GUEST POST/What trusts are and how they work

Posted by Conservative:

I am aware that I have already written about this subject, but am reacting to your call or analysis, which your readers may find helpful. Few people, in Malta, or indeed anywhere else, understand very much the intricacies of trusts, foundations and offshore companies, so here goes.

The person who sets up a trust and provides the assets is known as the “Settlor”. The Settlor does not own the trust, nor is it his.

A trust can have a “Protector”, who “protects” the trust by being able to oversee the activities of the “Trustees”.

The assets held within a trust are held for the benefit of persons known as the “beneficiaries”. The settlor can be a
beneficiary.

Assets in a trust are held in the name of the “Trustees” but the trustees cannot benefit; instead they must hold the assets under the terms of the written document signed by the settlor and called the “Trust Deed”. The trustees are the owners of the assets in the trust.

Trusts are a very common method of legally mitigating tax and protecting assets so that they can pass to the intended heirs, without the need of probate, and avoiding the delay, complication and expense, which may result from succession laws and taxes. The trustees will effect any investments recommended by the Settlor’s financial advisers or lawyers.

The beneficiaries include those the Settlor may wish to benefit, and may include or exclude the settlor/s. For as long as the settlor is alive, they may request that the trustees add or remove beneficiaries, if they so wish.

Distributions from the trust, by the trustees, during the Settlor’s lifetime and after the settlor’s death, would be carried out in accordance with the trust deed. The Settlor can guide the trustees by signing a confidential memorandum of wishes, which can always be changed during the settlor’s lifetime.

A trust can hold anything: property, yachts, paintings, antiques, shares, bonds, bank accounts, and any other financial or non-financial instruments.

In a number of jurisdictions, a “simple” or “small” trust is one that holds simple financial assets, such as life assurance bonds or bank accounts. A “complex” or “large” trust is on that holds property or an offshore company.

By creating a “complex” trust, the settlor is able to effectively hide away the assets, their origin and their true ownership. A settlor is often called the “economic beneficial owner”.

Now picture this. An illegal payment (commissions paid by way of a bribe or to a public or private officer in the normal course of their duty are illegal payments) is expected to be received for say €10 million. The intended recipient of that money sets up an offshore company in Panama (as an example). The shares of that company are held by another company in the British Virgin Islands (BVI).

The BVI company shares are then assigned into an offshore trust in New Zealand (NZ). Anyone looking at the shares held by the NZ trust will simply see, say, “10,000 ordinary shares in KM Holdings Company Limited”. The shareholders will be “The Trustees of the NZ Trust”.

This information would be very difficult to get hold of – indeed only the settlor, protector or trustees have a “right” to this information. The beneficiaries have no “right” to information on the trust, on any aspect of it. None at all.

If anyone may then be able to get hold of the BVI company accounts, they will simply see, say, “20,000 ordinary shares in Panama Holdings Company Limited”. If that “anyone” may then be able to get hold of the company documents and accounts for the Panama company, they will simply see that the company holds a bank account and that the shareholders are “KM Holdings Company Limited”.

At no stage will the name of the originator of that money appear anywhere. Nor that of the settlor – whose name would only be known to the trustees, who would never disclose that information as it would constitute a breach of confidentiality.

Whilst trusts are a very common method of legally mitigating tax and protecting assets, offshore companies are most often all about obfuscation. Offshore companies are all about hiding the origin of funds and the ownership of assets.

So let’s get back to the illegal payment. If say “Oil Co International Holdings Inc.” wants to pay an illegal bribe, commission or payment to someone, they simply pay it into the bank account of the Panama company (we are here calling it “Panama Holdings Company Limited”). The Panama company would issue an invoice to Oil Co International Holdings Inc.

No tax is payable in Panama, because it’s an offshore company not undertaking business in Panama, no tax is payable in the BVI, and no tax is payable in New Zealand.

If Daphne Caruana Galizia does not find out about it, mum’s the word and no one will ever be the wiser as trusts can last for up to 110 years – or even more.

The use of an offshore company in an offshore trust is to cover large and complex transactions. It is simply too costly for holding a property worth less than €1 million, simply too costly for any monetary or investment transactions that are legal.

If you want a trust to hold your investments or inheritance, you don’t use an offshore company. There is simply no point. You use a platform, or a life assurance contract (or “Bond”).

An offshore company is the most useful tool to use if receiving payments from outside the EU and the EEA (European Economic Area) which you do not wish to disclose in your country of residence. No EU or EEA company is easily able to make payments to any blacklisted jurisdiction as the banks in the EU and EEA will simply refuse to collaborate in money laundering.