• What is a Trust?
   

• What is a Trustor (Settlor)?
   

• What is the role of the Trustee?
   

• Who are the Beneficiaries?
   

• What is a Protector?
   

• What are the uses of a Trust?
   

• Who needs a Trust?
   

• What are the requirements for the creation of a Trust?
   

• What is the object of a Trust?
   

• Initial Capital
   

• Revocability of a Trust
   

• What about Confidentiality?
   

• Sample  Structures
   

• Trust vs. Private Foundations
   

• What is an Escrow?

WHAT IS A TRUST?

A trust is a juridical act by virtue of which a person named trustor (settlor, grantor) transfers property to a person named trustee to manage and distribute to one or more beneficiaries, as per the instructions of the trustor, normally contained in a Trust Deed or Declaration of Trust.

 

THE TRUSTOR - SETTLOR

The trustor (settlor, grantor) is the natural or juridical person who wishes to create a trust. It is the person that assigns the initial patrimony to the trust and decides, initially, the manner of administration and who will be the beneficiary(ies), the trustee(s) and protector(s), if any.

The trustor may be (and usually is) at the same time the first beneficiary of the trust, appointing other persons as secondary and/or final beneficiaries.

For instance: I want to create a Trust so my property passes on to my loved ones, without need of probate proceedings, with instructions that upon my death, it be distributed to my wife and children in the manner that I, if alive, would had done it:

"To my wife, a monthly allowance of $10,000. To my children, $10,000 on each birthday from the age of 18 and until they reach 30. When the youngest becomes 30, I want all the assets of the trust to be distributed as follows: 1/2 to my wife, 1/2 to my children in equal parts, thus ending the trust."

This is a typical case where the trust is used for inheritance purposes but, it may be used for any other legal purpose.

The trustor may reserve during his/her life certain rights. Most frequently, to revoke the trust, to appoint and dismiss the trustees, beneficiaries, and protector, and  the manner in which the assets shall be invested or managed.

 
 
ROLE OF THE TRUSTEE

The trustee is the natural or juridical person who is entrusted with the custody, administration, and distribution of the trust property.

Upon placement of the property in a trust, title thereof is transferred to the trustee. Doctrine calls this the "trust estate" since, although the trustee holds legal title of the assets, it has the legal obligation to protect, custody, manage and distribute these to the beneficiaries, as per the instructions set forth in the trust agreement and those received from time to time from the trustor by means of a "Letter of Wishes" or the protector (if so empowered).

The duties of the trustee may range from the simple custody of assets to the discretionary and unrestricted management and distribution of the patrimony. It all depends of the client's needs and the purpose of the specific trust.

 
 
THE BENEFICIARIES

Beneficiaries are the persons designated as such by the trustor (or the protector or trustee if so established) to receive the proceeds derived from the trust estate (interest, dividends, etc.) and the final title or property rights over such assets, as determined in the trust agreement.
 
 
THE PROTECTOR

The figure of the protector is optional. It is not necessary to appoint a protector for a trust to be valid.

The protector may be useful, depending on the particular case, in different circumstances. If the client does not wish to appear as trustor in the trust, but wishes to keep some degree of control over the structure, he may act as protector, with the same powers and rights he would have had as trustor.

Likewise, the client may appoint a person of his/her trust to act as protector, such as a brother, his/her lawyer, a friend, etc.

The powers and rights usually granted to a protector are, among others, to ensure proper discharge of the trustee's duties, being empowered to remove or change the latter if deemed convenient; approve the accounts rendered by the trustee of its administration; exclude or designate beneficiaries, as set forth in the trust agreement or Letter of Wishes.
 
 
USES OF THE TRUST

The trust is a very broad juridical act, as it allows its use for all kinds of business transactions, transmission of property, or administrative relationship. Thus its popularity in the countries with such legislation, and even in countries where its validity is acknowledged, even though it is not regulated in its laws, as is the case of Switzerland.

Trusts are juridical vehicles perfectly suited  for estate planning and asset protection. Setting up a trust account in a banking institution or thru an independent trustee, is an ideal way to preserve and give continuity to that account, instead of having to go thru probate and testamentary procedures.

With a trust, people can achieve general purposes such as to obviate probate proceedings, reduce tax brackets, obtain professional asset management, confidentiality, avoid conflicts among heirs to an estate, protect assets from lawsuits, etc.; and specific objectives such as to provide for the medical and educational expenses of certain individuals, leave gifts or specific assets to people who are not necessarily heirs, uninherit an undeserving family member, provide support for life to a disabled person, constitute a guarantee for financial or business transactions, etc.

Assets given in trust to the trustee are no longer part of the trustor's patrimony. Therefore, legal title of such assets (property title) is transferred to the trustee for its proper administration and distribution, following pre-established instructions in the Trust Deed or Letter of Wishes. To such end, the law provides that the assets of a trust may not be seized or attached for debts of the trustor, the trustee or the beneficiaries (only the benefit assigned to them may be attached). That is, unless the trustee has incurred in certain obligations as a result of his administrative duties regarding the trust fund itself. In other words, it is an "autonomous patrimony" subject to the instructions established in the trust agreement and the  letter of wishes from the trustor.

 
WHO NEEDS A TRUST

The trust is an ideal vehicle for those who do not have a prenuptial agreement, persons who have several marriages, persons with underage or disabled children, business persons wishing to limit the liability of a specific business transaction, persons wishing to leave a specific gift to a loved one, persons who want a certain degree of confidentiality regarding management and disposition of their patrimony. Most business transactions or property transfers can be made in the form of a trust, which in some cases can be mutually beneficial to all of the parties involved.

From an estate planning perspective, everyone that has substantial assets should benefit from the flexibility that this structure provides regarding the management and distribution of property.

Trusts are very useful as part of an asset protection strategy. Specially those created on a jurisdiction other than the trustor's, normally referred to as "offshore" or "international" trust, as potential creditors must consider the time and expenses that will have to be incurred in order to sue the trustee (since the trust cannot be sued itself) in a foreign jurisdiction as a way to satisfy a claim against the trustor. There are many other considerations when establishing an asset protection trust, such as the statute of limitations regarding the transfer of the assets to the trustee; the degree of control of the trustor over the assets (the more control, the less protection); irrevocability is a must; the choice of jurisdiction, etc.

It is important for individuals to consult and work with a trust or estate professional in order to ensure creating a valid trust that will fulfill the wishes of the trustor with regards to the protection, management, and ultimate distribution of his hard earned assets.

REQUIREMENTS FOR THE CREATION OF A TRUST

The requirements to create a legally valid trust vary according to the legislation to which it is subject. MMG holds trust licenses in strategic and favorable jurisdictions. The basic requirements are:

• Name and address of the trustor, trustee, and beneficiary. In common law jurisdictions, the creation of a trust is allowed by virtue of a Declaration of Trust, whereby the Trustor declares that has received certain assets in trust, subject to the conditions specified in the Deed of Trust. In Civil Law countries, corporations may act as trustor thus achieving the same level of confidentiality as with a Declaration of Trust. It is important to point out that the beneficiaries are generally designated in a separate document from the Trust Agreement called Letter of Wishes, where the client or real trustor instructs the trustee regarding the specific rules for the administration and distribution of the assets. Said document is private and confidential. As to the designation of the trustee, one or several trustees may be appointed to act jointly or severally. Likewise, the appointment of substitute trustees is recommended in case the trustee resigns or becomes unable for any reason to continue to act as such;
   

• Description of the initial capital placed in trust, to which other assets from the same trustor or third parties may be added to at any time;
   

• Powers and obligations of the trustee that as said previously, may vary in accordance with the object of the trust and the needs of the client;
   

• Prohibitions and limitations imposed on the trustee for the performance of his/her office;
   

• Rules of accrual distribution and disposal of the capital and proceeds from the trust assets that as we explained, may be set forth in the Letter of Wishes;
   

• Place and date of constitution of the trust;
   

• Domicile of the trust which is often the trustee's domicile;
   

• Jurisdiction that will govern the trust agreement;
   

• Arbitration clause or designation of the competent courts in charge of resolving conflicts that may arise from the interpretation of the  trust agreement;
   

• The fees that the trustee shall receive for his/her work, often including a fixed rate for the constitution of the trust and a fixed or variable annuity, as per the nature of the trust. Normally, the constitution fee, depending on the amount of work required from the lawyer in charge, is approximately, US$2,500 to US$5,000 and the variable annuity will depend on the amount of the assets managed (a 0.5% average).

THE OBJECT

The object of the trust is perhaps the most important element of the agreement as it establishes the type of trust to be drafted and necessarily, will have to be made based on the instructions of the client and his/her needs. Lawyers of MMG Fiduciary & Trust must work closely with the clients in this respect.

CAPITAL

An initial nominal capital may be fixed in the trust agreement and then, privately, other contributions may be made to the trust capital. The requirements to legally transfer assets to a trust depend on the nature of the assets. Real estate is generally the hardest to transfer since it implies drafting, signing, authenticating and registering a deed of transfer. We recommend our clients to transfer immovable property to a corporation and then assign to the trust the shares of the corporation that owns the property, thus avoiding a double transfer of such property (to the beneficiary or future buyer of the real estate property) and the expenses arising from it. Transfer of shares will depend on whether they are issued to the bearer or in nominative form. For the transfer to be valid, nominative shares must be registered in the name of the trustee.

REVOCABILITY

Unless otherwise provided by the trust agreement, trusts are presumed irrevocable, as well as the conveyance of assets to the trustee, in compliance with what is set forth in the trust agreement and the letter of wishes. Should the client wish to retain the right to revoke the trust, he/she can very well do so and revocability may take place at any time before the death or disability of the trustor. This power can also be assigned to the Trustee or the Protector, under specific circumstances, within certain guidelines.

CONFIDENTIALITY

Trustees and other persons who by virtue of their profession have knowledge of the business or activities involving a trust must keep such information in strict confidentiality. In Panama, for instance, it is a crime to disclose information regarding trusts, punishable with a fine of $50,000 and 6 months in prison.

USUAL STRUCTURES

Clients who wish to retain control of the assets until their death or total dissability, may do so through a "Trust of Shares". The client handles all business through a corporation and the shares of the corporation are transferred to the trustee, with instructions as to how to distribute said shares in case of disability or death of the client or "designated person".

For those who wish to provide loved ones with a lifetime rent, MMG Fiduciary may counsel you on how to obtain the best results by opening a long term bank deposit or low-risk investment account. Depending on the amount of the benefit for the beneficiary and the approximate interest or yielding rate of the assets, we can define the amount that should be placed in trust to provide the beneficiary with a fixed rent (that may be increased periodically if so desired or be subject to cyclical or market changes) for the life of such beneficiary and then distribute the capital among the ultimate beneficiaries. Likewise, immovable property (or the shares of the corporation that owns it) may be transferred to the trust, the trustor or principal beneficiary retaining the right of usufruct over said property for life, with precise instructions about what to do with such property upon his/her death. Finally, it is even possible to have a life insurance policy payable upon the death of the client or another person, having the trustee as beneficiary, with instructions as described above for the lifetime rent, and without having to contribute at that time the totality of the monies required for funding the trust.

Guarantee trusts are specially attractive to business people and allow them to obtain financing without having to mortgage or otherwise pledge the totality of the assets in a specific deal. In essence, through a guarantee trust, a person transfers property to a given trustee with specific instructions that if he/she does not pay a particular obligation, such trustee is to sell the property at a fair market price, cancel the amount of the outstanding obligation and give the remaining balance back to him/her. The trust may stipulate also that upon the event of default on the repayment of an obligation, the Trustee is instructed to hand over the trust property as payment. This scheme is specifically attractive to Banks and lenders, since it obviates the need to forclose the mortgage, which is costly and time consumming. This scheme may be used for any other kind of commercial transaction.

TRUST VS. PRIVATE FOUNDATION

Basically, all things described here, except for the guarantee trust, may be done through a Private Interest Foundation (hereinafter PIF). The law regulating PIF's does not allow their object to involve commercial activities.

One of the main differences is the origin of these figures. While the trust comes from British (Anglosaxon) or common law and the subsequent complement referred to as "Equity"; the PIF is basically a legacy of the Romans and countries which adopted the Civil Law tradition.

The basic difference between these two figures is that the PIF is a juridical person that may undertake obligations and own assets in its own name, sue and be sued, open bank accounts, etc., while the trust is a juridical relationship regulated by the law, by the trust agreement (which is law among the parties) and by the Letter of Wishes (this latter provides guidelines), all of which contain the rights and obligations of the Trustee, the Trustor and the Beneficiaries. In the Trust, all assets are in the name of the Trustee and any business it carries out or the claims, bank accounts, etc. of the trust will be handled by the trustee in its own name.

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Escrow Services

The Escrow Service is a Fiduciary relationship based on trust. It involves the custody and safekeeping of assets of any kind by the Escrow Agent, until a predefined condition has been met, in which case the assets are then transferred to the party that is entitled to them.

Escrows are normally used in closings of important transactions, especially on purchases of real estate, of vessels, and in mergers and acquisitions of companies. It has become popular in Internet transactions and is recommended for safeguarding against fraud, particularly in transactions where the buyer and seller are not known to each other. It is important to negotiate the conditions under which the transfer of property will be made and the Escrow Agent participation in the negotiation is often required. These conditions vary from transaction to transaction depending on the specific location of the parties, the object of the transaction and the method of payment. For example, a purchase of a guitar over the Internet may be subject to a series of conditions:

1. Agreement over the price;
2. Agreement over the quality;
3. Payment of price to Escrow Agent;
4. Confirmation of receipt of funds to the parties;
5. Contracting insurance for the guitar;
6. Packing and shipping of the guitar to buyer;
7. Confirmation of receipt by buyer and agreed to condition of the instrument;
8. Testing period during which the buyer can still decide to by or return the guitar;
9. Buyer agrees to purchase;
10. Escrow Agent pays the purchase price to Seller

These conditions are contained in an Escrow Agreement that once established, must be followed by the Escrow Agent and give as a result a very safe and comfortable transaction for both buyer and seller.

The sale of Real Estate, for example, usually involves a period in which the transfer of ownership is being recorded with the corresponding authority, during which, the owner or seller is unwilling to transfer the ownership title to the buyer, unless the buyer pays the purchase price, and the buyer is not willing to pay the price unless his title to the property has been duly recorded. The solution is to give the purchase price to an impartial Escrow Agent with the instructions to transfer the cash to the seller once evidence of the recording of the ownership title has been produced, or to give back the cash back to the buyer, in case the title has not been recorded by a certain date, or as agreed by the parties.

The same can be applied to a sale of a vessel. Most of the time the vessel is owned by a limited liability company, whose shares are then placed in Escrow along with the purchase price, until the change of ownership has been duly recorded.

In the previous examples, the Escrow acts like an insurance policy for the transaction, as each of the parties is assured that the other party will not and cannot deviate from the negotiated terms of the contracts.

An Escrow can be set-up also to guarantee that the outcome of a specific transaction that has already taken place is indeed that which the parties intended. In Mergers and Acquisitions, for example, it is customary that 10% of the purchase price of a company be placed in Escrow for a year, to account for unforeseen creditors, faulty equipment, etc., that the buyer or new owner now has to face. These expenses will be deducted from the purchase price of the company and paid by the Escrow Agent. Once the duration of the Escrow Agreement expires, then the remaining assets are transferred to the seller.

In legal terms, an Escrow is a contractual obligation that is either subject to a "Condition Precedent" or a "Resolutory Condition".

When subject to a Condition Precedent said condition needs to be met in order for the obligation to be enforceable. For example: the inscription of the ownership title of a vessel in the above example is a condition precedent that the Escrow Agent has to evidence prior to transferring the purchase price to the seller.

On the other hand, we can see a Resolutory Condition where the expiration of the time limit alone, causes the obligation of the Escrow Agent to return the remaining assets to the seller in the merger & acquisitions example above.

Escrow Agents will normally charge a set-up fee, depending on the time spent on the negotiation of the conditions, drafting, and execution of the Escrow Agreement; and a small percentage of the amount involved in the transaction.

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