History of Trusts
They were first established by barons, knights and other wealthy nobles during the Crusades, and were a way of ensuring their land and possessions would be disposed of in accordance with their wishes should they become over familiar with Turkish steel.
So, while there are many varieties of trust, they all share the same ultimate aim: to ensure that assets such as land, money, shares and even antiques (collectively known as the "trust property") are passed on to the "beneficiaries" in a way that the "donor" would want.
The legal owners of the "trust fund" are known as "trustees", and it is they who administer the fund on a day-to-day basis and ensure that tax is paid out of it.
They also decide where to invest the trust's assets, although this must always be in the best interests of the beneficiaries.
Usually, the trustees will seek professional advice to ensure the assets are wisely invested from both a tax and asset allocation perspective.
Trusts can be used in all kinds of circumstances such as:.
When someone is unable to handle their own affairs because of incapacitation If a person wants to distribute land or assets to loved ones while they're still alive Or, like many hapless crusaders, under the terms of a will. But there is more. Individual trusts can have attractive tax advantages and are often used to reduce inheritance tax and for other tax planning purposes. Hong Kong does not have inheritance tax now. Setting up a trust for this tax saving reason is no longer necessary.
Legal advice and Trust Deed
However, bear in mind that trusts and their tax treatment can be highly complicated and need to be discussed at greater length with an expert.
Anyone interested in setting up a trust will need a solicitor to draw up the "trust deed" and will have to appoint trustees.
At least two is the norm. Usually, one trustee is a professional familiar with trusts - a lawyer, for example - while the other is a family member or relative.
Here, we focus on three types of private trust that are widely used to manage and protect a family's wealth.
Probably the most common private trust is the discretionary trust.
The name derives from the trust's open structure, as numerous beneficiaries can be named in the "trust document" and the donor does not have to stipulate at outset who will be receiving what and when.
Discretionary trusts are additionally flexible in that the trustees can add or remove beneficiaries, including those that are unborn, at any point.
It is the role of the trustees to decide when to allocate assets or income to one or more of the beneficiaries, and, of course, how much.
Interest in possession trusts
Interest in possession trusts (sometimes called "life interest trusts") are often created as part of wills and are structured in such a way that the surviving spouse, or "life tenant", will have a right to receive an income for the rest of his or her life, or for a fixed period at least.
A male divorcee, for example, may want his second spouse to receive an income on his death but for his children to then receive the capital on her death.
This income will be paid once the trustees have deducted the relevant tax, after which a further liability or reclamation of tax (minus the dividend tax credit) may be apparent depending on the individual beneficiary's circumstances.
However, the spouse will not be entitled to the trust property itself, which will usually be passed on to any children.
Accumulation and maintenance trusts
Accumulation and maintenance trusts are often used by grandparents to support their grandchildren.
For example, they may be created to cover a child's education and general living costs, with any income that remains left to "accumulate" and then added to the trust property.
In the early years, while the grandchildren are young, accumulation and maintenance trusts are run very much like a discretionary trust.
However, the grandchildren usually become entitled to the trust property between the age of 18 and 25, and at this time the accumulation and maintenance trust turns into an interest in possession trust.
In other words, the income is now given to the beneficiaries as of right.
The tax treatment on this type of trust works in the same way as for discretionary trusts, until the beneficiaries become entitled to the income and capital.