Setting up trusts: focus on Luxembourg

A trust is a legal arrangement that allows a person to transfer ownership of their assets to a trustee, who then manages those assets on behalf of beneficiaries. Trusts are a popular estate planning tool that can help individuals ensure their assets are distributed according to their wishes, provide for the care of loved ones, and minimize estate taxes. There are many different types of trusts, each serving a specific purpose. One common type of trust is a revocable living trust, which allows the grantor to retain control of the assets during their lifetime and designate beneficiaries to receive those assets after their death. This type of trust can help avoid probate, which can be time-consuming and costly.

Irrevocable trusts, on the other hand, cannot be changed or revoked once they have been established. They are often used to protect assets from creditors, reduce estate taxes, or provide for a loved one with special needs. Special needs trusts are another type of trust that allows individuals to provide for a loved one with a disability without jeopardizing their eligibility for government benefits. These trusts can be used to supplement the beneficiary’s income and provide for their care and support in a way that ensures their quality of life.

Trusts can also be used to protect assets from spendthrift beneficiaries, provide for minor children, or ensure that assets are distributed according to specific conditions or timelines. They can be a valuable tool for individuals who want to ensure their assets are managed and distributed in a way that reflects their values and priorities. Among the pros of setting up a trust, we can find:

• Limited liability is possible if a corporate trustee is appointed.
• The structure provides more privacy than a company.
• There can be flexibility in distributions among beneficiaries. 
• Trust income is generally taxed as income of an individual.

Creating a trust involves drafting a legal document that specifies the terms of the trust, including the identity of the trustee, beneficiaries, and the assets that will be held in trust. It is important to work with an experienced estate planning attorney when setting up a trust to ensure that it is properly structured to meet your goals and comply with state laws. Trust agreements whereby the trustee – regardless of their nationality or the location of their supervisory authority – is:

• a credit institution: an establishment whose activity consists in receiving deposits and other reimbursable funds from the general public, and offering loans on its own behalf; or
• an investment company, such as a wealth manager, a commission agent, etc.; or
• a fixed- or variable-capital investment fund (société d’investissement à capital variable ou fixe); or
• a securitisation company; or
• a trust (fiduciary) agent in a securitisation transaction; or
• a mutual investment fund or securitisation fund management company; or
• a pension fund, such as a variable-capital pension savings company; or
• an insurance or reinsurance company; or
• a national or international public company operating in the financial sector.

A trust agreement may provide for one or more trustors. Likewise, one or more trustors may appoint several trustees.

Luxembourg Trusts

Formation of the trust

Forming a trust in Luxembourg not only frees you from having to deal with the additional paperwork and frowns associated with the traditional offshore tax havens. Luxembourg’s stable tax administration, global importance and perception of the country offer easy in many ways. Setting up a trust in Luxembourg requires a contract (a trust agreement). As such, a trust cannot be formed by way of a unilateral contract. For the agreement to be considered valid, 4 conditions must be satisfied:

• the contracting parties’ consent must be free and informed: they must know what they are committing to. The parties’ consent must not be invalidated by error, fraud (deceit or fraudulent maneuvering) or violence (physical or moral duress);
• the contracting parties must have the capacity to contract: they must have the legal capacity to contract; as such, this condition excludes legally incompetent adults and dependent minors; 
• the content of the agreement must be legal: only those purposes which are accepted in normal legal intercourse are considered legal purposes; and certain: the purpose of the agreement must be accurately determined, or determinable based on elements contained in the agreement;
• the cause of the agreement must be legal: the reason underlying the parties’ desire to contract must comply with the law.

Remoteness of assets

The fiduciary assets must be distinct from the trustee’s personal assets, and from any other fiduciary assets. The fiduciary assets:

• can only be seized by creditors whose rights stem from the assets;
• are not considered to be part of the trustee’s personal assets if the trustee is in liquidation or bankruptcy, or in any other situation involving their personal creditors.

The trustee must account for the fiduciary assets separately from their personal assets and other fiduciary assets. Each fiduciary asset must be recorded separately in the trustee’s books under an account that is clearly identified as a trust account. This account must include a reference to the relevant trust agreement.

Fiduciary obligations

Fiduciary obligations are the rights and duties of the trustee, the trustor and, where applicable, the beneficiary. They determine the trustee’s duties, that is to say, how they may use the trust assets.

Relationship between the trustor and the trustee

The mandate rules – discounting agency rules – govern the relationship between the trustor and the trustee. As such, the trustor is entitled, in principle, to give the trustee instructions. However, the parties’ interests, or those of a beneficiary, may dictate that the trustor waive this right. Furthermore, neither the trustor nor third parties – even if they are aware of the existence of the trust agreement – may invoke the agreement to create a direct link between themselves. Unless otherwise agreed, neither the trustor nor the trustee may unilaterally terminate a fixed-term trust agreement. The trustor, the trustee, or a third-party beneficiary provided for in the trust agreement may bring legal proceedings, for serious reasons, to seek:

• the temporary or permanent replacement of the trustee; or
• early termination of the trust agreement.

Reasons deemed to be serious include, most notably:

• mixing fiduciary assets and personal assets;
• dissipation of assets;
• grossly objectionable conduct by the trustee, in violation of financial legislation, etc.

Setting up trusts: focus on Luxembourg

A trust agreement may be established for the purpose of serving as a guarantee for existing or future debts. The parties may agree that the pool of fiduciary assets may change based on the guaranteed commitments or other factors of their choice. Moreover, any provision of the trust agreement will be considered null and void if its purpose or effect dispenses the trustee from paying the trustor or a third-party beneficiary the net balance resulting from the difference between: the value of the assets serving as the guarantee, on the day the assets are realized; and the amount of the guaranteed debt.

The trust agreement may provide for a method for determining the value of the fiduciary assets and the guaranteed debt.

Proof and enforceable against third parties

Proof of the existence of the trust agreement must be established in writing. The trust agreement is enforceable against third parties as soon as it is concluded. Nevertheless, there are 2 reservations with regards to this rule, i.e.:

• the rules as to the form and the enforceability that are applicable given the nature of the transferred assets: this applies to assets for which the transfer of ownership is subject to public disclosure or registration. In this case, the transfer becomes enforceable against third parties only when it has been publicly disclosed/registered;
• The contractual limitations to the trustee’s powers are only enforceable against third parties who are aware of such limitations.

Accordingly, the transfer of debt is enforceable against third parties as soon as it is concluded. Nevertheless, the debtor is validly discharged from settling its debt with the trustor as long as they are unaware of the transfer. Additionally, the rule governing enforceability is only applicable for debt transfers whose enforceability against third parties is governed by Luxembourg law.

Registration and inheritance rights

Concluding and updating a trust agreement are not subject to registration formalities, even if the agreement is used in proceedings before the courts or any other authority. If the trust agreement has been registered at the fixed fee, the definitive allocation to the trustee – during the term of the trust agreement, or when the agreement expires – of the assets or rights that have been transferred to them, must be registered, at the trustee’s request. The registration fee is charged at the normal rate. When assets or rights are transferred by a trustee to a third party beneficiary for no consideration, gift taxes are due depending on the degree of kinship between the beneficiary and the trustor. The same applies for the calculation of inheritance tax and transfer duties in the case of death.

Compulsory approval of trust (fiduciary) agents

Investors and creditors in a securitisation undertaking may entrust the management of their interests to one or more trust (fiduciary) agents. Trust agents whose registered offices are located in Luxembourg must be approved by the minister responsiblefor the CSSF (the Financial Sector Supervisory Commission). The application for approval must be sent in writing to the minister responsible for the CSSF, along with all information that is necessary for the minister’s assessment, in particular, detailed information on the applicant’s administrative and accounting structure. Approval of the trust agent’s activity is only granted to capital companies with a share capital and shareholder equity of at least EUR 125,000.

Overall, trusts are a versatile estate planning tool that can help individuals protect and distribute their assets according to their wishes. By understanding the different types of trusts available and how they can be used, individuals can create a comprehensive estate plan that provides for their loved ones and preserves their legacy.