Trusts FAQs

Trusts FAQs

What is a trust?

In its simplest form, a trust is a separation of the ownership of an asset into two parts — legal title and beneficial ownership. An example of this is where a trustee is the registered holder of shares in a company, but holds the shares for the benefit of some other person.

Trusts can of course become much more complicated arrangements involving many individuals, a large quantity of assets, detailed powers and responsibilities for the trustees, and elaborate terms as to how the assets are to be held and distributed.

At the heart of even the most complicated trust arrangement, however, is the simple notion that the trustees hold the trust assets not for themselves but purely for the benefit of the beneficiaries of the trust.

How is a trust created?

Ordinarily, trusts are created either by a deed of trust (for a trust created during the lifetime of the person who gives assets to the trust) or by a will (for a trust that is to be created on the death of the person making the will).

Who are the parties to a trust?

For estate planning purposes, the three types of parties to a trust are:

  • a settlor, who gives assets to the trust (sometimes referred to as “settling” assets on the trust);
  • the trustees, who are charged with holding the assets on trust and administering the trust in accordance with its terms; and
  • the beneficiary or beneficiaries, for whose benefit the assets are held on trust.

One might sometimes also hear of a “protector” being appointed. This is sometimes the case with offshore trusts where professional companies act as trustees. The protector is appointed to ensure that the trustees operate the trust in accordance with its terms and the intent of the settlor.

What assets can be put into trust?

Just about any asset can be transferred to trustees. For some assets, however, such as land, there are special rules governing when they can be put into trust. Moreover, where the title to an asset must be registered (as with shares in a company or a motor vehicle) the transfer of the asset to trustees will not be complete until the asset is registered in the name of the trustees.

Why do people create trusts?

Primarily because they offer more flexibility and control over the transfer of an asset than an outright gift. With a trust, one can separate capital and income, and distribute the two separately. In addition, a trust allows a person to parse out assets over a period of time. One can also give a “life interest” in a trust, so that one beneficiary gets the right to an asset (such as a house) for as long as he lives, with the asset passing to another beneficiary on his death.

Perhaps one of the most compelling reasons people create trusts is the fact that a person can provide in her will that a trust is to be created on her death. In effect, this allows her to control the disposition of her assets for years after she has died.

Who benefits from a trust?

The person creating a trust — the settlor — decides who benefits. He or she may individually name the beneficiary or beneficiaries of the trust, or specify a class of beneficiaries that might change over the course of its duration. For instance, a grandparent could establish a trust for the benefit of his or her “grandchildren”, even though more grandchildren may be born (and therefore added as beneficiaries) after the trust is created. Or one can do the reverse, limiting the class of beneficiaries to, for example, such grandchildren as are alive at the date the trust is created.

What are the powers and duties of trustees?

Trustee powers and duties vary depending on the type of trust established — the deed or other document establishing the trust should provide some guidance. In a “discretionary trust”, for example, the trustees may have a great deal of power, since they can exercise discretion on how best to allocate trust assets and income. Other trusts are more prescriptive, however, offering trustees no discretion whatsoever, just a precise set of rules to follow. Outside the trust document, statutes and case law impose a number of rules on how trustees should behave in relation to the trust. For specific and tailored advice, seek out the services of a solicitor who specialises in estate planning.

Can a trustee be held responsible if he does something wrong?

Yes. Anyone accepting an appointment as a trustee needs to be mindful of this risk. If a trustee acts outside his powers and duties, he can be held personally liable for damages sustained by the beneficiaries as a result of such a “breach of trust”.

Professional trustees will ordinarily protect themselves from beneficiaries’ claims by acting through a trust company, rather than as individuals, and by obtaining appropriate indemnities from the settlor and beneficiaries when they take up their appointment as a trustee.

An inexperienced individual who agrees to act as trustee of, say, a family trust, should take professional advice to ensure that he fully understands his obligations to the beneficiaries and to ensure that he has taken appropriate measures to protect himself from personal liability if things go wrong.

Are trusts taxable?

Simple answer: yes! The man taxes affecting trusts include inheritance tax, capital gains tax, and income tax. In addition, trust assets may also be subject to stamp duty (e.g., on transactions involving shares and real estate) and VAT (e.g., on improvements to investment property held in the trust).

How long can a trust last?

With a few notable exceptions (e.g., charitable trusts), a trust cannot last indefinitely.

Until recently, the limit on the age of a trust was 80 years. Parliament recently extended this, however, to 125 years for trusts created after 6 April 2010. Trusts created before this date, including those using an older-style reference to a “life in being”, may now last 100 years.

If a beneficiary’s interest does not vest within the time permitted, it will fail and trust assets will revert back to the settlor of the trust (or his estate if she is deceased).

Can a trust be terminated?

If all of the beneficiaries agree, and none of them are minors or otherwise lacking legal capacity, they can require the trustees to distribute the trust assets to them. The beneficiaries can also require the trustees be replaced by new trustees.

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