Creation Of A Trust.docx

Creation of a Trust A trust is an obligation which binds a person (or persons) to deal with property for the benefit of beneficiaries or for a charitable purpose in accordance with the terms of the trust (Chetcuti Cauchi Advocates). A trust can come into existence in any manner, by an instrument in writing (including a will), by a unilateral declaration, by operation of law and also by oral declaration. However, when a trust is created orally, the law requires that there is sufficient evidence of the setlor’s intention to create a trust. In the absence of unequivocal evidence of this intention the law will presume that the person intended mandate or deposit and not the creation to a trust (Dr. Matthew Bianchi). “A valid declaration of trust over personal property will not require any formality, provided it can be demonstrated that the settlor intended to create an immediate trust over the property. In relation to property to be made subject to a trust on death, in relation to trusts of land, and in relation to certain other property, there will be statutory formalities to be satisfied before a valid trust will be created” Hudson (2007, p.207). Specifically in the case of unit trusts and inter-vivos trusts, these cannot be created by an oral declaration. Both of them are generally created by a written instrument. A unilateral declaration refers to a declaration made in writing stating; who is the trustee, the terms of the trust and information on the beneficiaries. One of the key distinctions that can be made in creating a trust is that between inter-vivos (or living) trust and testamentary trusts. A living trust is created during the lifetime of the settlor and comes into effect within this period. On the other hand, a testamentary trust is a trust created by will, which comes into effect only upon the settlor’s death. These two may have significant differences in the formalities implied for creating and changing the trust as well as the costs involved. There are also differences that may be significant in certain circumstances, depending upon the specific objectives that one is trying to achieve. A trust may continue for up to 100 years from the date of its existance. The amendments to the Trusts and Trustees Act (by means of Act XII of 2006) enable retirement schemes set up as trusts to continue past the 100th anniversary of the date on which the trust comes into existence (Dr A. Cremona, Ganado & Associates). This also applies to unit trusts and charitable trusts. There are a number of reasons why a Trust may be created. These are commonly used by high-net worth individuals to plan their financial affairs and provide for other individuals, including future generations. Hence, trusts play a major role in the process of asset holding, asset protection and succession planning (Monica Galea, 2010). Besides these purposes, a person may opt for Trusts as part of their tax planning and management, business continuation, confidentiality and to preserve family wealth, especially when children are spendthrift or incapable of managing wealth.

2.2 The three certainties of a valid trust The three main certainties refer to a rule which was stated in the UK case of Knight vs Knight. Lord Langdale was the first who conceptualised the idea of the three certainties. The

case stated that for an express trust to be valid, the trust instrument must show certainty of intention, certainty of subject matter and certainty of objects.

Certainty of intention Certainty of intention is also known as certainty of words. This means that it must be clear that the settlor wishes to create a trust; independently from any particular language used. Looking at Re Kayford (1975), Megarry J said that, “the question is whether in substance a sufficient intention to create a trust has been manifested”. Kayford Ltd had disposed customer’s money into a separate bank account. Although not conclusive, it was held as an indication that there was an intention to create a trust. Words were necessary for the conclusion of this case because a trust was held on the basis of conversations between the company’s managing director, accountant and manager. However, in contrast to this case, the word ‘trust’ may not be a conclusive evidence of the existence of a Trust. In the leading case Re Adams & Kensington v Vestry (1883), the testator said: “I give, devise, and bequeath all my real and personal estate…unto…my wife…in full confidence that she will do what is right as to the disposal thereof between my children”. Even though the words “in full confidence” were used, it does not give rise to legal obligation. Hence, in this case there is no trust. Looking at past court decisions, one could note the emphasis made on the words used to create a trust. These must make it plain that ultimately there was an intention to create a trust. Today, in most instances, trust documents are drafted by professionals and one would hope that these should not present any difficulty to show certainty of intention.

Certainty of subject matter The property subject to the trust must be clearly identified. There are two aspects to this requirement that include the certainty as to what property is to be held upon trust and the certainty as to the extent of the beneficial interest of each beneficiary (Norson B Harris 2003). The former is necessary because a trustee must know what is and what is not included in the trust. It is also essential that the trustee knows what or how much each beneficiary will be entitled to and what income should be accumulated for the beneficiary. In the court case Palmer v. Simmonds (1854) it was held that the phrase “the bulk of my residuary estate” was not certain enough for a trust relationship to subsist. However in another case Re Golay (1965), the statement “one of my flats and a reasonable income” was enough certain to constitute trust. When it comes to distinguishing trust property from other assets, the courts have dealt with this according to the nature of the subject-matter involved. In Re Goldcorp (1995) the court held that the subject-matter in the trust was not separate form other assets and so the trust was not valid. On the other hand, in Hunter vs Moss (1993) it was held that even though the assets (which were fungibles or incorporeal) are not separate, this does not hinder the constitution of a valid trust.

Certainty of object

This relates to the idea that there must be, in general, a person or persons entitled to the benefit of the trust. Such beneficiaries must be clearly identified or at least ascertainable. The test for determining this depends on the type of trust being created. This beneficiary principle in fact is inapplicable to charitable trusts. Alternatively, beneficiaries may include people not born at the date of the trust (for example, “my future grandchildren”). In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries. In the court case McPhail v Doulton (1971) it was established that in the case of a discretionary trust, there is certainty of object if you can determine whether any given person is a beneficiary or not. The words used in this case were “my relatives and dependants of staff”. The Court held that there was conceptual certainty. However, one may note that in Brown vs Gould (1972) the words “my old friends” lacked precise definition and so the court held that there was no certainty of objects. In a fixed trust, the trustee has no discretion of how to delegate trust property and therefore the class of beneficiaries must be known or else the trust will fail. Objects here may be described as a class for example “my children”. When the validity of the trust is impeached because of lack of certainty of objects, the trustee will hold the assets on trust for the benefit of the settlor and his heirs.

The Effect of Uncertainty If there is no certainty of intention, the transferee will take the property outright. If there is a lack of certainty of subject matter, then the whole transaction is ineffective (with the result of course, that the potential transferor remains liable for tax purposes). If there is no certainty of objects then the trustee will hold on a resulting trust for the transferor, or if he is dead, his estate (Trusts Law and Management, 2008).

2.3 Trust Property The basic idea of the trust is that the settlor passes on full ownership of the property to the trustee. The settlor may write a document setting out his wishes in relation to the trust property and the trustee has the duty to execute those wishes. A trust is not created until there is an interest in property that is subject to the trust. If no property is immediately made subject to the trust, the trust will not come into existence. Generally, property of any sort may be held on a trust, from a lump sum of money or bank deposits to real property, stocks and shares. While the trustee holds legal title to the trust property, the beneficiary or beneficiaries hold equitable title to the same property. Depending on the trust deed, the beneficiary will receive income from the trust property or receive the property itself, either immediately or in the long run. One of the main issues discussed in the 1984 Hague Convention on the Law applicable to Trusts and their Recognition is that trust property is a separate fund and it does not form part of the trustee’s estate. Under the Maltese law, any transaction related to the property under trust is regulated by the Trust and Trustees Act and other laws that apply specifically to trusts (Xuereb A, 2010). Transactions relating to the transfer of ownership or other rights to or in

property under trust shall therefore be carried out in the form and manner required by the law applicable to such transactions (Dr J.P. Chetcuti).

2.3 Trust Instrument or Trust Deed According to Article 7 of the Trust and Trustees Act, a trust may come into existence in any manner including a trust deed where both the settlor and the trustee are parties thereto. In simple terms a trust deed is a formal documentation which binds the trustee to deal with the assets and income for the benefit of the beneficiaries. Unlike a will, a trust is not registered as a public document but it is kept confidential. There are various types of benefits which can be created in a trust instrument including receiving income, use of assets, distribution of capital or a combination of these. The most efficient method of establishing a trust is by a written document since it mitigates the possibility of misunderstanding or legal challenge to the validity of the trust. However there is no legal necessity for this document, as it is possible to create a trust by simply verbal communicating a desire to do so. (http://www.estatesortrusts.co.uk) Among other things, a trust deed names a trustee, directs the trustee about how to manage and invest the assets in the trust as well as instructs him regarding when to pay out income and principal. It also lists out names and rights of the beneficiaries and may give complete instructions about the obligations which must be carried out. Otherwise, one may also find a trust document which gives out only very broad and simple guidance to the trustee. It is necessary therefore that a trustee is familiar with the trust deed and is also able to advice clients as to what a trust document must contain in order to meet the requirements the settlor (i.e. the client) specifies. As such, it is perhaps the first and most important point of reference for the trustee. Hence, it should be drafted with utmost care and attention in order to reflect the real intentions of the settlor and that the trustee comprehends the nature and extent of his rights, powers and duties under the trust. If a trust deed is not drafted with the client’s intentions, this may affect the validity of the trust deed. In the trust deed, the settlor grants powers to the trustees regarding the administration, management and disposition of the trust property. The setttlor may give specific instructions as to how the trustee should administer and distribute the trust assets in which case, the trust is considered to be a “fixed trust”. On the other hand, the settlor may decide to give discretion to the trustee as to how to manage, administer and dispose of the assets, as well as to when to make distributions to the beneficiaries. This is known as a “discretionary trust”. In this case, the settlor may draft a “letter of wishes” to serve as a guideline to the trustee (Maria Elena Gatt Floridia and Andrew Chetcuti Ganado, 2005). In Malta, it is allowed to create customized solutions for each individual trust set up, hence, “off-the-shelf” trusts are rarely offered. Each and every trust is structured carefully according to the requirements of the settlor. Unlike some other countries, Maltese law permits the trust to choose to be governed by the laws of another jurisdiction provided this is specified in the trust deed (Finance Malta, 2010 p.101).

2.4 Classification of Trusts While all types of trusts must have a settlor, a trustee, a beneficiary and some sort of property, they all don’t have to hold the same property, the same purpose and they don’t have to be created in the same manner. All of these differences give rise to the various types of trusts which exist today. One may find various classifications of trusts however the most basic classification of trusts derives from the way in which the trust is created.

Express Trusts One of the most common types of trust is the express trust. This is created when the settlor deliberately and consciously creates a trust either to come into existence now or later upon death. Typically in such situations the beneficiaries are clearly identifiable and a trustee is appointed in order to manage specific property according to the terms set out by the settlor. One may make further distinction between two categories of express trusts which include those that are deliberately created by the settlor (drafted by a lawyer) and those which according to the court’s interpretation show the true intentions of the settlor. In the latter situation, the settlor is not aware that he/she is acting as a settlor, but the court chooses to interpret such case as creating an express trust. However for any express trust to exist it is required that property is sufficiently identifiable, there is no uncertainty as to the identity of the beneficiaries and the legal title in the trust property must be transferred to the trustee before the trust can be effective (Hudson, 2003).

Implied or Resulting Trusts The second classification of trust is the implied trust which sometimes is known as resulting trust. Resulting trusts are implied by the court and hence they are not created intentionally by the settlor. This can be further sub-divided into two which include ‘presumptive’ and ‘automatic’. When a settlor transfers property to a beneficiary and there is evidence which indicates that the intention for the property was to be held in trust refers to a presumptive implied trust. However, they are instances where this will not hold true such as the case where assets are transferred form a husband or wife to their spouse. On the other hand, an implied automatic trust occurs when there is no intention expressed or any presumption of a resulting trust by the settlor. Examples of when this can happen include situations where the beneficiaries are not sufficiently identified, or when the objectives of the trust are no longer relevant. (http://www.estatesortrusts.co.uk)

2.5 Maltese Trusts “Whilst being a civil law jurisdiction, Malta has a fully-fledged trust law in place. Indeed Malta ranks among the few civil law jurisdictions that have developed the concept of equity by integrating it with an intrinsically civil law legislative system” (Fenech & Fenech Advocates, 2009). By introducing a comprehensive regulatory and legal framework for trust and trustees, as well as the concept of trust into the Civil Code, Malta has been able to establish itself as a trust jurisdiction worth looking for. A choice of trust jurisdiction will inevitably be the result

of the careful consideration of a number of factors ranging from the regulatory framework, the expertise of service providers, costs and the judicial system (http://financemalta.org/content.aspx?id=173657). Malta has been able to emerge as an attractive jurisdiction for the holding of assets of international high net worth entities. Other than imposing itself as a viable trust jurisdiction, the Maltese legislator has also been very careful to ensure that nothing in the Maltese law can impinge on the freedom of international trustees from operating in Malta. In addition, since the introduction of trusts to Maltese residents in 2004, the domestic trust industry and practice has grown considerably.

2.5.1 History of Maltese Trust Law Although generally the trust concept is not found in countries like Malta (whose legal system is based on civil law), as part of Malta’s development as an international finance centre, Malta does in fact have a codified trust law. “The Maltese Trust law is essentially based on the civil law approach, having its roots in the Napoleonic Code, with sparse influences from the common law system, the latter being more profuse in the commercial legislation” (Tonio Ellul, 2010). As a result of over 150 years under British rule, the legal system was influenced profoundly by a large number of statutes which derive from English Common law. This influence has continued until recently, when Mala joined the European Union and had thus, it had to abide by the EU legislation system. Particularly, Maltese lawmakers increasingly relied on UK statute with regards to the commercial sector, insurance, banking, tax and company law. This has been the case up until the legislative harmonization with the EU legislation in the last decade or so. (http://www.credalnetwork.com/trust/synopsis.htm) During British times, trusts law and equity relating to trusts were never absorbed or statutorily incorporated into Maltese law and trusts are only very rarely mentioned in legislation until 1988, when an Offshore Trusts Act was enacted as part of the launching of Malta as an offshore centre (Institute of Financial Services Practitioners Malta, 2008). The Offshore Trust Act 1988, which was largely modelled on the Trust Jersey Act 1984, introduced trust law and trusts into our legal system as a ‘ring-fenced product’ available only to non-residents. The settlor and the beneficiary of the trust had to be residents outside Malta. The act prohibited any immovable property situated in Malta and any shares in Maltese registered companies to be held on trust. The Offshore Trust Act had introduced the trust concept into our legal system but it had not made it an integral part of our domestic law yet. In the 1990’s this concept of ‘ring-fencing’ was removed from the financial services sector and the ‘Offshore Trust Act’ was re-named as the ‘Trust Act’. (Dr. Matthew Bianchi) Eventually, in 1994 the ‘Recognition of Trusts Act’ was introduced 1994 in order to enable us to ratify the Convention on the Law Applicable to Trusts and their Recognition which came into force in 1996. This amendment introduced a general concept of trust and distinguished between Maltese trusts and foreign trusts (governed by a foreign law). The

Hague Convention on the Law Applicable to Trusts and their Recognition outlines the main features of the trust and the consequences flowing from the creation of a trust, facilitating their recognition and use in civil law states. The drafting of a new trust law began in the early 2000’s and in 2004, the Trusts (Amendment) Act was enacted, introducing amendments targeted primarily at enabling Malta to honour its international commitments towards the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF). Some of these amendments include eliminating the nominee regime (and introduces a licensing regime), abolishing certain rules on confidentiality and re-positioning Malta as a reputable international onshore financial centre as well as addressing taxation issues and establishing a detailed regulatory framework for trustee and fiduciary activities. In this regard, the MFSA is the competent authority for the purpose of the Act. As part of these amendments, the Trusts Act was also renamed the Trusts and Trustees Act (TTA). The Trusts and Trustees Act came into force on the 1st January 2005 (http://www.csbgroup.com/EN.Malta_Trust.aspx). Under the TTA, transfers of assets into a trust or a change of beneficiaries may give risk to a charge to tax and any registered trust must have a Maltese Professional Trustee as one of its trustees. One may note that this new law has affected no less than nineteen other laws including the Civil code, notarial laws, company law and fiscal laws. With this act, Malta moved closer to becoming an on shore regime, with the creation of a framework in which the use of trusts is appropriately marketed.

2.5.2 Uses and Benefits of Trusts in Malta Trusts can be tailor-made for a number of uses, depending on the specific requirements and circumstances of the individual. As a result of their flexible nature, trusts have been and are still being used for a numerous uses, the limit being set only be the imagination of the practitioners in the field. Such uses can be categorized into two broad classes namely private uses and uses of a commercial nature. While private trusts deal with the ‘inter vivos’ or ‘causa mortis’ needs of private individuals, on the other hand commercial trusts offer practitioners in the commercial world a variety of tools which can be drawn up in particular contexts to provide for commercially useful results (Tonio Ellul and Annalise Michallef, 2010). Private trusts can be employed to provide for situations mainly involving family members, such as providing for children with special needs or to protect a spendthrift beneficiary from dissipating the patrimony left to his benefit. Apart from providing for family members, trusts may be used for asset protection, estate planning, preservation of wealth and confidentiality. With regards to asset protection Malta offers a secure and stable political environment in which to hold assets and protect them from strategic risk. In addition a trust can offer protection from creditors or other parties in the country of domicile or residence of the settlor. Commercial trusts under Maltese law rage from security trusts to the use of trust in setting up collective investments schemes and in the context of security offerings. Unlike private trusts, commercial trusts are afforded greater flexibility, security and certainty by allowing the parties to participate in setting up the trusts and allow the possibility to shape their instrument in the most applicable mode to suit their commercial needs (Tonio Ellul, 2010). The trust

legislation identifies a number of scenarios qualifying as commercial transactions such as the use of trusts for: Collective Investment Schemes, Securitisation of assets, Granting of real or personal security, Securities offerings, whether to the public or for private placement, Portfolio management, Custody of investment instruments, Syndicated loan agreements and other multi-creditor banking facilities; and Insurance policies and the payment of proceeds thereunder (Dr James Scerri Worley, 2009). With the development of Malta as a financial services centre and with the enactment of special laws and regulations in place, Maltese trusts became known as a trust jurisdiction offering a variety of benefits to whoever makes use of such trusts. Regulation of trusts and trustees reveal a great commitment by Malta towards the trust industry and hence one may regard such jurisdiction as being open to progress whilst ensuring that standards are maintained. There are a number of benefits in setting up a trust including confidentiality, flexibility, control of assets, tax treatment and preserving family wealth. When compared to other traditional trust jurisdictions, Malta trusts offer a number of advantages including the trust legislation itself which creates a highly regulated environment for the set up of trusts, offering settlors a higher degree of assurance. For example, in Malta a trustee has to be licensed by the Malta Financial Services Authority (MFSA). In addition, Malta trust law offers security that other jurisdictions do not. In case of any conflicts between the trust and any other Maltese law, trust law prevails. Furthermore, as a civil law country Malta offers a more familiar legal terrain to people from other civil law countries. “While the Maltese trust is based on the Anglo-Saxon concept of trusts and incorporates all the features and flexibility of such a structure, in Malta it is also given the legal recognition in relation to other areas of the law and is created with sufficient legal powers to be able to manage conflicts between the two systems of law, without invalidating the trust” (Finance Malta, 2010). Malta also offers a considerable low set-up and administrative cost. The difference in the cost of setting up a fully fledged trust between jurisdictions depends significantly on the professional fees, such as legal and audit fees. A key instrument in the attraction of wealth management activities to Malta has been the Maltese trust and Trustees Act (2005). Offering greater flexibility and high standards of certainty, the act creates a more streamlined and simplified trust regime. This has made Malta more attractive to international clients. Malta is also known for its advantageous taxation regime. The actual impact of taxation on trusts depends on a number of issues namely the type of asset and the status of residence of the

beneficiaries. However, Maltese tax law states that income attributable to a trust is charged directly to the beneficiary on distribution of income (Finance Malta, 2010).

2.5.3 Predominant types of trusts used in Malta Maltese law recognises the main types of trusts which one expects to find in the traditional Anglo-Saxon jurisdictions. According to Art. 7 of the TTA, a trust may come into existence in any manner64, including: – trust deed where both the settlor and the trustees are parties thereto; – unilateral declaration by the trustee only; – oral trusts; – testamentary trusts set up through a will; – trusts by operation of law; – trusts by a judicial decision. Maltese Trusts can take the form of: – discretionary trusts; – fixed interest trusts; – accumulation and maintenance trusts; – spendthrift trusts; – charitable trusts; – implied, constructive or resulting trusts. SEE_ IMP- certainty, maltese types of trust etc pdf SEE_ Finance Malta – see pdf

Adopting a different law on Trusts There are various types of trusts which are not considered in the Maltese trusts law. This may be due to the fact that these were not included in the Jersey trust law either. That being said, in the dynamic financial world we live in today,

it may be wise to consider whether Malta should adopt other legislation in order to incorporate all types of trusts in order to enhance international competitiveness. On the other hand such adoption may put negative pressures on Malta if these different types of trusts do not reach the standards of the EU or other international organisations. 2.5.4 Foreign settlors and Maltese trusts 18.3. Why go international?- SEE_ IMP- certainty, maltese types of trust etc pdf

2.5.5 Trustees Code of Conduct Jersey Trusts Jersey Trust Law Types of trusts in Jersey Utilization of Jersey trusts Taxation Guernsey Trusts Changes to Guernsey ‘s Trust Law Challenges of Guernsey Tax Regime Trust Services in Guernsey Types of Trust Commonly used in Guernsey Attractiveness in Guernsey trusts Isle of Man Trusts Trust Legislation in the Isle of Man Features of Manx Trust Law Forms of trusts used in Isle of Man Financial Status of Isle of Man Trusts