Trusts are something new for the vast majority of people, so we summarize the levels or elements to be analyzed in the previous decision phase. We base our ideas on our professional opinion and on our experience with hundreds of Latin American families we have assisted over the years.
v These elements are:
1. The psychological element.
The person concerned must be able to meditate on his old age and his own death. They should assume that their harmonious family may have future conflicts (especially when the person is no longer there) and should be calm and confident that they no longer hold title to and control over their assets and that such assets will be transferred to a third party during the life of the trust. Anyone who does not understand and accept these concepts and consequences should not even consider establishing a trust. You will lose time and money, and you will sleep poorly. You should be wary of anyone who wants to force you into a trust.
2. Value (cost-benefit relation).
Having overcome the psychological filter, we have to look at the value. Setting up and managing a trust generates costs, fees and expenses. The trustee must be compensated for their exposure, responsibility and professional activity. There are legal, accounting, administrative and notarial expenses. Not all estates tolerate the cost of setting up a trust. The benefits, as we have explained in other articles, are asset protection, estate planning and tax neutrality. If the value of the estate does not justify these expenses, or if the income from the estate is not at least sufficient to cover them, at a minimum, the trust will be unsustainable and should not be set up.
3. The legal element.
If the interested party has psychologically understood the implications of a trust and accepts the cost-benefit relation, they can start thinking about establishing a trust. As it is a legal structure, its structure must be impeccable on that level. It must have all the essential elements required under the applicable law, and the client must understand and accept those rules of the game. If an essential element is missing, there is no trust. It may be objected by third parties (e.g. creditors) and therefore should not be established. Once the essential elements have been verified, it should be structured in an optimal way, taking advantage of all the benefits and opportunities provided by the applicable law and being clear about the possible risks in order to prevent future problems. It is a joint exercise between the client and their advisor and it is what takes more time.
4. Taxation.
This is the last level to be considered. The client may be in the correct psychological situation to establish the trust, and its cost-benefit is acceptable. The interested party has also consented to the correct legal structure for the trust to exist, and jointly with their advisor have optimized it for their situation. It is now essential to understand the tax implications of what you are trying to do. Will setting up the trust in the planned manner lead to paying less tax than if it had not been set up, or to paying more, or the same (neutrality)? In any of the three options, the client must accept the result beforehand. If they do not accept it, they should not set up the planned trust. Where there is doubt, or where there is no precedent enabling to issue a prior opinion, they should at least understand and accept what would happen in an adverse scenario.
The client often sees that the potential tax savings are very similar to the cost of structuring and maintaining the trust. Mistakenly, even if the three initial filters are passed, they give up just because of that factor. If, for the same cost you have to pay for a tax, you gain asset protection and estate planning, the advantage is obvious and you should appreciate it.
Conclusions
These lines have tried to summarize years of professional experience and actual cases. Every family is a world and should have a customized trust that contemplates that truth. This is not incompatible with the fact that the previous analysis process should be substantially the same. Hopefully these four successive levels or filters of analysis will serve as a guide for those who are approaching the world of trusts. Most feel a logical disorientation and are overwhelmed by so much information, often explained in an incomprehensible or unfriendly way.
v These elements are:
- The psychological element;
- Value (cost-benefit relation);
- The legal element; and
- Taxation.
1. The psychological element.
The person concerned must be able to meditate on his old age and his own death. They should assume that their harmonious family may have future conflicts (especially when the person is no longer there) and should be calm and confident that they no longer hold title to and control over their assets and that such assets will be transferred to a third party during the life of the trust. Anyone who does not understand and accept these concepts and consequences should not even consider establishing a trust. You will lose time and money, and you will sleep poorly. You should be wary of anyone who wants to force you into a trust.
2. Value (cost-benefit relation).
Having overcome the psychological filter, we have to look at the value. Setting up and managing a trust generates costs, fees and expenses. The trustee must be compensated for their exposure, responsibility and professional activity. There are legal, accounting, administrative and notarial expenses. Not all estates tolerate the cost of setting up a trust. The benefits, as we have explained in other articles, are asset protection, estate planning and tax neutrality. If the value of the estate does not justify these expenses, or if the income from the estate is not at least sufficient to cover them, at a minimum, the trust will be unsustainable and should not be set up.
3. The legal element.
If the interested party has psychologically understood the implications of a trust and accepts the cost-benefit relation, they can start thinking about establishing a trust. As it is a legal structure, its structure must be impeccable on that level. It must have all the essential elements required under the applicable law, and the client must understand and accept those rules of the game. If an essential element is missing, there is no trust. It may be objected by third parties (e.g. creditors) and therefore should not be established. Once the essential elements have been verified, it should be structured in an optimal way, taking advantage of all the benefits and opportunities provided by the applicable law and being clear about the possible risks in order to prevent future problems. It is a joint exercise between the client and their advisor and it is what takes more time.
4. Taxation.
This is the last level to be considered. The client may be in the correct psychological situation to establish the trust, and its cost-benefit is acceptable. The interested party has also consented to the correct legal structure for the trust to exist, and jointly with their advisor have optimized it for their situation. It is now essential to understand the tax implications of what you are trying to do. Will setting up the trust in the planned manner lead to paying less tax than if it had not been set up, or to paying more, or the same (neutrality)? In any of the three options, the client must accept the result beforehand. If they do not accept it, they should not set up the planned trust. Where there is doubt, or where there is no precedent enabling to issue a prior opinion, they should at least understand and accept what would happen in an adverse scenario.
The client often sees that the potential tax savings are very similar to the cost of structuring and maintaining the trust. Mistakenly, even if the three initial filters are passed, they give up just because of that factor. If, for the same cost you have to pay for a tax, you gain asset protection and estate planning, the advantage is obvious and you should appreciate it.
Conclusions
These lines have tried to summarize years of professional experience and actual cases. Every family is a world and should have a customized trust that contemplates that truth. This is not incompatible with the fact that the previous analysis process should be substantially the same. Hopefully these four successive levels or filters of analysis will serve as a guide for those who are approaching the world of trusts. Most feel a logical disorientation and are overwhelmed by so much information, often explained in an incomprehensible or unfriendly way.
