The Use of Trusts in Estate Planning
Hildeberto (Hil) de Frias · October 6th, 2006
To the average man on the street the idea or notion of using a trust for estate planning purposes is often associated with the very wealthy. In fact trusts are being settled (or created) by people from all walks of life more and more these days as access to information increases and the mystery surrounding trusts is cast aside.
So what, in fact, is a trust?
Quite simply it is a relationship between the person who intends to settle the trust and transfers assets to the trust (called the Settlor) and the person(s) who will own and hold the trust assets (called the Trustees) for the benefit of other persons (called the Beneficiaries).
A trust is not a separate entity. It exists simply as a relationship between the Settlor, the Trustee and the Beneficiaries with each of the parties having certain rights and obligation with respect to the trust relationship. For, example the Trustees have very important duties and obligations to ensure that the assets of the trust are invested wisely and must generally consider applying the income and/or capital of the trust for the benefit of the Beneficiaries from time to time. If the Trustees fail in their duties they could be held personally liable for any resulting loss to the trust and Beneficiaries. The Trustees must not profit from the trust fund other than to charge a fee for their services and even this must be specifically set out in the document which evidences the trust relationship.
The Beneficiaries also have certain rights by law with respect to the trust such as the right to ask for certain information relating to the trust (such as. financial statements, the document evidencing the trust etc.) and the right (depending on the type of trust) to call for their share of the trust assets to be released from the trust and be paid to them directly.
In many cases the Settlor also retains certain rights such as the right to remove and appoint Trustees and the right to approve or disapprove proposed distributions out of the trust assets to Beneficiaries.
And so what are the uses of trusts in Estate Planning in Bermuda?
Before the uses are discussed it should be mentioned that there are several types of trust which may be utilised for estate planning purposes but by far the most popular type of trust used in Bermuda is the Discretionary Trust. This type of trust takes its name from the fact that the Trustees usually have an absolute discretion to determine when, how, and to what extent any of the Beneficiaries will benefit from the trust assets. Generally, the Trustees must consider making distributions from time to time to the Beneficiaries but need not make any distributions if they feel it is appropriate not to do so. The Settlor often prefers this type of trust because it is more flexible than other types of trust and can adapt to the changes is the circumstances of the Beneficiaries.
Turning to the uses of trusts in estate planning, we can illustrate one of the more popular uses in the following example involving Bermuda real estate.
Minimising Future Estate duties and Probate Costs
Where a Trust relationship already exists a Beneficiary may approach the Trustees with a request for a loan to purchase a home. The Trustees, instead of making the loan to the Beneficiary, could (if there are sufficient funds) purchase a home and permit the Beneficiary to live in it rent free or for a reduced rent or even a market rent. This should ensure that the property will not form part of the Beneficiary’s own assets or estate and will not therefore be subject to Estate Duties (or Death Taxes) upon the Beneficiary’s death. In, fact the Beneficiary’s own children may, if appropriate, continue to reside or take up residence in the home (with the permission of the Trustees) without having to go through the often expensive and lengthy process of probating their parent’s estate and paying large sums in Estate Duties and legal fees to probate the estate. It is often for this reason that the average man on the street considers settling a trust to acquire real estate for his benefit and the benefit of his family. It is a long term estate planning tool which reduces the incidence of Estate Duties on assets which would normally otherwise be subject to such Duties.
Another of the uses of trusts in estate planning is to protect Beneficiaries from themselves!
Protective Trusts
This is often the case where parents wish to benefit their children after their death (or even during their lifetimes) but have valid concerns as to the children’s, or a particular child’s, ability to manage and preserve the assets for his or her own benefit. Common examples involve children with substance abuse problems, children who are or may become bankrupt, children who lack the mental capacity to manage their own affairs and children who have an uncontrollable propensity to spend money unwisely. In all of these cases a trust may be an appropriate method of ensuring that the family wealth is passed on for the benefit of their children including the problem child without the need to place the assets in the hands of that child directly. In such cases the assets are held by Trustees for the benefit of the child and distributions may be made as and when the Trustees deem it appropriate and may be made directly or indirectly for the child’s benefit.
One further use of trusts in long term estate planning was briefly touched on in the previous paragraph and that is what is often improperly called asset protection.
Wealth Preservation
Assets in the hands of Trustees of a Discretionary Trust are not generally available to be claimed by the creditors of the Beneficiaries of that Trust even in some cases where the Beneficiaries obtain or derive some benefit from the Trust’s assets. The desire to preserve and protect the assets for future generations is a reason that people sometimes transfer assets to a Trust. However, one important thing to note in this case is that if anyone transfers assets to a trust with the intention of placing them out of the reach of an existing creditor, or likely future creditor, the Courts may set aside the transfer to the Trust (i.e. declare it void) and treat those assets as the assets of the person who tried to make the transfer to the Trust. Thus, the assets will be available to the creditors and the fraudulent attempt to put the assets out of the reach of the creditors will have failed.
Any transfer of assets to a Trust should be done with a genuine intention to carry out one’s long term estate planning and should not be done with the intention of putting assets out of the reach of known creditors or even person who may likely become creditors in the near future. If such creditors can prove in Court that a transfer of assets to a Trust was made to defeat their claim on such assets, the Court will treat the transfer as if it never happened.
In considering your estate planning always obtain independent legal advice!
We’ve only scraped the surface of trusts with this discussion and it is certainly not intended as legal advice but merely a brief introduction to the uses of trusts in estate planning in Bermuda . In considering the use of trusts in your own estate planning we would always strongly recommend that you take comprehensive advice from your own trusted legal advisors first.