If you own assets in multiple countries and want to protect these for the long term, a trust may be an option.
A trust is a legal structure that separates the assets from their owner, and as a result, comes with a range of tax and control benefits.
However, trusts also come with significant drawbacks. As a result, it is essential to fully understand their purpose and pro's and con’s before utilizing them.
Trusts have long been recognized as powerful legal instruments for managing and protecting assets. Whether for personal or business purposes, the use of trusts can offer a range of benefits.
When you establish a trust, you transfer assets of your choosing into a so-called trust fund. From then on, you do not own these assets anymore. The trust owns and controls the assets.
When you set up a trust, you appoint a trustee who manages the assets inside the trust according to predefined rules and guidelines that you decide at the time the trust is established.
Such rules address the beneficiaries and distribution amounts of the assets in the trust.
Pros of Using a Trust to Hold Assets:
Asset Protection:
One of the primary advantages of using a trust is the enhanced level of asset protection it provides. Assets held within a trust can be shielded from creditors, lawsuits, and potential claims. By transferring ownership of assets to a trust, individuals can minimize the risk of losing valuable properties or funds due to unforeseen circumstances.
Estate Planning:
Trusts are valuable tools for effective estate planning. They allow individuals to specify how their assets should be managed and distributed upon their death, ensuring a smooth transition and potentially minimizing probate costs and delays. Moreover, trusts provide privacy in the distribution of assets, as they do not go through the public probate process.
Tax Planning:
Trusts offer potential tax advantages, depending on the jurisdiction and the type of trust used.
For example, certain types of trusts can provide tax benefits by reducing estate or gift taxes. That’s important if you own substantial assets in countries with high inheritance taxes. For example, if you own real estate in the UK, or stocks in the US as a non-US citizen.
Additionally, income generated by assets within a trust may be subject to lower tax rates compared to personal income tax rates.
Continuity and Control:
Trusts provide a mechanism for continuity and control over the management of assets.
Settlors can appoint trustees to oversee the trust and ensure that the assets are managed and distributed according to their wishes. This can be particularly advantageous for individuals who want to provide ongoing financial support to family members or charitable organizations.
If the settlor becomes too old to execute some of these decisions, they can instead be safely handled by the trustee.
Flexibility:
Trusts offer a high degree of flexibility, allowing for customization based on individual needs and circumstances. There are various types of trusts available, such as revocable trusts, irrevocable trusts, living trusts, and special needs trusts, each catering to specific objectives. Trusts can be tailored to accommodate changing family dynamics, financial goals, and legal requirements.
Cons of Using a Trust to Hold Assets:
Complexity and Costs:
Establishing and maintaining a trust can involve significant complexity and expenses. Legal assistance is often necessary to draft the trust document and ensure compliance with relevant laws. Additionally, ongoing administrative tasks, such as accounting, tax filings, and trustee fees, can contribute to the overall costs of managing a trust.
Loss of Direct Control:
By transferring assets to a trust, the settlor relinquishes direct ownership and control. The appointed trustee becomes responsible for managing and distributing the assets in accordance with the trust's terms. This loss of control may be undesirable for some individuals who prefer to have a hands-on approach to managing their assets.
Limited Liquidity:
Assets held within a trust may experience limited liquidity. Depending on the terms of the trust, accessing and liquidating assets may require the approval of the trustee, which can introduce delays and complications, especially in urgent or unforeseen situations. This lack of immediate access to assets can be a drawback for individuals who require quick access to funds.
Irrevocability of Irrevocable Trusts:
Some types of trusts are irrevocable.
Once an irrevocable trust is established, it typically cannot be modified or revoked without the consent of all beneficiaries. This lack of flexibility can be a disadvantage if changes in circumstances require changes to the trust structure. It is important to carefully consider the long-term implications before creating an irrevocable trust.
The good news is that establishing a trust is just one of many available strategies to protect your assets and/or reduce inheritance taxes.
Here at the Dubai Navigator, we assist clients with assets in multiple countries, including the UAE, in protecting their assets for the long term. Check out our advanced international estate planning services for UAE residents.
We also offer complementary services from business and residence relocation to tax-optimized property and stock investment strategies.
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