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Creation of trusts

When deciding to create a trust, it is necessary to separate reality from fiction, and to determine exactly why a trust is needed and if it is really needed, then what kind and in which jurisdiction.

Legal institute of trust is overwhelmed with myths and legends, most of which are far from the truth, so it is important to understand what a trust is and why it is needed

Myths about trust:

  • Trust is a company. NOT, if you do not want it to be. A common-law trust is not a legal entity and it has no legal entity in the “conventional” sense. It is a legal relationship, which arises in connection with the asset management; therefore, there are no members, shareholders and directors in the trust.
  • Trust is illegal. NOT. Trusts reside in many countries of the world absolutely legally, moreover, today they are recognized and used even in those countries, where the law does not directly regulate trust relationships (for example, in Switzerland, the Netherlands, Germany, Austria, France, etc.).
  • Trust is offshore-only. NOT. Trusts originated in England in the 12th century and are now actively used in all common law countries, including the USA and Canada. If a client wishes to establish a trust in a respected jurisdiction, then it is not only conceivable, but also very prestigious.
  • Trust is expensive. NOT. The cost of creating and maintaining a trust directly depends on the purpose, amount and value of the assets that are transferred to the trust, as well as on the jurisdiction where it is be established. There are many trusts that are affordable for the majority of ordinary citizens: family, savings and hereditary.
  • Trust conceals information on the beneficiaries. NOT. Whilst in the past in most jurisdictions it was really possible to avoid disclosure of information on beneficiaries, in recent years, banks and public authorities, as a rule, require disclosure of this and other information. Otherwise, issues with opening and operating bank accounts and other negative consequences may arise both for trustees and, ultimately, for beneficiaries.
  • Trust stands for tax evasion. NOT. In the countries where trusts exist, there is also a clear taxation scheme for transactions and incomes related to asset management. At the same time, trusts are still used as a vehicle to optimize taxes.
  • Trust is a contract. NOT. Only a minority of trusts are created by contract. Most are established based on the so-called trust declaration (trust deed, trust declaration) – a unilateral deed, in which the trustee assumes the responsibility to manage the property in the beneficiaries’ favor. In addition, often the trusts are based on a will, judgment or even law.

If the client nevertheless made the decision to establish a trust, it is necessary to determine its essential conditions and features.

Conditions of establishing a trust:

  1. The settlor must be direct or indirect property owner, have a full legal capacity and an unlimited right to dispose of his/her assets.
  2. It is necessary to determine the exact list of assets that are transferred to the trust. Assets must not be under arrest, pledged, mortgaged or otherwise encumbered.
  3. It is necessary to determine who will be the beneficiary and under which conditions. The beneficiaries can be simply listed or the criteria can be set, by which the list of beneficiaries can be accurately established.
  4. It is necessary to determine who will act as the trustee. The choice usually depends on the type and number of assets, as well as on a number of other conditions.
  5. It is necessary to determine the jurisdiction where the trust will be established. The more prestigious is the country, the more expensive establishment of a trust and asset management will be.
  6. The law applicable to the trust must be determined. In practice, you can often find that assets are transferred to a trust of a Swiss company, but the trust relationship will be subject to the law of Jersey, Guernsey and other “offshore” states. This is done in order to legally create a trust in a prestigious European country, the law of which does not regulate trust relationship.

In addition, the client should understand for himself/herself whether he wants to take direct or indirect participation in the further asset management, whether he/she needs a protector (a person who controls the trustee’s activities) or several trustees.

It is almost impossible to answer all these questions without the advice of experienced specialists who, having assessed all the information about the client, can create the most effective asset management scheme. For this, VigoLex lawyers, specializing in the creation of trust structures should be involved, who not only have experience in this field, but also reliable partners in other jurisdictions.

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