- what it is and how it works

A Trust is an artificial "legal paper person". It is set up so it can act in commercial life, much like a person. It can own things, both tangible and abstract, it can buy and sell things, it can borrow and lend money, and it can enter into legally binding agreements.

The Trust is established with a purpose. The purpose generally is to manage its assets to the benefit of a person, an organization, or an idea or a concept. Almost anything is possible!

What makes the Trust interesting in our context is the fact that it can be established with the purpose of benefiting YOU! With such a purpose, the Trust will almost become a parent for you - a protector that will take care of you and shield you from exploitation from others, such as tax collectors and foreign creditors.

You might want to view a graphical presentation of a Trust while you read this.

The link opens a separate window with a drawing in PDF format, so it takes a few seconds to download. You might want to print it out for reference - you do this by using the print icon of the Adobe program (closest to the drawing itself) - not your browser's print icon (on the outer frame of the window).

If you don't have an Acrobat Reader yet, you can download one for free (opens in a new browser window).

Thinking now of your Trust as your "parent", you can imagine that the Trust itself has two parents (your "grandparents"), who are live persons or institutions (like a bank or a business - most often some kind of incorporation because of the liability aspect):

The "mother" is the Trust Manager
(the TRUSTEE, your "grandma"), who takes care of all the day-to-day operations of your Trust.

The "father" is the Trust Inspector (the PROTECTOR, your "grandpa", who looks after the Trust Manager and ensures that she truly is doing her job for you as well as she should. The Protector has the power to veto any decisions made by the Trust Manager. He can even remove the management responsibilities for the Trust away from her and find another Trustee for your trust in a different country, if the Trustee for instance is forced by local law to do things that are not in your best interest.

As the "child" of the Trust (the BENEFICIARY), you cannot manage the Trust. You cannot decide what the Trust is going to do in certain business situations. All you can do is to forward a "Letter of Wish" to the Trust Manager (your "grandma"), letting her know what exactly you would like to see done by the Trust and when. If nothing tells her that this is bad for you, there is no reason for not following your wish and she will take action on the Trust's behalf as you requested.

However, if you ask her to make the Trust do something that is obviously not in your own best interest, your "grandma" (the Trust Manager) will refuse your request with a smile, letting you know that your "parent" cannot do this for you! This could for instance happen if you are acting under pressure from somebody else who wants you to pay for something you don't benefit from paying for. This obviously goes for the situation of a foreign government trying to find out what assets your Trust owns. It also goes for the case of your losing a legal dispute in court and being ordered by the court to pay certain fees or penalties you cannot afford or don't want to pay.

The set-up

If you set up the Trust so that it has you as its Beneficiary, it cannot use the assets in any other way than letting you enjoy them - which it then does. This means that you can donate your house, your car, your piano, your shares, your bonds, your jewelry, whatever assets you possess, to the Trust. In doing so, you become the SETTLOR for the Trust. The Trust Manager will confirm the possession - and issue you a certificate that states you as the person who has the right to use these assets even though they legally belong to the Trust. The Trust cannot transfer the ownership without your requesting it, as long as you are the beneficiary. The Trust will even respect your will and transfer the title of Beneficiary to whomever you want, when you die.

Technically, you could establish a Trust for someone else as the Beneficiary. It could be your chosen successor, your child, or an organization you want to support. (This is actually the historical origin of Trusts.)

You could also, technically, have someone else establish a Trust for you as the Beneficiary.

In some countries (including the USA, Canada, and Australia), there is some liability connected with your assuming the role of Beneficiary or Settlor (= "Grantor" in the USA) of a Trust. You are supposed to report to your government on your tax return whether you have such title or not. For your own future protection and to avoid later hassle, you should choose "not". This is possible by having someone else establish the Trust in your place as Settlor and provide a nominee Beneficiary, so you name does not appear on any documents pertaining to the Trust. This makes the Trust a "Foreign Grantor Trust", which truly ensures you complete anonymity.

Using the Trust

You can send money to the Trust. The Trust Manager will make you a bank account, or as many bank accounts you want, and you can - through a "Letter of Wish" - have the Trust manager invest the Trust's money on your behalf, "playing the market", as you want.

The money you receive for work well done as a consultant or a subcontractor, or as part of any business deal that does not involve employment, can easily be sent to the Trust. You can either make it part of the deal that any payments and fees to you must be endorsed not to yourself, but to your Trust, or you can have the Trust manager establish an account that will accept checks or money orders endorsed to you for deposit in the Trust. This way, you do not pay income tax on the money you make, because, legally, you don't make any! Your Trust does!

You can also have the Trust pay money for you. You can buy almost anything with the Trust's money - provided the funds are there and the purchase does not conflict with the purpose of the Trust! It takes only a simple expression of your wish to the Trustee to facilitate this.

One warning: if you let the Trust pay money to yourself, it will have consequences for your personal income tax, unless you set it up so it clearly and legally is a loan.

A Trust does have some similarities with a Swiss bank account. The Swiss banks have been world famous for many generations for not being willing to report their accounts to any government outside Switzerland, and the Swiss government itself never wanted to tax foreigners when they don't live in the country. Even through the World Wars, all countries respected that - and there is no doubt that this was an important reason for Switzerland to be able to stay neutral throughout those wars!

A Swiss bank account, however, can only accept money, and it does not take over ownership of other assets, as a Trust can do. The Trust can accept ownership of any kinds of assets; there really is no limitation.

Now, by having all your assets transferred to a Trust and having all your professional income sent to your Trust, you would think that you could not pay any taxes, right?

Wrong! In most western countries, and most definitely in the USA, all western European countries, Japan, Canada, Australia etc., the Trust will be charged tax, or you will be charged gift tax! Most countries who have room for Trusts in their legislation do not allow their own citizens to use Trusts as a tax shelter - and they all have their powerful ways of making the Trusts report income, so it can be taxed, one way or the other!

So, why the hassle of doing this Trust business?
Here is the clue: who says you have to establish the Trust in your own country?
Check what happens when you go "off-shore" with your Trust
and establish it in another country than the one you live in!

Now, we are getting close to the really exciting stuff:

Why "Offshore"?