Who controls the money in a trust?

Our clients often wonder if they can retain control over the money that they have put in a trust. If the trust is irrevocable, the answer is negative. When you put money or property in a trust, you cease to be its owner and you cannot control assets that do not belong to you. There are legal ways of retaining control over your money kept in trust but some risks are associated with this.

Who controls and manages the assets kept in trust

Normally, the Trustee is the official owner and the manager of the assets held in trust. There can be exceptions to this rule, however.

• If the trust is revocable, the trust Settlor remains the owner of the assets de facto and de jure. This fact entails the following consequences:
  • Even though the assets are written in the name of a trust, the Settlor has to report all profits that the trust makes and pay the corresponding taxes.
  • If the Settlor is taken to court, the creditors can claim the assets kept in revocable trust.
• If the trust is irrevocable, the Trustee becomes the owner and the manager of the assets, which makes them much safer. When an irrevocable trust is created, the following consequences arise:
  • The trust Settlor surrenders his/ her property rights to the trust. He or she is not the owner of the assets, from the legal point of view. 
  • Now the Trustee has to file the tax reports supplying his/ her own taxpayer’s identification number.
  • The Settlor does not have to pay any taxes on the property kept in trust: the Trustee does.
  • Irrevocable trusts are best suited for asset protection purposes because the property in trust cannot be subject to judicial disputes if the Settlor is sued.

You need expert’s advice if you would like to create an irrevocable trust. If you do not fine-tune your trust in a proper way, you may face unexpected tax obligations. Please find more information about offshore trust taxation by following the link.

Irrevocable trusts for capital protection

The current political situation in the world makes a growing number of wealthy individuals as well as companies create irrevocable trusts to protect their assets. When an irrevocable trust is created, the following state of affairs takes place: 

• The property owner transfers to property to the trust headed by the Trustee;
• The founder of the irrevocable trust cannot liquidate it until the set date and he or she has no access to the property management;
• The property in trust as well as the money, corporate entities, and other assets are managed by the Trustee who follows the recommendations of the trust Settlor but acts at his/ her discretion anyway.

Neither courts of law, nor creditors, nor relatives (heirs or divorced spouses) cannot claim the property held in trust. In some cases, however, the situation can change if it is found out that the property has been put in trust for the purpose of tax evasion or concealment of profits.

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Inheritance trusts in Europe and in offshore jurisdictions

Trusts are often registered in offshore zones but as far as inheritance trusts are concerned, they are popular in European countries as well. Many well-to-do European dynasties have been using inheritance trusts for centuries to pass property from one generation to another. In this way, they have been legally avoiding the payment of inheritance taxes. We would like to stress that an inheritance trust is a legal way of saving on taxes.

Should you make a will or create an inheritance trust to hand down property to your heirs? Please find the answer to this question by following the link.

An offshore company in a combination with a trust

This is a highly flexible scheme popular with many international entrepreneurs. It can be used for business company management, investment portfolio management, and protection of personal assets.

A possible algorithm of the use of ‘offshore company + trust’ combination:

1. One of the offshore company directors (if the By-Laws allow it) creates a trust for the benefit of the company owner’s children and puts all the offshore company shares in irrevocable trust. The trust Settlor does not have to be a legal resident of the country where the trust beneficiaries reside for legal purposes. Besides, the beneficiaries can remain ignorant of their status until some ‘special circumstances’ arise.
2. The offshore company thus acts as the Trustee, that is, the legal owner of the assets held in trust.
3. The trust can replace nominee shareholders of offshore companies and appoint itself a corporate director of the companies. It can also open a single bank account where money from all sources can flow.
4. The income that the offshore company makes (via international investments, for example) is distributed to the trust beneficiaries (shareholders and partners) in accordance with a previously made agreement.
5. The Trustee of an offshore trust is tax-exempt for international profits made by the trust, in accordance with the law. The trust beneficiaries are taxable on the income in their countries of tax residence after the income has been distributed to them.

This scheme has the following main advantages: less money is paid in taxes, flexible mechanisms of property management, and a high level of property owner’s confidentiality. The assets of the real property owner also become immune to decisions of foreign courts of law.

How to gain access to the assets held in trust

There is a way of gaining control over the assets that you have put in trust. It is legal but your maneuvers may attract attention of regulators, tax authorities, and creditors who are after your assets.

• The trust beneficiary can register an investment company in a country that has not signed the CFC agreement with his/ her home country. In this case, the person can act as an independent entity and legally borrow money from the trust.
• The profits of the investment company are going to be taxed, but the largest portion of the money will go back to the trust to pay back the loan. The trust can repeatedly lend money to the investment company.
• In this way, the trust founder does not exercise control over the property held in trust, from the legal point of view. He or she simply acquires temporary management rights. Thus, the trust founder can use his/ her own assets to make more money for the trust, which is in the interest of the trust beneficiaries, including the trust founder him/ herself. The Trustee is going to have an easy time managing the trust property: there’s not going to be very much for him/ her to do.

If the investment company owner dies, is detained, or loses legal capabilities, the trust can claim the loan to be repaid before the set date and keep accumulating money on its account in accordance with the trust deed.

Factors to note when setting up an offshore investment company

It is quite possible to find a country that does not have a CFC agreement with your home country in most cases. Registering an investment company in that country is also a performable task. However, you should take into consideration the following aspects before you decide to register a foreign investment company:

• The Controlled Foreign Corporation rules are toughening;
• There will be tax obligations;
• There will be reporting and economic substance requirements;
• There will be problems with banks;
• There will be problems with concealing the information about the true beneficiary company owners, and so on. 

Whatever the difficulties may be, an offshore trust remains a powerful instrument of asset protection. The popularity of offshore-registered trusts is growing in the modern unstable world. Please write to info@offshore-pro.info and request a professional consultation on creating an offshore trust.