A trust is a legal arrangement where one or more ‘trustees’ are made legally responsible for holding assets – such as land, money, buildings, shares. Those assets are placed in trust for the benefit of one or more ‘beneficiaries’.
Explanation of the trust concept
The origins of Trusts go back over eight centuries. In fact history provides a concise explanation of the purpose of a Trust:
In 12th century Britain, a soldier leaving for war in the Crusades, knew that he would be away from home for many years. He might not return. In his absence his farm and his animals were the only assets to provide for his family. However he was worried that others might make claims on his estate while he was away at war. If he lost his assets, his family would suffer.
He had a solution. Before he left for war, he gave away his farm, all his animals and other assets to a trusted friend. He also recorded in a letter his wish that his family would be cared for from those assets. He told the local Court of this arrangement.
The soldier went to war. He was now without money, land or assets, but he was satisfied that his family would be protected. He was content.
Modern trusts have developed from such events in history. They are well established in the common law legal systems of the US, UK and traditionally linked countries and have been widely adopted by others. Note that foundations, as an alternative to trusts, were subsequently developed in civil law jurisdictions.
The soldier in the example, gave away or settled (gave the title to) all his assets to a trusted friend. In modern Trust terms, the soldier was the settlor and the trusted friend became a trustee. The soldier’s letter of wishes, was to guide the trustee by indicating how future benefit should be given to the soldier’s family. They became the beneficiaries of the soldier’s Trust. All of the arrangements for the soldiers Trust were presented to the Court as recorded in a Trust Deed.
Benefits of a Trust
Note that in the context of the example, the soldier gave his assets away. The farm, animals and other assets were no longer his – they now belonged to his trusted friend. No person with any claims against the soldier could take those assets. It is this protection that forms the important basis for modern Trusts.
The Letter of Wishes provided by the soldier to his friend is a guide only. The trustee can operate within that guide to meet the overall duty to provide for the soldiers family welfare. Wishes are not instructions and a trustee is not an agent. The difference is about the trustee having discretion over his actions, whereas an instruction leaves no room for variation or choice. Discretion is an important consideration in Trusts.
All details of the arrangements are recorded in the Trust Deed but this is not a public record. It is a private document and all details of the value of the Trust remain undisclosed. Trust operations and those involved are protected as confidential. Such anonymity is important to those who establish Trusts.
Lastly note that the soldier did not ask his trusted friend to operate his farm in his absence. The trustee’s task was limited to providing for the family from those assets. Extending this to modern times confirms that even if shares are given to a Trust, trustees do not operate companies. However a Trust can be organised to operate alongside companies.
The purpose of a trust
Trusts may be set up for a number of reasons, for example to control and protect family assets, to pass on money or property under the terms of considered wishes.
Trusts may also be established in consideration of the benefits of anonymity, security and protection to the Trust as the beneficiary of business operations.
What is ‘trust property’?
‘Trust property’ is a phrase often used for the assets held in a trust. It can include money, investments, land or buildings, other assets, such as paintings, furniture or jewellery – sometimes referred to as ‘chattels’.
The cash and investments held in a trust are also called the trust ‘capital’ or ‘fund’. This capital or fund may produce income, such as interest on savings or dividends on shares. The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.
What is a settlor?
A settlor is a person who has put assets into the trust. This is known as ‘settling’ property. Assets are normally put into the trust when it’s created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.
Normally a settlor does not benefit from the Trust he creates. However there are exceptions.
The role of the trustees
Trustees are the legal owners of the assets held in a trust. Their role is to deal with trust assets in line with the trust deed. They manage the trust on a day-to-day basis. They are also responsible for compliance with legal and tax returns. They may take advice from others – for example to invest the trust’s assets and/or how the assets in the trust are to be used – although this must always be in line with the trust deed.
The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees. One trustee may be a professional familiar with trusts – a lawyer, for example – while the other may be a family member or relative.
What is a beneficiary?
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiary, such as a whole family or a defined group of people.
What is a Protector?
A protector is a person appointed under the Trust Deed to direct or restrain the trustees in relation to their administration of the Trust. A protector is therefore a powerful back-stop.
Historically, the concept of a protector developed in offshore jurisdictions where settlors were (perhaps understandably) concerned about appointing a trustees in a small or distant country as sole trustee of an off-shore trust which is to hold a great deal of the settlor’s wealth. However, protectors now form a part of mainstream trust operations in most jurisdictions which recognise trusts.
Protectors allow a great degree of flexibility when dealing with changes in circumstances, including both factual circumstances (death, premature divorce, previously unknown children) and legal changes (any legal changes, but most frequently changes to applicable revenue laws).
An offshore trust is simply a conventional trust that is formed under the laws of an off-shore location.
Generally offshore trusts are similar in nature and effect to their onshore counterparts. However, a number of offshore jurisdictions have modified their laws to make their jurisdictions more attractive to settlors forming offshore structures as trusts.
Many consider that Offshore Trusts provide complete and absolute confidentiality. Offshore Trusts are almost always found in low tax or in low-regulation offshore jurisdictions.