A trust is a company that acts as an asset manager (trustee) for another company. The activity of a trust is characterized by two characteristics:
A trust is an independent decision maker.
A trust does not own the assets it manages.
In other words, one person is giving away the property to a second in favor of a third. A trust is a legal arrangement in which the settlor transfers his or her property (real estate, dividends, savings, or other assets) to another person – the trustee – so that it can be used for the benefit of the beneficiaries (who can either be an individual) or group). Trusts are often used to protect assets and pass them down through the generations.
Although generally managed by the beneficiary, a trust is ultimately an independent decision maker. A trust acts in accordance with the rules and regulations of the relevant agreements and aims to achieve the best results for the beneficiaries. However, the strategy for achieving these results is determined by the trust itself. The scope of these activities is practically unlimited and ranges from investments to donations to the sale of an estate.
As for ownership, a trust is limited to management and trustees do not own any of the assets. Actual ownership of these assets will vary by jurisdiction. In some jurisdictions, e.g. Russia, the property belongs to the company or the person using the trust’s services. In others, the assets acquire a special status and do not belong to the user of the services, the trust or the beneficiaries.
Functions of a trust
The main function of a trust is to manage assets on behalf of its owner for the benefit of the beneficiaries. To this end, a trust can choose any activity it deems to be effective and beneficial, unless the respective contract stipulates otherwise. The functions of a trust include:
Manage finances
Management of investments
pay bills
accounting
Preparation of financial reports
Distribution of profits
In addition, a trust can perform almost any other administrative function specified in the contract. Depending on the individual case, they also offer financial planning, tax optimization and similar services.
Trusts can be useful to anyone with significant assets. Trusts are usually set up to protect assets and property and to optimize taxation. You also have inheritance applications: Trust assets are not subject to inheritance obligations because they no longer belong to the trustor’s estate and are therefore unaffected by the content of his will.
Advantages and characteristics of trusts
Aside from the specific purposes that trusts can be used for, there are some common advantages that apply to all types of trusts:
Anonymity. In most countries, the contents of wills and the names of the owners of real estate or other assets are publicly available. The names of the beneficiaries of the trust usually remain unknown. Hence, by using a trust to hold real estate or distribute assets, you can maintain your privacy.
Income suppression. The ability to transfer all assets and assets to the trust allows you to declare insufficient availability of personal assets and, for example, apply for a lower tax rate.
Tax avoidance. In many offshore jurisdictions, trustees are not required to report the trust’s income to the tax authorities of the country in which the beneficiaries are located.
Charity. In some countries, all property given to a charity must be managed under a trust.
Capital protection. Trusts can be used to protect the beneficiaries (e.g. the settler’s children) from their own inability to manage the funds. The terms of the trust may impose restrictions on the use of the money or the age at which the beneficiaries gain control of the funds and the use of the property.
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