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Revocable trusts

For most residents of the post-Soviet countries, it is difficult to understand what trust is, and how one can personally transfer ownership of property to a stranger or a company that is beyond the influence and control of the original owner of assets. Probably, this is the main psychological frontier, which is difficult to cross for a person with Ukrainian rationale when establishing a trust.

But, given the fact that such considerations and doubts are inherent not only to Ukrainians, various types of trusts have been created in the world, and some of them are quite different in their legal nature from the original (that is, the classic Anglo-American trust). Among such trusts, revocable trusts should be noted separately.

Revocable trusts are trusts that can be changed or terminated by the settlor at any time

According to the general rule, a trust is created for a certain period, normally for sufficiently long term. In such case, the ownership right in the literal sense of word is transferred to the trustee, i.e. in the ownership records maintained by the authorized bodies of a particular country, the owner is the trustee. This means that it is the trustee that is legally the sole and absolute owner of the transferred assets, but he/she must use them exclusively in the beneficiaries’ interests, and not for his/her own benefit.

At the same time, the primary owner has no legal right to influence the asset management, give instructions to the trustee, or claim to receive benefits from the property (except in the case when the settlor is also the trust beneficiary). As a rule, such trusts can be terminated either due to the term expiration, or the achievement of their purpose, death or liquidation of all beneficiaries and some other cases.

At the same time, things are different in revocable trusts. The settlor has the right to change or terminate the trust at any time and to require the trustee to return the ownership for the property. Moreover, he/she has the right to control the trustee’s actions, to give him/her instructions and recommendations. This type of trust is more understandable for Ukrainians who are afraid of losing control over their property and completely trust in a professional manager.

However, on the other hand, such trusts in most countries of the world are no longer qualified as trusts, but are considered by the tax authorities as a specific form of ownership and management of the primary owner’s property.

Thus, in a classic trust, the property transferred to the trust legally belongs to the trustee, therefore, the settlor’s creditors do not have the right to claim it, and the tax authorities are unable charge taxes on this property and incomes from its management.

In a revocable trust, on the contrary, the actual control over the property remains at the settlor and, accordingly, the tax authorities consider the latter as the actual owner of the property. It is something similar in effect to CFCs – controlled foreign companies, where formally the company does not belong to a particular person, but if it is established that this person has effective influence or control over the company, then from the point of view of the tax authorities, it will be considered that just this person is the ultimate beneficiary and it is he/she who will be responsible for paying the company’s taxes.

Based on this, several conclusions can be drawn.

If the settlor’s goal is to transfer the property to professional management, but retain control over the assets, then revocable trusts are exactly what is needed. But if the settlor wants to legally protect his/her property from creditors and tax authorities, then this type of trust will be ineffective, it will be necessary to create a completely different type of trust – an irrevocable trust.

More detailed information about revocable and irrevocable trusts can be obtained from VigoLex professionals, who will be happy to answer the client’s inquiries and assist to choose the solution to the matter that will be most suitable for the client.

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