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TRUSTS: WHAT THEY ARE AND HOW THEY ARE CREATED? What is a trust? A trust is an obligation binding a person (which can be an individual or a company) called a 'trustee' to deal with 'property' in a particular way, for the benefit of one or more 'beneficiaries'. or A trust is the relationship which arises when one person (the settlor) has given his property (the trust fund) over to another individual or company (the trustee) to manage for the benefit of other persons (the beneficiaries) of whom the settlor may be one. • • • • Anyone over the age of 18 who has the capacity to manage his own affairs can create a trust. However, for a trust to be created, three things are essential: The words used must be an imperative direction to the trustee (i.e. certainty of words). The property must describe with reasonable certainty so that there is no problem identifying it (i.e. certainty of subject matter). The beneficiaries should be defined with sufficient certainty (i.e. certainty of objects - the description of the beneficiaries should enable the trustees to make a list of them).
What is a 'trustee'? Trustees are the legal owners of the trust property. They are legally bound to look after the property of the trust in a particular way and for a particular purpose. Trustees administer the trust and in certain circumstances make decisions about how the property in the trust is to be used. The trust can continue even though the trustees might change, but there must normally be at least one trustee. • • • • • • Trustees are subject to very strict duties regarding the way in which they carry out their obligations to the beneficiaries. If a trustee does not act in the way in which he should or fails to act when he ought to, he will have committed a breach of trust and will personally liable to make good any loss resulting from his improper or lack of action. Trustees have to obey the directions contained in the trust agreement with respect to the interest of the beneficiaries (who gets what) and also the administration of the trust (i.e. management of the trust property). There are also strict standards as to the way in which the Trustees powers and discretions may be exercised. The trustee cannot use or deal with the trust fund for his own private advantage. A trustee has to exercise the powers given him in the best interests of the beneficiaries.
A trust company is held to an even higher standard. Is a settlement the same as a trust? The words 'settlement' and 'trust' are sometimes used in place of each other. How is a trust created? . The way income is taxed depends on the type of trust. There can be one or more beneficiaries. The land and buildings may produce rental income. such as a whole family or a class of people. For tax purposes. such as interest or dividends. The cash and investments held in the trust are also called the 'capital' or 'fund' of the trust. the trust fund suffers a loss. Property is normally put into the trust when it is created. This capital (or fund) may produce income.• A Trustee must act prudently when managing the trust property and will be liable for breach of trust if by failing to exercise due diligence and care. For example. and settlements that are trusts. and to describe the same thing. What is 'property'? The property of a trust can include • • • • money investments land or buildings other assets. What is a 'settlor' A settlor is a person who has put property into the trust. What is a 'beneficiary'? A beneficiary is anyone who benefits from the property held in the trust. but it can also be added at a later date. or the capital only. such as paintings. and each may benefit from the trust in a different way. the term 'settlement' can have a wider meaning and can include various other arrangements or agreements. a beneficiary may benefit from • • • the income only. or both the income and capital of the trust. This only deals with trusts.
this is becoming increasingly difficult as the major taxing jurisdictions are continually passing antiavoidance legislation. Tax Planning: To minimize the amount of taxes. With a trust in place. his assets are not split up and distributed to his heirs. infant children and aged parents. For example. for example. Protecting The Weak: An individual can provide for those whom he considers unable to manage his own affairs. 4. However. Some Reasons Why Trusts Are Used 1. when deciding how to deal with property for the benefit of a child or an incapacitated person who cannot manage his or her own affairs. rather than have the law choose for them. A settlor might ask a professional adviser to draw up a trust deed. the settlor). 7. so there is little or no connection with the settlor. Sometimes the Courts will create a trust. A trust can be created under the terms of a will.e. Preserving The Family Fortune: A person may wish that after his or her death. Asset Protection: The assets making up the trust fund are no longer owned by the individual who contributed the assets (i. the individuals to whom monies are owed). A trust can also occur if a person dies without leaving a will.Normally a trust is created by a deed. or other pitfalls in life. 6. However. 2. which then sets out the terms of the trust. Different Types of Trusts . but rather are preserved so that future generations can also benefit. please note that an individual cannot transfer property to trustees with the intention of defrauding his creditors (i. Avoiding Disruption On Death: The death of the head of the family can be quite a significant disruption. Confidentiality: The legal title to the trust fund is vested in the trustee. Estate Planning: A lot of people prefer to choose who will inherit their assets. therefore in the event of duress or coercion. whether or not he leaves a will. 5. 3. persons of unsound mind. the assets are protected. the management of his assets will continue uninterrupted.e. when someone leaves instructions that when he or she dies some or all of the estate is to be placed in trust. Many people also like to make provision for the education and care/maintenance of family members as a measure of protection.
The trustees must pass all of the income received. This is a bare trust because Juliet is absolutely entitled to both the capital (the original money settled in the trust) and the income (any interest earned). but that trustee has no discretion over what income to pay the beneficiary. but usually they fall into one of the following categories • • • • • bare trusts interest in possession trusts discretionary trusts accumulation and maintenance trusts mixed trusts. The property is held in the name of a trustee. Depending on the terms of the trust. and often does not. the capital will pass to a different beneficiary. the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income. the trustee is a nominee in whose name the property is held and has no active duties to perform. known in this case as an 'income beneficiary'. is one in which each beneficiary has an immediate and absolute right to both capital and income. also known as a 'simple trust'. What is a 'bare trust'? A bare trust. In effect. has a current legal right to the income from the trust as it arises. have any rights over the capital of such a trust. A beneficiary who is entitled to the trust capital is known as the 'remainderman' ('fiar' in Scotland) or the 'capital beneficiary'. or beneficiaries. at a specific time in the future or after a specific future event. A beneficiary who is entitled to the income of the trust for life is known as a 'life tenant' (a 'life renter' in Scotland) or as having a 'life interest' (a 'life rent interest' in Scotland). The beneficiaries of a bare trust have the right to take actual possession of trust property. She also has a right to take possession of any of the money at any time. less any trustees' expenses and tax. What is an 'interest in possession trust'? This type of trust exists when a beneficiary. to the beneficiary. The money is to be held in trust.There are a number of different sorts of trusts. Example . Normally. with Juliet entitled to the money and any income. The income beneficiary need not. such as interest. it earns. Example Gary leaves his sister Juliet some money in his will.
the trustees wind up the trust and distribute all of the money to Azra and Jaspal. the trustees might decide to pay for piano lessons for them. when the children are young. Kathleen has no right to the capital. What is an 'accumulation and maintenance trust'? An accumulation and maintenance trust is one in which the beneficiaries will become entitled to the property or at least the income when they reach a certain age (no more than 25). Unlike Juliet in the bare trust example. at which time the beneficiary. As they get older. conditions to impose on the recipients. if any. On his death Stanley's will creates a trust and all the shares he owned are to be held in that trust. After 20 years. or may not. The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren. Income that has been accumulated becomes part of the capital of the trust. The trustees may. or beneficiaries. .Stanley is married to Kathleen. but the trustees can decide • • • • how much is paid to which beneficiary or class of beneficiaries payments are made how often the payments are made what. Trustees of an accumulation and maintenance trust are given power to 'accumulate' the income of the trust until a certain date. Kathleen has an 'interest in possession' in the trust as she is entitled to the income (the dividends) arising on it for the rest of her life. The trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property. the trustees might pay towards a wedding. so when she dies the trust ceases and all the capital (the shares) passes to her children or grandchildren (the remaindermen or fiars). The dividends earned on the shares are to go to Kathleen for the rest of her life. Example Mina puts money into trust. be allowed to 'accumulate' income within the trust for as long as the law allows rather than pass it to the beneficiaries. for the benefit of her two grandchildren. So. Azra and Jaspal. to be held for 20 years. What is a 'discretionary trust'? Trustees of a discretionary trust generally have 'discretion' about how to use the income of the trust. They may be required to use any income for the benefit of particular beneficiaries. are entitled to the property of the trust or to the income arising from that property. and when she dies the shares pass to the children or grandchildren.
Often this is the only power granted to the Trust Protector. the beneficiary (unless the terms of the trust say otherwise) becomes entitled to the income from the property held in the trust when he or she reaches age 18 and an interest in possession trust is created at that point. Example Two children benefit from an English accumulation and maintenance trust.In England and Wales. Example Bill puts money into an accumulation and maintenance trust for the benefit of his grandson Andrew. or changes in management. Ability to remove or replace the Trustee. . What is a Protector? A term used to describe an office created by the Trust Deed in which power to do or to approve certain things is vested. when Zoe reaches 18 the trust becomes a mixed trust. at will. or investment choices. without explanation to the current Trustee. The trustees can make payments to Andrew from the trust for his maintenance and will accumulate any remaining income. trust company. However. Some of the powers generally given to a Trust Protector are: 1. So. the Trust Protector can fire and replace the Trustee. for example • • an interest in possession trust and a discretionary trust. insurance company. Scots law limits accumulation periods so accumulation and maintenance trusts will often end when the beneficiaries reach the age of majority. In cases where the Trustee is a corporate body (bank. The terms of the trust give Andrew the capital and any accumulated income at the age of 25. Zoe reaches 18 while Sarah is still 14. What is a 'mixed trust'? A mixed trust is a mixture of more than one type of trust. or an interest in possession trust and an accumulation and maintenance trust. So on his 25th birthday Andrew is entitled to all the money at that date. The part of the trust benefiting Zoe becomes an interest in possession trust while the part that benefits Sarah remains an accumulation and maintenance trust until she reaches 18. or professional trustee) if the Trustee is unresponsive or not performing to the Trust Agreement for the benefit of all Beneficiaries. as there is no equivalent entitlement to the income of the trust at age 18. The position in Scotland is different.
4. Ability to veto investment decisions. the Trust Protector may terminate the Trust. 3. the Trustee.2. 7. If in the opinion of the Trust Protector there are insufficient funds or the cost of administration is greater than available cost/benefit. For example. or Nevada (low tax states) or changes in laws occurring long after the initial implementation of the Trust Agreement. and there aren't enough assets to administer the Trust for the next 11 years. from California or New York (high tax states) to New Hampshire. The Trust Protector can override/veto the Trustee and withhold distributions temporarily or permanently make other arrangements such as buy the assets necessary for the benefit of the Beneficiary (buy a house. or the Beneficiary is undergoing divorce proceedings. Ability to sue and defend lawsuits against the Trust assets. 9. is under duress. sign a rental agreement. or the Beneficiary may be too young.e. Before distributions are to occur the Trust Protector may want to investigate the financial stability of the Beneficiaries. but have the Trust own the assets. and the Trust Agreement guidelines in protecting the assets for the Beneficiaries. Ability to control spending over a certain amount.e. 5. Ability to veto distributions to Beneficiaries. This level of control is significant if disbursements of the Trust are in excess of pre-arranged amounts requiring two signatures of the Trustee and the Trust Protector i. i. . The Settlor. if all beneficiaries have received their distributions based on age (over the age of 21) and there's one minor beneficiary currently 10 years old. Ability to resolve deadlocks between co-trustees or in squabbling between the Trustee and/or Beneficiaries. in excess of $10. unable to manage. if the beneficiary is being sued. Ability to terminate the Trust. and the Beneficiaries. prudence. The fiduciary duty of the Trustee and The Trust Protector as to save the assets of the Trust. A Trust Protector usually is the balance of power between the Trust Agreement. 6. as for example. make loans or make other provisions. or otherwise unavailable. Ability to change the Trust's situs to take advantage of law changes or necessary steps to act in the best interest of beneficiaries if they move from low tax states to high tax states.000. the Trust Protector has the power to make the final distribution and terminate the Trust. This checking and balancing of investment decisions are based on the Trust Protector's experience. The Trust Protector may withhold distributions. 8. Trust Protector's Role The Trust Protector's role is created by the Trust Agreement to add an additional layer of protection and is usually a person most familiar with the Settlor’s long-term financial and personal goals. at any cost. mentally incompetent. a car. for the benefit of all classes of Beneficiaries.
nor anyone related to the family by blood or marriage. Both positions should be independent of each other acting in the long-term interest of the beneficiaries. .Neither the Trustee or the Trust Protector should be a family member.