Private Foundations and Trusts
In doing business generating a steady income, the following question eventually arises: how to save earnings from excessive taxes, excessive interest of the state bodies, spendthrift relatives and other nuisances. Shelter may be found in the global practice of creating trusts and private foundations.
Trust is a quite complex legal structure; its essence lies in the fact that the owner of certain property (the settlor) places the property into trust of a legal entity or a physical person (the trustee), who manages the property for the benefit of the settlor or third parties (beneficiaries) defined by the settlor. In that case, the property by the settlor loses legal relationship with him and no actions, for example, of fiscal nature, may be performed with it.
Why need for trusts?
The advantages of a trust allows optimizing the taxation of assets and largely protects the assets from a number of negative factors for the following reasons:
- Assets placed into trusts are recognized under the Convention as a separate fund and are not a part of the settlor’s own estate and, consequently, are sheltered from taxation and imposition of lawful restrictions (seizure, confiscation, etc.). In that case, the property remains economically connected with the settlor and produces income the payment of which may be deferred indefinitely. Such deferral is another tool of tax optimization, as in most countries, personal income is taxed only after it its payment to such person;
- The title of the actual owner of the trust property belongs to the fiduciary manager (the trustee) acting on behalf of the settlor. The name of the settlor may remain unknown to others;
- The fiduciary manager (the trustee) is entitled to dispose of the assets in trust only in the interests of the settlor or the persons appointed by him (beneficiaries). All actions of the trustee taken beyond the limits of the aforesaid powers are illegal and voidable through court and any property or benefit that has been illegally disposed of is to be recovered by the trust
Another effective tax shelter used worldwide is the placement of assets in private funds. The main difference between a private foundation and a trust is that the former in its legal nature is a legal entity which acts under a formal legal document - the articles of association. On the contrary, trust is not a legal entity.
In many developed countries (for example, the Principality of Liechtenstein) the legislation provides for a significant confidentiality of information about settlors and beneficiaries of private funds and the property transferred to the disposal of the fund, as well as its earnings, enjoy benefits in taxation and a significant degree of protection against state and other sanctions.
Legal relations connected with the set up and legal support of activity of trusts and funds are quite intricate and require an exclusive professional approach. Some European countries have not so far ratified the Convention, and the setup of the discussed structures in those countries is fraught with considerable difficulties and associated with high risks. In addition, the legislation of some countries, for instance, the Russian Federation, does not recognize the direct placement of property of residents of the country into the trusts and, thus, to fully protect the assets a more complex legal mechanism involving several levels of legal protection is required.
SBSB has the extensive experience in registration and management of trusts and funds, we will help you to choose the optimal strategy for asset protection subject to your individual needs and wishes.
If you have any questions regarding registration of trusts and funds, please contact SBSB attorneys.