The concept of a trust is a unique feature to 'common law' or English speaking jurisdictions. Historically, it developed from the English laws of equity and was widely used in the United Kingdom as both an effective and legal tax avoidance method. Basically speaking, a trust is merely a way in which a person (known as the Settlor) transfers his or her assets to independent third parties (known as Trustees) who manage and control the disposed assets in favour of Beneficiaries. A critical factor is the fact that to be effective a trust must give full autonomy to the Trustees. If this is not done, then it could be claimed that the trust was not settled and therefore was not a properly constituted trust instrument. If this occurred then the Settlor would still be legally deemed to be the owner of the trust's assets and therefore still taxed as such. 

Obviously, given this requirement to totally deny the Settlor's direct control over what were formally his assets, demands great 'trust' in the Trustees. Fortunately, Trustees are not totally free of control and, by convention, they will invariably make decisions having agreed to a document known as a 'Letter of Wishes'. This is an explanation of the desired disposition and/or investment of assets by the Settlor to the Trustees initially at the time of the trusts creation. Letters of Wishes should always be updated during the Settlor's lifetime on a regular basis to take account of any changes in his Wishes or in his family circumstances. The Settlor will often appoint a protector (normally a trusted member of their family or a business associate) who is required to give his consent to many of the decisions of the Trustees. 

What type of Trust

Whilst there are many different types of Trust employed in the World's common law jurisdictions, it is the Discretionary Trust which finds most favour in the 'offshore' world. The reason for this is that a Discretionary Trust not only ensures that the Settlor has divested himself of his assets, but it also provides sufficient benefits to the intended heirs. The reason for this is that whilst it is known that there will of course be beneficiaries, a Discretionary Trust leaves the amount of capital and/or interest to be paid to the, normally unnamed beneficiaries, totally at the discretion of the Trustees. In effect, this allows the Trustees total flexibility to control when and what type of payment should be in the best interest of the Beneficiaries and the family as a whole.

Who can use a Trust

Until recently, there were virtually no restrictions on who could make effective use of a Trust. However, both common law and statute have severely reduced the legal employment of Trusts for those tax domiciled in countries such as the United Kingdom and the United States. Notwithstanding these restrictions, Trusts are still very flexible means of protecting assets against unknown future risks and, in certain circumstances, for the mitigation of income and capital taxation.