Updated: Sep 20
The origin of the trust concept has its roots from ancient times in the Roman law, but has been particularly developed and honed in the English legal system during the 12th and 13th centuries.
Trust Concept. The origin of the trust concept has its roots from ancient times in the Roman law, but has been particularly developed and honed in the English legal system during the 12th and 13th centuries. The trust was formulated to protect family property, maintain and/or increase its value while its owner was off to fight in the Crusades.
What is a Trust? The Law does not provide a comprehensive definition of trusts. The more common and simplistic definition is that a trust is a legal relationship created by a settlor who places assets under the control of a trustee who manages and controls the assets for the benefit of a beneficiary. What a trust basically does is to split legal and equitable title of the property, the legal title is vested in the hands of the trustee while the equitable title in the hands of the beneficiary.
Basic Structure of a Trust. It is a fact that there is a substantial amount of different types of trusts and their complexity varies, but the most common structure of trust is as follows:
a. The Settlor is the person (natural or legal) who creates the trust. He is the owner of the property and settles the property under trust for other persons (beneficiaries- a settlor can also be a beneficiary)
b. The Trustee is the person (natural or legal) who assumes management and control of the settled property under the terms of the Trust Deed or Letter of Wishes (Intent) which was previously established by the settlor.
c. The Beneficiary is the person (natural or legal) that has the beneficial or equitable title to the trust assets
d. The Protector is a person other than the trustee to whom powers can be vested into. The purpose of a Protector is to check and balance the powers of a trustee and could even have a veto to the decisions trustee. (it is not mandatory to appoint a Protector)
Creation of a Trust. For a valid trust to be created the following must be present:
a. The Settlor must be of full age and of sound mind
b. Certainty of Intention: For a trust to be created there needs to be a clear and express intention of the settlor to formulate a trust. The most substantial way this can be achieved is through a carefully planned trust instrument (Trust Deed). Even though trusts can be created orally it is much more common today to utilize a Trust Deed.
c. Certainty of Subject Matter: The trust assets must be readily identifiable otherwise the trust is voidable for uncertainty. This means that the property is clearly separated from other property so as to be certain exactly what the trust assets include.
d. Certainty of Objects: A valid trust must include beneficiaries whose identity is ascertained or ascertainable at the time of setting up a trust. This suggests that all beneficiaries must be known or can be in a group of people that can be ascertained when needed to identify the beneficiaries of the trust.
Types of Trusts.
Under this type trust, the trusteed have discretionary powers over when, how much and if the beneficiary (class of beneficiaries) is to receive/enjoy any benefit, share or interest over the trust property. The beneficiaries may be defined according to name or reference to a class (i.e. the settlor’s children) or simply left to the full discretion of the trustees. Usually, the settlor indicates to the trustees his wishes for the disposal of the trust property by means of a Letter of Wishes.
Should the settlor wish to give a more positive guidance than relying on a Letter of Wishes, it is possible to include a third party in the trust deed known as the “protector” .The protector’s role is to prevent the trustees from exercising their discretion in certain circumstances.
The trustees will usually exercise their discretion with the prior consent of the protector or nominator.
Under a fixed trust, the trustees have no discretion in distributing the trust assets to the beneficiaries. For example, under such a trust the trustees are directed to distribute the income to a designated individual for a fixed period of time and thereafter distribute the capital of the trust to a specific beneficiary or beneficiaries.
Fixed and Discretionary Trust
This type of trust gives discretion to the trustees over the distribution of income for a period of time. However, they may be required to distribute the income to a specified individual or individuals in fixed amounts, while maintaining discretion over the distribution of the capital amongst a class of beneficiaries.
This trust is appropriate when a beneficiary is given a life interest which may become discretionary on certain defined events, such as the bankruptcy of the beneficiary.
Declaration of Trust
This is a variation of the discretionary trust in which the settlor is not named in the trust deed and the trustees declare that they hold the assets which were transferred to them on trust. In such a case, the trustees accept a Letter of Wishes.
Under this trust, the trustee is usually a limited liability company which has powers to carry on business, and the trust has trading functions and employees to manage its business. Since all documentation used is in the name of the trust company, third parties are not aware of the existence of the trust.
A resulting trust is created by the settlor’s actions or behaviors rather than expressed intention to create a trust. If there is no evidence that the settlor had intention to create a trust, but his acts and behaviors suggest that he did then a resulting trust is created.
Cyprus International Trust
The Cyprus International Trust (CIT) when introduced in 1992 was and still is one of the most modern and advanced legal concepts of International Trusts globally. The 1992 Law was an attempt by the Cyprus Republic to attract investors and modernize the Trust Law which was built on the 1955 Trustees Law, Cap. 193.
A CIT is defined as “a trust created by a non-resident settlor for the benefit of non-resident beneficiaries.
Conditions for creating a valid CIT. To create a valid Cyprus International Trust the following condition must be met:
a. The settlor must not have been a resident of the Republic of Cyprus during the year preceding the year of the creation of the trust.
b. At least one of the Trustees is a permanent resident of Cyprus
c. None of the beneficiaries may be resident of Cyprus the calendar year preceding the year of the creation of the trust.
d. The three certainties must be met
e. The settlor must be of full age and of sound mind
The definition of resident has the same meaning as Tax resident and is established by the Income Tax Law. “An individual is resident in Cyprus, if he/she resides therein for a period or more which in aggregate exceed 183 days. A company is resident in Cyprus, if its management and control are exercised in Cyprus”.
Benefits of Cyprus International Trusts. There are numerous benefits of creating a CIT. The list below identifies the most important:
A. General Benefits
Ø Ideal for high income, high net worth individuals (net worth of approximately €350,000 is a starting where the benefits of establishing a CIT outweigh the costs)
Ø Ideal for complicated family structures (inheritance planning)
Ø The same person can be a settlor, a trustee (as a sole director and shareholder of a Cyprus company) and beneficiary.
Ø A CIT may continue in perpetuity
Ø A CIT may form a Cyprus company or partnership and hold shares in such investment and enjoy the benefits (dividends)
B. Tax Benefits
CITs in Cyprus are tax transparent which means that they are not subject to tax provided that the Beneficiaries are not Cyprus tax residents and that the trust assets do not include immovable property located in Cyprus. In the case where the beneficiaries are indeed resident of the Republic then only the income which is earned from sources within Cyprus is subject to income tax. Beneficiaries who are not tax residents are only liable for income tax purposes for Cyprus sourced income. If the beneficiaries are imposed with any taxes it is the responsibility of the trustees to ensure that the taxes are paid.
Ø Income, gains and profits are exempted from income tax, capital gains tax or any other taxes in Cyprus
Ø There is no inheritance tax in Cyprus
Ø May be used to reduce or eliminate inheritance tax of the settlor.
Ø May be used to distribute untaxed income in Cyprus to the beneficiaries, i.e. family members
Ø Dividends, interest or royalties received by an International Trust from a Cyprus international business company are not taxable and not subject to any withholding tax.
Ø Possibility to fall under double tax treaties
Ø Pre-migration arrangement- protect assets for individuals moving to high tax countries
C. Asset Protection
Arguably the most important advantage of a CIT its usage as an invaluable tool for asset protection. It is a fact that through the creation of a trust, the beneficial and legal title is split. The legal title is bestowed in the hands of the trustee whilst the equitable title is attached to the beneficiaries. The property transferred to the trust is no longer considered to be the property of the settlor and therefore it is out of reach of future or potential creditors, litigators etc.
An important aspect of CITs one must have in mind is that the trust should be used as precautionary measure. It is usually simpler to equate the CIT with an insurance plan. You want to protect yourself before your house is already flooded, this concept is the same with CITs. It is more beneficial and safer to create a CIT prior to any creditor claims. The CIT is a powerful shield that can be used against any potential creditors, inheritance laws of other jurisdictions, claims of negligence, and claims of breach of contract and so on.
Important asset protection features of the CIT law:
1. The Law suggests that no foreign law relating to inheritance is capable of invalidating the trust and this has effect of making the CIT immune from forced heirship and claw back rules of other jurisdictions.
2. Furthermore the trust is not void or voidable if the settlor becomes bankrupt or insolvent.
3. The only way of setting aside the trust is if the trust is deemed to be specifically created to defraud the settlor’s creditors. The onus of proof falls on the creditors.
4. No action or claim can be brought against the trustees of the CIT after the lapse of a two year period from the date of settlement of the property to the trust. Arguably after the trust matures no claim can be brought against it that will be able to put at risk the trust property.
D. Confidentiality and Reporting
Confidentiality is of particular importance in regards to international trust regimes. The trust law regime in Cyprus has managed to balance global requirements of transparency with the confidentiality requirement of a trust.
Prior to 2013 a CIT had no reporting requirements and registration of the trust was optional. Pursuant to an amendment of the CIT Law however, all CITs must now be registered to one of the supervisory authorities (Cyprus Bar Association, Cyprus Securities and Exchange Commission and the Institute of Certified Public Accountants of Cyprus).
The Registers of the trusts include the following information:
a. The name of the trust
b. The names of the trustees
c. The date of creation of the trust
d. The date of any change in the law governing the trust
e. The date of termination of the trust
These information are not available to the public and are only available for inspection by the supervisory authorities.
A substantial level of confidentiality is retained as there is no requirement for the CIT to provide any information on the Trust Deed or its contents, nor to provide any information about its beneficiaries or the settlor.
It is evident that legislators in Cyprus have succeeded in balancing between the need of privacy and the need to of accountability and transparency of the financial sector.
E. Trustees Investment Powers
The trustees under the CIT law have extensive investment powers and this is extremely beneficial as it allows them the freedom required to invest, maintain and control the trust property in line with the Trust Deed for the benefit of the beneficiaries. This feature gives the trustee the power to invest whilst eliminating any reservations in making investment decisions. The most important investing powers are as follows:
a. The ability to borrow
b. To make capital distribution
c. To make guarantees
d. To mortgage
e. To employ
f. To invest and lend
g. To make payments where necessary
h. Maintain or invest in movable and immovable property locally and abroad
F. Ability to Reserve Power for the Settlor
It is a fact that when the settlor settles his property into a trust, that property is no longer considered to be his property and therefore he has no control over it. However with the amendment to the CIT law in 2012 the settlor has the ability to reserve powers for himself if these are specifically drafted into the trust instrument/trust deed. Section 4A of the law provides the following powers that can be reserved for the settlor:
a. To revoke, vary or amend the terms of a trust;
b. To advance, appoint, pay or otherwise apply income or capital of the trust assets or to give directions therefor;
c. To act as, or to give binding directions as to the appointment or removal of a director or officer of any company wholly or partly owned by the trust;
d. To give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust assets;
e. To appoint or remove any trustee, enforcer, protector or beneficiary;
f. To appoint or remove any investment manager or investment adviser;
g. To change the proper law of the trust or the forum of administration of the trust;
h. To restrict the exercise of any power or discretions of a trustee by requiring that they shall only be exercisable with the consent of the settlor;
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