Ask the expert: Setting up a trust

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.

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.

Executive aircraft – toy or tool?

Since the implementation of the Córdoba Agreement in 2006 – when restrictions were removed to permit direct flights from Spain – Gibraltar residents may have noticed an increasing number of small, private aircraft using the airport. We have certainly seen an increase in corporate jet activity and I expect to see this increase when the new terminal opens. I understand there will be services dedicated to the business aviation industry based from the terminal, so that is another reason to look forward to its completion.

But how, in these economically strained times, can such “toys” be justified? Surely this is yet another example of the type of corporate excess that should have been consigned to history. A number of large companies certainly seem to think so – they have either sold or downsized their aircraft fleets in recent years. But is there any place for expensive business aircraft in the post-crisis economic world in which we now find ourselves?

In my opinion, there is. Executive aircraft come in all sorts of shapes and sizes and there are many ways to own or operate them from full to fractional ownership, or simply chartering on an ad hoc basis. Under the right circumstances, the sensible use of a private jet – however this is done – can not only be economically justified, it can be a very attractive option both to business people and the companies they represent. Read on.

Consider this example. Imagine you are in Gibraltar with five colleagues and you need to get to Nice for a meeting. There are no direct flights from here and although Málaga is only a hundred miles up the coast, surprisingly there are no direct flights to Nice from there either. Our party of six business executives is now faced with a dilemma and at least two flights – first to London or Paris, then an onward connection. How much more simple it would be to charter a business jet for a direct flight from Gib to Nice – and presumably back again, although of course that may not be necessary.

The advantages speak for themselves. The party simply turns up at the airport very close to departure time and, in this example, the round trip could easily be achieved in just one day. Naturally the formalities remain but they are generally easier to complete and there’s no need to arrive up to two hours before departure as with commercial trips. A direct flight straight to the airport closest to where you want to go could be just what your company needs. There will be a considerable saving of down time and any of the usual difficulties one can encounter when using scheduled airline services – cancellations, overbooking, delays – will be avoided. In addition, confidentiality is assured and, because the fellow passengers are likely to be colleagues or associates, the flight time can be spent more profitably.

What is the likely price for such convenience? As always this can vary widely but, as an example, local private charter firm GibJets (www.gibjets.com) charges around £2,500 per flying hour. Divide that between the six passengers that its aircraft might typically carry, and one can start to appreciate the commercial sense of using this option. Add to that the fact that executive jets can use a much greater range of airfields than those available to commercial airliners, then the expense becomes even easier to rationalise. Business jets can land at airports with limited facilities and very often – depending on the type of aircraft – they can be operated by just a single pilot.

So much for the theory. In these days of economic austerity what is the state of the market for business jets? They range in price from the so called “Very light Jet” or VLJ (sometimes referred to as “Entry Level Jets”) to airliners such as the four engine Airbus A340 used by a very select band of billionaires and royalty for their private, or executive, use. The price tags match this wide range, starting at a couple of million dollars but easily rising to US$100m or more for the airliner-size versions.

My colleagues at Register An Aircraft.com, Sovereign’s aviation division, report that the sector has certainly seen a noticeable downturn since the onset of the global economic crisis. The use of business jets as a corporate tool was much criticised at the height of the crisis; who can forget the outcry over bankers and automakers flying to Washington in their private jets to testify at congressional hearings into the massive government bailouts they were receiving?

As the economic situation stabilises, at least in certain countries, the use of corporate jets is once again becoming more acceptable for many international businesses (and more importantly their shareholders). The business case for such use has not changed – the time and money saved, together with more confidentiality and better use of time spent flying. What has changed is the perception of the press and the public in relation to the “Jet Set”.

The business jet charter market is certainly recovering; we are seeing a number of these aircraft landing at Gibraltar on a more regular basis. And it is interesting to note that, while new aircraft sales in Europe are still slow, business has been increasing in other parts of the world. In particular, dealers are reporting higher levels of interest in the Middle East, India, China and South America – especially Brazil where a local manufacturer, Embraer, has developed into a world leader.

So as we all look forward to using our own brand new airport terminal later in the year, I hope to see even more of these remarkable aircraft flying into and out of the Rock. Next time you see one, rather than seeing it simply as a toy for spoiled executives, consider instead that it might just be a serious business asset that is adding to the bottom line in clear and demonstrable ways.

Aircraft landing and taking off at Gibraltar will of course fly over the marinas where super yachts seem to be perpetually moored. Pleasurable these vessels undoubtedly are; practical, sometimes, maybe. But one cannot drift on an executive jet. They are designed to get one from A to B far more efficiently than commercial flights. That is the difference and the reason why I, for one, believe that given the right circumstances they can be ideal business tools. This is also why I am looking forward to welcoming them to Gibraltar in ever greater numbers. And the wealthy people they carry, of course!

Written by Ian Le Breton who is based in the Gibraltar office.

Winner of the 2010 Sovereign Asian Art Prize

The Sovereign Art Foundation announced Pala Pothupitiye as the winner of the 2010 Sovereign Asian Art Prize last night at a gala dinner and auction sponsored by Julius Baer, leading Swiss private banking group with a longstanding tradition of supporting the arts. Hailing from Sri Lanka, Pala was the recipient of the US$25,000 prize for Jaffna Map, in which he recrafts official maps of Jaffna, located in the northern tip of Sri Lanka and a key city in the war between the Tamil Tigers from the north and the southern Sinhala Lions. Ferocious teeth and claws of Lions and Tigers decorate the land mass, while the ‘internally displaced persons’ are represented in the border areas, being chased away from the bestial clash.

The winner of the US$1000 Schoeni Prize, which was determined by a public vote, was also announced as Anton Del Castillo, for Toy Soldier.

Over 400 nominated entries from across Asia were received this year, of which 30 finalists were selected by a distinguished panel of judges: David Elliott, Fumio Nanjo, Lars Nittve, Tan Boon Hui, David Tang and Xu Bing. The works of the remaining 29 finalists were auctioned off last night, with sales totalling over US$300,000. Half of the proceeds go to the artists and the other half is donated to arts charities supported by The Sovereign Art Foundation. The winning artwork is retained by The Sovereign Art Foundation in order to promote the artist and Asian art to the community at large. The work will be eventually donated to a museum or used to further charitable causes.

Major auction results include:

• Artificial Wonderland No.2 by Yang Yongliang, US$35,000
• Witness from Baghdad by Halim Al-Karim, US$24,000
• After a Hard Day’s Work by Amanullah Mojadidi, US $14,000

A special edition Gucci watch, inspired by the Grammy Awards, was presented to the highest bidder on the evening.

Howard Bilton, Chairman of The Sovereign Group, commented, “Our judges were particularly impressed with the standard of entries this year. I think we certainly found the strongest ever group of finalists. It was therefore no surprise that nearly all works found buyers at above estimated prices. We expect many of these mid-career artists to go onto bigger and better things in the near future and buyers will find they picked up a real bargain even if they paid well over estimate.”

The 2010 Sovereign Asian Art Prize was principally sponsored by Julius Baer, the 120-year-old Swiss bank with an unwavering tradition and dedication in supporting the arts. Andrea Benenati, CEO Hong Kong & North Asia stated, “We are proud of our sponsorship of The 2010 Asian Sovereign Art Prize which marked our first step in supporting the development of Asia’s art scene. As we decisively growing Asia into our second home market, we hope to continue to extend our global commitment of nurturing artistic talents to the Asia region. ”

Winner Pala Pothupitiye stated, “I am deeply honoured to be recognised by the prestigious Sovereign Asian Art Prize. I am proud to be able represent Sri Lankan art and share it with the greater Asian region. The prize money will enable me to actualize ideas and work on projects that I otherwise would be unable to pursue and raise awareness for Sri Lankan art.”

This year, The Sovereign Art Foundation has pledged to continue its support to help the children in M’Lop Tapang in Cambodia and Kalki in India using the arts as rehabilitation and therapy. The Foundation will also be launching a new partnership with the Christina Noble Children’s Foundation in Vietnam. Bilton commented, “Our thanks go to everyone who supported us this year. This money will make a real difference to the charities we support. We are going to be able to improve the lives of a significant number of disadvantaged children.”

Held at the Four Seasons hotel, the gala dinner attracted 360 guests, including a panoply of high-profile members of Hong Kong’s arts, fashion, and business arenas, such as Vivienne Tam, Irene Wan, Bob and Stacey Morse, Dr. Mohindra Boya and Lina Ross, and Nick and Melanie Simunovic.

India to get bank details from Switzerland starting April: Government of India

NEW DELHI: India will be able to access banking information from Switzerland in specific cases beginning April 1, 2011, Parliament was told today. India and Switzerland had signed an agreement on August 30, 2010 to amend the Double Taxation Avoidance Agreement (DTAA) to facilitate exchange of information between the two countries.

"The amended DTAA (with Switzerland) will enable India to get banking information in specific cases for a period beginning April 1, 2011 and thereafter", Minister of State for Finance S S Palanimanickam told the Rajya Sabha in a written reply.

The revised DTAA with Switzerland was signed by Finance Minister Pranab Mukherjee and Micheline Calmy-Rey, head of Swiss Federal Department of Foreign Affairs. While the India has completed the formalities for implementation of the revised DTAA, Switzerland has yet to ratify the agreement, Mukherjee said in reply to another query.

"The amending Protocol will enter into force on completion of the internal process by Switzerland. Switzerland has informed that they have still not completed their internal process as the Amending Protocol has yet not been ratified by their Parliament", Mukherjee said.

The revised DTAA, according to Palanimanickam, will, "specifically provide for exchange of banking information as well as information without domestic interest". The Amending Protocol, he added, "contains a provision wherein the requesting state has to provide the name of the person under examination or investigation and, if available, other particulars facilitating that person's identification such as address, date of birth, marital status and tax identification number."

The revised agreement with Switzerland, however, will not allow "fishing expeditions", a term used for seeking general information. "The Amending Protocol also provides that these clauses contain important procedural requirements that are intended to ensure that fishing expeditions do not occur. Nevertheless they need to be interpreted in order not to frustrate effective exchange of information", the Minister added.

Pointing out the government does not have any verifiable information on the total amount of money deposited in Swiss banks by Indian nationals, Palanimanickam said the Finance Ministry was getting a fresh study done on unaccounted income and wealth within and outside the country.
"The proposal (of study) was approved by the government in January 2011. The study is likely to be completed within a timeframe of 18 months", he added.

The government is committed to tax undisclosed income of Indian residents within and outside the country, the Minister said, adding "this also include undisclosed deposits in other countries including Switzerland. Since this in an on-going process, no time frame can be fixed for the same".

Confusion over UAE Inheritance Law for Expats

By Vikrant Pangam

Sovereign Group, Abu Dhabi Office

There have been many conflicting views on inheritance laws in the UAE. "If I were to pass away in the UAE and my bank accounts are frozen, how is my wife to access my funds? What about my will written in the UK?" As these questions among others - were directed to a panel of legal experts at a symposium held at Abu Dhabi Chamber of Commerce and Industry (ADCCI) on 28th February 2011, not all elicited easy answers.

The panellists, who admitted to a gaping conflict of views on inheritance laws in the UAE, said they would persuade the government to bring about greater clarity on such matters.
"A lawyer can say to you we cannot guarantee you anything because in a civil code country, judges are not bound by judgments of previous cases," said Cynthia Trench, Principal of legal firm Trench & Associates, which organised the symposium at the ADCCI.

"We have a lot of conflicts here because of which courts are giving conflicting judgments, lawyers are giving conflicting advice and the press is giving conflicting articles," she said.

To illustrate her point, Trench referred to different sections of the law and said on the one hand, we can look to the law of domicile of expatriates, Article 17 (1), to determine the distribution of properties or assets. On the other, Article 17 (5) says the laws of the UAE shall apply to wills made by expatriates disposing of their property in the state. And there's Article 2 (Civil Transactions Code), which says the principles of Islamic jurisprudence shall be relied upon in interpreting these provisions. "What law should we apply?" she wanted to know.

Cynthia further cited recent Dubai Court Cases and explored that

1. Presently the majority of the judges apply Sharia Law and ignore any Foreign Wills;

2. Even if you manage to obtain the ears of a sympathetic judge, it would take over 12 months and could cost more than Dhs 50,000 (Advocate fees, notarisation and legalisation of the Foreign documents, translation costs and foreign lawyers’ fees).

Dwelling on a document issued by the Notary Public on wills for non-Muslims which says, "Write it, Attest it, Keep it", Trench referred to Para 12 which in effect notes that the decision would not be upheld by the competent court.

To avoid such unfavourable implications, the most certain way moving forward is to take the ownership of your assets, bank accounts and properties offshore. The UAE laws at the moment allow Expatriates to own any assets under an offshore company, which in effect takes the assets outside UAE jurisdiction for inheritance purposes.

Pictures from the Recent Sovereign Art Foundation Show