Trusts and Protectorships

What is a Trust?

A trust is a contractual agreement between the person or entity that creates the trust (the “Settlor”) and a person or entity that holds legal title of the assets (the “Trustee”) transferred into the trust to be held in trust, for the benefit of a third party (the “Beneficiary”).

Trusts are a popular succession and estate planning tool used for centuries in Common Law countries. Trusts as we know them developed in England from the times of the Crusades. The long legal history provides legal certainty and stability that are highly beneficial.

US Trust v. Foreign Trust

For a trust to be considered a “US Trust”, the trust must satisfy the following two criteria:

a. A US court has jurisdiction over the administration of the trust (the “Court Test”), and
b. One or more US persons have control over all the substantive actions of the trust (the “Control Test”).

Any trust which does not meet both criteria is considered a foreign trust. Therefore, a trust could have a US trustee and be subject to US law but be considered a foreign trust if the control test is not met.

Directed Trust v. Discretionary Trust

Trusts can be fully discretionary or may be “directed trusts.” A discretionary trust is a trust agreement wherein the trustee has the discretion as to how distributions of the trust estate are made as indicated in the trust agreement. Directed trusts allow the proper delegation of management of the underlying entities to third parties unrelated to the trustee.