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What is a Hybrid Trust?

A Trust is a legal figure that is born as an agreement of wills, combining among other things characteristics of a company, a contract and a will. The  Settlor  (trustor or creator of the trust) signs together with the Trustee  (Trustee) a document establishing the terms and conditions by which the parties must abide to comply with the agreement, reserving in said document some powers to the protector , who among other things may remove the Trustee in case it does not fulfill the purposes for which it was designated. The same document also stipulates who are the  beneficiaries (those who will use the assets entered into the trust, and the profits generated by it) and the way in which they will benefit. The statutes and jurisprudence of the trust law determine how the provisions of the trust document are interpreted and fill gaps when the document contains ambiguities or essential terms need to be covered. There is an infinite variety of trusts and each one must be tailor-made according to the profile and objectives of the Settlor or its fiscal residence and considering the selection of the assets entered into the trust. The hybrid American trust, for example, is a category of trust created under the law of one of the states of the United States, but which is not considered an American taxpayer under the American tax standard.


Privacy benefits

Although a trust has certain characteristics common to a partnership, it is not necessary to register it to create or keep it active. Therefore, it is not necessary to report the existence of the trust. Obviously, the trust will have to disclose itself when dealing with third parties, such as opening bank accounts or selling real estate, but in these cases it is only necessary to give limited information. In fact, some trust laws were specifically designed to protect the identity of the Settlor and the beneficiaries and compel third parties to deal with the Trustee directly. For families in compliance with the laws of their country, the hybrid trust may be exempt from declaration and not subject to exchange of tax information.

Fiscal benefits

The hybrid trust is a legally American trust but at the same time it is not a US taxpayer. To achieve this fiscal legal duality, it is necessary to write the trust document with certain technical details and be careful in the way it is administered. The hybrid trust is basically taxed as a foreign individual; it does not pay tax on what it earns outside the United States, nor does it pay tax on interest or capital gains on US investments. When it comes to inheritance tax, when the Settlor dies, the US estate that belongs to the trust is excluded from said tax, which amounts to 40%. Using United States trust law, it is safer to get the desired tax treatment in the face of a lawsuit or audit,

Equity Benefits

The main benefit of the trust is to serve as a testamentary vehicle, because the assets belonging to the trust must be out of the court’s reach when the Settlor dies and in the event of the appointment of a guardian due to the Settlor’s disability. In certain cases, the trust may also shield the estate from claims against Settlor and / or a beneficiary. In fact, in the event of a divorce or death, the spouse or heirs may not have rights to the estate within the trust. Being a trust controlled by the laws and courts of the United States, the hybrid trust is backed by the most secure, developed, predictable and flexible laws that can be enforced in the most efficient and fair courts of the world if necessary.

Technical considerations and practical consequences

With so many edges between law and tax, designing a trust that is truly fiscally efficient, capable of surpassing court or audit scrutiny really is painstaking work. Among other things, considerations that impact legal and fiscal functioning include:

  • Deciding between American jurisdictions: eg Delaware, Wyoming, Nevada, South Dakota, Florida, US Virgin Islands, Puerto Rico, etc.?
  • Select Trustee: Natural person or institution? Independent licensed or family member?
  • Revocable vs. Irrevocable; What powers does the Settlor of an irrevocable trust hold?
  • Discretionary or directed? Can distributions be made before Settlor’s death or not?
  • How to handle the issue of current or potential US beneficiaries?
  • What FATCA classification will the trust have? How to complete the W-8BEN-E or W-8IMY?
  • How to stipulate testamentary wishes and conditions for beneficiaries so that they can be interpreted by the Trustee and / or by a judge if someone does not comply with the wishes of the Settlor?
  • If you have an existing offshore trust, is it better to “tame” it or “decant” it to a hybrid trust?
  • How can the tax treatment change when Settlor dies?
  • Choose the protector and know what powers to grant him. Can it be the Settlor? A relative or a professional?
  • Etc., etc., etc….

Legal and tax treatment of trusts in Latin jurisdictions

Having an Anglo-Saxon origin, the local regulations of the Latin American countries are adapting the characteristics of this figure to their domestic law according to the tools of each legislation. The last Tax Reform in Argentina legalized the figure of the foreign Trust (Trust) as an accepted vehicle when it is properly structured. Even President Macri used this figure to structure his personal assets and the main author of the reform is the former tax partner of Price Waterhouse Coopers, now working for the DGI, who knows this structure for promoting it for many years from his private practice.

Other advisors

Obviously, a United States trust specifically designed to have certain characteristics under that country’s tax law must be tailored by an independent attorney experienced in tax and trust law. Furthermore, the independent attorney is the only professional who qualifies to obtain protection over confidential communications, that is, to maintain professional secrecy. However, the following professionals are also an indispensable part of the team to create a trust because they cover topics beyond tax and trust law in the United States:

  • Settlor Country Attorneys and Beneficiaries : Each country has a standard that defines whether something needs to be reported in that country regarding a US hybrid trust. Communications with these attorneys may be privileged, depending on the country.
  • Accountants : American accountants cannot form partnerships with attorneys or write legal documents or maintain professional secrecy. However, an accountant who is an expert in the trust’s international tax subspecialty is required to prepare the tax returns that arise when, for example, a hybrid trust was not done well or after a change of control to US persons.
  • Trust / Corporate Service Providers : In most jurisdictions, the Trustee needs to be licensed in order to provide trust services, and few attorneys act as Trustee because of the risk of having a conflict of interest. There is a very small market for companies offering these commercial services to be Trustee and each cautions their clients that they need to seek legal and tax advice from an independent attorney during the training process.
  • Financial advisers : Private bankers and other financial advisers are usually the first to identify the need to speak with a lawyer about the possibility of creating a trust, considering the possible reduction in capital due to the payment of unnecessary taxes or the risk that the family wealth after a disorderly generational transfer. When setting up the trust, it is necessary to coordinate the entry of funds and / or the opening of accounts with the financial institution.

How the Insight Trust can help

The creation of a hybrid trust that really works is a process that is divided into 4 stages. 

  1. You must first carefully and confidentially review the technical considerations outlined above with Settlor to determine the optimal structure for your particular case; 
  2. Based on this, a draft of the trust document that defines the relationship between the Settlor, Trustee, protector and beneficiaries must be drafted. Multiple versions can be made until Settlor is certain that the stipulations in the draft match their wishes, applicable rules, and Trustee requirements;
  3. Hold a final meeting to execute it with all necessary legal formalities, including coordinating the signing of the Trustee; Y
  4. Enter the estate into the trust.

Throughout this process we remain available to answer questions and clarify any doubts, collaborate with the other advisors as necessary, to conclude this task with a patrimonial structure that is understood and knows how to maintain, works in the desired way and above all, has the legal strength necessary to overcome the scrutiny of the treasury (IRS) or any court where a succession is opened or a lawsuit is filed against Settlor or any of the beneficiaries.

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