A “trust” is a legal structure that involves the transfer of asset ownership from an individual to a third party, known as the “trustee,” who manages them for the benefit of specific beneficiaries, following the terms and conditions established in the trust agreement. The basic structure of a trust consists of three parts:

• Settlor: The person who creates the trust and transfers assets or properties to it, establishing the rules and instructions.
• Trustee: The person or entity responsible for managing the assets or properties in the trust according to the settlor’s instructions, with the aim of benefiting third parties.
• Beneficiaries: The individuals or institutions entitled to the benefits or income generated by the assets held in the trust, as determined by the settlor.

The concept of a “trust” has roots dating back to medieval England. It evolved from the legal and property practices of the time, where an individual transferred ownership of assets to another person (the “trustee”) to be managed for the benefit of third parties (the “beneficiaries”) according to established terms. Precisely for this reason, the trust is not yet very popular in Brazil, as Brazil follows Roman law rather than Anglo-Saxon law (English law).

In medieval England, the Trust provided a way to separate legal ownership from beneficial ownership, with the trustee acting as a guardian. This structure evolved over the years to become the foundation of the modern “trust” concept used for various purposes, such as:

• Succession Planning: The person who establishes a trust can address succession in advance, ensuring that the chosen beneficiaries receive the asset without complications in the absence of the account holder.

• Asset Protection: By investing through a trust structure, there is protection in a strong currency and the security of a jurisdiction different from the Brazilian jurisdiction.

• Tax Benefits: Generally, the trust is established through jurisdictions with privileged tax regimes, which ensures tax advantages such as exemption from capital gains taxes, for example.

Types of Trusts

Being a very ancient instrument, there are several categories of trusts that have emerged over time. Each category will have its own characteristic and its own operating rules. Among the most well-known categories of trusts are:

• Revocable Living Trust: A revocable trust allows the settlor to make changes to the trust during their lifetime. Revocable Living Trusts are quite popular in the United States, especially in states where probate processes are complex and costly. Trusts are used to avoid probate, maintain privacy, and facilitate the efficient transfer of assets to heirs.

• Special Needs Trust: Created to benefit individuals with special needs, providing care and financial resources without disqualifying eligibility for government assistance programs such as Supplemental Security Income (SSI) and Medicaid in the United States. In the United Kingdom, similar structures exist, such as “Disabled Person’s Trusts,” which allow financial resources to be held in trust for the benefit of individuals with disabilities, ensuring they receive appropriate and complementary care.

• Qualified Personal Residence Trust (QPRT): The Qualified Personal Residence Trust (QPRT) is an estate planning instrument used to transfer the ownership of a personal residence to a trust while the settlor continues to reside in it for a specified period. The QPRT can be a valuable strategy for individuals who wish to transfer a personal residence to their beneficiaries with tax efficiency while still enjoying continued use of the property.

• Charitable Lead Trust (CLT): A Charitable Lead Trust (CLT) is an estate planning structure that involves the donation of assets to a charitable institution for a specific period, followed by the transfer of the remaining assets back to the settlor or their beneficiaries. The CLT is designed to combine philanthropic goals with succession planning while providing tax benefits.

• Irrevocable Life Insurance Trust (ILIT): An Irrevocable Life Insurance Trust (ILIT) is a type of irrevocable trust, meaning that once established, its terms cannot be easily changed. This category of trust involves transferring resources to beneficiaries in the form of a life insurance policy, facilitating succession.

What are the advantages of an Irrevocable Life Insurance Trust (ILIT)?

The primary goal of an ILIT is to shield families from inheritance taxes and provide an effective means of transferring assets to beneficiaries while ensuring liquidity. Since the life insurance policy becomes a part of the trust, the transferred assets are not considered part of the settlor’s taxable estate, resulting in inheritance tax savings. An ILIT is particularly suitable in the following cases:

• Avoiding Estate Tax in the U.S.: The estate tax exemption threshold in the United States is currently $60,000. This means that if you have more than $60,000 invested in the U.S., that amount is subject to estate tax with rates ranging from 18% to 40%. By transferring assets to an ILIT, these assets are considered outside of the deceased’s taxable estate, thereby avoiding estate taxation.

• Avoiding ITCMD and Probate in Brazil: The life insurance paid to beneficiaries is not considered part of the estate, as the compensation is directly paid to beneficiaries without the deceased’s assets undergoing probate or distribution. For this reason, the ILIT is utilized as a form of succession planning, as it ensures liquidity and ease of resource transfer, exempting it from ITCMD (a Brazilian state-level inheritance tax) and eliminating the need for probate proceedings.

• Global Investment Flexibility: Even as an irrevocable trust, the account holder retains the freedom to choose which assets to invest in. The terms of the trust, defined at its creation, will determine the extent of control the settlor maintains over the assets. An irrevocable trust can be structured so that the settlor has some influence over investment decisions and asset management. The same applies to partial withdrawals that can be made within the structure.

• Capital Gains Tax Exemption: Certain jurisdictions such as Puerto Rico, the Cayman Islands, and Malaysia offer tax advantages for trusts established within their borders, including exemptions from capital gains taxes. This results in significant tax savings, as it becomes possible to buy and sell assets without concerns about capital gains.

• Asset Protection: An irrevocable trust helps protect the settlor’s assets from potential future legal actions. Since the assets legally belong to the trust, they may be less vulnerable to lawsuits or claims.

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