Types of Trust
Offshore trusts are similar to onshore trusts; however in some cases they have legislative modifications to make the more commercially attractive by abolishing or modifying certain common law restrictions. Below are many of the important generic trust structures which can be established in offshore jurisdictions. The end of the section includes several specific offshore structures:
Generic Trust Structures
Bare Trust (or Simple Trust): With a bare trust, the beneficiary has the right to access the assets and income of the trust. He is legally entitled to transfer ownership of the trust property, or ask for remittance of assets and income. This effectively makes the trustees nominees on behalf of the benefactor.
Fixed trust: The beneficiary's entitlement to the assets of the trust is fixed by the settlor. The trustee has little or no discretion. Common examples are:
- A trust for a child ("to X if he reaches 18")
- A life interest ("to pay income to X for his lifetime")
- A remainder ("to pay the income to Z after the death of X")
Discretionary Trust: Rather than a fixed arrangement, the settlor of a discretionary trust sets a series of criteria that grants discretion to the trustee over how the assets are invested on behalf of the benefactor.
Hybrid trust: A hybrid trust is a combination of fixed and discretionary trusts. In a hybrid trust, the trustee is legally obliged to pay a fixed amount of the trust assets to each beneficiary, as agreed by the settlor. The trustee has discretion over the remaining assets within the framework set by the settlor.
Unit trust: In a unit trust the beneficiaries are referred to as unitholders. Each unitholder possess a certain number of units (i.e. shares) and can instruct the trustee to pay money to them out of the trust property by redeeming their units. This creates a vehicle for collective investment - the entity that provides the assets for the trust is also the beneficiary. Unit trusts are always discretionary.
Incentive trust: Is used to encourage or discourage the benefactor to do certain activities, through the use of income or asset distribution. They provide fixed conditions, set by the settlor, to access the trusts funds.
Interest in Possession Trust: Gives the beneficiary a "right to the present enjoyment of something". The arrangement allows the benefactor to receive some or all of the income generated by the trust (if trust funds are invested on a discretionary basis) or the right to 'enjoy' the trust assets at the present time, such as living in the real estate of the trust.
Revocable trust: May be altered or revoked by its settlor at any time, (given the settlor is not mentally incapacitated). Revocable trusts area substitute for a will with minimised administrative costs.
Irrevocable trust: In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed.
Protective trust: Protective trusts are used in estate planning to protect property from possession by creditors prior to inheritance. The current owner of the house establishes a trust with two benefactors: the current owner and the inheritor. In the trust deed, it is agreed with the trustee that the current owner will continue to inhabit the property until they die. Upon death, the ownership transfers to the inheritor rather than the creditors if the property has built up debts.
Charitable Trust: Is technically another type of purpose trust, which is available in most onshore jurisdictions. Like the purpose trust it exists to advance a cause, however this cause is charitable. These charitable trusts differ between jurisdictions and can take on many of the trust characteristics of other trust structures, such as discretionary trusts, fixed trusts etc... They almost always have favorable tax status.
Spendthrift Trust: Is a type of discretionary trust which provides the trustee with the discretion on how to spend the trust income on behalf a beneficiary, who's unable to control their spending.
Types of Offshore Trusts
Royal Live Clause Avoidance: Trusts are subject to the rule of perpetuity which places a limit on the length of time a trust may be established. Some trusts have been struck down due to infringement of this rule. Some offshore jurisdictions have enacted complicated frameworks to avoid this clause.
STAR Trusts (Cayman Islands) and VISTA Trusts (BVI): Is a type of discretionary trust which allows the settlor to manage the trust assets and income, whilst making the trustee a nominee appointment. Such trusts are used by hedge funds and mutual funds as unit trusts, or are used as orphan structures in bond issues. They are recognised under the Hague Convention.
Self Settled Spendthrift Trust (Offshore Only): A self settled spendthrift trust, used for tax-planning, allows the settlor to be beneficiary to the income of the trust. This means that by establishing a trust, the settlor can avoid his own debts. Where adopted, for creditors to make a claim in judicial courts they must provide concrete proof and may have to post a bond (USD 13,000 in Nevis). Also, some judicial systems have relatively weak case law, which acts as another deterrent. Key jurisdictions include: Nevis, Belize and the Cook Islands.
Purpose Trust: Also known as a non charitable purpose trusts. Generally onshore jurisdictions do not permit non-charitable purpose trusts outside of certain anomalous exceptions. However, certain offshore have passed legislation allowing non-charitable purpose trusts generally. The BVI, Cayman Islands, Bahamas and Bermuda are all examples where this is possible. Purpose trusts do not specify beneficiaries, but exist to advance some non charitable purpose.