What are trusts for expats? Are you looking for one?
Explore a comprehensive guide to international trusts for expats and how they can benefit your offshore investment strategy.
We’ll tackle the importance of estate planning and trusts in this article, and show you the options you can choose from depending on what’s available in your location.
If you have any questions or want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.
International Estate Planning, Trusts, and Wills
Estate Planning for Expats
The term “international estate planning” refers to a more general notion for handling one’s assets and affairs across many nations.
An expat’s assets must be distributed and managed while adhering to foreign law and regulation in international tax and estate planning.
Specific elements of global estate planning include expat trusts. To keep and administer assets for the benefit of individuals or organizations named in the trust document is the legal definition of a trust.
Asset protection, tax efficiency, privacy, and the orderly transfer of assets to beneficiaries across countries are just some of the reasons expats may use trusts as part of their worldwide estate planning strategy.
There are certain parallels between a typical estate plan in the UK and one for an expat, but there are also considerable distinctions. These differences arise from accounting for the financial and legal systems in your country of residency and from following local customs.
In most cases, the following elements make up an expat’s estate plan:
- Considering your domicile status when you draw your wills in each jurisdiction in which you have property.
- Choosing a legal representative and an executor.
- Using trust accounts to trim taxes.
- Discussing any funeral arrangements made in advance.
The process of creating an estate plan as an expat is complex and should not be undertaken alone. Working together with skilled experts is highly advised.
Trust vs Will
Wills govern how your possessions are distributed after death, whereas trusts manage your finances during and after life.
Separate Wills for assets in various countries protect your family and assets, reduce costs, and minimize stress for your executors.
How do trusts work?
A trust allows one or more people to force the trustee to act in a specified way with respect to assets held on behalf of beneficiaries. Trusts are like locking safes for your assets; you can’t access the money inside unless the people you’ve designated to do so unlock the safe.
You will be known as the settlor and you can name the people you want to benefit from your estate by putting money in a trust and setting a trigger date or event. Any person, organization, or trust (including philanthropic trusts) can be a beneficiary.
You are not excluded from the list of beneficiaries because you are a foreign domiciled settlor; you may withdraw assets from the trust fund if you so choose. With some forethought, a UK resident can end up with either a monthly income stream or periodic access to a share of the trust’s assets.
The same Inheritance Tax rates would apply to your wealth if it were not shielded by a trust fund assuming you are not excluded from benefit under the Trust.
Protecting assets and ensuring beneficiaries can benefit financially from the trust in a way that suits the family group and the settlor are common trust goals.
The most prevalent type of trust amongst wealthy individuals and business owners is the discretionary trust. For the sake of asset protection and tax planning, they are typically established to hold family and/or corporate assets.
There is a trust deed for every trust. Most importantly, a trust’s rules and conditions are laid down in the trust deed. In particular, the trust deed lists the beneficiaries, the end date, and the trustee’s property holding terms.
A competent court may nullify actions outside the trust deed. Unauthorized trustee actions can result in taxation ramifications for the trustee and personal liability for damages or other negative effects for beneficiaries.
Since each trust deed is unique, trust management and planning should start with reading the provisions before taking action.
Why is estate planning important?
However uncomfortable it may be to broach the topic, having a plan in place for your estate before you reach old age is very necessary if you have considerable assets. Planning ahead is necessary to guarantee that your assets are distributed in the manner you specify after your death. If you put off dealing with the matter, the probate process or tax bills could do serious damage to your fortune.
Types of Trusts for Expats
Bare Trusts
This occurs when the settler has designated a trustee to receive the real estate. This type of trust is the simplest and is used when the settler is giving the trust away as a gift. Individuals who wish to leave behind assets that they will not need in the foreseeable future might choose one of these. They have already decided who they want to benefit from their estate and are trying to minimize inheritance tax.
Life Interest Trusts
A so-called life tenant is a trust beneficiary who receives income from this trust for as long as they live. After their passing, the trust’s assets go to anyone the trustee chooses.
Purpose Trusts
To avoid having to worry about picking the right beneficiaries, purpose trusts are set up to serve a specified function. Any motivation must be lawful and not run counter to public policy. The assets in a purpose trust can be held for the benefit of future generations, family businesses can be protected, and specific projects and activities can be funded.
Revocable and Irrevocable Trusts
This type of trust is also known as a “living trust” since the trustor can make changes or revoke the trust at any moment throughout their lifetime. The trustor’s assets are transferred to the beneficiaries upon his or her passing without going through probate.
An irrevocable trust, in contrast to a revocable one, cannot be changed or terminated after it has been established without the consent of the trust’s beneficiary. Most people set up these trusts for the purposes of tax minimization, asset preservation, or to qualify for a specialized government benefit.
Charitable Trusts
These trusts are established for the good of a certain organization or the broader public. Most often, a charitable trust is set up as part of an individual’s or couple’s estate strategy to reduce or eliminate their exposure to estate and gift tax.
Special Needs Trusts
To avoid being disqualified from getting government help, these trusts were created for the sake of a person getting government aid. This can be done while the parent is still living or in a Will.
Protective and Spendthrift Trusts
These trusts are put up to shield the beneficiary’s assets from the beneficiary’s creditors or the beneficiary’s own irresponsibility.
Fixed Interest Trusts
Income from a fixed interest trust, also called an interest in possession trust, is distributed in a given proportion to the trust’s beneficiaries regardless of changes in the value of the trust’s assets. People who need a steady supply of income may benefit from setting up one of these trusts.
Trusts Inter Vivos
Depending on the terms, an inter vivos trust in Canada can be either revocable or irrevocable, and it is created during the settlor’s lifetime. Assets can be transferred to the trust while the settlor is still alive, and the trust can be managed and protected indefinitely. Income and principal from an inter vivos trust can be distributed in a number of ways, depending on whether it is a discretionary or a fixed interest trust.
Loan Bare Trust
This occurs when the settlor retains management of the trust but gifts the growth to the beneficiaries. One who can afford to give up the trust’s growth but still needs access to the trust’s principal is the target beneficiary of these arrangements.
Discretionary Trust
When a settlor delegates greater authority to the trustee, the latter gains sway over distributions such as how much, when, and to whom the funds are disbursed. If you have young grandchildren, for instance, you might find this useful.
Accumulation Trust
Gains from investments can be reinvested in the trust at this time.
Interest-in-Possession Trusts
The trust’s beneficiary is entitled to receive distributions of trust revenue when they become available.
Mixed Trust
Multiple trusts might be said to be held in a mixed trust. Individual or joint trusts can be granted to recipients.
Testamentary Trust
After your death, the trustees will carry out the instructions set forth in the Trust that you established in your will. It’s vital to remember that if you become mentally handicapped before you die, your Will will be null and void.
Family Trusts
Family trusts, often called private or family settlement trusts, are frequently utilized to manage and safeguard family assets and transfer of wealth across generations. Flexible wealth management, reduced estate taxes, and the protection of cherished traditions are all benefits that can be realized through the use of family trusts.
Standby Trust
In the case of your death or incapacity, a Standby Trust can be activated to manage your assets and protect your loved ones. Until the triggering event occurs, the Trust typically only receives a fraction of the assets.
Vista Trusts
Only in the British Virgin Islands (BVI) can a company’s shares be maintained in a trust indefinitely without the trustees being obligated to get involved in the company’s management.
Special Trusts (Alternative Regime)
STAR Trusts, which are exclusive to the Cayman Islands, can be established for any authorized purpose, including but not limited to charitable giving, and can benefit individuals, purposes, or both.
Fixed Trusts
The trustee of such a trust is bound by the terms of the trust deed to make distributions of trust assets to the beneficiaries in the predetermined ratios.
Unit Trusts
Though they are not technically trusts, unit trusts are a common type of collective investment arrangement in both Singapore and Australia. To invest in a diverse portfolio of stocks, bonds, or real estate, investors can pool their money in a unit trust.
Unitholders in the trust get investment returns and experienced fund managers oversee the trust’s underlying investments. A unit trust is a professionally managed investment pool that allows ordinary people to take part in the financial markets.
Hybrid Trusts
Because of its adaptable structure, hybrid trusts include the advantages of both unit trusts and discretionary trusts. With a hybrid trust, you have the best of both worlds: the flexibility to make distributions at your discretion as well as the security of knowing exactly how much each beneficiary will get.
Trading Trusts
Commercial activities like business and investment employ trading trusts. Those who benefit from a trading trust are entrusted with assets in a firm, while the trust is responsible for their care and management. Profits, assets, and businesses can all be safeguarded and passed on more easily with the help of a trading trust.
Foreign Trust
When a trust is established in a foreign country, the governing regulations are those of that country. Expats mostly consist of wealthy businesspeople who relocate or obtain second citizenship in another country. They will have access to both the onshore and offshore trusts, which is particularly necessary if they have a sizable amount of money, stocks, real estate, a business, or other assets that will be subject to inheritance tax in their home country.
Trusts are a great option for expats looking to leave their wealth to loved ones back home since they provide for a smooth, controlled transfer of assets without exposing beneficiaries to unnecessary tax liability.
Tips for Moving Overseas with a Trust
What if I have an existing trust and plan to move overseas?
Trust administration and planning must take into account the potential impact of a change in tax residency on the transfer of assets into other tax jurisdictions. Learn how residency for a trust is determined in your new country of residence before you relocate there if you plan to form one.
For instance, if a single trustee has tax residency in Australia, the entire trust will be treated as a resident of that nation for tax purposes. The trust’s residence status may also be determined by whether or not its management and control are centralized.
If you already have a trust and are moving, you need to carefully evaluate how your new place of residence could affect its terms. Notably, putting personal assets to a trust before changing residency and going overseas can be a wise move. This method is not without its own set of pros and cons, just like any other strategy.
Should I move my Trust?
When an Australian trust’s individual trustee moves out of Australia, the trust’s resident status may change because of the trustee’s actions. Considerable thought must therefore be given to the potential tax consequences that may result from the trustee’s relocation.
Do consider whether it’s better for you and your loved ones to keep the trust’s residency in the nation where it was initially founded, or to transfer the trust to the new country. Also consider other options if the current plan for the trust does not produce desirable immediate or long-term tax results.
Strategies in this regard could include appointing a corporation headquartered in the jurisdiction to which you are moving as the new trustee and submitting the trust to the laws of that location. To transfer the trust’s location to a different country, a new trustee may be appointed in a third jurisdiction.
There can be no understating the necessity of preparing for a trust’s exit strategy. As trusts are typically used as long-term family assets, a change in residency status shouldn’t necessitate their dissolution and the loss of whatever benefits they may have provided.
Navigating Trusts During Residency Change
International trust administration is a challenging activity that need for significant thought and planning. There is a high risk of undesirable outcomes if you travel to a foreign nation without a strategy.
Whenever a new person customer moves and takes on the role as trustee of a foreign trust, it stands to reason that the trust will move in with the client. While certain countries may not tax assets transferred to foreign trusts prior to migration, others may do so even if the client steps down as trustee before making the move.
Remember that the trust deed itself may need to be revised if certain provisions are to remain applicable after the trust is transferred to a different country. A thorough evaluation of the trust deed, taking into consideration the legislation of the new nation, is nevertheless necessary even though the trust is located in a different country.
It’s also possible that trust deed-related ideas and terms that are relevant in the original jurisdiction won’t be in the new one. It’s important to keep in mind that the arriving trust can still have reporting requirements in the nation where it was first created.
Other people with continuous involvement in the trust’s management could be foreign protectors. In terms of reporting requirements in the country to which you are migrating, it is necessary to assess the impact on these parties.
When a large amount of money or a business is in the arriving trust, this becomes an urgent matter. One of the most important things to think about is the trust’s cost base in the new country at the time it first sets up shop there. There may be rare cases where the cost base does not reflect the market value of the assets on the day the trust is established.
Always give careful thought to the tax consequences and the impact of your relocation on your trust. The trust’s move in this ever-changing international environment can be facilitated by careful tax preparation.
Say, in Australia. Trusts come in many forms in this country, from estate-management focused family trusts to retirement savings vehicles called self-managed super funds. A trust’s residency status will often be the same as that of the trustee. This can be problematic for self-managed super funds when members move abroad, as maintaining the trust’s Australian tax residency may require the appointment of a personal or corporate representative.
Being the beneficiary of an Australian trust, which is typically considered a foreign trust by other tax bodies, can give rise to important tax implications, although this fact is not often known. For instance, as a US tax resident, you may face significant compliance expenses and tax-related difficulties if you are a beneficiary of an Australian trust.
Those who are trustees or beneficiaries of Australian trusts and who want to leave Australia and become non-residents for Australian tax reasons are urged to seek individualized tax advice. This preventative measure guarantees that any unfavorable tax implications are discovered and, if feasible, alleviated.
Certain Jurisdictions Without Trusts
There are certain territories that don’t legally recognize trusts and some of these are listed below:
Luxembourg
Because of its civil law system, Luxembourg does not recognize trusts in the same way that common law countries do. However, it has implemented legislative mechanisms with similar benefits and functions. Twenty years ago, the country formalized a framework for dealing with trust-related issues and recognizing the idea of a trust.
Fiduciary arrangements, in which the fiduciary takes legal ownership of assets on behalf of the beneficiary, are a popular substitute for trusts in Luxembourg that are regulated by the Financial Sector Supervisory Commission.
Two types of financial vehicles, the Specialized Investment Fund and the Investment Company in Risk Capital, are available in Luxembourg. These arrangements are not trusts but provide a way to manage and invest large sums of money in a flexible and weakly regulated manner.
For the administration of personal or family wealth free from taxation, Luxembourg provides the Société de Gestion de Patrimoine Familial. Luxembourg’s wide range of legal tools for managing money may accommodate a wide range of situations and preferences.
How are trust-like structures taxed in Luxembourg?
The tax consequences of fiduciary arrangements and other trust-like structures vary widely depending on the particulars of the arrangement and Luxembourg’s complex tax system. Trustees may be immune from dividend withholding taxes but must pay corporate income taxes, municipal business taxes, and a net wealth tax.
Although Luxembourg does not have a trust legislation per se, it does provide a number of other options that are both flexible and secure for the management and protection of assets.
The Netherlands
Although trusts under common law are not recognized in the Netherlands, there are other legal structures that serve similar purposes. The foundation (Stichting) is a similar legal entity in the Netherlands, which follows the principles of civil law.
For instance, the Dutch Foundation is very similar to a trust. It is a separate legal entity with no individual members or stockholders that was formed to manage and protect property for a predetermined set of goals. Similar to trusts, this setup keeps the identities of the legal and beneficial owners of an asset distinct.
The Stichting Administratiekantoor (STAK) is one variant that stands out. This foundation structure is frequently used for purposes including privacy and succession planning. Economic ownership is kept by the holders of depository receipts issued by STAK, while legal ownership is retained by STAK.
Another type of Dutch legal institution that performs trust-like duties, such as managing assets and investments, is the Fiscal Investment Institution. Not quite a trust but designed for pooled investments with favorable tax treatment thanks to Dutch law.
What’s the tax situation like?
Whether or not a foundation, STAK, or Fiscal Investment Institution will have any significant tax implications depends on a number of criteria, such as the nature of the entity’s assets and revenue, the location of the beneficiaries, and the type of tax system in place. Understanding and making the most of the complicated Dutch tax regulations requires expert guidance.
Although trust law does not exist in the Netherlands, there are a number of safe and adaptable options for handling and investing wealth in the country too.
Italy
Italy is governed by a civil law system, however the Hague Trust Convention allowed for the incorporation of the trust idea into Italian law. While no trust-specific Italian law exists, this convention recognizes and upholds trusts. According to the convention, a trust that is created in accordance with the laws of a country that recognizes trusts shall be recognized in Italy.
In Italy, trusts can manifest in various forms, including revocable trusts where the settlor retains the right to revoke the trust, and irrevocable trusts where this right is not reserved. Furthermore, discretionary trusts grant the trustee the authority to allocate assets among beneficiaries based at their choosing, while fixed trusts entail predetermined allocations of the assets.
Trusts in Italy can be established for a number of reasons. Firstly, they can serve as a shield against creditors. Second, under Italian law, trusts are an essential part of any comprehensive estate strategy. By avoiding the convoluted probate processes that are standard in the country, they make it easier to distribute an estate to heirs. The assets are transferred to the beneficiaries without any problems should the settlor pass away.
Moreover, they allow for more efficient tax management due to the flexibility in the potential tax breaks based on the settlor’s and beneficiaries’ individual situations.
What are the tax implications?
The residency status of the settlor and beneficiaries, the assets held by the trust, and the nature of the trust all have a role in how Italian trusts are levied. Any profits a trust makes from its holdings are typically taxable as individual income. Distributions of trust assets to beneficiaries after the death of the settlor may be subject to IHT.
Trusts can be a useful tool for asset management, protection, and succession planning in Italy, albeit trust law in the country is not as developed as it is in common law jurisdictions.
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