Trusts aren’t only for the “super-rich”

In its November issue, GOLD magazine presented the STEP Cyprus Board of Directors, who shared their views on the challenges facing the industry as well as emerging opportunities in today’s shifting technological and sociopolitical landscape.

Here is what they had to say.

Nicky Xenofontos, Vice President

One common misconception is that trusts are reserved for the “super-rich.” How can trusts be beneficial for individuals from various financial backgrounds?

We’ll leave the definition of “high net worth” open to interpretation but trusts can be set up to serve a variety of purposes and aren’t only for the “super-rich”. This is probably the most widely believed myth but it could not be further from the truth. Trusts can be beneficial for people of all income levels and can also protect assets from creditors, ensure they are distributed according to one’s wishes, avoid probate, provide for educational or medical purposes, and provide for loved ones who cannot manage their finances, depending on the type of trust that is created. Simply put, trusts are not only for the rich and famous. They serve several purposes and categories of people. For instance, parents who want to provide for their young children’s future may create a living trust for their benefit. Moreover, trusts can be used by people with beneficiaries needing help to manage a property or are unable to do it, as well as people who own property that is hard to divide, such as a business or an income-producing asset. Similarly, people who want to control their property after death and people who are concerned about estate taxes in their country of domicile, providing for individuals with disabilities, education and charitable purposes, can use trusts for those purposes.

Evi Papacleovoulou, Secretary

With concerns about potential misuse, like using trusts as vehicles to hide assets, what are the regulatory measures and enforcement mechanisms to ensure that trusts are used ethically and in compliance with legal standards?

Cyprus strictly regulates trusts through the Trustee Law and International Trusts Law and, to ensure ethical and compliant use, it has implemented various regulatory measures and enforcement mechanisms. Trust service providers, including corporate service providers and law firms, must register and obtain a licence from the Cyprus Securities & Exchange Commission (CySEC) or other regulators in the industry. This requirement ensures that qualified and regulated professionals are involved in trust administration. Trust service providers are also obligated to perform due diligence and Know Your Customer (KYC) procedures to identify and verify the identity of the settlor, beneficiaries and other relevant individuals involved in the trust. Thorough record-keeping and reporting obligations are in place, requiring accurate records of trust activities and regular submissions of reports to the regulators. The regulators are responsible for supervising and inspecting trust service providers to ensure compliance with laws and regulations. Penalties, including fines and licence revocation, can be imposed for non-compliance or misuse of trusts. Cyprus actively engages in international efforts against tax evasion and money laundering, having signed agreements like the Common Reporting Standard (CRS) and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Overall, these measures aim to promote the ethical and compliant use of trusts in Cyprus while preventing illicit activities.

George Economides, Treasurer

Looking ahead, what trends and developments do you foresee for the trust and estate-planning environment in the future?

Estate planning, especially in cases of foreign properties or complex family arrangements, has always been – and will continue to be – topical. Trusts have traditionally served as a key solution to address this issue. Today, with the increasing global mobility of both individuals and corporations, High Net Worth Individuals are relocating to different jurisdictions and, consequently, several jurisdictions with different laws come into play. Not only must one ensure the protection of one’s estate and assets, often spread in various countries, but also but also plan for a seamless and tax-efficient transfer of accumulated wealth to chosen beneficiaries. There is a change of scenery in trust and estate planning, with the question of what will happen when someone passes becoming a prominent concern alongside topics like asset protection and inheritance tax. A trust simplifies things, especially when dealing with inheritance regimes in various jurisdictions for both immovable and movable property. In Cyprus, for example, the influx of foreign individuals, corporations and their senior executives is expected to drive demand for cross-border estate planning over multiple jurisdictions and lead to a rise in family investment companies and family offices. Nowadays, such a service requires the ongoing support of specialised advisors in the private client field. The trusts and estate planning industry in general is evolving from “Who will inherit my assets?” to “Who is currently handling my assets, efficiently and effectively?”.

Eleni Drakou, Board Member, Education Officer

What sets trusts apart as a more attractive proposition in succession planning, as opposed to other tools like wills?

Wills and trusts are frequently used in succession and inheritance planning. Wills express a person’s last wish concerning the distribution of their estate to their loved ones, the beneficiaries. Trusts express the settlor’s wishes about the distribution and management of certain assets for the benefit of the beneficiaries. However, trusts are often preferred over wills in succession planning due to the trusts’ immunity to forced heirship rules. The Cyprus Wills and Succession Law (Cap. 195) implements forced heirship by eliminating a person’s right to dispose of their estate up to a particular portion (the disposable portion) that is defined by law depending on the person’s family status. Moreover, the remainder of the person’s estate (the statutory portion) can’t be disposed of by will and is by law distributed to the person’s closest relatives. In the case where the person has executed a will and the disposed part of the estate exceeds the disposable portion as defined by law, such disposition will be limited proportionally to the disposable portion. Such forced heirship limitations do not apply to a trust. As per the Cyprus International Laws of 1992 (69(I)/1992), the laws of Cyprus or any other country’s regarding inheritance or succession do not affect the transfer, disposition or validity of any international trust, thus providing protection and immunity to a trust from heirship claims.

Rania Vrondou, Board Member, Events Officer

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?

Everyone, knowingly or not, has come across trusts. It is a mechanism dividing property management and beneficial enjoyment between multiple people. In Cyprus, trusts often serve social welfare and equitable justice by managing the estate of deceased persons, aiding personal insolvency and handling ownership of immovable property in divorce proceedings. Furthermore, trusts are often employed for charitable purposes, including access to education (e.g. scholarships), the advancement of arts (e.g. funding exhibitions) and poverty relief (e.g. assisting families in need). Charitable trusts allow for asset management by persons other than the settlor, as well as the supervision and scrutinisation of the management’s actions (typically trustee(s) divided into or assisted by committees). In addition, trust documents govern their operation and procedures in their entirety, offering assurance that even if a charitable trust fails, the assets are repurposed for related charitable causes by the courts. They are ideal for families wishing to contribute to social welfare while maintaining, to the greatest extent possible, their privacy, and they are easy to set up. It has been said that “We make a living by what we get. We make a life by what we give.” Charities are the embodiment of this statement.

Yiannis Simakis, Board Member, Events Officer

What makes Cyprus such a great destination for trusts?

Cyprus stands out as an exceptional destination for trusts due to its favourable legal framework, tax benefits and strategic location. Renowned for its robust trust laws, Cyprus offers a secure environment for setting up and managing trusts, boasting a comprehensive legal system, based on English common law principles, ensuring clarity and predictability in trust matters. Cyprus’ tax advantages are also noteworthy as well as its extensive network of Double Taxation Treaties, enhancing its appeal for global trust planning. The island’s strategic location at the crossroads of Europe, Asia and Africa further enhances its allure, facilitating international business and trade and making it convenient for trustees to manage diverse portfolios effectively. Additionally, Cyprus offers political stability and a skilled workforce proficient in multiple languages. Combined, these factors create a conducive environment for establishing trusts, making Cyprus an excellent choice for individuals and businesses looking for a secure and advantageous trust jurisdiction.

Kyriacos Xenophontos, Board Member

In the ever-changing landscape of the trust and estate planning industry, how do you envision the role of professionals evolving in the coming years? What new skills, knowledge or competencies will become increasingly important for practitioners?

The trust and estate planning industry will always remain relevant, even if the landscape changes over time, as people will always want to plan ahead and do their best to secure not only their own but also their loved ones’ future and legacy. The biggest challenge faced by trust and estate planning practitioners concerns the developments brought about by technological innovation and the ways these technologies interact with or, in many cases, disrupt traditional industries and mindsets. The rapid pace at which technology is advancing and affecting the world challenges professionals to stay abreast of developments. They will face increased volatility and uncertainty as traditional approaches are called into question, not only by the developments themselves but also by their younger clients. They will need to act as a bridge between the older and younger generations, closing the gap between the two. Practitioners will need to keep up with these developments and seek specialist advice, if required, to make informed decisions, manage risk effectively and guide their clients through a challenging world. It will be crucial for professionals to adapt – indeed once again, and as always, “The times they are a-changin’.”

Panicos Loizou, Board Member

Beyond diversifying the financial services sector, what are the broader economic benefits that Cyprus derives from hosting international trusts?

In recent years, the financial services sector around the world has been undergoing a major transformation. Digital currencies (cryptocurrencies) are taking over, digital banking continues to grow, while the collapse of banks and financial services companies, like Credit Suisse – a legend in banking until recently – has shocked the financial world. Central Banks around the world are divided on whether to recognise cryptocurrencies and try to regulate them or simply ban them! Legislation needs to be updated or even totally redrafted to cope with the digital transformation. There are several recent legal cases concerning digital currencies stolen from crypto wallets. Are Cyprus international trusts allowed to cater to digital assets? How do the trustees deal with these digital assets? What is the legal framework to support this? Are the trustees knowledgeable enough to handle such assets? At this moment, the Government has not yet legalised digital assets but, at the same time, it is not illegal for a Cyprus international trust to hold such assets. For the Cyprus financial service sector to grow and prosper during this very demanding transformation, the entire legal framework, including the legislation of Cyprus international trusts, must be proactive.

This article was first published in Gold magazine. To view it click here