The Merits of Setting Up a Trust
Central, Eastern Southeastern Europe and Central Asia (CESA) Law Leader, Managing Partner at Prountzos & Prountzos LLC | EY Law
Our experience has repeatedly shown that most people omit to actively implement any estate planning and thus do not pre-emptively take action to protect their wealth against any future events. Even when they do decide to take action, the setting up of a Trust has, until recently, probably not been high on their list. However, over the last few years, we have witnessed an increased flow of inquiries and willingness to assess the merits of setting up a trust to manage one’s wealth. The key questions on anyone’s mind before setting up a trust are: What is a trust? and How can a trust address my individual concerns?.
What is a trust?
In simple terms, a trust is a contractual arrangement between two parties: a settlor and a trustee. Although there are many different types of trusts and each type may be used for a number of different purposes, this article will focus on trusts aiming at managing a person’s wealth and property efficiently and the agreement of the trustee to accept, manage and protect all the assets delivered/transferred to it by the settlor and to administer those assets in accordance with the settlor’s wishes and the terms of the trust deed. Eventually, the purpose is to distribute the trust income and principal, only as per the terms of the trust deed, and only for the benefit of the people identified in the trust, i.e. the beneficiaries.
A trust essentially separates the legal ownership of the assets (i.e. the trust property) transferred to the trustee from the beneficial (or equitable) ownership of the assets, which belongs to the beneficiaries of the trust. It is important to note that the trustee is a fiduciary and, as a fiduciary, must at all times:
- act with reasonable care in administering the trust and selecting how to invest the trust property; and
- avoid any conflict of interest or self-dealing in holding, purchasing and selling trust assets; and
- diligently avoid breaching any of the trustee’s duties to the settlor and the trust beneficiaries.
The trustee is bound by the terms of the trust deed and owes a duty of prudence and reasonableness in making all administrative and investment decisions. The specific terms of the trust, express obligations of the trustee and any safeguards, considerations, powers and restrictions with regard to the management, administration, disposal and distribution of the assets of the trust are contained in the trust deed to which the trustee must adhere at all times.
In order for a valid trust to be created, the following three certainties must be evident:
- Certainty of Intention – there must be evidence of the express intention of the settlor to create the trust.
- Certainty of the subject-matter – the assets that are to become part of the trust property must be readily identifiable.
- Certainty of objects – the identity of all the intended beneficiaries of the trust must be ascertained or ascertainable at the time of setting up the trust.
Benefits of using a trust
Establishing a trust can bring about a number of benefits to the potential settlor, including:
- An opportunity for succession/inheritance planning
- An opportunity for tax planning
- Asset protection
- Preservation of family property for its members in accordance with the wishes of the settlor
- A mechanism to implement employee benefit schemes for the settlors’ business
- Charitable purposes
Using a Cyprus International Trust
The Cyprus International Trust Law builds on the well-established English law principles of equity and trusts creating an efficient, secure and attractive environment. This enables the creation of trusts whilst ensuring that they can suit and address all complex planning situations and afford the settlor the flexibility to set up their trust in the optimal structure for them.
A Cyprus International Trust may be of indefinite duration and may be set up as irrevocable. The only requirements for setting up a Cyprus International Trust are:
- The settlor and beneficiary/ies must not be permanent residents of the Republic of Cyprus in the year preceding the year of the creation of the trust.
- At least one of the trustees must be a permanent resident of the Republic of Cyprus throughout the duration of the trust.
Provided that the above are satisfied, the legal framework allows the settlor to set up the trust, taking into account their personal considerations and objectives as well as set out the rules, via the trust deed, under which the trust will operate. The setting up and registration of a Cyprus International Trust does not require the submission or disclosure of the relevant trust deed, ensuring the confidentiality of the terms of the trust. Furthermore, the settlor has the option of achieving additional layers of protection through the appointment of a protector, an individual with authority to restrict the exercising of certain key powers by the trustee (only exercisable with the protector’s consent). Furthermore, the trust may be utilized as a tax planning and optimization tool, reducing and/or eliminating tax exposure and inheritance tax for the settlor.
- Asset Protection
As mentioned earlier, one of the main advantages of a Cyprus International Trust is the protection of the assets under the trust, essentially due to the separation of legal and beneficial ownership. A Cyprus International Trust offers an additional layer of protection to the assets, as it should not be void or voidable and no claim may be made in respect of the assets that have been transferred to the trust in the event of the settlor’s bankruptcy or liquidation or any action or proceedings against the settlor.
A Cyprus International Trust may only be set aside by the settlor’s creditors to the extent it is proven, to the satisfaction of the Cyprus Courts, that the trust was set up by the settlor with the intention to defraud the creditors. Any such action should be brought within a period of two years from the date of the transfer/settlement of the assets by the settlor to the trust and the burden of proof would be on the creditors.
- Succession Planning
Another key advantage of setting up a Cyprus International Trust is that the validity of the trust or any transfer or disposition under the trust will not be affected by the laws relating to succession or inheritance in force in Cyprus or any other jurisdiction. In effect, the structure would be immune from forced heirship rules thus allowing the settlor absolute discretion to decide how their assets would be passed on to his/her heirs.
Over the last few years, estate planning, asset protection and forced heirship considerations have been high on the agenda. Cyprus International Trusts offer individuals an excellent mechanism to assess and address all the above considerations. The Cyprus legal framework on International Trusts offers a reliable, secure, flexible and efficient framework within which an individual may structure his/her assets to achieve their specific goals, whilst providing the optimal tools for the trustee to balance those goals with prevailing investment and economic factors.