A properly drafted and managed trust can confer advantages under any or all of the following heads:
Estate planning
Failure to plan your affairs in advance of death can cause your estate to disorder. Many people seek to order their affairs by making a will but the probate process can result in lengthy delays. High administration costs (typically around 4% to 6% of the total value of the estate) and often tax liabilities. Many people do not set up a trust during their lifetimes. Many people do not want their assets to pass under the laws of intestacy or for their testamentary wishes, chosen by them or as prescribed by law, and prefer to make more assured arrangements. These might include: providing a source of income, but not capital, for a spouse for life; making provision for the education of children but not letting them have access to capital until later in life; or providing a fund to protect members of the family. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.
Tax planning
Assets transferred into trust are no longer considered as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s). Inheritance tax can be eliminated because the trustee(s) continue to own the assets after the death of the settlor. Anti-avoidance legislation in the home country of the settlor or in the location of the trust assets may seek to counteract this outcome, but a correctly structured and administered trust may offer substantial tax benefits.
Confidentiality
Probate is a public procedure. Domestic authorities will need to receive a complete list of all the property owned by the deceased in order to assess the amount of estate duty payable before the property can be transferred to the executors for distribution. It is not possible for executors to secretly exclude assets from the estate. The only other legal form of transfer is via a trust and this would generally save estate duty and keep the trust assets confidential.
Asset protection
Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a properly constituted trust no longer form part of the settlor's estate and so are not vulnerable to the settlor's personal creditors. There are rules that require the trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk mitigation strategy.
Avoiding Forced Heirship
Most civil law jurisdictions have a tradition known as forced heirship, which creates a legal obligation to distribute a certain proportion of a deceased's assets to their next-of-kin children. If forced heirship laws are at odds with your intentions, a trust will enable a wider or different distribution of your assets.
Protecting the weak
A trust is a useful vehicle for people who may want to provide for those who are unable to manage their own affairs, such as infant children, the aged, the sick or disabled. Trusts can allow for the independent supervision of those assets on behalf of those who require it.