A trust fund is a financial instrument for asset management. It is created on the basis of an agreement on the transfer of the asset from the founder to a trustee. The ultimate goal of such an agreement is the guaranteed transfer of assets and profits received to a third party (persons) upon the occurrence of the conditions specified in the agreement. Thus, a trust fund for children is an alternative to a will — the founder’s property can be transferred to his ownership upon reaching adulthood, marriage, or the birth of a child. From the moment the agreement is signed, the founder loses ownership of the assets transferred to the trust. They don’t belong to anyone until the fund is dissolved.
General Work Scheme of a Trust Fund
To understand what a trust fund is and how it works, you need to know its organizational structure. The trust main persons are the following:
- The fund founder transfers assets into ownership and trust management and determines the rules for their transfer to beneficiaries.
- The trustee — an individual or legal entity who receives the right to manage the founder’s property. The obligations of the trustee are specified in the contract. He can perform only those operations with assets that bring maximum profit, receiving a percentage for property management or other remuneration specified in the agreement.
- Recipients of benefits under a trust agreement (beneficiaries) — receive income and the fund assets.
Trust, or trust fund, is a means for accumulating various business structures. The fund receives profit from its economic activities. Assets can include not only cash, but also real estate, securities, and even works of art.
Benefits of a Trust Fund
A trust management fund includes the following advantages:
- Protecting assets from waste, misuse, or transfer to unwelcome parties. Assets can only be transferred to the beneficiaries designated by the settlor in the agreement when creating a trust.
- Protection of beneficiaries from loss of property if they have not yet reached the age of majority, do not have the skills to dispose and manage assets, or conduct business.
- Ensuring the data confidentiality about the founder and beneficiaries if the trust fund is a private structure and all information on its assets remains outside the public sector.
- For obtaining tax advantages it is necessary to select the appropriate trust format that allows you to optimize tax payments, for example, a charitable trust.
- Providing a clear indication of the beneficiary prevents inheritance disputes and ensures property transfer without inheritance procedures.
- The possibility of partial payments to beneficiaries from the fund’s profits at a certain interval.
- Use of assets exclusively for specific purposes specified by the founder.
- The impossibility of interference in the trust work from the outside what means even the court cannot appoint a third-party manager, which often happens when assets are transferred by inheritance.
What Are the Weaknesses of Trust Funds?
In addition to obvious advantages, a trust company also has some disadvantages:
- Quite a high cost of trust registering.
- The complexity of setting up a trust fund and its creation procedure. It will require the assistance of an experienced, qualified lawyer so that beneficiaries do not have future problems with receiving partial payments and all property after the end of the trust fund’s operation.
- A complex trust management procedure — the need to select a reliable manager and the high costs of paying for trust management services.
- Unobvious tax preferences when asset values are below a certain level.
What Are the Types of Trust Funds?
There is a wide variety of trust funds available. They can be divided into types according to different criteria.
Types of Trust Funds According to the Terms of the Agreement
According to the terms of the trust agreement, the fund can be the following type:
- Revocable and irrevocable, depending on whether the founder has the right to revoke the property, return it to his ownership, and cancel the contract.
- Fixed and discretionary — in the first case, beneficiaries and payments are fixed by agreement, and in the second, the amount of payments and distribution of assets is determined by the manager.
- Blind — when starting a blind trust fund, the beneficiaries do not know that they are beneficiaries and cannot influence the management of the assets.
Types of Trust Funds According to Registration Conditions
Depending on the conditions of registration, the trust fund can be the following type:
- Private and public — all family foundations are private. A charitable fund is an example of a public trust.
- International and local — a trust fund is considered international if it is registered in a jurisdiction other than where all the property is located. When opening a local fund, the presence of a local manager is required.
Types of Trust Funds by Purpose
Based on the purposes for which property is transferred into trust management, you can distinguish the following trust funds:
- Testamentary Trust — designed to distribute assets among beneficiaries in accordance with the founder’s wishes.
- Qualified Terminable Interest Property Trust — its purpose is to distribute assets to beneficiaries at different times. The agreement establishes the order of payments — ownership rights are transferred to the next beneficiary after the death of the previous one.
- A special needs trust has the purpose of providing for the daily living needs, procedures, and medical care of people with disabilities.
- A Charitable Trust designed to distribute the founder’s assets to charitable non-profit organizations after his death. Such a trust can be part of a regular trust fund, which allows for reducing the tax burden or avoiding taxes.
- Bypass Trust — it is created to bypass taxes or reduce the tax burden. Such a trust fund is usually used by married couples so that after the death of one of the spouses, property passes to the other, and can be revocable or irrevocable.
- Generation-Skipping Trust — unlike a child trust, this one is created to transfer assets not to children, but to grandchildren.
- Credit Shelter Trust works on the principle of transferring assets to the surviving spouse, while the property is not included in the tax base if it is transferred to other beneficiaries.
- Life Insurance Trust is an irrevocable trust created to hold, invest, and distribute the proceeds of a life insurance policy. It helps beneficiaries avoid estate taxes upon the death of the settlor. Usually, the spouse and children are the beneficiaries.
Trust Fund Income
Depending on the purposes for the fund creation, it can help to earn money or be non-income in case you need to preserve assets and not increase them. In cases where investments in promising projects are still expected, it is necessary to think in advance about how to earn money and what business to invest in before registering a trust fund. Also, think of the possibility of reducing the tax burden and developing income distribution schemes.
Advantages of Opening a Trust Fund in the UAE
Registering a trust in the UAE has the following advantages for foreigners:
- Complete confidentiality of information about the fund assets, its activities, founder, trustee, and beneficiaries.
- Reliable protection of assets and the ability to effectively manage them.
- The ability to own real estate transferred to a trust fund without the need to declare it.
- No minimum capital requirements when opening a trust in the UAE.
- Tax exemption when investing from a trust fund.
- Guaranteed inheritance of assets by beneficiaries without paying taxes.
- The possibility of obtaining resident status for beneficiaries and all signatories of the trust agreement, as well as obtaining tax residency status.
How to Open a Trust Fund in the UAE
Trust funds in the United Arab Emirates, as legal entities, must be registered. In accordance with current legislation, the creation of trust structures in the UAE is possible only in free zones. The most popular free zones for registering a trust fund are in Dubai (DMCC, DIFC), Abu Dhabi (ADGM), and Ras Al Khaimah (RAK ICC).
To register a trust fund in Dubai and other emirates, you must do the following:
- Analyze the need to create a fund, determine its goals, and allocate assets from your property that will be transferred to trust management.
- Decide on the type and structure of the trust, and think over the conditions for the fund functioning and management.
- Choose a jurisdiction for registering a trust in the UAE and find a trustee.
- Prepare a trust agreement and collect all the necessary documents for registering a trust — in Dubai and other emirates, the requirements for the package of documents may be different, so their composition should be clarified with the administration of the corresponding free zone.
- Pay the necessary fees and charges.
- Submit documents for registration and wait for the decision of the registration authority.
Creating trust in the UAE is a complex procedure that requires a good knowledge of the country’s legislation in the field of regulating the work of trust funds.
Cost of Setting Up a Trust Fund
How much does it cost to set up a trust? The costs of registering it in the Emirates can reach up to $20 thousand or more, depending on the jurisdiction and type of trust fund. The cost of creating a trust is also influenced by the lawyer’s competence, the price of his services, and the amount of work that he performs.
Practical Tips and Advice on How to Start a Trust
Creating a trust fund allows you to preserve assets, ensure that they are managed in accordance with your wishes, and carry out long-term planning for the distribution of property and income received during the term of the trust agreement among its beneficiaries. To achieve your goals, you need to carefully consider each clause of the trust management agreement, since you lose control over your assets. Dynasty Business Adviser specialists will teach you how to establish trust and help do this correctly. To get a consultation, contact us in any convenient way from those listed in the contacts!