What does a trust company do?

What is a trust company?

Revocable Trust, Irrevocable Trust, Living Trust, Inter Vivos Trust, Testamentary Trust

A trust is a means of estate planning popular in the Anglo-Saxon legal area. As part of our practice, we often encounter questions from our clients about this structure, which is foreign to German law. In the following I summarize therefore some principles to the trust and the handling with him in Germany.


First of all, a trust is nothing other than a legal relationship between two persons in which one person transfers certain assets to another person and this is connected with a specific purpose. The transferor is referred to as a “settlor”, “grantor” or even as a “trustor”. The corresponding German term would be that of the “founder of the trust”. The person to whom the intended assets are transferred is referred to as a “trustee”, or “trustee” in English. The one in whose favor the trust furnished, is called “Beneficiary”, in German approximately “beneficiary”.

There are trusts in the US (under state law), in the UK, but also in many so-called off-shore jurisdictions, such as the British Channel Islands, eg Isle of Man or Jersey, or in the Caribbean, such as the Cayman Islands, the British Virgin Islands or the Bahamas.

A trust will be established during life or death. In the former case the trust arises immediately. This is referred to as the ” Living Trust “, or as the ” Inter Vivos Trust “, ie a “trust among the living”. A trust that is structured so that it only comes with the time of death of the settlor, however, is a “testamentary trust”, a “testament Aryan Trust”.

Another characteristic of a trust is that it is either ” revocable “, that is revocable, or ” irrevocable “, irrevocable. The revocable trust can be revoked at any time by the settlor. With his death, the revocable trust becomes irrevocable. An Irrevocable Trust is irrevocable right from the start.   

In the context of a Living Trust, the settlor often becomes a trustee himself. Upon his demise, the replacement trustee named in the trust deed will then follow in his footsteps.

How is a trust managed? 
A factor that is often unfamiliar and difficult for German investors in a trust is that a trust always gives a third party more or less influence over their own assets. The word trust itself means “trust”. The establishment of a trust without trust in the person of the trustee does not make sense. Of course, the settlor may determine the manner in which the assets to be used and increased in the trust are used. Also, the granting of remaining influence of the settlor is possible in principle.

Trustees are often professionals, such as lawyers or so-called “Trust Company”, whose skin purpose is to run the business of trusts. The rights and duties of the Trustee, whether it is a trusted lawyer, trust company or private individual, are determined by the Trust Agreement, the Trust Agreement between Settlor and Trustee / Trustee. An experienced lawyer can set up very strict and strict rules of use and investment with the settler here. Such a trust is called ” Strict Trust “. On the contrary, it is also possible that a trust gives the trustee great freedom. Such a trust is a discretionary trust. In practice, there are usually mixed forms between these two forms.

Regulations in the Trust 
Often the question is asked how the offspring can be favored by the trust exactly. Here, the settlor is granted the widest possible freedom. Thus, there may be a staggering of payments at age, some expenses may be pre-approved, such as training or start-up costs, there may be monthly fixed payments, or even a benefit, more or less in the open Discretion of the trustee. Here it will always depend on the individual case and in particular the wishes of the settler.

Since a “revocable trust” is revocable, and usually the settlor himself acts as a trustee during his lifetime, the effect of such a trust during the lifetime of the settlor is still quite limited. On the other hand, anyone who sets up an irrevocable trust broadly transfers the power over assets to the trust. This can also have tax and inheritance effects (mandatory part).

A Trust ends with the expiration of the time specified in the Trust Deed, or with fulfillment of purpose or the final impossibility of fulfilling the purpose or by court order.

Trust for Germans 
The German courts do not recognize the structure of a trust. In certain circumstances, a court may recognize the intention of the settler expressed in the trust, for example, in appointing an executor. This does not mean that a German can not or should not set up a trust. It means, however, that for assets that are located in Germany and for whose transfer a German court is to be called, the trust structure will be ignored.

The transfer of property to an irrevocable trust can trigger gift tax for a person who is fully taxable in Germany. When the settler dies, complex tax issues often arise for German heirs.

Summary:

  • A trust can also be a useful instrument of estate planning for a German. The trust should then refer exclusively to assets located abroad.
  • The irrevocable trust is better than his reputation. The settler does not have to let all his assets go; There are many ways to protect the settlor’s will even after the trust is established.

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