A trust is a vehicle to secure assets and at the same time insure them against unreasonable waste by beneficiaries.

In short terms, an offshore trust is a trust that is formed in another country whose laws are beneficial for the creation of trusts. For example, many offshore jurisdictions have relaxed time limits for property in the trust to be distributed to the beneficiaries and beneficial tax terms. These trusts do not “hide” assets, they simply place a portion of one’s assets in a place where it is harder for one’s future, as yet unanticipated creditors to reach them in satisfaction of claims they assert.

Why use a trust?

Officially, trustsare fiduciary arrangements under which a third party (trustee) holds the assets for another person (beneficiary). Also, these are commonly drafted in diverse ways for varying purposes, which makes them an effective financial tool. For instance, they can be used as a tax shelter, to protect assets from creditors and even to avoid marital claims.

Benefits of an offshore trust

As we have mentioned before, some special and unique benefits of having an offshore trust are the asset protection (in divorce or against creditors), and its use as a tool for inheritance transfer.

Creditor protection using trusts

Considering that, when a trust is created, the settlor simply does not own its assets anymore, it represents certain protection against creditors. For example, if a future creditor gets a judgment against a settlor and then tries to satisfy the judgment with property of thesettlor, the property in the trust is not available, because the property is owned by the trustee(s), not the settlor.

This is the case even where the grantor has set up a discretionary trust in which the settlor is among the beneficiaries at the time of distribution of the trust, to whom distributions may be made in the discretion of an independent Trustee. One danger, however, is the possibility that a court may set aside transfers to the trust if found to be made to defraud creditors. However, there are jurisdictions, like Belize that still protect these trusts because they don’t have fraudulent conveyance rules. Read more here.

Avoidance of marital claims using trusts

When a couple divorces, property is divided according to the laws of the jurisdiction in which they live in. Depending on the local law, separating the marital assets into two separate trusts may insulate the assets of one spouse from any financial risks brought on by, or actions taken against the other spouse.

This is why a trust can be an alternative to a prenuptial agreement, since these can be awkwardto discuss before marrying. Therefore, the terms and conditions of the trust must be written carefully so that the trust is not included as marital property. When specifying the terms of a trust, if the beneficiary cannot go to the trustee and demand distribution of assets, then the funds are not considered the beneficiary’s money and are protected from property division in divorce.

Trusts and inheritance transfer

When you an asset in a trust, technically you don’t own it anymore. This means it might not count towards your Inheritance tax bill when you die. Instead, the cash, investments or property belong to the trust. Therefore, once the property is held in trust, it’s outside anyone’s estate for inheritance tax purposes.

Also, another potential advantage is that a trust avoids handing over valuable property, cash or investment whilst the beneficiaries are relatively young or vulnerable.The trustees have a legal duty to look after the trust assets for the person who will benefit from the trust in the end. Nevertheless, when you set up a trust, you decide the rules about how it will be managed. For example, you could say that your children will only get access to their trust when they turn 21, and in that way the inheritance transfer through trusts becomes more attractive.

Trusts and bankruptcy

When someone is filing for bankruptcy and he or she is a potential beneficiary of a trust that has considerable assets, there are issues that need to be resolved before deciding whether it's likely the assets of the trust will be included in the bankruptcy liquidation.

First, it must be determined whether the consumer has control over the trust. A way to determine this is by looking at whether the trust is revocable or irrevocable.

A revocable trust can be taken away by the grantor. With a revocable trust, the grantor has complete control over the assets until his or her death and the trust beneficiary doesn't have any legal claim to the trust assets. So, generally, a revocable trust is not considered an asset a consumer controls that can be acquired and liquidated by a trustee in a bankruptcy proceeding.

Then, an irrevocable trust means that the assets have been permanently transferred to a trust with designated beneficiaries. With an irrevocable trust, the grantor has removed his or her rights to the assets of the trust and only the beneficiaries can change or modify the trust. Thus, the assets are at risk of becoming liquidated.

Deciding the best route to take in a complex process like this one gets tough when is done alone. But you can consult our legal experts at Mundo about trusts and bankruptcy, and then obtain the best possible financial outcome.

Forced heirship and trusts

Forced heirship is common in civil law systems, and it determines which heirs are entitled to receive the assets of a deceased person. The rules of application of Forced Heirship vary from country to country. Under this system, an individual cannot freely dispose of their assets as they see fit; the entitled heirs are determined by the applicable heirship laws in force.

A trust can be used to mitigate the impact of Forced Heirship rules. For instance, in countries like Cyprus, one can nominate beneficiaries of a trust. The property is then gifted to legal owners or the trustees, and Forced Heirship no longer applies.

What can we do for you?

As you have seen, trusts can be the key to avoid losing your assets if you have the right and most accurate information about them. They can be the shield you need in different life events if you plan them well, and this is what we want to offer you here at Mundo.

Our experienced lawyers and experts will develop plans and professional pieces of advice that are tailored to your specific needs, and will offer you the desired protection of your assets through trusts. For more information and, if you have any inquiries regarding our services, contact us right now!

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