An Introduction to Trusts Ian Watson TEP Barrister

An Introduction to Trusts Ian Watson, TEP Barrister and New York Attorney STEP Cross-Border Estates Group Presentation to STEP Hungary 2013 Conference Budapest 11 June 2013 3 Stone Buildings, Lincoln's Inn, London WC 2 A 3 XL, England tel: +44 (20) 7242 4937 fax: +44 (20) 7405 3896 10 Rockefeller Plaza, 16 th floor, New York, NY 10020 -1903, USA tel: +1 (212) 713 7680, fax: +1 (212) 713 7679 www. 3 stonebuildings. com

Overview 1. Welcome to STEP – a few words about C-BEG 2. What is a Trust? 3. Why Use a Trust? 4. Are Trusts Secret? 5. Trusts and Tax 6. International Trends in Trusts 7. The Future S

1. STEP and C-BEG Ø The Society of Trust and Estate Practitioners Ø Cross-Border Estates Group S

2. What is a Trust? Ø No single law of trusts – different rules in England, Scotland, Ireland, each of the United States, former British colonies in the Caribbean, Canada, Australia, Hong Kong, Singapore, the Channel Islands, etc. Ø A structure to provide for family, continuing ownership and management of assets and succession Ø Also business and commercial uses Ø Not a separate legal entity, rather a relationship among a Settlor, one or more Trustees and one or more Beneficiaries S

Typical Trust Settlor Trustee net income Trust dividends interest £ Shares Cash Beneficiary House right to occupy S

Traditional Features of a Trust Ø Legal ownership by Trustee Ø Trustee has fiduciary duty to act only in the interest of the Beneficiaries Ø Trustee may only invest in specified types of conservative assets Ø Trustee may have wide discretion to decide amounts distributed Ø Successive or overlapping beneficial interests (e. g. , life interests v. remainders) Ø Restrictions on Beneficiary’s right to alienate interest Ø Limited duration – the Rule Against Perpetuities S

Rule Against Perpetuities Ø “An interest must vest or fail to vest within lives in being at the time it is created plus 21 years” Ø Notoriously difficult to apply – and harsh result Ø Modified or abolished in many jurisdictions: Ø Ø Ø Fixed term: e. g. , 80/90/100/150 years, etc. , or Unlimited duration Limit generally did not apply to trusts with only charitable purposes S

3. Why Use a Trust? Ø A variety of personal and commercial uses Ø Flexibility and administrative convenience S

Pension Trust Employer (Settlor) Trustee Pension Fund (Trust) dividends interest £ Shares income Retired Employees (Beneficiaries) Cash S

Charitable Trust Donors (Settlors) Trustee income Trust dividends interest £ Shares Charitable Causes (Beneficiaries) Cash S

Discretionary Trust for Family Trustee Settlor Trust dividends interest £ Shares income Cash Settlor’s widow right to and children occupy (Beneficiaries) House S

Life Interest Trust for Spouse Trustee Settlor net income Trust dividends interest £ Shares Cash Settlor’s widow right to occupy (Income Beneficiary) death of widow capital House Settlor’s children (Remainder Beneficiaries) S

More Specific Provisions [1] Settlor’s widow to receive net income during her life death of widow Settlor’s children to receive income at the Trustee’s discretion until they reach age 21, then to receive net income. To receive capital at age 35 / 50, etc. , or Settlor’s grandchildren to receive capital at parent’s death of children S

More Specific Provisions [2] Settlor’s widow to receive net income during her life death of widow (divide capital into equal shares for children) Child X Settlor’s other children to receive income from his share at the Trustee’s discretion for life. to receive their share of capital at widow’s death of child X Settlor’s grandchildren by Child X to receive their share of capital at Child X’s death S

Additional Discretion Ø Trustee or a Beneficiary may be allowed to deviate from default terms to meet unexpected situations Ø Trustee’s overriding power of appointment Ø Beneficiary’s power of appointment S

4. Are Trusts Secret? Ø Confidential, but not secret Ø Creation or existence of a trust may need to be disclosed (particularly if “offshore”) Ø Generally, details can be kept private (but wills may be in public record) Ø “[T]he obligation to keep taxpayer information confidential and only release it in accordance with the law is a fundamental principle. ” (Engaging with High Net Worth Individuals on Tax Compliance, OECD, May 2009, p. 53). S

5. Trusts and Tax Ø Not a vehicle for avoidance and hiding from tax authorities Ø Extensive disclosure requirements and tax costs for “offshore” arrangements Ø Many different tax systems, but a general principle is to try to make trusts “tax neutral” – i. e. , taxed the same as if there were no trust Ø Some tax advantages may remain, depending on context and jurisdiction S

Discretionary Trust for Family Settlor Trustee income Trust dividends interest £ Shares Cash House Settlor’s widow right to and children occupy (Beneficiaries) S

Typical UK Will Trusts Estate Life interest Trust For Spouse Balance of estate Nil Rate Band Discretionary Trust £ 325, 000 Death of spouse Inheritance tax paid on death of spouse Trust(s) for children, then grandchildren S

Discretionary Trust for Family Settlor Trustee income Trust dividends interest £ Shares Cash House Settlor’s widow right to and children occupy (Beneficiaries) S

6. International Trends in Trusts Ø The Hague Trusts Convention XXX of 1 st July 1985 In force: Ø Ø Ø Australia Canada (other than Ontario & Quebec) Italy Liechtenstein Luxembourg Malta Monaco The Netherlands San Marino Switzerland United Kingdom Not yet in force: Ø China Ø Cyprus Ø France Ø United States S

7. The Future Ø Growing popularity Ø Increased international recognition Ø Unpredictable changes in tax laws S

For more information please contact: Ian Watson, TEP 3 Stone Buildings Lincoln’s Inn London WC 2 A 3 XL England Tel: +44 (20) 7242 4937 Email: iwatson@3 sb. law. co. uk DX 317 Chancery Lane 3 Stone Buildings, Lincoln's Inn, London WC 2 A 3 XL, England tel: +44 (20) 7242 4937 fax: +44 (20) 7405 3896 10 Rockefeller Plaza, 16 th floor, New York. NY 10020 -1903, USA tel: +1 (212 ) 713 7680, fax: +1 (212) 713 7679 3 stonebuildings. com