in decision making:

• Its corporate experience in managing trusts;
• The trust-related legislation of the country;
• The articles of the Deed of Trust;
• The characteristics of the trust beneficiaries.

Trust paperwork

The trustee has to keep the records, file tax declarations, distribute the profits, and so on. He or she has a lot of paperwork to do and the requirements related to keeping the records vary from country to country. 

It may happen that an individual person is unable to cope up with all the paperwork involved in managing the trust. If this is the case, he/ she has to hire some help, which will mean additional expenditures. A corporate trustee, on the other hand, will have all the specialists and all the knowledge required.

Asset protection from sanctions and foreign law courts

Sometimes a trust is created with the sole purpose of concealing the name of the true property owner thus protecting the property from foreign creditors, law courts, and sanctions. The trustee has to be knowledgeable about all the national legislation related to trusts, among other things. If he/ she makes a mistake due to lack of legal knowledge, the assets in trust may be lost.   

You have to take into consideration the following aspects:

• Private trustees are seldom monitored by banks and financial regulators. This means that their mistakes can go unnoticed. At the same time, the mistakes can be dangerous for the trusts that they manage.
• Corporate trustees are closely monitored by bank administrations and state regulators. The accounting and tax reports that they file are checked carefully, which ensures that your trust is a law-abiding and a ‘clean’ entity.
• A private trustee may have insufficient legal knowledge to protect the assets held in trust. Besides, compiling the right stock portfolio and protecting the trustor’s personal information also requires special skills. 
• A corporate trustee will normally have experience in trust management and it can guarantee efficient asset protection.

Whatever trustee you hire, the person (or the company) has to be knowledgeable and loyal. Besides, the trustee has to have good analytical skills to manage and protect the assets held in trust in the most professional way. 

Trusts in questions and answers

We invite you to request a free consultation from our experts if you are interested in creating an offshore trust. Below we answer some questions related to trusts that we often hear from our clients. However, the answers are not supposed to be exhaustive. Rather, they should give you some food for thought.

What is a trust?

A trust is a written agreement between the trustor and the trustee. The trustor puts some assets in trust and the trustee is responsible for managing the assets. Trusts also have beneficiaries. They are the people (or legal entities sometimes) in whose interests the assets in trust are managed. 

Please find out who becomes the owner of the assets put in trust.

What happens if the trustee becomes unable to perform their tasks? 

If the trustee dies, retires, or becomes legally incapable, a temporary trustee can be appointed. As a rule the trust deed will contain an article that explains what should happen if the trustee becomes unable to perform their duties. Often a ‘substitute’ trustee is specified at the moment when the trust is created.

Who has access to the trust bank account information?

The trustee is considered the account holder when a trust sets up a bank account. The trustor has the right to inquire about the account balance with the trustee. The beneficiaries do not have access to the trust bank account information (unless a beneficiary is also the trustor or trustee).

Can the trustee be replaced?

Yes, the trustee can be replaced if the trustor is not satisfied with his/ her performance. The trust deed should contain the corresponding article. Sometimes the trust can be re-domiciled and the trustee often has to be changed in such cases. So, replacing the trustee is quite possible.

What property management rights does the trustee possess? 

The property management rights that the trustee has need to be defined in the trust deed. Normally, the scope of the trustee’s authority is rather wide. He/ she can perform the following operations, for example: 

• Sell real estate held in trust (if the trust is revocable).
• Make investments.
• Cover the trust maintenance costs by drawing on the trust bank account. This includes paying taxes, insurance premiums, lawyers’ fee, etc.

What assets can I put in trust?

Assets of many different types can be put in trust. Works of art and expensive jewelry are often put in trust as well as real estate, business companies, bank accounts, and so on.

Can I make my unborn grandchildren beneficiaries of the trust? 

Yes, you can. When you create a trust, you do not have to call each beneficiary by his or her name. Rather, you can establish a class (a group) of beneficiaries. For instance, you can state in the trust deed: ‘all children of my younger daughter shall be beneficiaries of the trust’. And they will be when they are born.

Who pays the income tax when trust profits are distributed? 

When the trust profits are distributed to a beneficiary, he/ she has to pay the personal income tax at the rate applicable in his/ her country of tax residence. It is true that you should choose the jurisdiction for your trust carefully. However, the jurisdiction where the trust beneficiaries reside for tax purposes is also an important factor to consider.

Who pays the trustee and covers the trust maintenance costs?

Trustees are usually paid in two alternative ways: 

• The trustee receives a fixed pay from the trustor. (The payment can be made via the protector – an intermediary between the trustor and the trustee);
• The trustee receives part of the profit made by the trust. 

The second option can be preferable in the view of the need to cover the trust maintenance costs. These can be deducted from the total income and the net profit can be easily calculated. However, some trustees will insist on getting a fixed pay.

What happens if the trust beneficiaries cannot be found?

It doesn’t happen very often but a trust beneficiary can go missing. Some trustees have had to hire detectives to find the beneficiaries. If a beneficiary is missing and the trustor is still alive, changes to the trust deed can be introduced. The document will often contain an article that instructs the trustee how he/ she should act if a beneficiary cannot be found. Often the part of the income that the missing beneficiary is entitled to goes to charity.

Conclusion

Creating a trust is a highly intricate task that requires a lot of legal knowledge. At the same time, a trust can come in especially handy in the times of economic turbulence, political instability, and sanction wars. In any case, you are going to need professional assistance in creating a foreign trust.