Managing Family Assets: Trusts vs. Trust Foundations

Managing Family Assets: Trusts vs. Trust Foundations

If you have young heirs who cannot manage assets yet, you might want an independent professional to manage these for them, in their interest. If you wish to transfer wealth between living generations, you might need a special legal arrangement to achieve that with tax-savings. If you would like to donate funds to a charitable cause, you might want to include your wishes on how these should be managed. Whatever the case may be, should you wish to keep part of your wealth separate, safe and have it managed professionally, in the interest of a third party and under favorable tax conditions, setting up a trust or a trust foundation might be interesting to you.

What is a trust?

A trust is a special relationship in which you as a settlor give another person (a professional) the right to hold your assets as a trustee for the benefit of one or more family members as the beneficiary(ies). The entrusted assets are separate from both yours and the trustee’s personal assets. The trustee has a legal obligation to manage the assets in the interest of the beneficiary. You pay a fee to the trustee for managing your assets, based on a contract.

Trusts have several advantages, such as:

  • Safety from bad asset-management. A trust is an excellent way to prevent the shrinkage of the family wealth by potential miscalculated decisions of the next generation. The assets held in trust are managed by a professional chosen by you, even after your death. If you worry about certain heirs becoming unworthy of the family assets over time, you can also set conditions in the contract to prevent them from receiving them.
  • Tax-optimization and transfer of wealth between living generations. If you do not wish to wait until the end of your life to transfer wealth down to the next generation, a trust can be a favorable way to achieve that. Trusts can also be particularly fitting for tax-planning. If you put the amount of money to be transferred into a trust, it will be released to the beneficiaries with significant tax savings compared to other forms of passing them on, such as inheritance.
  • Securing the future of a young or disabled family member. In the event of your death, or even a temporary circumstance like an illness, the trustee is obligated to finance, supervise and take care of the family member you chose as the beneficiary. This means that you can use a trust to ensure someone’s future even after your passing.
  • A (partial) alternative to inheritance. The rules concerning trust can be more flexible than those of last wills and inheritance. For instance, in case of a trust, you have the possibility to set certain conditions concerning the distribution of the assets upon release, allowing for a differentiation between beneficiaries in time or in proportion. You can also name multiple beneficiaries, in a successive or a simultaneous manner, or even apply a combination of both. A trust can also be a helpful tool in dealing with potential disputes between heirs by regulating their shares in advance. In case of a trust, there are no lengthy inheritance proceedings during which no one has the right to manage the estate. With a trust, no proceeds are lost due to the vacancy or uncertainty in management.

Please note that the rules of trust can differ from country to country. We recommend seeking out a local legal professional.

Trust foundation: a special kind of trust arrangement in the Hungarian system

Essentially, it serves the same purpose as a trust, but instead of one person managing the assets for you, an entire entity is created for this purpose. The trust foundation as the created entity gains ownership of the entrusted assets and is responsible for managing them. It can also engage in economic activity to generate income from the assets, however, only in the interest of the beneficiary. However, compared to a trust, a trust foundation is a significantly more structured and complicated method with higher capital and personnel requirements.

What are the main differences between a trust and a trust foundation?
  • Minimum capital. In case of a trust, there are no requirements concerning the amount of assets to be managed, whereas the minimum capital for establishing a trust foundation is HUF 600,000,000 (app. EUR 1,500,000). Therefore, trust foundations are advised for higher net-worth individuals, families or businesses.
  • Structure. Trust foundations are legal entities with several compulsory statutory requirements on organization, such as a deed of foundation and a formal decision-making process. A simple trust however can more easily be tailored to the parties’ needs, since they regulate their relationship in a contract. There are no additional organizational requirements that apply, unless the parties want them to.
  • Personnel. In case of a trust foundation, there are several compulsory statutory requirements on staff, such as a board of trustees, an auditor and members of a supervisory board. This means that you need to appoint more people that you have confidence in to manage and supervise the assets. In comparison, a trust is a relationship between 3 parties: the settlor, the trustee and the beneficiary(ies). Therefore, no personnel is required and you can set it up even with one person that you find suitable to manage your assets.
  • Protection from creditors. Both structures offer protection from the settlor’s creditors, since the entrusted assets come to form a separate pool of wealth. However, in case of a trust foundation, the separate legal entity created offers an extra layer of protection. This legal entity can be considered as a quasi “holding company” to manage the assets of multiple family businesses as well.
  • Tax benefits. Both a trust and a trust foundation can be an excellent tool in long-term tax planning. However, due to the separate and taxable legal entity, these benefits are more tangible in case of a trust foundation. The transfer of assets by the founder to the trust foundation are not subject to any tax or duty. The withdrawal of capital by the founder is tax-free up to the amount of the initial assets of the foundation. Dividends and capital gains realized by the trust foundation are also tax-free.
  • Maximum term. Most jurisdictions have a time limit on trusts, meaning that after a certain time, the entrusted assets need to be released to the beneficiary. Under Hungarial law for instance, a trust can be set up for up to 50 years, whereas a trust foundation is unlimited in time.
  • State supervision. Trust foundations are registered legal entities that the state has multiple ways of supervising of. For instance, it is possible to commence court proceedings against the trust foundation to verify the legality of its operation. In case of simple trusts, there might be an obligation to notify an authority of the trust (in Hungary: the Hungarian National Bank), but the possibilities of state supervision are much more limited.
  • The possibility to give instructions to the trustee. In case of a trust, the settlor does not have the right to directly instruct the trustee, they can only leave wishes to be followed regarding the management. In comparison, in case of a trust foundation, the right to instruct the trustee can be instituted in the deed of foundation.

Which one should you choose?

Choosing the right legal arrangement for your situation is key. There are many different factors that may apply when selecting the greatest method to manage assets, such as: the net-worth of the family or business, the amount of assets to be entrusted, the number and capacity of beneficiaries, the aim of the transfer of assets and so on. We recommend seeking out a legal professional who can assist and advise you in your asset-planning, so that it is completely tailored to your individual situation and needs.

Forgó, Damjanovic and Partners is a Budapest-based law firm aiming to provide outstandingly high-quality legal service. We work mostly with international clients, may they be corporations, high net-worth individuals or prestigious families. We specialise in complex transactions and legal disputes and cases of a cross-border nature. We offer services on an internationally recognised service level, based on the clients’ individual needs. We are happy to assist you in all questions relating to asset-planning in Hungary.

Find out more about our services on our website: https://fdlaw.hu/

Réka Bali

Reká Bali

Forgó, Damjanovic and Partners

fdlaw.hu

Gábor Damjanovic

Gábor Damjanovic

Forgó, Damjanovic and Partners

fdlaw.hu

International Estate Administration from a Canadian perspective

International Estate Administration from a Canadian perspective

International Estate Administration for Canadian executors or beneficiary

The administration of an estate can be a complex and intimidating process at the best of times. If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential. This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

There are a number of things that can make an estate administration “international”. These include:

  • foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile* of the deceased at the time of death or at the time of making his/her will
  • a foreign executor
  • or some combination of the foregoing. When an estate has one or more of these characteristics, there are certain questions that need to be addressed. The remainder of this article will be guided by these key questions and answers.

What laws apply to the estate?

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.

The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements.

The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.

Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).

The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

Where should you apply for probate?

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located. Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange). As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.

Those requirements will be one of the following:

  • a certified copy of the will; a fully attested copy of the will (possibly translated) [ The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.]
  • a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.

Note that assets that do not require probate in Canada may require it in other jurisdictions. If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor. In the context of an international estate administration this should be a material consideration for any executor.

Are there special tax issues with an international estate?

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements. Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country. If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate).

Note  this  is  different  from  the  clearance  certificate  that  the executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically. [ Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.]

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself. However, an information return may still need to be filed with the CRA [ Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).]. If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA [ Form T1135 (Foreign Income Verification Statement).].

Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward. It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.

If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death [ Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months], then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.

The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever. The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).

The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

What should you do to plan your international estate in advance?

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

  1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.
  1. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.
  1. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.
  1. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the lawyers or other professionals who were involved in their preparation or other estate planning.
  1. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

Source

international estate administration

James Bowden

Afridi & Angell
Trusts and the importance of discretion

Trusts and the importance of discretion

Controlling your Trust – A Matter of Some Discretion

Two common reasons for the use of trusts in estate planning are to achieve tax efficiencies and to protect assets from potential creditors and claims.  These are by no means the only reasons that trusts are utilized, but they are important benefits and are sometimes the primary focus of trust structure.  Generally speaking, trusts that provide tax and asset protection benefits need to be structured so as to grant the trustees very wide discretion as to when distributions are to be made, to which beneficiaries, in what amounts, and in which circumstances.

The language used in trust deeds usually gives trustees “absolute discretion” or “unfettered discretion” or similar.  Consider the following two examples of why discretion is important:

  • Example A (tax efficiency):  If a family trust is established with many family members as potential beneficiaries (e.g., “all of my issue”, which would include children, grandchildren, and you may include corporations owned by them, etc.), one of the goals of the trust is probably to take advantage of income splitting opportunities among the beneficiaries.  The trustee needs to be able to assess the individual tax brackets of the beneficiaries so they can “income sprinkle” across the beneficiaries in a tax efficient manner.  If the beneficiaries had fixed entitlements to a specified proportion of trust income or capital, the trustees could not achieve a tax efficient result.  Thus, discretion is needed.
  • Example B (asset protection):  Consider the same example again, but this time one of the beneficiaries has been successfully sued and his/her assets are subject to attachment by the judgment creditor.  If the beneficiary has a fixed entitlement under the terms of the trust, the creditors will be able to attach that interest as well and that beneficiary’s interest is effectively lost.  If the beneficiary’s entitlements are entirely subject to the trustee’s discretion, then the beneficiary has no vested interest at all unless and until the trustee declares each new distribution.  The trustee can confirm before making a distribution whether any beneficiary is subject to creditor claims, and if so, it can exercise its discretion in favour of another beneficiary (or none at all), until the claims are dealt with, keeping the trust assets out of the creditor’s hands.  Accordingly, discretion is again an essential component. [For asset protection trusts, note that it is important that the beneficiary whose interest is being protected is not also the sole trustee (or ideally even one of multiple trustees), as a court may order the beneficiary/trustee to exercise its control over the trust to satisfy the creditor’s claim.  The beneficiary must not have any control over trust decisions.]

With the necessity for a trustee to be granted such broad discretion, the question is often asked:  how do you know the trustee is going to exercise its discretion in the manner you would have intended?  There are essentially three approaches available:  include terms in the trust instrument itself, issue a letter of wishes, and/or the appointment of trust “protectors”.  We will briefly discuss each in turn.

  1. Terms of the Trust Deed Some terms can be included in the trust deed itself without unduly constraining the trustee’s discretion.  These may include directions to the trustee not to make distributions to beneficiaries whose assets are subject to attachment; or a term which excludes the trust property from any beneficiary’s net family property to help protect it from being included in equalization payments upon marriage breakdown; or even a direction that requires certain minimum payments or expenses to be paid out of the trust so that the broad discretion only applies to the funds remaining after that. 

    A trust deed is a very flexible instrument and can be prepared with as many, or as few, specific constraints on a trustee as desired.  However, for the most part, if tax and asset protection benefits are to be maintained, the hard constraints need to be kept to a minimum.  It is more common to do the opposite; that is, explicitly oust duties that trustees would otherwise have as a matter of law that would potentially constrain them.

  2. Letter of Wishes A letter of wishes is separate from the trust deed and is just what its name suggests:  a letter from the settlor to the trustee setting out guidance for the trustee as to how the settlor wishes the trustee to exercise its discretion.  The trustee is not legally bound by the letter of wishes, but in practice trustees do give effect to them, and if a beneficiary challenges the trustee’s choices a court will take letters of wishes into account as relevant context.  Letters of wishes are sometimes very brief and provide simply that the trustees should take into account the views of another person when exercising their discretion (and that person is sometimes the settlor).

    This is a potentially acceptable approach in the short term, but it has its drawbacks:  a court may find that the settlor is the person who is “in fact” making trust decisions as a de facto trustee, a finding that would almost certainly have detrimental consequences for any plan for which the trust was needed; and, upon the settlor’s death (or to whomever the letter of wishes referred), the settlor obviously then loses whatever influence he/she had.  Thoughtful, detailed, foresightful letters of wishes are strongly recommended.  Note that the trust deed should oust any default duties that trustees must comply with as a matter of law which may prevent compliance with a letter of wishes (the obligation to treat all beneficiaries equally, for example, should be ousted in the trust deed, along with others).

  3. Appointing a Protector Finally, there is the role of the trust “protector”.  A protector is someone (or multiple persons) who is granted a number of key powers in the trust deed, but who is not a trustee and, typically, has no fiduciary duties to beneficiaries. [The issue of whether a protector does have, or should have, fiduciary obligations to beneficiaries similar to the obligations of trustees is an unresolved issue in Canadian law.  Care should be taken to specify the settlor’s intent in the trust deed as to the duties expected of a protector.] They are supposed to provide oversight of trust administration and decision making from the perspective of someone close to the settlor who presumably knows what the settlor would have wanted.  Protectors are often granted powers to approve certain decisions of the trustees, to veto certain decisions, to remove and replace the trustee, or to terminate the trust, among other key powers.

    The protector provides a significant check on trustee discretion.  The choice of protector is therefore important:  not only should the protector be someone close to you and who understands your wishes, they should be trustworthy and reliable, and without a conflict of interest (e.g., a beneficiary, or a spouse of a beneficiary).  Care must be taken so as not to usurp the role of the trustees altogether, either in the trust deed or in practice, or there will be a risk that the protector will be found to be the de facto trustee, with potentially disastrous consequences. [Garron Family Trust v. Her Majesty the Queen (2012 SCC 14) is the leading case in Canada on trust residency.  In that case, the courts “looked through” the exercise of powers by a protector, where the protector was in turn subject to replacement by the beneficiaries, and this was one of the reasons that court found that the beneficiaries were effectively functioning as the trust decision makers, with negative consequences for the trust in that case.]

In addition to the above, where a trust is created as part of a plan intended to have specific tax consequences, it is common for trustees to obtain professional advice before making a distribution, to ensure that it is being made in a manner that will not upset the plan.  This is not a limit on the discretion of the trustees, per se, but it does function as one.  Sometimes, detailed tax-driven instructions are provided to the trustees by professional advisors when the trust is created, setting out guidelines for how distributions are to be made, when, and also to whom they must not be made.  Such advice has similar status to a letter of wishes, but is arguably even more likely to be adhered to as the trustees will not wish to be responsible for triggering negative tax consequences in the face of having received such advice.

The above tools to control the discretion of a trustee are very useful, but they still leave some discretion to the trustee, which is unavoidable if the structure is to be robust enough to withstand a challenge by tax authorities or disgruntled beneficiaries. [This note focussed on trustee discretion with respect to distributions of trust income and capital.  It is important to bear in mind that a trustee’s discretion with respect to managing the trust’s investments can be controlled as well, to a greater degree of certainty and detail than controlling discretion as to distributions.] On a practical level, these tools are quite effective as professional trustees are motivated to serve their clients (i.e., settlors) as best they can, and to avoid litigation that may arise from ignoring letters of wishes, or professional advice, or contravening a protector’s decision.

Source

If you have questions about whether a trust may be suitable for you, please contact us and we will be happy to help.

international estate administration

James Bowden

Afridi & Angell
Wealth planning and offshore trust structures

Wealth planning and offshore trust structures

Choosing the Right Offshore Jurisdiction

Wealth and estate planning that make use of so-called offshore trust structures are popular. Such structures are useful for many reasons, including to support individuals and families who are seeking a change in residency, and to offer longevity, predictability and security that is not always available in one’s home country.

They can more readily adapt to beneficiaries in different and changing jurisdictions, and in the right circumstances they can offer tax efficiencies. If you have determined that an offshore structure is right for you, you will find that there are many offshore jurisdictions that could potentially be suitable for your needs. This inBrief looks at how to go about evaluating and selecting the right jurisdiction for your structure.

A brief summary of some of the factors you should take into account when looking at offshore trust structures:

  • A zero-tax environment. Many jurisdictions offer this.
  • Reputability. This is really a colloquial catch-all for how well the jurisdiction adopts and implements FATF guidelines, OECD (and US) tax and reporting rules, transparency and level of cooperativeness of local government and courts, among other things. The international reputation is not a matter of perception, but much more importantly, it is a matter of how willing other professionals and financial service providers will be to deal with entities formed in that jurisdiction.
  • Regulatory compliance. This is related to reputability. A jurisdiction that is compliance-focused will be more readily welcomed by banks, investment managers, insurers, land and asset registries, and others that will interact with the entity you establish. In this context, compliance refers essentially to thorough disclosure of beneficial ownership and processes to keep it up to date and verifiable, and accessible to legitimate government inquiry (not to the public, necessarily).
  • Quality of service providers. Offshore structures such as trusts can only function properly if they are serviced by qualified, experienced, reliable service providers, in particular trust companies acting as trustees (others include accountants, lawyers, private bankers, investment managers, and insurance advisors). It is of great benefit to establish a trust in a jurisdiction with a mature market of well-established service providers.
  • The legal environment. Offshore jurisdictions tend to have well-developed laws regulating their trust industry, and many have developed issue-specific specializations. Depending on your priorities and what you wish to achieve with your trust, you may be better served by one jurisdiction or another. For instance, the Cook Islands have a relatively strong position protecting Cook Islands trusts against foreign claims.The British Virgin Islands offer a special regime for so-called VISTA trusts1, which have advantages when the trust acts as a holding vehicle for shares in an underlying company, especially where the underlying investments are relatively high risk.The Cayman Islands have a special regime for so-called STAR trusts, which allow for non-charitable purpose trusts, useful for creating “orphan” structures, for example. There are other examples and many other uses for VISTA and STAR trusts.2
  • The courts. This is really part of the legal environment, but it deserves a separate mention. The track record of the courts in upholding the local laws, and their ability to address trust-related claims in a manner that is sophisticated and predictable is an important factor.
  • Privacy. This is also part of the legal environment but deserves a separate mention too. Robust, modern privacy laws are important to ensure that your sensitive personal and financial information is not misused or disclosed to third parties or the public or potential bad actors. It is worth clarifying that “privacy” does not mean “secrecy”, and that any reputable jurisdiction will have detailed beneficial ownership disclosure requirements, and will have international reporting obligations and exchange-of-information treaties, including among tax authorities.The purpose of an offshore structure is not to conceal information from governmental authorities who have a legitimate interest. This was the case decades ago and is the source of negative stereotyping of offshore jurisdictions which continues in the media to this day, ignoring the enormous reforms in transparency, regulation and international disclosure that have occurred over the years.
  • Political stability. A long track record of peace and good order and rule of law is critical. Trusts for wealth and estate planning purposes are often intended to last for many years, over multiple generations.
  • Cost. The cost of establishing and ongoing maintenance of the trust or other structure is a legitimate focus, of course, but in our view is not the primary driver. The other factors listed above are more important, and, the cost tends to be relatively similar across the board, with limited exceptions.

In our view, among the factors listed above, by far the most important factors to focus on are the legal environment and the quality of trust service providers. The legal environment is important because the objectives for the trust may be better served by the laws of one jurisdiction or another.

The quality of trust service providers is important not only for the reasons summarized above but also because a good service provider brings with it its own standards and safeguards around privacy (and the IT infrastructure and culture of compliance that goes with that), often at a level higher than that required by local laws.

A good service provider will also attract qualified personnel, will be responsive, service-oriented, and will be helpful and capable whenever new demands arise.

If you have identified jurisdictions that are reputable, and which have a legal environment that supports your needs, and which have quality service providers available, you can consider some of the softer tie-breaker considerations, such as time zone for ease of communication, and physical accessibility in the event you wish to personally visit from time to time to meet your trustees or other providers.

During the planning phase, it can be useful to weigh the pros and cons of different jurisdictions for a number of reasons. Good planning sometimes entails utilizing a structure with elements in multiple jurisdictions (a private investment company owned by a trust, each in different jurisdictions, for example); and, it can be helpful to consider an alternate jurisdiction in case you wish to re-domicile your trust (most offshore trusts are portable from one jurisdiction to another, if the trust deed allows for it).

The above is not intended to be a definitive list, and specific factual context must always be taken into account. The factors set out above should usually present a reasonable starting point.http://www.afridi-angell.com

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

If you are considering an offshore trust structure or have questions about whether it may be suitable for you, or which jurisdiction may suit your needs, please contact us and we will be happy to help. 

international estate administration

James Bowden

Afridi & Angell
  1. Trusts created under the Virgin Islands Special Trust Act 2003 (as amended) (British Virgin Island) [↩]
  2. Trusts created under the Special Trusts (Alternative Regime) Law 1997 (Cayman Island). [↩]
Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).

In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.

The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000). [There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.]

The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings. [ For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  Https://Www.Henleyglobal.Com/Publications ]

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.

International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

  • Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
  • Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
  • Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
  •  Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
  • Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
  • Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us.

international estate administration

James Bowden

Afridi & Angell