The trust is a contract that is usually used to protect the interests of a minor, protect an estate or manage the assets of a person with a disability, for example, but it also has other purposes. In this article we tell you what the trust contract is, what types exist, what advantages and disadvantages it has and how it is taxed.
What is a trust deed?
The trust contract is a legal institution whereby one person entrusts another person with the management and conservation of certain goods or assets to hand them over to a third person at a certain time, when a condition, date or situation established in the will is fulfilled.
The persons involved in the trust are the following:
– Settlor. This is the person who is in charge of the conservation or administration of the asset, which may be, for example, a house.
– Trustee. This is the person who receives the asset to manage it for a specific period of time and then hand it over to another person.
– Trustee. This is the person who receives the property once the established term or condition is fulfilled.
For a better understanding, here is an example:
Alberto is a businessman with a large estate who has a daughter and a granddaughter. To prevent the family from losing the entire estate due to mismanagement, he makes a will and sets up a trust. The final inheritance of the entire estate is attributed to the granddaughter when she reaches the age of majority. The settlor is the daughter until she dies and thereafter the granddaughter receives the assets.
Limitations of the trust contract
The Civil Code establishes a series of limitations affecting the substitution of trusts, which are as follows:
-Cannot go beyond the second degree.
-It cannot encumber the legitimate.
In addition to the above, Article 785 of the Civil Code establishes that:
The following shall have no effect:
Trustee substitutions that are not made expressly, either by giving them this name, or by imposing on the substituted party the definitive obligation to hand over the assets to a second heir.
Provisions containing a perpetual prohibition on alienation, and even a temporary prohibition, outside the limit set out in Article 781.
Those which impose on the heir the obligation to pay a certain rent or pension to several persons in succession, beyond the second degree.
Those whose purpose is to leave all or part of the inherited assets to a person so that they may apply or invest them according to the reserved instructions given to them by the testator.
What types of trust are there?
We can differentiate between two types of trusts, which are as follows:
-Pure trust. In this case, the trustee may not dispose of the assets, i.e. he/she may not sell them or assign their use.
-Residuary trust. In this case the trustee may use the assets and dispose of them (the residue). The trustee must expressly authorise the possibility of selling, exchanging or donating, for example.
Advantages and disadvantages of the trust contract
The trust contract provides several advantages such as the following:The assets that are administered are unattachable, so if there are debts: they are protected.
-The administration must be transparent so that the final beneficiaries know at all times what is being done.
-It is possible to establish different conditions to protect the assets, so the trust is flexible.
-The information about the assets and their administration does not have access to any public record, so confidentiality is maintained.
The disadvantages are as follows:
-The granting of a trust contract involves the generation of a series of costs such as those associated with the professionals (lawyers, tax advisors, etc.) involved in the operation.
-There are legally established limitations that can limit the assets that can be the object of the trust contract or establish a limited period of time for the duration of the contract.
-It can lead to conflicts between the trustee and the trustee if there is no mutual trust or if the trustee is not an impartial person.
What are the responsibilities of the trustee?
The trustee must carry out a number of activities in order to properly manage the assets entrusted to him/her. They are the following:
-Comply with the trustee’s instructions. It is important that the trustee complies with the settlor’s instructions and acts in good faith and protects the interests of the trustee.
-Legally represent the beneficiaries. The trustee acts as the settlor’s legal representative before third parties and has the capacity to sign contracts and negotiate, among other actions.
-Reporting and accountability. The trustee must report periodically to the trustees on the actions taken (investments, income and expenses, among others) and on the state of the real estate.
In general, the trustee must act loyally towards the trustees and avoid conflicts of interest. In other words, the trustee must act diligently and give priority to the interests of the trustees.
Inheritance and Gift Tax on trusts
It is often thought that the trust saves taxes with respect to inheritance, but it is necessary to analyse each case, to see the taxation with an expert and to know that article 53 of the Inheritance and Gift Tax Law establishes the following:
3. In trust substitutions, the tax shall be levied on the institution and on each substitution, taking into account the pre-existing assets of the instituted or the substitute and the degree of kinship of each one with the deceased, with the trustee and the trustees, with the exception of the last one, being considered as mere usufructuaries, unless they could dispose of the assets by acts “inter vivos” or “mortis causa”, in which case it shall be settled by the full domain, applying the provisions of Article 47.3 of these Regulations.
In addition to ISD, the trustee will also be taxed on the municipal capital gains tax at the moment he receives the property.
In short, the taxation of the trust depends on the pre-existing assets, the degree of kinship with the trustee and the possibility of disposing (selling or transferring the use) or not of the assets, since if he disposes of the assets he can obtain an economic benefit for which he will have to pay tax. On the other hand, the beneficial owner will also have to pay tax when he receives the assets.
Differences between the trust contract and usufruct
There is often a tendency to confuse a trust deed with a usufruct. Usufruct is the right (of the usufructuary) to use assets and receive profits (fruits) from those assets, although the ownership of the assets remains in the hands of the owner, called the bare owner. When the usufructuary dies or the term of the usufruct ends, the bare owner becomes the full owner. Based on the above, we can see that the main difference with the trust contract is that in the latter there is a transfer of the assets and this does not occur in the usufruct.
As a consequence of all of the above, it is essential that, if you wish to use the trust contract, you have the help of expert advisors to analyse the case and indicate the best way to act and the taxation of each alternative.
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