The Different Types of Offshore Trust Available

Most trusts created offshore are formed as inter vivos or ‘living’ trusts.

These are generally revocable trusts and they are created while the settlor is still alive.  They are created to hold the assets of the settlor for the benefit of another, i.e., the beneficiary.

As a trust is the creation of English common law, the most suitable location for an offshore trust is in a jurisdiction which has English common law as the foundation for its legal system such as Jersey, the Isle on Man or Guernsey.

There are four general categories of trust, and most offshore trusts come under one of them: -

-  Private: the most common type of trust for an individual
-  Corporate: including pension and employee benefit trusts
-  Charitable: for the benefit of charitable organisations
-  Purpose: trusts with no beneficiaries that are established for purposes that are ‘certain, reasonable and possible’

An offshore trust can be either ‘revocable’ or ‘irrevocable’ and ‘fixed interest’ or ‘discretionary’.

Revocable Trust

The offshore trust can be terminated or altered by the Settlor after a set period of time or at any time.

Irrevocable Trust

The offshore trust cannot be terminated nor can the terms of it be varied by the settlor at any time.

Fixed Interest Trust

The interests of the beneficiaries of the offshore trust are fixed in the terms of the trust deed.  The trustee has no power to vary these interests whatsoever.

Discretionary Trust

The trustee has the power of allocation.  He can set levels of income and distribute capital amongst the beneficiaries and he can also alter the membership of the beneficiary class.
When a trust is created for the settlor, it will depend upon the circumstances and requirements of the settlor as to whether the trust is set up as revocable or irrevocable.

Discretionary trusts are often necessary to satisfy tax planning objectives. 

With this type of trust the trustees do have quite far reaching discretionary powers which can sometimes be of concern to the settlor.  To alleviate some of the potential worry or risk for the settlor the powers of the trustee can be curtailed by the requirement for the consent of a third party known as the protector. 

Furthermore, the trust deed of a discretionary trust can include an informal but strictly confidential letter from the settlor to the trustees and protector.  In this letter the settlor can detail his direct wishes regarding for example the amount of asset, interest and income distribution, investment decisions, the employment of specific fund advisers, names of primary beneficiaries etc.  Legally this letter is non-binding and can only be deemed as guidance for the trustees; however the trustees do generally respect the settlor’s wishes and act in accordance with them.

Modern offshore trust deeds can generally be designed to meet the settlor’s specific requirements.  The trust deeds are usually worded in the widest possible terms however, to allow the trustee the scope to respond to any market or individual changes in circumstance or requirement.

It is common for offshore trusts to incorporate a company as well nowadays.  This means that the assets within the trusts are actually held by the company rather than by the trustees.  The benefit this can have for certain individuals is that the trust’s assets are not likely to be subject to capital taxes in the country of investment.

If you would like more information about offshore trusts or any other subject Shelter Offshore write about, feel free to ask us!