Trusts & Tax Planning

Trusts can be quite useful when it comes to tax planning, helping your beneficiaries minimize their tax liabilities. However, there are a few things you need to know, especially if you are planning on setting up an offshore trust. Here, we’ll take a look at everything you need to know about trusts and tax planning.

What is a trust? A trust is a specific way of managing assets. It can be defined as a fiduciary agreement that permits a third party, deemed a “trustee,” to hold assets on behalf of a beneficiary or beneficiaries. There are different ways in which a trust can be arranged, and it is possible to arrange how and when the assets can be passed on to the beneficiaries, depending on how it is arranged. Trusts typically avoid probate (the legal process of settling an estate, which typically involves proving the validity of the will, collecting and accounting for the assets of the deceased, and paying any debts and taxes of the deceased). That means that an individual’s beneficiaries will gain access to the assets much more quickly, saving time and court fees.

Are there different kinds of trusts? Yes, as trusts can be arranged in different ways, there are different kinds of trusts out there. The most common types of trusts tend to be bare trusts (also known as simple trusts), in which the beneficiary gains the immediate and absolute right to any assets in the trust and income generated, and discretionary trusts (also known as accumulation trusts), in which the trustee is the legal owner of the assets and accumulates profits but must run the trust to benefit the beneficiary and must hand the trust over to the beneficiary when he or she is legally entitled to it. Other trust types include a heritage or charitable trust, an interest in possession trust, a mixed trust, a nonresident trust, a parental trust for minors, and vulnerable beneficiary trusts.

Why are trusts useful for tax purposes? As previously mentioned, many people opt to use trusts to minimize their tax liabilities. For example, trusts may help reduce estate taxes and can help avoid inheritance taxes. Although probate is a matter of public record in many countries, when a trust allows assets to pass outside of probate, it also helps ensure that these assets remain private.

What about offshore trusts? Offshore trusts work the same as any other kind of trust, although they can complicate a beneficiary’s tax situation significantly. For example, in the United Kingdom, a UK resident beneficiary who is receiving any kind of benefits or distributions from a trust is required to pay various UK taxes. These taxes can include UK source income tax and capital gains tax; inheritance tax may also apply, depending on the situation. In addition, it is important to note that if money from an offshore trust is ever repatriated to a trustee’s country of domicile, he or she may face significant taxes. If you want to set up an offshore trust or are receiving any kind of beneficiation from an offshore trust, it is advisable to contact a professional so that you have a complete understanding of your tax liabilities.