Trusts are a significant part of estate planning and form part of advice we offer to clients on a daily basis. However, when a client owns foreign assets, trusts can add an additional layer of complexity and in some countries, they are not recognised.
Why use a trust?
Whether a trust is set up during lifetime or set up through a will, they can offer a number of advantages, including flexibility (the ability to distribute assets depending on circumstances) protection (the ability to protect assets for young beneficiaries or those with external risk factors) and control (offering the trustees the ability to control how and when beneficiaries receive trust assets). They also come into play around inheritance tax planning and with a general increase in ‘blended families’ liferent trusts and discretionary trusts are being used frequently for lifetime planning and in wills.
What if a client has foreign assets?
Whether it’s a villa in Spain, a bank account in France or an investment in Greece, many countries do not recognise trusts so this can cause complications. In particular, if a client has one will prepared in Scotland (dealing with their worldwide estate) leaving all assets (including foreign assets) in a flexible discretionary trust, this can lead to difficulties for the executors, making the administration process complex, time consuming and expensive.
For example, in Spain you cannot have an asset administered by a third person (e.g. trustees) and any Spanish property held in a trust would need to be extracted and passed to a defined beneficiary outright. Meaning any intention of protecting assets in a trust is not followed through.
What other consequences are there?
For countries such as Spain who do not recognise trusts, there can be tax consequences as a result of appointing assets outright to a defined beneficiary. Alternatively, in France, French tax law applies strict rules to foreign trusts. Inheritance tax in France is based on proximity of relationship (the closer you are to the deceased, the bigger your allowance is and the lower the rate of tax is). There are certain trusts in France that may be treated as an ‘unrelated’ entity, such that there is no allowance and the highest rate of tax apples (60%). Additionally, there can be various reporting obligations required, tax on distributions and potential wealth tax where a trust set up here has connections to France.
Similar to the Scottish rules around legal rights, both Spain and France enforce strict forced heirship laws, mandating a significant portion of a deceased’s estate to children or spouses. In France, these rules apply to your worldwide estate.
Is it better to have more than one will?
In some cases, it can be more helpful to have a will for each country you own assets in. However, different countries have different rules and different legislation can apply. If more than one will is prepared, these must be carefully coordinated to avoid accidental revocation or conflicting provisions.
What should a client do?
When a client has various assets in other countries, or connections to other countries, the best thing that client can do is to seek proper and effective legal advice in all jurisdictions. Not all solicitors are able to offer this advice.
At Brodies we have a team of individuals who can assist with cross border issues for clients, and we work closely with firms in other jurisdictions. For more information, please get in touch with our trust lawyers.
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