This Advisory provides an overview of the legal concept of a trust, including its role in family wealth preservation and management. It also describes interesting tax-effective strategies for using a trust which you may find relevant to your own situation.
GENERAL TRUST PRINCIPLES
What is a Trust?
A trust is a type of relationship. The key element of a trust is that title to property is transferred to a person (the "trustee") who has a legal obligation to hold the property for the benefit of others (the "beneficiaries").
Creation of a Trust
To establish a valid trust, the person who transfers the property must intend it be held for the benefit of other persons. The trust comes into existence when the property is transferred to the trustee. The three "certainties" or requirements in order to establish a trust are (i) the intention to create a trust (ii) property held on trust and (iii) identifiable beneficiaries.
Dual Ownership Under a Trust
The trust is viewed as one of the great achievements of English common law because of its concept of "dual" ownership of property – the trustee has "legal" ownership, while the beneficiaries have "beneficial" ownership. Once a trust is created, the person who has contributed the property loses his or her ownership. Ownership is then held between the trustee and the beneficiaries. The trustee, who holds legal title in his or her name to the trust property, is responsible for its management, but is not entitled to benefit from it in his or her capacity as trustee. Only the beneficiaries are entitled to benefit from the trust property.
The Trust Agreement
A trust agreement provides how the trust property is to be held, to whom and when it is to be distributed, in what amounts, and upon which terms and conditions. The trust agreement also defines the obligations of the trustee. The trust agreement can be tailored to meet various objectives. It can be broad in the discretion it provides the trustee in distributing and managing the trust property, or it can be restrictive and provide little or no discretion, but instead require the trustee to distribute the trust property according to specific instructions.
Inter Vivos and Testamentary Trusts
A trust may be established during a settlor's lifetime (an "inter vivos" trust), or it may be established under a will and as a result only take effect on death in accordance with the terms provided under the will (a "testamentary" trust).
GENERAL USES OF TRUSTS
A trust is one of the most powerful tools available to assist in wealth preservation and management. By use of a trust, it is possible to provide for family members now, and also protect their financial interests in future, while maintaining control over the management and distribution of the trust property. A trust can be used to achieve one or more of the following estate planning objectives:
Wealth Protection and Management
By use of a trust, third-party professional management of financial assets can be obtained while ensuring succession of property to future generations of family members. A trust can also be used to protect assets from possible future unknown claims, including matrimonial and creditor claims.
Protecting Beneficiaries with Special Needs
A trust can also be used to hold and manage property for persons who by virtue of aging, disease, infirmity, or physical or mental disability require special assistance to manage their property. A trust can be structured to allow the trustee to control the level of payments for the benefit of a special-needs individual, while providing flexibility as needs change over time.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.