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An article on Trusts from eHomelink's latest newsletter.
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An article on Trusts from eHomelink's latest newsletter.
What is a Trust?
There are various types of Trusts including trading trusts. The following information is based on a family trust. It should be noted that all Trusts are similar in most ways but there are important differences in Trusts for specific purposes. Please always ask advice from a qualified professional in that regard.
Some basic legal principles
A Trust is essentially a method of separating legal ownership of assets from the beneficial enjoyment of those assets.
Transferring assets to a Trust ensures that:
• The appreciation of assets does not accrue to the owner but instead accumulate to the Trust (which could then be distributed to the owner or family members)
• By using a gifting programme, over time the owner can reduce the amount of the debt, and thus also transfer to the Trust the wealth accumulated up to the date of transfer.
Like a partnership, a Trust is not a separate legal entity. Because Trusts are not separate legal entities, generally Trustees are personally liable for all Trust debts.
Beneficiaries of a Trust are not personally liable for debts incurred by a Trust, which are in excess of the Trust fund. This puts the beneficiaries in a similar limitation on liability position to that they would enjoy as shareholders in the company.
To set up a trust the following are required:
• A Settlor
• Trustees
• Beneficiaries
• Trust property
Settlor
A settlor or settlors is an individual or two individuals (normally husband and wife) or entity who establishes the Trust, usually by making a gift to the Trustees. The settlor determines in the first instance who the Trustees and beneficiaries are, and the powers of the Trust. The powers usually give the settlor the right to appoint and remove Trustees.
Trusts can be set up without a settlor. In this case the first Trustees make a declaration creating the trust. This is a less common method of establishing a Trust.
Trustee
A Trustee is a person who has positive duties to perform in relation to Trust property of which the Trustees have legal ownership.
A Trust Deed can provide for one or more Trustees at the inception of the Trust.
It is sensible to appoint at least two Trustees at the outset to ensure that there is no break in the Trust's administration in the event of the death or incapacity of one of the Trustees.
The Trustees could be yourself, your partner and an independent (Professional), Trustee. The additional Trustee should be someone who is not a beneficiary and not likely to be one. Obviously that person should be someone you can trust, notwithstanding that person has a legal obligation to act in the best interest of the beneficiaries.
Alternatively you could have a ‘Corporate Trustee’. This is a company which you can form and of which you and your partner /spouse are the Directors which acts as the Trustee on behalf of the Trust. The 100% shareholder would be the person who would otherwise be the ‘independent or professional’ Trustee.
One of the reasons for having a ‘Corporate Trustee’ is that the Trustee always goes on the title of the property. If the personal names are on the title and you wish to change the name of the independant Trustee then this will mean a change of title. This is usually done through a solicitor and will incur fees similar to buying and selling property. In the case of changing the Independent who is the shareholder it just means changing the shareholder via the Companies office. This is something that can be done without affecting the title and therefore saving you substantial money in the future.
Another reason for having a “Professional Trustee” –either as Trustee or shareholder of the Trustee Company.
• Often technical expertise is required to administer a Trust and it is therefore appropriate that an independent person with that "expertise" should be appointed; and
• An independent Trustee may be required to deal with situations in which the settlor has a conflict of interest in dealing with trust assets, for example, where the settlor may wish to purchase Trust assets, or use them as security for personal borrowing.
The Beneficiaries
Anybody who will, or may, derive a benefit under a Trust deed is a "beneficiary" except those who derive remuneration from administration of the Trust (i.e. Trustees and their advisers).
As a general rule beneficiaries of a family discretionary Trust are generally confined to a settlor's family, descendants and possibly spouses of descendants. It is however possible to specify a very wide range of beneficiaries. Distribution if any, is made to beneficiaries at the discretion of Trustees. The distribution can be capital or income.
Defining who or what are the beneficiaries is the most crucial issue in the Trust deed.
Two approaches are normally undertaken:
• Named persons can be identified as those benefiting from the Trust assets. This has the downside of not covering within the concept of “beneficiary” those persons who the settlor may want to benefit from the trust in the future but was not in existence at the time the Trust was constituted e.g. unborn children of the settlor.
• Beneficiaries can be defined as a class. This is often described by their relationship to the settlor e.g. "children of the settlor", "grandchildren of the settlor" etc. In defining the "beneficiary" by reference to a class it is important to ensure the requirement of certainty of objects for the Trust is met. In this instance a draftsman must use conceptually certain criteria in defining the membership of the class of objects
Beneficiaries also have certain legal rights Vis a Vis the Trustee. These include;
• The right to be considered by the Trustees when their discretion, either to act or not to act, is being considered.
• The right to seek court intervention where they believe the Trustees have acted improperly.
As a general rule a Court will not interfere with the way Trustees have exercised their discretion unless the Trustees have refused to consider the exercise of a power, or have exercised it in a capricious or clearly wrongful or fraudulent manner.
Often the prime purpose of a Trust is to provide a home and income for the people setting up the Trust. If this is the intention this should be included in the Trust deed.
Points to Note:
• Minors: If a minor is identified as a beneficiary or a potential beneficiary it is necessary to decide at what age they will receive their entitlement. If none is stipulated then the Trustee can take a receipt when the beneficiary attains the age of 20.
• A person cannot be sole Trustee and beneficiary as the legal and beneficial interest in the Trust property would reside in the same person and there would be no Trust.
For more information regarding the setting up of a trust and very affordable costs please email [email protected]
There are various types of Trusts including trading trusts. The following information is based on a family trust. It should be noted that all Trusts are similar in most ways but there are important differences in Trusts for specific purposes. Please always ask advice from a qualified professional in that regard.
Some basic legal principles
A Trust is essentially a method of separating legal ownership of assets from the beneficial enjoyment of those assets.
Transferring assets to a Trust ensures that:
• The appreciation of assets does not accrue to the owner but instead accumulate to the Trust (which could then be distributed to the owner or family members)
• By using a gifting programme, over time the owner can reduce the amount of the debt, and thus also transfer to the Trust the wealth accumulated up to the date of transfer.
Like a partnership, a Trust is not a separate legal entity. Because Trusts are not separate legal entities, generally Trustees are personally liable for all Trust debts.
Beneficiaries of a Trust are not personally liable for debts incurred by a Trust, which are in excess of the Trust fund. This puts the beneficiaries in a similar limitation on liability position to that they would enjoy as shareholders in the company.
To set up a trust the following are required:
• A Settlor
• Trustees
• Beneficiaries
• Trust property
Settlor
A settlor or settlors is an individual or two individuals (normally husband and wife) or entity who establishes the Trust, usually by making a gift to the Trustees. The settlor determines in the first instance who the Trustees and beneficiaries are, and the powers of the Trust. The powers usually give the settlor the right to appoint and remove Trustees.
Trusts can be set up without a settlor. In this case the first Trustees make a declaration creating the trust. This is a less common method of establishing a Trust.
Trustee
A Trustee is a person who has positive duties to perform in relation to Trust property of which the Trustees have legal ownership.
A Trust Deed can provide for one or more Trustees at the inception of the Trust.
It is sensible to appoint at least two Trustees at the outset to ensure that there is no break in the Trust's administration in the event of the death or incapacity of one of the Trustees.
The Trustees could be yourself, your partner and an independent (Professional), Trustee. The additional Trustee should be someone who is not a beneficiary and not likely to be one. Obviously that person should be someone you can trust, notwithstanding that person has a legal obligation to act in the best interest of the beneficiaries.
Alternatively you could have a ‘Corporate Trustee’. This is a company which you can form and of which you and your partner /spouse are the Directors which acts as the Trustee on behalf of the Trust. The 100% shareholder would be the person who would otherwise be the ‘independent or professional’ Trustee.
One of the reasons for having a ‘Corporate Trustee’ is that the Trustee always goes on the title of the property. If the personal names are on the title and you wish to change the name of the independant Trustee then this will mean a change of title. This is usually done through a solicitor and will incur fees similar to buying and selling property. In the case of changing the Independent who is the shareholder it just means changing the shareholder via the Companies office. This is something that can be done without affecting the title and therefore saving you substantial money in the future.
Another reason for having a “Professional Trustee” –either as Trustee or shareholder of the Trustee Company.
• Often technical expertise is required to administer a Trust and it is therefore appropriate that an independent person with that "expertise" should be appointed; and
• An independent Trustee may be required to deal with situations in which the settlor has a conflict of interest in dealing with trust assets, for example, where the settlor may wish to purchase Trust assets, or use them as security for personal borrowing.
The Beneficiaries
Anybody who will, or may, derive a benefit under a Trust deed is a "beneficiary" except those who derive remuneration from administration of the Trust (i.e. Trustees and their advisers).
As a general rule beneficiaries of a family discretionary Trust are generally confined to a settlor's family, descendants and possibly spouses of descendants. It is however possible to specify a very wide range of beneficiaries. Distribution if any, is made to beneficiaries at the discretion of Trustees. The distribution can be capital or income.
Defining who or what are the beneficiaries is the most crucial issue in the Trust deed.
Two approaches are normally undertaken:
• Named persons can be identified as those benefiting from the Trust assets. This has the downside of not covering within the concept of “beneficiary” those persons who the settlor may want to benefit from the trust in the future but was not in existence at the time the Trust was constituted e.g. unborn children of the settlor.
• Beneficiaries can be defined as a class. This is often described by their relationship to the settlor e.g. "children of the settlor", "grandchildren of the settlor" etc. In defining the "beneficiary" by reference to a class it is important to ensure the requirement of certainty of objects for the Trust is met. In this instance a draftsman must use conceptually certain criteria in defining the membership of the class of objects
Beneficiaries also have certain legal rights Vis a Vis the Trustee. These include;
• The right to be considered by the Trustees when their discretion, either to act or not to act, is being considered.
• The right to seek court intervention where they believe the Trustees have acted improperly.
As a general rule a Court will not interfere with the way Trustees have exercised their discretion unless the Trustees have refused to consider the exercise of a power, or have exercised it in a capricious or clearly wrongful or fraudulent manner.
Often the prime purpose of a Trust is to provide a home and income for the people setting up the Trust. If this is the intention this should be included in the Trust deed.
Points to Note:
• Minors: If a minor is identified as a beneficiary or a potential beneficiary it is necessary to decide at what age they will receive their entitlement. If none is stipulated then the Trustee can take a receipt when the beneficiary attains the age of 20.
• A person cannot be sole Trustee and beneficiary as the legal and beneficial interest in the Trust property would reside in the same person and there would be no Trust.
For more information regarding the setting up of a trust and very affordable costs please email [email protected]
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