Sovereign Corporate Services shows how you can protect your property for your next of kin when you are no longer there
Most people prefer not to think about what will happen to their property on their death. However, failure to make proper plans can create real problems and cause great expense, including tax liabilities, for next of kin. They will be forced to sort out such problems at a time when they are emotionally upset and most vulnerable.
Making a will is a sensible way for an individual to put his or her affairs in order. However, the administration of a deceased's estate can be costly. One alternative to making a will is to set up a trust during one's lifetime. With careful planning, this can eradicate delays, costs and taxes and provide other benefits such as protecting assets from future creditors or providing anonymity.
What is a trust?
Unlike a company, a trust is not a legal entity. It is best described as a relationship; an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who holds the property for the benefit of specified people or objects (the beneficiaries).
A trust deed sets out the terms and conditions upon which the trustees must hold and administer the trust assets. The trust deed also sets out the rights and interests of the beneficiaries.
A trust can also be created by a will, but if assets are "transferred" to trustees during lifetime, they should be unaffected by the subsequent death of the settlor. Another word for "transfer" is "settle"; hence, the transferor of the assets is called the settlor and the trust is often referred to as a "settlement".
Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a trustee. However, the duties of trustees have been developed over centuries through English equity and common law and are now in many cases codified in statute law.
This law distinguishes between legal ownership (trust assets are held in the name of trustees) and beneficial ownership (only the beneficiaries may benefit from the assets). Further, even greater duties are imposed on professional trustees who, in reputable and well-regulated jurisdictions such as Gibraltar, for example, are required to be licensed.
Where can I set up a trust?
Virtually all low-tax or zero-tax common-law jurisdictions have some form of trust law. Gibraltar is at the forefront of best practice development in the area of trusts and was one of the first jurisdictions to introduce the regulation and supervision of trust companies. Professional trustees must be licensed under the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC).
Gibraltar trust law is derived from English common law and the rules of equity, supplemented by certain legislation. Gibraltar's Trustee Ordinance is based on the Trustee Act 1893.
"Asset protection trusts" are also permitted although all trusts provide some element of asset protection.
Are there concerns regarding confidentiality?
Regulations require trustees to know the identity of the settlor and ultimate beneficiaries of a trust. This information is kept completely confidential. Disclosure to third parties is only required in very particular circumstances and must be accompanied by a court order. In the case of asset protection trusts, the register maintained by the Registrar of Dispositions to record the transfer of assets to asset protection trusts is closed and its contents are privileged.
What about tax liability?
The vast majority of Gibraltar trusts are set up as discretionary trusts so that beneficiaries only have a contingent interest. The beneficiaries can, therefore, avoid any tax liability until assets are distributed to them.
Trust income is exempt from tax in Gibraltar if the trust is established by a non-resident, has no Gibraltar beneficiaries and derives no income locally (other than bank interest). The terms of the trust must expressly exclude Gibraltar residents from being beneficiaries.
Asset protection trusts (APTs) are permitted in Gibraltar. These must be registered with the Register of Dispositions.
Only professional trustees licensed by the FSC can act as trustees of APTs and an application fee of £300 (around Dh1,785) is payable upon registering the trust and £100 is payable annually to maintain the registration.
What are the main advantages of a trust?
Trusts can be a very useful means of tax planning. They can be very flexible; even the settlor can continue to benefit from the trust assets.
Trusts offer asset protection and confidentiality. There is no public register of trusts or trustees, so the ownership of trust assets can remain entirely confidential in most circumstances.
They help avoid forced heirship. They also facilitate estate planning, protecting those who may be unable to manage their own affairs such as children, the aged or persons suffering from certain illnesses.
If a company's shares are transferred into a trust prior to the owner's death, the unnecessary liquidation of the family business can be prevented.
In some circumstances, depending on the local laws, a "local company" may be required to sit under the trust (for instance, it's common for a Jebel Ali offshore company to hold Dubai property and have a trust acting as a shareholder of the company).
While every effort has been made to ensure that the details contained herein are correct and up to date, this information does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.
Thursday, September 22, 2011
Tuesday, September 6, 2011
Jargon busting – after a long summer
Jargon busting – after a long summer
Oh dear, September is here and that means it’s back to work for many Gibraltarians after the lazy, if not necessarily crazy, days of summer. We can look forward to National Day but the main holidays are over for another year. How was the summer for you? Let me tell you about mine.
Reading the financial press every day, I became ever more disturbed as the summer went on. It may surprise readers to learn that this wasn’t because of the generally woeful economic news – although it was pretty dreadful across the board. No, I was more concerned to read countless articles containing words that seem to have no other purpose that to sow seeds of confusion among the readership.
I am referring to that scourge of the modern age – jargon. In many articles I read this summer, it was just unadulterated balderdash and blether, and I am convinced that there exist out there a whole bunch of finance professionals who simply thrive on jargon. The cynic inside me (surely not?) would say that this means they can charge more for their opinions and advice.
Some of the recent stuff I have read in the financial press would confuse anyone. Has Greece defaulted, or not? Who cares? And why? And what on earth is meant by increasing the US debt ceiling? Have they gone in for DIY over there or what? I thought the readership of The Gibraltar Magazine deserve better than that, so here are a few answers to some of the burning world economic issues of the day. You are entering a jargon busting zone – for a bit anyway.
Firstly, we all depend on the strength of the general economy. So let’s remind ourselves what is meant by gross domestic product – or GDP. And the difference between “growth” and “recession” – for there is not much difference between these two concepts even though we love the first and have learnt to steer well clear of the second if at all possible.
Gross domestic product (GDP) is the total market value of all goods and services produced within a country in a given period. The standard of living is often referred to as GDP per capita (i.e. per person) and is often considered a good measure of one country’s performance measure against another – bearing in mind that no two countries have exactly same number of residents.
Typically GDP figures for a country are published every three months, i.e. every quarter. If the reported figure is positive – and they are always measured as a percentage – then the country is said to be growing. Naturally, the reverse is true if the figure is negative when the overall economy is said to be contracting. Technically speaking, a recession is said to occur if the figures in two successive quarters – that is a six-month period – are contracting. It can be a very fine line but the consequences can be far reaching.
Another bit of jargon we have heard far too much about this summer has been all this talk of possible “sovereign default” – especially by Greece. So has that country defaulted or not? And what are the implications for the rest of Europe and indeed the wider global economy?
Simply put, a sovereign default is the term used to describe the inability of a country (a “sovereign state”) to repay its debts in full. One could add “or on time” which amounts to pretty much the same thing. And there’s the rub. The latest EU discussions concerning Greece and its second bailout in as many years had two main objectives. Firstly, the EU sought desperately to avoid the impression that Greece had defaulted and, secondly, it was trying to defuse the seemingly inexorable market pressure on other troubled EU economies that might follow suit. The already-bailed-out Ireland and Portugal were the main two preoccupations, but then further worries re-surfaced about the much larger economies of Italy and Spain.
“Too big to fail” is an overused expression but for many reasons that phrase is true of the larger countries. The consequences of a default by one of these would be catastrophic – let us not even imagine the affect any default by Spain would have on our small economy here in Gibraltar. Let us simply hope that this hypothetical question remains just that – a theory and no more.
As I write this, an even more worrying scenario appears to have been averted, but only just. A default by the largest economy of them all – the United States. Again, the problem is that the US has simply run out of money. The talk all along was of an increased debt ceiling. So what is one of those, then?
A debt ceiling is basically an overdraft limit. In the case of the United States, the maximum total overall debt is fixed by law. In the same way that all of us know the majority of our outgoings in advance, the country’s finance chiefs were aware that on Tuesday, 2 August, the debt would have surpassed the limit that was US$14.3tn. After much debate and not a little grandstanding by several politicians, it was agreed to increase this limit by US$2.4tn – but with swingeing cuts to government spending in order to reduce the deficit.
The eagle eyed will have noticed that tiny abbreviation – “tn”. Surely that’s a misprint. I mean “bn” for billion, right? Wrong: “tn” is short for trillion or 1,000 billion. So the new debt limit will be – wait for it – US$16,700,000,000,000. More jargon and something worth explaining.
When I was a kid doing my maths homework, a billion was a million millions and a trillion was a billion billions. Ludicrous numbers that I never expected to use in real life. Since then, the world has adopted the US version where a billion is a mere 1,000 million and a trillion is 1,000 times that. Sounds a lot more reasonable, doesn’t it? Until you read the debt figure above written there in all its horror – with 12 zeros. It doesn’t really matter what we call it. The figure is astounding.
Finally I wanted to look at one last bit of jargon – credit ratings – and why they are so important. A credit rating measures the credit worthiness of a debt issuer. This could be a company but during the summer we have heard more about the ratings of specific countries – put simply, the chances of the debt issuers’ default. Credit ratings are determined by specialist agencies and recently we have seen a succession of downgrades of European debt. The steepest declines have been in places such as Greece, but even Spain has not been immune. Despite the massive increase in the US debt discussed earlier, its credit rating has not been downgraded – yet.
Credit ratings are used by bond purchasers to determine the likelihood that the government concerned will actually pay its bond obligations. If not of course, the bond purchaser might lose some of his investment – the so called “haircut”. This is why ratings are so important. Any downgrading can severely affect sentiment and the whole merry-go-round starts all over again.
I have always admired the Plain English Campaign which has worked tirelessly for over 30 years to rid Britain of gobbledegook and confusing information that could be misunderstood. I think there is a good case for financiers to adopt the same approach. The danger of course is that the general public will make a startling discovery. Rather like the story of the Emperor’s clothes, perhaps some finance “professionals” and journalists in particular might be found severely wanting once the veneer of their jargon was removed.
So here is my clarion call: “Plain business speak please!” With a little more of that, we might all understand better the extent of the world global crisis we are living through. And we might be less willing to tolerate the messes that our financial institutions and governments get us into.
Oh dear, September is here and that means it’s back to work for many Gibraltarians after the lazy, if not necessarily crazy, days of summer. We can look forward to National Day but the main holidays are over for another year. How was the summer for you? Let me tell you about mine.
Reading the financial press every day, I became ever more disturbed as the summer went on. It may surprise readers to learn that this wasn’t because of the generally woeful economic news – although it was pretty dreadful across the board. No, I was more concerned to read countless articles containing words that seem to have no other purpose that to sow seeds of confusion among the readership.
I am referring to that scourge of the modern age – jargon. In many articles I read this summer, it was just unadulterated balderdash and blether, and I am convinced that there exist out there a whole bunch of finance professionals who simply thrive on jargon. The cynic inside me (surely not?) would say that this means they can charge more for their opinions and advice.
Some of the recent stuff I have read in the financial press would confuse anyone. Has Greece defaulted, or not? Who cares? And why? And what on earth is meant by increasing the US debt ceiling? Have they gone in for DIY over there or what? I thought the readership of The Gibraltar Magazine deserve better than that, so here are a few answers to some of the burning world economic issues of the day. You are entering a jargon busting zone – for a bit anyway.
Firstly, we all depend on the strength of the general economy. So let’s remind ourselves what is meant by gross domestic product – or GDP. And the difference between “growth” and “recession” – for there is not much difference between these two concepts even though we love the first and have learnt to steer well clear of the second if at all possible.
Gross domestic product (GDP) is the total market value of all goods and services produced within a country in a given period. The standard of living is often referred to as GDP per capita (i.e. per person) and is often considered a good measure of one country’s performance measure against another – bearing in mind that no two countries have exactly same number of residents.
Typically GDP figures for a country are published every three months, i.e. every quarter. If the reported figure is positive – and they are always measured as a percentage – then the country is said to be growing. Naturally, the reverse is true if the figure is negative when the overall economy is said to be contracting. Technically speaking, a recession is said to occur if the figures in two successive quarters – that is a six-month period – are contracting. It can be a very fine line but the consequences can be far reaching.
Another bit of jargon we have heard far too much about this summer has been all this talk of possible “sovereign default” – especially by Greece. So has that country defaulted or not? And what are the implications for the rest of Europe and indeed the wider global economy?
Simply put, a sovereign default is the term used to describe the inability of a country (a “sovereign state”) to repay its debts in full. One could add “or on time” which amounts to pretty much the same thing. And there’s the rub. The latest EU discussions concerning Greece and its second bailout in as many years had two main objectives. Firstly, the EU sought desperately to avoid the impression that Greece had defaulted and, secondly, it was trying to defuse the seemingly inexorable market pressure on other troubled EU economies that might follow suit. The already-bailed-out Ireland and Portugal were the main two preoccupations, but then further worries re-surfaced about the much larger economies of Italy and Spain.
“Too big to fail” is an overused expression but for many reasons that phrase is true of the larger countries. The consequences of a default by one of these would be catastrophic – let us not even imagine the affect any default by Spain would have on our small economy here in Gibraltar. Let us simply hope that this hypothetical question remains just that – a theory and no more.
As I write this, an even more worrying scenario appears to have been averted, but only just. A default by the largest economy of them all – the United States. Again, the problem is that the US has simply run out of money. The talk all along was of an increased debt ceiling. So what is one of those, then?
A debt ceiling is basically an overdraft limit. In the case of the United States, the maximum total overall debt is fixed by law. In the same way that all of us know the majority of our outgoings in advance, the country’s finance chiefs were aware that on Tuesday, 2 August, the debt would have surpassed the limit that was US$14.3tn. After much debate and not a little grandstanding by several politicians, it was agreed to increase this limit by US$2.4tn – but with swingeing cuts to government spending in order to reduce the deficit.
The eagle eyed will have noticed that tiny abbreviation – “tn”. Surely that’s a misprint. I mean “bn” for billion, right? Wrong: “tn” is short for trillion or 1,000 billion. So the new debt limit will be – wait for it – US$16,700,000,000,000. More jargon and something worth explaining.
When I was a kid doing my maths homework, a billion was a million millions and a trillion was a billion billions. Ludicrous numbers that I never expected to use in real life. Since then, the world has adopted the US version where a billion is a mere 1,000 million and a trillion is 1,000 times that. Sounds a lot more reasonable, doesn’t it? Until you read the debt figure above written there in all its horror – with 12 zeros. It doesn’t really matter what we call it. The figure is astounding.
Finally I wanted to look at one last bit of jargon – credit ratings – and why they are so important. A credit rating measures the credit worthiness of a debt issuer. This could be a company but during the summer we have heard more about the ratings of specific countries – put simply, the chances of the debt issuers’ default. Credit ratings are determined by specialist agencies and recently we have seen a succession of downgrades of European debt. The steepest declines have been in places such as Greece, but even Spain has not been immune. Despite the massive increase in the US debt discussed earlier, its credit rating has not been downgraded – yet.
Credit ratings are used by bond purchasers to determine the likelihood that the government concerned will actually pay its bond obligations. If not of course, the bond purchaser might lose some of his investment – the so called “haircut”. This is why ratings are so important. Any downgrading can severely affect sentiment and the whole merry-go-round starts all over again.
I have always admired the Plain English Campaign which has worked tirelessly for over 30 years to rid Britain of gobbledegook and confusing information that could be misunderstood. I think there is a good case for financiers to adopt the same approach. The danger of course is that the general public will make a startling discovery. Rather like the story of the Emperor’s clothes, perhaps some finance “professionals” and journalists in particular might be found severely wanting once the veneer of their jargon was removed.
So here is my clarion call: “Plain business speak please!” With a little more of that, we might all understand better the extent of the world global crisis we are living through. And we might be less willing to tolerate the messes that our financial institutions and governments get us into.
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