Offshore trust solutions for expatriate freelance consultants.

Rather than taking all of their earnings as salary, freelance contractors have the opportunity to direct part of their fee income into offshore discretionary trusts. This allows clients to pass on ownership of assets while maintaining control of their distribution.

The benefits of this structure are many-fold and different benefits will apply to different people. Let's look at some of them relating to tax-sheltering and asset protection:

By passing on titles to your property (fee-income, assets or savings) you are able to take that property completely out of the tax system. The assets held in trust do not form any part of a tax return, because they have already been passed on.

What is a Trust?

Think of a trust as a holding pen, a place where you put your assets before they are released to the people or organizations that you designate to eventually receive them. A trust is a legal entity and so are you. Because you and the trust are separate legal entities, anything you transfer from you to the trust becomes property of the trust. The trust then holds the property for your benefit, or for the benefit of those whom you designate.

A trust consists of four components:

The settlors, who creates the trust.

The beneficiaries, who receive the benefits (income and/or principal) of the trust. The settlor can also be a beneficiary.

The assets, which are the properties transferred to the trust.

The trustee, who is the person or entity that manages the trust's assets and distributes the property according to terms established by the settlor. A professional trustee is obliged to follow the settlors instructions.

Trusts can be set up while you are alive (the legal term for this is intervivos), or they can be established upon your death by your Will (known as testamentary).

What are the reasons for setting up a trust?

Every person considering a trust has a different purpose and the reasons are vast, but here are some of the more common reasons:

Protection of families

Ensuring there is proper provision for families in future years. A properly established trust cannot be contested in the same way as a bequest under a will. A trust gives the settlor greater certainty that his/her wishes will be implemented .Protection of, or providing for, individuals Here an amount is set aside and might either be held until that individual such as a grandchild attains a certain age, marries or until a certain event occurs, such as when funds are needed to buy a house.

Providing for education

The purpose here is to set aside funds over a period to provide for future educational needs. Education trusts are very popular, particularly with the rising cost of all forms of education and the likelihood of having to have very substantial sums for tertiary education. Protection of assets against creditors or other claims It is now common for persons who are either in business, might have given guarantees or be acting as Directors of companies or trustees and thereby potentially incurring legal liabilities, to set aside their assets in trust. If claims arise against them, their personal assets will be protected for their later benefit or for the benefit of their families. Protection of assets for future generations By using a trust, a person can set aside assets for future generations and in effect implement the provisions of his/her will during their lifetime. It has become popular for people to put assets such as house properties in trust for their children or future generations.

Matrimonial circumstances

Trusts can be used to make a marriage settlement when persons are about to become married and do not wish their assets to be mixed together, or in cases where persons are either married or in a relationship and wish to protect assets for their own children as distinct from their partner's children. They can also be used to dictate the distribution of assets in the unfortunate case of a divorce. A great deal of subsequent difficulties can be avoided through the use of trusts in these circumstances.

For charitable purposes

Setting aside funds for charitable purposes has long been a popular reason to establish a trust. With increasing stories of major charities experiencing difficulties in raising funds it is therefore an advantage to establish a Charitable trust, thereby ensuring that the capital of the trust will be protected for all time and not caught up with the charities' financial difficulties. The bequest will continue to provide benefits for the charitable purpose over a long period. It is also possible in this way for the ongoing recognition of the benefactor to be secured.

Taxation planning

Over the past few decades trusts have been used for reducing taxation liabilities. The general object here is to take income out of the hands of the person who is on a higher tax rate and either capitalise the income so that the tax is paid by the trust or pass it on to other beneficiaries who are on lower tax rates. There can be significant tax savings especially for the internationally mobile who move between tax regimes. A trust may also protect the assets from future changes to personal taxation.

To avoid Probate

When a person dies 'probate' must be proved before their assets (after tax) are distributed to their beneficiaries under the terms of their will. This can involve considerable delays (often years) and considerable cost especially if the assets are situated in various jurisdictions. Nearly all assets fall under probate including most life assurance policies over £10,000. There is no probate to be proved to a trust.

What about encashments from the trust?

These can be treated as gifts or inheritances, depending on the country or jurisdiction in which they are taken. Many clients will currently transfer untaxed earnings into offshore bank accounts, but will need to be careful once they have done so when they complete their tax returns – as it is deemed a fraud not to declare these holdings and their source. If one is in doubt, it is often better to take a loan from the trust which can be repaid, or not, as appropriate. This is especially useful for mortgage repayment, for example.

Other encashment solutions frequently used are through the creation of other beneficiaries. Children's education, for example, can be funded free of tax. A gift to a spouse, or partner, would also be an effective tax-sheltering solution. Many clients will also keep their assets in trust with a view to purchasing of retirement property outside their own country of domicile and funding their retirement. In financial planning, this can be a very clean and effective way of mitigating any potential tax liabilities. Beneficiaries can be changed at any time at no cost, as and when circumstances dictate.

The above strategies are examples which are used by the mega-rich, and especially government ministers, but are available to anyone who is prepared to concentrate on the issues of personal financial planning. Most freelance consultants who are able to work for ten years or more should become quite wealthy, especially if they are able to protect their accumulated assets.

What types of investment are available?

A selection from the world's best known and best performing managed funds, stocks and shares, bonds, cash and property can all be settled in trust.