International (Foreign) Trusts

In our ever more interconnected global economy, an increasing number of people have financial connections internationally, including through foreign bank accounts, real estate, and trusts.

A trust is a legal arrangement in which the owner of assets, known as the settlor or grantor in private trusts, transfers complete legal ownership of the assets to a trustee on behalf of the trust beneficiaries.

The trustee, which can be a company or an individual, becomes the legal owner and administrator of the assets. The trustee has the power to enforce the trust terms and general law. There may be more than one trustee.

Trustees are responsible for administering, investing, and distributing the assets held within the trust according to the terms outlined in a document known as a trust deed and the governing law of the jurisdiction where the trust is established.

The beneficiaries of the trust hold the equitable interest in the trust property, subject to the terms of the trust, while the trustees hold the legal interest in that property.

The beneficiaries can include the settlor or grantor. In most cases, however, this reduces or negates any specific tax benefits of establishing a trust because establishing a trust for one’s own benefit is often viewed as a tax shelter.

The beneficiaries can also include the trustee of a discretionary trust, but a sole trustee cannot be the sole beneficiary.

A settlor or grantor can also be a trustee in certain circumstances, although it is usually best that this not be the case.

International (foreign) trust laws deal with assets that have legal consequences in multiple jurisdictions.

Trusts are used in various situations, such as land ownership, partnerships, pensions, and private family trusts.

Discretionary trusts can have both discretionary and named (non-discretionary) beneficiaries.

A bare trust is a trust in which the beneficiaries have the absolute right to the capital, assets, and income generated from those assets. Bare trusts have no discretionary beneficiaries.

Before agreeing to become a trustee, anyone taking on this role should thoroughly understand the terms of the trust deed and the general legal principles that govern trusts. They should also recognize that being a trustee entails a very strict duty, one that requires that they act with the utmost integrity as required by law.

One of the trustee’s duties is to invest per the terms of the trust. Trustees must generally consider a number of factors, including the following:

• Restriction of investments to those permitted by the trust;

• The prospects of the yield of income and capital appreciation when judging the return from the investment;

• Avoidance of speculative investments;

• Diversification of investments; and

• Care and prudence, which may entail seeking appropriate professional advice where applicable.

International trusts are primarily used to transfer or gift assets for succession, tax planning, and asset protection purposes.

International trusts are often used to structure, preserve, and grow family wealth for current and future generations.

Professional trustees usually manage the assets in an international trust.

Having an international trust has its benefits. They typically offer more flexibility, privacy, and asset protection. However, the tax implications of an international trust will also need to be fully understood and assessed. Depending on the jurisdiction, certain strict reporting requirements domestically respecting international trusts exist.

In the US, a foreign trust is a trust over which a US court cannot exercise primary supervision over substantially all issues relating to its administration or over which US persons do not have authority to control substantially all the trust’s decisions.