Trust Formation – General Overview
By Dr Rachael Cassar Torreggiani
What is the meaning of trust?
A trust exists where a person (called a trustee) holds, as owner or has vested in him property transferred to it by the settlor, under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence. The settlor may also be one of the beneficiaries or the sole beneficiary.
The trust property constitutes a separate fund held and owned legally by the trustee which is distinct and separate from the personal property of the trustee. Creditors of the trustee have no claims over trust property.
The trustee has the duty to administer the trust property in accordance with the terms of the trust deed and the laws applicable to trusts.
Once property has been placed in trust, the settlor loses legal ownership of the property and it is up to the trustee to manage, administer, acquire or dispose of any trust assets.
It is important when setting up a trust that there is certainty of intention, certainty of assets and certainty of beneficiaries.
Types of property which may be transferred to a trust
Both movable and immovable property may be placed in trust (eg. Cash, real estate, cars, shares etc). It is also possible to settle an immovable property in trust whereby the asset ie. the immovable property is placed for the benefit of one person and the income on that asset for example the rent is for the benefit of another person.
- Duration of Trust
A trust may continue until the 125th anniversary from the date in which it came into existence unless terminated beforehand.
A trust may be varied or revoked subject to the trust deed and the provisions of the law.
- Types of Trusts
Trusts can either be set up as fixed interest trusts or discretionary trusts which in turn can serve to act as maintenance trusts, protective/spendthrift trusts, charitable trusts etc. It is also possible to set up a testamentary trust which would kick in on the death of the settlor.
Fixed Interest Trust: a trust where the trust deed itself normally provides for the manner in which income and capital are to be distributed, on specific dates, to the beneficiaries identified therein and according to the ratios specified in the trust deed. In such types of trusts, the trustee does not exercise any discretion over the trust’s management or distribution. The main characteristic of this type of trust is that it is created in favour of pre-determined beneficiaries or classes of beneficiaries having a fixed pre-determined share of the identified trust property.
Discretionary Trust: a trust where the trustee is given the discretion as to the manner in which the trust property is distributed and/or the people to whom that property is distributed. The trustee may be given the power to appoint beneficiaries, power to remove, the time and the manner in which assets are to be distributed and other powers relating to the appointment of advancement of the trust property. It is also possible for the settlor to identify a number of beneficiaries and empower the trustee to appoint the remainder. This type of trust offers flexibility.
A settlor may opt to have a protector appointed. Typically a protector is appointed so that the trustee would be obliged to obtain the protector’s approval prior to taking certain decisions or exercising certain discretions. This means that the protector’s job is to ensure that the trustee is in fact acting in the interests of the beneficiaries of the trust. The appointment of the protector goes some way to ensuring that the settlor’s wishes are in fact regarded.
- Beneficial Interest
A beneficiary is entitled to disclaim his interest.
A beneficiary may subject to the terms of the trust, sell, charge or transfer is interest to third parties.
- Nature of Trustee
The trustee may either be a person that is in possession of a license to act as trustee from the MFSA or otherwise a natural person who qualifies to act as a ‘private trustee’.
Private Trustee: the trustee in such case is either related to the settlor or has known the settlor for a minimum period of 10 years and is not remunerated, does not promote himself as a trustee to public and does not habitually act as a trustee. In such a case, the trust must be created by a notarial trust deed and all decisions, accounts and material events must be delivered to the depository notary. All such documents shall be confidential.
Where a Maltese trust is created, succession rights, testate and intestate and especially the indefeasible share of the spouses, ascendants and descendants, will prevail over the terms of the trust.
Although a trust can be used for succession purposes it may not be used to defeat the institute of legitim.
The beneficiaries under a trust have the right to be made aware of their interest under a trust and to be provided information as to the state of the trust. However, it is also possible for restrictions to be set up in the trust deed whereby the trustee would not be permitted to provide information for a specific period of time.
- Fiscal Implications[i]
The overall tax treatment may vary significantly depending on the manner in which the relationship is structured or administered. It is also essential that each subsequent step is carefully considered and evaluated before the trust is set up, since sometimes, resort to a trust may not necessarily be the most cost effective option in a given situation.
No fiscal implications will ensue unless the property being settled is – chargeable property in terms of Article 5 of the Income Tax Act, accordingly:
- Immovable property or any real right thereon
- Intellectual property
- Business goodwill
- Beneficial interest in a trust
The settlement of property on trust shall constitute a deemed sale at fair market value, that is the price which that asset would fetch if sold on the open market at the time of the transfer. The difference between the cost of acquisition to the settlor and the fair market value will be the chargeable gain to the settlor who will pay tax at his applicable rate of tax.
Exemptions on Settlement
Income Tax: on the settlement of property on trust, it shall be deemed that:
- no transfer had taken place where the sole settlor is also the sole beneficiary of such trust;
- such property had been donated directly by the settlor of such trust to the beneficiaries that are persons other than the settlor himself; provided
- the relevant trust instrument specifically provides that the beneficiaries have an irrevocable vested right to receive all the property settled in trust as specified in the said written instrument; and
- beneficiaries are the spouse, descendants and ascendants in the direct line and their relative spouses or in the absence of descendants brothers/sisters and their descendants or approved philanthropic institutions;
- include persons who are in existence at the time of settlement
(c) No gain or loss will arise where in addition to the persons mentioned above there are persons substantially limited in their ability to administer or manage property or persons who may become unable to fully provide for their maintenance
Duty of Documents: on settlement of property, it shall be deemed that no transfer has taken place:
- where the settlor is the sole beneficiary and has an irrevocable vested right to receive trust property.
- Settlements are connected to ‘designated or approved commercial transactions’
Fiscal implications may arise in other circumstances.
Where a trustee acquires or transfers property during the administration of a trust, fiscal implications may arise in accordance with fiscal legislation.
There are some exemptions which relate mainly to income arising outside Malta and beneficiaries who are not resident in Malta.
Where a trustee distributes the trust property to the beneficiaries, it shall be deemed that no transfer took place in the cases where settlement was made in accordance with the manner above described provided such beneficiaries were not settlors. Property which was settled in accordance with (c) above shall be treated as though a donation was effected. Where a beneficiary was also a settlor, it shall also be treated in the same manner as a donation.
Where property reverts back to the settlor it shall be deemed that the property was never settled in trust.
Income Tax: a transfer of a beneficial interest will not attract tax unless the trust includes taxable property.
Exemptions to tax
(a) Where the CIR is satisfied that an irrevocable disclaimer was not effected with the sole or main purpose of avoiding, reducing or postponing liability to tax – prior approval is required in this case, or
(b) Upon the transfer of a beneficial interest where the trustee holds property for the purpose of a designated commercial transaction.
Duty on Documents: The inter vivos transfer or any change in beneficiary of a trust for immovable property or a trust for marketable securities constitutes a chargeable event.
The trust is a flexible instrument and estate planning tool and therein lies its appeal. Setting up a trust in Malta would offer peace of mind that one’s estate is being properly managed and administered whether during one’s lifetime or after one’s demise. It can also prevent heirs from frittering away the hard earned money they may inherit and reduce frivolous claims. If used properly it may also ease the burden of hefty estate taxes.
[i] This does not constitute a fiscal opinion and your fiscal affairs should be confirmed by your financial advisors.