An Introduction to Trusts Presentation to STEP Hungary 2013 Conference Budapest 11 June 2013 STEP Cross-Border Estates Group Ian Watson, TEP Barrister and New York Attorney STEP Cross-Border Estates Group 3 Stone Buildings, Lincoln's Inn, London WC2A 3XL, England tel: +44 (20) fax: +44 (20) Rockefeller Plaza, 16th floor, New York, NY , USA tel: +1 (212) , fax: +1 (212)

 Overview 1. Welcome to STEP – a few words about C-BEG 2. What is a Trust? 3. Why Use a Trust? 4. Are Trusts Secret? 5. Trusts and Tax 6. International Trends in Trusts 7. The Future

 1. STEP and C-BEG  The Society of Trust and Estate Practitioners  Cross-Border Estates Group

 2. What is a Trust?  No single law of trusts – different rules in England, Scotland, Ireland, each of the United States, former British colonies in the Caribbean, Canada, Australia, Hong Kong, Singapore, the Channel Islands, etc.  A structure to provide for family, continuing ownership and management of assets and succession  Also business and commercial uses  Not a separate legal entity, rather a relationship among a Settlor, one or more Trustees and one or more Beneficiaries

 Typical Trust Settlor Trustee Trust £ Beneficiary SharesCash House interest dividends net income right to occupy

 Traditional Features of a Trust  Legal ownership by Trustee  Trustee has fiduciary duty to act only in the interest of the Beneficiaries  Trustee may only invest in specified types of conservative assets  Trustee may have wide discretion to decide amounts distributed  Successive or overlapping beneficial interests (e.g., life interests v. remainders)  Restrictions on Beneficiary’s right to alienate interest  Limited duration – the Rule Against Perpetuities

 Rule Against Perpetuities  “An interest must vest or fail to vest within lives in being at the time it is created plus 21 years”  Notoriously difficult to apply – and harsh result  Modified or abolished in many jurisdictions:  Fixed term: e.g., 80/90/100/150 years, etc., or  Unlimited duration  Limit generally did not apply to trusts with only charitable purposes

 3. Why Use a Trust?  A variety of personal and commercial uses  Flexibility and administrative convenience

 Pension Trust Employer (Settlor) Trustee Pension Fund (Trust) £ Retired Employees (Beneficiaries) SharesCash interest dividends income

 Charitable Trust Donors (Settlors) Trustee Trust £ SharesCash interest dividends income Charitable Causes (Beneficiaries)

 Discretionary Trust for Family Settlor Trustee Trust £ Settlor’s widow and children (Beneficiaries) SharesCash House interest dividends income right to occupy

 Life Interest Trust for Spouse Settlor Trustee Trust £ Settlor’s widow (Income Beneficiary) SharesCash House interest dividends net income right to occupy Settlor’s children (Remainder Beneficiaries) death of widow capital

 More Specific Provisions [1] Settlor’s widow to receive net income during her life Settlor’s children to receive income at the Trustee’s discretion until they reach age 21, then to receive net income. To receive capital at age 35 / 50, etc., or death of widow death of children Settlor’s grandchildren to receive capital at parent’s death

 More Specific Provisions [2] Settlor’s widow to receive net income during her life Child X to receive income from his share at the Trustee’s discretion for life. death of widow death of child X Settlor’s grandchildren by Child X to receive their share of capital at Child X’s death Settlor’s other children to receive their share of capital at widow’s death. (divide capital into equal shares for children)

 Additional Discretion  Trustee or a Beneficiary may be allowed to deviate from default terms to meet unexpected situations  Trustee’s overriding power of appointment  Beneficiary’s power of appointment

 4. Are Trusts Secret?  Confidential, but not secret  Creation or existence of a trust may need to be disclosed (particularly if “off- shore”)  Generally, details can be kept private (but wills may be in public record)  “[T]he obligation to keep taxpayer information confidential and only release it in accordance with the law is a fundamental principle.” (Engaging with High Net Worth Individuals on Tax Compliance, OECD, May 2009, p. 53).

 5. Trusts and Tax  Not a vehicle for avoidance and hiding from tax authorities  Extensive disclosure requirements and tax costs for “offshore” arrangements  Many different tax systems, but a general principle is to try to make trusts “tax neutral” – i.e., taxed the same as if there were no trust  Some tax advantages may remain, depending on context and jurisdiction

 Discretionary Trust for Family Settlor Trustee Trust £ Settlor’s widow and children (Beneficiaries) SharesCash House interest dividends income right to occupy

 Typical UK Will Trusts Nil Rate Band Discretionary Trust £325,000 Life interest Trust For Spouse Balance of estate Death of spouse Trust(s) for children, then grandchildren Inheritance tax paid on death of spouse

 Discretionary Trust for Family Settlor Trustee Trust £ Settlor’s widow and children (Beneficiaries) SharesCash House interest dividends income right to occupy

 6. International Trends in Trusts  The Hague Trusts Convention XXX of 1st July 1985 In force:  Australia  Canada (other than Ontario & Quebec)  Italy  Liechtenstein  Luxembourg  Malta  Monaco  The Netherlands  San Marino  Switzerland  United Kingdom Not yet in force:  China  Cyprus  France  United States

 7. The Future  Growing popularity  Increased international recognition  Unpredictable changes in tax laws

For more information please contact: Ian Watson, TEP 3 Stone Buildings Lincoln’s Inn London WC2A 3XL England Tel: +44 (20) DX 317 Chancery Lane 3 Stone Buildings, Lincoln's Inn, London WC2A 3XL, England tel: +44 (20) fax: +44 (20) Rockefeller Plaza, 16th floor, New York. NY , USA tel: +1 (212 ) , fax: +1 (212) stonebuildings.com