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INTRODUCTION TO OFFSHORE TRUST

INTRODUCTION

Before reading this material, we should advise that trusts, although still in use, are not that much in use anymore as are the Private Interest Foundations.

This a better tool since it is a hybrid between the corporation and the trust, meaning that has the best of both worlds and the founder can remain in total control of the foundations assets in anonymity, no needing to transfer the property of the assets to a trustee.

A "disadvantage" (although not always a disadvantage) is that the Private Foundation has to be registered, but the only information that goes Public is the name of the foundation council members and the name of the founder (which can be nominee, to overcome this disadvantage).

Why use a foundation instead of a Trust?
Before the new trust laws established in 1996, we used a foreign trust as the entity which held the shares of the IBC. The new trust laws required that any assets held in foreign trusts be reported and taxed. The solution is the Private Interest Foundation. Today, we use this foundation regularly in virtually all of our clients offshore structuring.

WHAT IS A TRUST?

A Trust is a legally acknowledged and binding arrangement whereby a person (or a number of people), known as the Trustee or Trustees, become the legal owner(s) of assets transferred to them by a Settlor or Settlors but only in as much as they are holding those assets for the benefit of another person or people, known as the Beneficiary or Beneficiaries.

The assets which are placed into a trust are called Trust Properties and can include anything which can be legally transferred such as:-

In our experience, cash (bank accounts), property and trading companies are the three most common assets to be placed in offshore trusts, for obvious reasons.

Although a trust can be a verbal agreement and implied by law, i.e., your words and actions are legally acknowledged by previous, similar precedents, it is far more common for a trust to be established by way of a written document called either a Deed of Trust or Declaration of Trust. This document describes the trust and details how it is to be administered and for who's benefit.

The person giving assets to a trust is known as the Settlor and is commonly named in the Trust Deed, but, depending upon the jurisdiction where the trust was established, not necessarily so. It is therefore quite possible to give assets to a trust anonymously (in the sense that you don't want to be linked as having given your assets to 'your' trust). This feature of certain trusts is regarded by many as one of the most valuable, if implemented correctly it can enable someone to appear to be of only modest means, yet live a luxurious lifestyle, the 'trappings of wealth' all belonging (ultimately) to a trust with no legal connection to that person. Great care must be taken in such instances since otherwise tax authorities tend to 'see through' the trust and tax you accordingly - it can be mighty hard to disprove such a 'connection' with a trust!

When either periodic or terminal payments are made from a trust to either a person or people named in the Trust Deed, the recipient(s) are known as Beneficiaries, i.e., they benefit from the trust.

BACKGROUND AND HISTORY

Most countries have one or other of two basis for their laws, either CIVIL law, historically derived from an early Roman concept, or COMMON law, derived from an early English concept where trusts can be traced back as far as medieval times.

In countries where civil law rules, trusts are either very uncommon or are not legally recognized, thus making Offshore Trusts of great importance in tax avoidance and asset protection to residents in those countries. Common law countries recognized trusts quite freely, indeed many trusts are established 'onshore' for asset protection or inheritance purposes. However Offshore Trusts still play a significant part as far as residents of common law counties are concerned, for they are ideal vehicles for tax avoidance.

Offshore countries, with their liberal taxation laws and strict non-disclosure arrangements (usually by way of not even knowing) are ideal bases for trusts of all kinds. Some offshore jurisdictions will allow nominee Trustees, will allow assets to be settled into a trust after it is formed to protect the identity of the Settlor and the type and value of the assets placed in trust, will allow trusts to have an indefinite life (most jurisdictions insist on a specific life span for a trust) and will allow Beneficiaries to be un-named and left to the discretion of the Trustees (see next section). Indeed it is not unknown for some enlightened jurisdictions to ensure that their laws over-ride the laws of the Settlor's and/or Beneficiaries' country in any trust matters.

TYPES OF TRUST

Beneficial Trusts
A Beneficial Trust is one in which the Beneficiaries are specifically named in the trust document, i.e., 'John Smith will receive the sum of US$100,000 on his 25th birthday'. Whilst beneficial trusts can be of value for asset protection and perhaps inheritance tax purposes, because there is a specifically named beneficiary (or several), they are all but useless for tax planning and privacy purposes, the Revenue Authorities in the country of residence of the beneficiary will soon become aware of the 'inheritance'.

Discretionary Trusts
If a beneficiary is named in a trust document, or if the beneficiary is clearly also the settlor, Revenue Authorities tend to 'look through' such trust arrangements and regard the beneficiaries as the owners of the trust assets and income. Thus it is quite feasible that beneficiaries can be taxed on assets or income which they never own or receive - simply on the basis that they could be the owner!

To get around this problem, what are called Discretionary Trusts were established. These are arrangements where the actual beneficiaries of the trust are at the absolute discretion of the trustees. Since no specific beneficiaries are named in the trust document, revenue authorities cannot tax any potential beneficiaries since there is no way of knowing when, or even if, they will benefit from the trust, although tax is (in theory) payable on the receipt of the proceeds of the trust by a specific beneficiary. But you wouldn't be so foolish as to have any distributions from the trust made over directly to you anyway would you? Do so via an offshore account or via an offshore company linked to the trust. We will advise fully on such structures, including ideas such as using credit/debit cards for drawing cash 'onshore' from an offshore trust.

OFFSHORE DISCRETIONARY TRUSTS ARE, IN OUR OPINION, ONE OF THE MOST VALUABLE TAX AVOIDANCE VEHICLES AVAILABLE.

Offshore Asset Protection Trusts
An Asset Protection Trust is little more than a specific type of Discretionary Trust and, as its name implies, is generally used by either private individuals or corporations to hold their assets in a form which makes them untouchable under any court order imposed against them. Very common in the U.S.A., correctly formulated and held, Asset Protection Trusts are showing signs of resisting attacks by creditors far better than Family Limited Partnerships which are widely promoted and frequently far more expensive. KSCL has a complete section dedicated to Asset Protection Trusts in this page.

TRUST STRUCTURE AND ADMINISTRATION

A Trust, whether onshore or offshore, and of any type, has a number of component parts, several of which have already been mentioned, but for the sake of completeness, we'll summarize them again here. In essence these are very simple and straightforward, although the Deed itself is a complex legal document and must only be written and modified by someone with detailed, in depth, understanding of the trust laws of the chosen jurisdiction. The major components of a trust (of any type) are:

The Settlor (Grantor)
This is the person or entity who formulates the trust and who settles his assets into the trust.

Deed of Trust (Trust Document)
This is the legal trust document itself and contains all the permutations and combinations of what the trust and its controlling Trustees can and cannot do according to both the wishes of the Settlor and the laws of the jurisdiction where the trust is written.

Trust Property (Assets)
The assets which the Settlor places into the trust from time to time. Depending on the type of trust, settled assets do not need to be specified in the initial Deed of Trust but may be added later.

Trustee(s)
The named individual, individuals or company appointed by the Settlor to administer his wishes according to the Deed of Trust. Frequently a professional Trust Agent within the jurisdiction of the trust, the Trustee has absolute control over the trust assets.

Beneficiary
The person or persons to whom the Settlor wishes the trust assets or income thereof to be paid to according to circumstances dictated in the Deed of Trust. Depending on the type of trust, Beneficiaries do not need to be specified in the Deed of Trust, but can be made known to the Trustees privately.

Protector
A Settlor can name a third-party individual to 'oversee' a trust to ensure that the Trustee is administering the trust according to his wishes.

Letter of Wishes
A Settlor can write a Letter of Wishes alongside a Deed of Trust which spells out exactly what actions he wishes the Trustees to take under differing sets of circumstances. This Letter is totally private between Settlor and Trustee and whilst not legally binding, is an excellent guide for a Trustee to follow, especially if the Settlor is no longer in contact with the Trustee for any extended period.

Obviously for any form of trust to work efficiently and effectively and be secure, the Settlor must have absolute faith in the Trustees, otherwise a Trustee could simply run off with the trust assets, name friends and relatives as beneficiaries or invest trust assets in a totally reckless way. There are a number of safeguards in this respect and trustees worldwide will observe both written and unwritten rules:

Firstly, in all the offshore jurisdictions were we have handled trust work, Trustees have to be licensed by the government to carry out trust work, and these licenses are usually only given out to highly reputable and established organizations such as lawyers or accountants - if a Trustee was ever even suspected of misconduct it would be the end of his business career. To our knowledge there has not been a case of misappropriation of funds by a Trustee in over 20 years.

Secondly, when a trust is established, the Settlor can prepare a 'Memorandum of Wishes' ('Letter of Wishes'). This document, which may be changed at any time, expresses the Settlor's wishes concerning the management and distribution of the trust. Whilst not legally binding, a Memorandum of Wishes is usually the major guide a Trustee has, and is usually observed to the letter, unless there are over-riding considerations which prevent a Trustee of doing so. In this event, and offhand we can't think of one, the Trustee would return to the Settlor for instructions.

Thirdly, it is also possible to appoint a Protector or Guardian to oversee a trust and control the powers exercised by the Trustees, however there are potential problems with tax authorities here, since the appointment of a protector could be construed as a thinly veiled attempt by a settlor to influence the Trustees to his advantage.

Finally, Panama Trust laws make specific provision to allow the Settlor, under the written authority of a Power of Attorney given by the Trustees, to act effectively as a Trust Manager. This can have major advantages for a Settlor who wishes to have tight control over a Trust and is reluctant to let any Trustee have total control..... But, and it is an important but, whilst legal under Panama law, this provision is regarded by most major tax authorities as making the trust a sham and thus giving them full legal rights (in their eyes anyway) to disregard it and over-ride its provisions and protection. Having said that, this Power of Attorney is a totally private document between the Settlor and the Trustees and if used wisely and carefully can be a very valuable tool in offshore asset management.

GENERAL SUMMARY

Offshore Trusts can be valuable vehicles for tax avoidance, (not evasion) either in a personal or a corporate role, as offshore companies can be. There are many cases where a combination of the two can be used for both tax avoidance on worldwide company income, plus a means of ensuring that all those profits are centralized and can be inherited, again free of tax, by your heirs or other named people. To recap:
? Protection Against Capital Gains and Inheritance Taxes
? Protection of Assets against Bankruptcy and Creditors Generally
? In the U.S.A. Particularly, Protection Against Civil Asset Seizure
? Protection Against Alimony and Maintenance Claims
? Protection Against Law Suits for Negligence and Claims for Damages

PRIVATE INTERESTS FOUNDATIONS

INTRODUCTION

In an effort to provide additional opportunities to the Offshore Community Law 25 of 1995 was created. Said Law contains the procedures and requirements for the creation of Private Interest Foundations.

ADVANTAGES OF PRIVATE INTERESTS FOUNDATION

Private Interest Foundations may be used as tax and estate planning device with the following advantages:
1. They provide a fiduciary structure for the orderly transfer and disposition of assets to beneficiaries upon the death of the Founder, keeping control of the assets during lifetime;

2. They may be established to have effects from the date of their constitution or after the death of the Founder;

3. According to Law 25 of 1995, inheritance laws that apply in the domicile of the Founder or the Beneficiaries, shall not be effective against the Foundations assets nor may these laws affect the validity or performance of the Foundations objectives;

4. Foundations are established to carry the specifics goals set out in the Foundation Charter and may additionally undertake sporadic commercial activities, exercise rights pertaining to their holdings, own property, contract obligations and take part in administrative or judicial proceedings.

5. A Private Interest Foundation should be established with a patrimony destined to fulfil its objectives, which shall be no less than US$10,000.00. Said patrimony may be increased by additional contributions of the Founder or third parties;

6. The assets of the Foundation become legally independent and do not form a part of the private estate of the Founder. Such assets are not sizeable and may not be subject to any precautory action or measure, unless such action or measure pertains to obligations incurred or damages arising from the fulfilment of the Foundations objectives; Notwithstanding the creditors of the Founder or of a third party shall have the right to contest the contribution or transfer of assets to a foundation when such transfer constitutes an act in fraud of the creditors. The rights and actions of such creditors shall lapse at the expiration of three (3) years, counted from the date of the contribution or transfer of the assets to the foundation.

7. According to article 27 of Law 25 of 1995, Private Interest Foundations are except from payment of any taxes, contributions, duties, liens or assessments of any kind arising from the acts of constitution, amendment or extinction of the same, as well as acts of transfer or encumbrance of the Foundations assets and the income arising thereof, when related to:

(1). Assets localized abroad;
(2). Money deposited by natural or juridical persons whose income does not derive from a Panamanian source is not taxable in Panama for any reason;
(3). Shares or securities of any kind issued by corporations which income is not derived from a Panama source, or which are not taxable for any reason, even when such shares or securities are deposited in the Republic of Panama;

The transfer of unmovable property, titles, certificates of deposits, assets, funds, securities or shares carried out by reason of the fulfilment of the objectives of the foundation or the termination of the same, in favor of relatives within the first degree of consanguinity or the spouse of the Founder shall also be exempted from all taxes.

The Foundation Charter shall be executed by the Founder by means of a private document, in which case it should be authenticated by a Notary Public, or by means of a public document directly before a Notary Public.

INFORMATION REQUIRED

In order for us to provide services in the constitution and management of Private Interest Foundations, the following information will be necessary:
1. Name desired for the Foundation to check on its availability. The word Foundation must be included in the name, for example: The Clear Water Foundation, John Doe Foundation for the Children, etc;

2. Initial patrimony if other by the standard of U.S.$10,000.00;

3. Names and addresses of the members of the Foundation Council, which will be no
less than three (3) members (natural persons), unless a juridical person is appointed, in which case a minimum of one member is required. We may provide nominees for these positions;

4. Domicile of the Foundation, if other than Panama;

5. Duration, if other than limited;

6. Name of the protector if required.

If required, we can provide standard Regulations with blank spaces to name beneficiaries for an additional fee of US$150

COSTS

We use Panama to form the offshore foundations, because the Panama law offers most protection.

The fees to form a Panama Private Interests Foundation: US$1350

This price includes:
? Notarial and registration fees
? Certified translation to English of the Foundational Charter
? Notarized Blank Power of Attorney
? Three (3) nominee foundation council members (If this service is required, there will no charge for the first year)

Options:
Certificate of Incorporation with Apostille US$200 (required for any bank acc)
Courier delivery: $100
Certificate of Good Standing (after first year of existence) US$200.
Nominee services US$400 p.a.
Mail Forwarding: US$400 p.a. + $100 deposit
Bank account in Panama: US$600. (see below)

Process of incorporation will take between 8 to 15 working days after receipt of payment.

Annual maintenance fees after first year:
Registered Office/Agent: $500 p.a.
Government Licence: $250 p.a.

Options:
Nominee services US$400 p.a.
Mail Forwarding: US$400 p.a. + $100 deposit