INTRODUCTION TO TRUSTS

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1 GLOBAL INTRODUCTION TO TRUSTS TRUST VISION

2 02 What is a Trust? A trust is a legal relationship amongst three parties the settlor, the trustee and the beneficiary in which the settlor gifts property to the Trustee to hold for the benefit of the beneficiaries. At creation of the trust, the Trustee becomes the legal owner of the trust property and the beneficiaries become entitled to the enjoyment of the property.

3 03 The Settlor gifts legal ownership of trust property to the Trustee. A Settlor can be anyone of legal capacity. Other parties may contribute to a trust through gift or sale once the trust is created, subject to tax considerations. The Trustee holds the legal ownership of and administers the trust assets. The Trustee has a fiduciary duty to the beneficiaries to act in good faith in the management of the trust assets. The Beneficiary is entitled to the benefit of the trust assets, within the terms of the trust deed. Any person can be a Beneficiary, and the trust can have multiple beneficiaries. The Protector, if appointed, ensures that the Trustee acts in accordance with the wishes of the Settlor. The Protector is appointed by the Settlor and generally has the power to remove and/or appoint the Trustee. The Protector can be an individual or a committee.

4 Why Are Trusts Used? 04 Trusts Are Flexible Structures and Are Used For a Variety of Purposes, Including Tax and Estate Planning, Asset Protection and Charitable Giving. Tax and estate planning The main advantage of a trust is the ability to transfer the benefit of an asset to others, while ensuring that the asset is owned and managed by a third party (the Trustee) according to the Settlor s wishes. The beneficiaries therefore enjoy the benefit of the assets without having to bear the burden of their ownership and management. Further, the Settlor can provide a Letter of Wishes as to how he would like trust assets managed and distributed to family members or friends, and can be confident that these wishes will guide the Trustee s decisions. Family assets passing to the next generation Trusts are frequently used to manage family assets for inter-generational planning. For example, a Settlor may want to gift assets to a family member who is not competent to hold and manage those assets, such as a minor or a person who is mentally infirm. A trust would allow the Settlor to provide support to that person without requiring him to be involved in the management of the assets. Or the Settlor may want to pass his assets to his children or grandchildren on specific events, such as upon marriage or during university, rather than bequeathing them in his Will. As a Will substitute A trust can also offer significant benefits as compared to a Will. In many countries the estate of a deceased individual is subject to probate formalities, which generally include validating the Will and authorizing an executor to act on behalf of the deceased. Assets in an inter vivos trust (a trust that is set up during the Settlor s lifetime) are generally not considered to form part of the deceased s estate. Therefore, the use of an inter vivos trust can protect the trust assets from the loss of confidentiality associated with the probate process, probate taxes and certain forced heirship laws.

5 Asset protection Trusts can offer asset protection to both the Settlor and the beneficiaries. Subject to jurisdictional laws, once a Settlor s assets are transferred to a trust, those assets are generally not considered to form part of the Settlor s estate. As a result, creditors or other interested parties generally cannot access trust assets. The trust is given the rights of its resident jurisdiction, including investment protection where treaties exist. Further, in many jurisdictions, creditors cannot bring claims on trust assets following creation of the trust, known the cure period, which generally ranges from one to six years.* A creditor s ability to attack a Beneficiary s interest in a trust is also limited, particularly where the interest is not fixed. In a discretionary trust, a Beneficiary s only right is to be considered by the Trustee for distributions from the trust, making it quite difficult for a creditor to bring a claim against that Beneficiary s interest. Asset protection for the beneficiaries generally increases with the extent of the Trustee s discretion and with the number of beneficiaries. For similar reasons, a trust can also protect an individual s estate from forced heirship laws and similar legislation. In some jurisdictions, the court has the right to alter a Will in response to claims by certain family members. For example, in many civil law jurisdictions, forced heirship laws allow some family members, such as children or grandchildren, who have been left out of the Will to claim a portion of the estate. 05 Charitable giving Trusts can provide a highly effective way for individuals and families to donate to philanthropic causes. The use of trusts in charitable giving can provide greater flexibility in the giving process, continuity of giving after the donor s death, as well as tax planning benefits. A donor may settle a trust with the intention that he and his family would receive the income of the trust while the capital would be donated to specified charities. Alternatively, the trust could continue after the donor s death, allowing his style and pattern of giving to carry on for many years. The use of trusts in charitable giving can also be greatly beneficial as part of the tax planning process, depending on the jurisdiction. Charitable organizations can also benefit from the use of trusts. A charitable organization may choose to set up a trust to receive and manage donations. This can be useful to protect donated assets from liability the charitable organization may face, as well as to allow for a more stable income stream for planning purposes. *Not applicable in Canada

6 How Do Trusts Work? 06 How is a trust created? The manner in which a trust is created depends upon whether it is an inter vivos or testamentary trust. An inter vivos trust is a trust created during the Settlor s lifetime. To create an inter vivos trust, the Settlor gifts the initial settlement property to the Trustee. This property may be a gold coin, silver wafer, currency, such as a one $100 bill, or another asset of value. A testamentary trust is a trust created via the Settlor s Will. To create a testamentary trust, the Settlor would include instructions in his Will specifying the property in his estate to be held in trust for specified beneficiaries, naming the Trustee, and setting out the rules that would govern the trust administration. How are trusts governed? Trusts are governed by a trust deed, which is the formal legal document created at the formation of the trust outlining the terms of the trust. The deed covers the identities, rights and powers of the parties of the trust, the nature of the trust property, and the duration and governing law of the trust. In addition to the trust deed, the Settlor may submit a letter of wishes, which outlines his wishes regarding the administration of the trust. This letter is used by the Trustee as a guide in the administration of the trust. The letter often covers how, when and to whom the Settlor would like the Trustees to consider making distributions, and how the Settlor would like the Trustees to consider investing the trust assets. The letter is not legally binding on the Trustee; it is generally used as a guide.

7 07 How are distributions made? Distributions from the trust are made to the beneficiaries in accordance with the terms of the trust, which are laid out in the trust deed. The deed may distinguish between income and capital distributions, which is often useful for tax planning purposes. The Settlor and beneficiaries can request distributions; however, only the Trustee has the decision-making power in a discretionary trust. How is a trust terminated? A trust is terminated according to the terms of the trust deed. However, the beneficiaries who have legal capacity acting unanimously can terminate the trust in most jurisdictions. Most jurisdictions have perpetuity periods whereby trusts must be terminated after a certain amount of time. For example, an international trust in Barbados must be terminated after 100 years. While many Canadian provinces have a perpetuity period of 21 years.

8 Choice of Trustee: A Trustee may be an individual, a licensed corporation or a combination of the two. The benefits of a corporate Trustee include continuity of administration, impartiality, professional administration of the trust, and security of trust assets. Continuity of administration: A corporate Trustee has an unlimited life and thus provides continuity where an individual cannot. This is important in cases where a beneficiary is under the age of majority or unborn. Impartiality: A corporate Trustee is independent and unbiased, and is better able to act impartially. In contrast, an individual Trustee is often a family member or friend of the Settlor or beneficiaries and may find it difficult to act objectively in the trust administration, particularly if there is family tension or a disagreement. Professional administration: Corporate Trustees are properly set up to meet the extensive, sophisticated, and often time-consuming duties involved in acting as Trustee. These include keeping detailed files and records, ensuring that trust assets are invested prudently and tax returns are submitted, and meeting with other Trustees and/or beneficiaries on a regular basis. Specialized knowledge: Corporate Trustees offer specialized knowledge in the complex tax and trust legislation applicable to the trust. Failure to meet these duties can result in a violation of the Trustee s fiduciary duty to the beneficiaries, for which the Trustee can be held liable. Security: A corporate Trustee provides greater security of trust assets than an individual Trustee. Corporate Trustees are subject to stringent regulation; are audited annually, and are required to hold their trust assets separately from operating capital. CIDEL Cidel is a leading independent global financial services company with offices worldwide. Our clients include private investors, regional and international businesses and global-scale institutional investors. The material contained in this document is for information purposes only and is not intended as an offer or solicitation for purchase or sale of any product or service, nor is it advice or a recommendation to enter into any transaction. We have endeavoured to offer current, accurate and clearly expressed information. However, since inadvertent errors may occur, relevant legislation and regulations may change and/or the application of laws and regulations may vary, the information may be neither current nor accurate. All individuals should obtain specific professional advice with regard to the respective tax or other professional area. No action should be taken or omitted to be taken in reliance upon any of the information provided and in no event shall Cidel Bank & Trust Inc., its subsidiaries, its directors, principals, agents or employees be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages whatsoever including, but not limited to contract, negligence or other tortuous actions arising out of or in connection with any content of the information provided or other use hereof. The content in this document is generic and does not pertain to any specific jurisdiction.