Stella Kammitsi: Trusts are not limited to the rich and famous
Adonis Adoni 07:17 - 30 November 2023
Stella Kammitsi, Chair of the Society of Trust and Estate Practitioners (STEP) Cyprus, introduces the concept of trusts, emphasising their role in managing and distributing assets in the ever-evolving world of wealth management and succession planning.
She also explains how trusts are driving philanthropy, Cyprus’ appeal as a trust destination, and their impact on the local economy.
Trusts offer a wide range of benefits, from protecting assets against creditors to facilitating business succession to ensuring education for dependents. Can you elaborate on some of the main ways in which trusts are used to manage and control wealth?
A trust offers a valuable legal mechanism through which one can manage and distribute one’s assets over time. This is done in accordance with the specific wealth management strategy and succession planning conditions that the settlor has chosen. These conditions are set out in the trust deed that regulates the management and operation of the trust. A trust can include conditions such as age and other attainment provisions, parameters or methods and mechanisms on how the assets will be used, as well as how and when they will be distributed to the beneficiaries. It ensures that the settlor’s assets will go to specific beneficiaries and that the assets are managed for the benefit of those beneficiaries, according to the settlor’s wishes. Transferring assets to a trust can also serve as an asset protection function, provided that the trust is not established with the intention of defrauding creditors and the settlor does not reserve unrestricted powers to himself to revoke the trust or otherwise recover trust assets. Depending on the governing law of the trust and the jurisdiction where the assets are located, trusts can further reduce estate duties and avoid forced heirship claims, as well as preserving confidentiality.
What sets trusts apart as a more attractive proposition in succession planning, as opposed to other tools, such as wills?
Both wills and trusts are used for estate succession planning but they function differently regarding how assets are passed on. Even though a will is the simpler option, a trust can avoid serious drawbacks triggered by a will, especially when it comes to how much, when, to whom and how a person’s assets are distributed. If we take, for example, inter vivos trusts – trusts created during one’s lifetime vis-à-vis wills – there are several striking differences making trusts the preferable choice. Firstly, a will can only be effective upon the death of the testator, while a trust goes into effect immediately after it’s been signed. A will typically goes into probate after the testator’s death, while a trust does not need any court approval to be operational. A will is also subject to forced heirship restrictions, so the testator has restrictions on whom outside the close family to leave any of his assets to. Based on these forced heirship provisions set out in Cap 195, the testator will not be able in his will to disinherit his closest heirs; otherwise, the protected heirs can easily overturn a will. However, under a trust, the settlor can have anyone of his choice as a beneficiary. Furthermore, a will is a set of instructions for after death while an inter vivos trust is created while the settlor is alive and can be funded by his assets and income derived via investments or the assets of the trust. Finally, another important distinction is that a trust established during the settlor’s lifetime can help family members in case of health issues and the inability to manage their assets. In such an instance, the trustee(s) can make payments, distributions and pay bills and expenses for the incapable members.
One common misconception is that trusts are reserved for the “super-rich”. Could you discuss how trusts can be beneficial for individuals from various financial backgrounds?
Indeed, it is a misconception to consider that trusts are only for the very affluent. Personal trusts are a powerful planning tool that can deliver benefits for a wide range of people across the wealth spectrum; they are not limited to the rich and famous! A trust depends not on the size of someone’s wealth but on the specific needs and purpose for which it is required and one’s unique financial situation, family needs, expectations and goals. Trusts are flexible and capable of addressing a variety of objectives, from simple to complex, and this is the reason why their popularity has been growing over the last two decades. Trusts can benefit any individual by ensuring, for example, the inheritance of assets in different jurisdictions without the need to have more than one will. They can also protect and preserve assets, customise and control how, to whom and when one’s wealth is distributed (before and after death). At the same time, they can assist the beneficiaries in managing property more efficiently, including minimising taxes, addressing family needs such as providing for young children and avoiding conflicts on inheritance in case of divorce, blended families or undivided property.
Building on this, can you provide examples of how trusts are being used as a force for good, such as in philanthropy, and how they can contribute to social causes?
There has been a significant momentum for philanthropy (especially during and after COVID-19), which is increasing as both legal entities and individuals donate to worthwhile causes as part of their social responsibility. Among other legal forms of charitable giving and philanthropy, the use of trusts is becoming increasingly popular. This is because the income and capital in trusts may only be used for the benefit of the charities or purposes indicated in the trust deed. These entities must be recognised as charitable under the laws of the relevant jurisdiction that governs the specific trust, such as for the prevention or relief of poverty, the advancement of health or education, the protection of orphans or victims of wars, and climate change actions. Asset protection is another important reason for using trusts for philanthropy, while the settlor has the option to appoint himself as a trustee, allowing ongoing involvement in how the donation is used and administered. The settlor can also amend specific provisions related to the trust’s operation and purposes in case of changes in circumstances or prevailing events, ensuring that the original charitable intention is upheld. This intention can be further detailed in a separate “Letter of Wishes”. Furthermore, trust assets can be invested, generating additional income that can be used over a prolonged period, by either the settlor or third parties, for the charitable purposes of the trust.
It makes sense that, given the market’s small size, most funds trusts registered in Cyprus are set up by foreign individuals. Nonetheless, what is the relationship between Cypriots and trusts?
Even though Cyprus’ journey on trusts started prior to its independence from the Crown in 1959 with the enactment of the Trustee Act Cap 193, locals randomly used them as a tool in their succession planning. Trusts became increasingly popular with the enactment of the Cyprus International Trusts Law in 1992 and its subsequent amendments, as the said law introduced certain provisions making Cyprus International Trusts attractive but limited to international clients. However, over the last decade, there has been a surge in interest from Cypriots for Cyprus local trusts. The primary driving force behind this heightened interest is the desire to avoid forced heirship provisions and ensure that the family assets are properly preserved and passed on to the next generation and beyond. These considerations are coupled with the fact many locals have assets of various types in different jurisdictions, mixed marriages and children from different marriages, divorce situations, and health issues within the family.
Cyprus has become an attractive destination for trusts due to its favourable tax benefits. Can you elaborate on what specific tax advantages Cyprus offers?
Indeed, there are several tax benefits, especially for international clients. In this case, when the beneficiary is not a tax resident of Cyprus, only the income and gains of a trust derived or deemed to be derived from sources in Cyprus will be subject to taxes imposed in Cyprus. Furthermore, Cyprus’ extensive double tax treaties and access to certain EU directives serve as useful tools for tax planning, providing considerable tax advantages for natural and legal persons who opt to establish Cyprus trusts.
As of October 2023, 155 professionals, including associates and affiliates, are members of STEP Cyprus. What role do they play in attracting trusts to the country? What expertise do they bring to the table, and how does their involvement influence the growth of this industry segment?
The majority of STEP Cyprus members are lawyers and accountants, specialising in wealth management and succession planning. Their role is critical since in most cases, they not only advise on setting up trusts but are also appointed as trustees. In doing so, they encounter the fiduciary responsibility for the proper management and administration of trust assets, in accordance with the trust deed and any separate “Letter of Wishes” from the settlor. Trust advisors must understand their clients’ long-term goals and needs, examining with them different scenarios before offering final advice – in the current landscape of private clients and family assets, there is no one-size-fits-all” solution. Professionals in the field need to be well-educated and maintain a commitment to staying updated on all regulatory and legal changes that impact trusts and their operations.
Trusts and the wider estate planning industry segment rely on expertise and specialisation. Could you explain how STEP promotes specialisation among professionals in the field?
As STEP Cyprus, we strive to serve as a trusted source of information for our members and have refocused our efforts to address the challenges that our business community has encountered in the last decade. One of our main targets has been knowledge sharing. To achieve this, we organise webinars and online speaker series featuring experts, as well as hosting an annual conference that delves into the hottest topics. Our commitment is to continually address the challenges faced by our members, enabling them to adapt to the evolving business environment with ease. In this endeavour, we work closely with STEP Europe and STEP Global to promote similar activities for our members.
Additionally, what measures are in place to prevent uncertified individuals from participating in trust services, and why is it essential to maintain the industry’s reputation?
All individuals or companies offering trustee, administration or related services must be authorized as ‘fit and proper’ and obtain a CySEC licence (pursuant to the Regulation of Fiduciaries, Administration Businesses and Company Directors Law of 2012). However, there is an exemption: lawyers and accountants are not required to obtain a CySEC licence if they are licensed and regulated by their respective regulatory bodies, namely the Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus.
Finally, beyond diversifying the financial services sector, what are the broader economic benefits that Cyprus derives from hosting international trusts? How do these benefits positively affect the local economy and job market?
Hosting international trusts in Cyprus has led to job opportunities in audit, tax, legal and banking services. Furthermore, over the last decade, many foreign clients have established family offices in Cyprus, making a substantial contribution to the country’s economy and bolstering Cyprus’ reputation as an international business hub. It’s worth noting, though, that the current banking sector in Cyprus isn’t fully supporting these efforts. As a result, many clients opt to open accounts with foreign banks rather than local ones.
(Photo by Michalis Kyprianou)
This interview first appeared in the November edition of GOLD magazine. Click here to view it.