An Isle of Man trust can be a valuable wealth planning tool

With a trust the legal ownership and control of an asset passes from the individual creating the structure (referred to as the settlor) to the trustee.

The trustee will hold the asset upon trust for the beneficiaries and generally in accordance with the terms of a documented trust deed.

Isle of Man law trusts are flexible arrangements used to facilitate and achieve many objectives.

These may include the management and preservation of wealth, succession planning, support and provision for vulnerable beneficiaries, tax planning as well as philanthropic and charitable purposes.

Where a person disposes of assets by settling them on trust, the trust assets will not form part of the settlor’s estate upon their death. This potentially enables them to avoid forced heirship rules which may be mandatory under the laws of their domicile, residence or nationality.

Trusts are a useful tool for managing complex, high-value luxury assets such as yachts and aircrafts and in recent years their sphere has extended to include other high-value collectibles known as passion assets such as cars, gems, watches, coins, stamps and wine.

It is possible through careful drafting of the trust deed, certain powers can be reserved or granted to someone other than a trustee, which is permissible under general common law principles. Care is required, though, as to the powers reserved, how these are exercised, and by whom, so as to protect the integrity of the structure.

Elements of a trust

Settlor
Once a trust is created the settlor must divest themselves of the legal ownership of the assets in the trust. The settlor may be a beneficiary and may also retain a degree of control and oversight over the trustee by reserving the power to approve distributions, appoint and remove trustees.

Trustee
Legal title to the trust assets is vested in the trustee who is responsible for the management and administration of the trust. A trustee must act with due diligence and professional skill. A trustee must exercise its powers solely for the benefit of the beneficiaries. The trust assets, however, constitute a separate fund and do not form any part of the trustee’s own estate.

Beneficiaries
The beneficiaries are the persons entitled to or who may benefit from the assets held on trust. In order for a trust to be valid there must be sufficient certainty as to the identity of the beneficiaries.  The ability to add new beneficiaries may be included in the trust instrument or, in the case of a discretionary trust, as the trustee may determine. It is also possible to include in the trust instrument a power to exclude beneficiaries from future benefit.

Trust fund
The assets constituting the trust fund may be of any type of movable or immovable property. Further assets may be added at any time after settlement of the initial assets. A common arrangement is to establish a trust with a nominal initial amount and subsequently to add more substantial assets. These would not need to be specified in the main trust deed.

Protector
In order to counterbalance the wide discretionary and fiduciary powers conferred on a trustee it is often found useful for the settlor to appoint a trusted friend or professional adviser, or even themselves, to act as a protector. In such cases the consent of the protector will generally be required before the trustee may exercise certain strategic powers. On the protector’s death, incapacity or resignation, their powers can be passed on to another person.

Tax

Trusts are taxed favourably on the Isle of Man, particularly when they are created by a non-resident settlor and there are no Manx beneficiaries. 

The Island does not levy any capital gains, inheritance, estate or gift taxes.

Income tax will not apply, except in very limited circumstances, provided the beneficiaries are overseas residents.

Regulation

Financial services provided from the Isle of Man are regulated and overseen by the Isle of Man Financial Services Authority. This is an independent statutory board created by the Isle of Man Government, and the provision of trustee and director services is a licensed activity under the Financial Services Act 2008.

No action should be taken on the basis of this note, nor should it be construed as amounting to tax, legal or VAT advice. Suitable, specific and professional advice should always be obtained in respect on any particular issue.
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