Trusts have been around and have been used by families for centuries. In fact in the UK for almost a millennium. Trusts are still relevant and widely used all over the world to this day. Why?
Throughout history, trusts have been used to avoid or address problems in two main areas: taxation and domestic matters but trusts are also widely used for commercial purposes. They remain as relevant today as ever, especially in a context where families increasingly have to deal with issues raised by divorce and second marriages. The growing frequency of marriage breakdowns may explain the huge increase in the popularity of trusts as a means of protecting and preserving assets for future generations.
What is a trust?
A trust is a legal arrangement where the ownership of a person’s assets (which might include real estate, shares or cash) is transferred to someone else for the protection of those assets and for their use and benefit by a third person or group of people.
The person transferring the assets is a “settlor” in the UK or a “grantor” in the US. The people holding the assets are called the “trustees” and the person who benefits from the trust is called the “beneficiary”. The legal arrangement is laid out in a “trust deed” and the assets transferred to the trustees are the “trust fund”.
A trust, unlike a company, does not have a separate legal entity and cannot own assets; hence, the trustees are the legal owners of the assets. A trust brings about the separation of legal ownership and beneficial ownership of the assets in the trust fund. Although the trustees are the legal owners of the assets, they have a legal obligation to put the interest of the beneficiaries above their own, at all times. Thus, the settlor of a trust can also be a trustee, but must still act in the interests of the beneficiary, not himself.
Trusts can be created during the lifetime of the settlor or on the death of the settlor (in which case they are called a “will trust”). There are different types of trust depending, for example, on how and when and to whom the assets in the trust fund are to be distributed. However, all forms of trust follow the basic principle that a trust contains assets owned by someone for the benefit of someone else.
Use and benefits of trusts
In common law jurisdictions such as the UK and the US trusts are very common. Most company pension schemes are structured as trusts and many life insurance policies are “written in trust” and trusts are commonly used for charitable funding. On a personal level, trusts are used for structuring and managing wealth.
In the context of estate or financial planning, trusts are attractive because they give the settlor the ability to plan ahead and control how assets will be used and applied to best use in the future. A trust provides a way of holding and managing assets for people who may not be ready or able to manage it for themselves. A trust can be formed to benefit people who are not yet born, such as future grandchildren
Typical family situations where trusts are used to good effect (often in conjunction with a will) are:
• To provide for a spouse after death while protecting the interests of any children
• To protect the inheritance of minors until they are old enough to take personal responsibility
• To provide financial security for vulnerable relatives who are unable to look after their own affairs
• To avoid taxes
• For succession planning in family businesses.
• For the avoidance of probate and fixed heirship requirements
• For asset protection
• For privacy and confidentiality
Creating a Trust
For every family problem or situation, there is a trust that can be tailored to meet the need. Creating the right trust to meet your particular family situation requires specialist help.
Whether creating the trust by Will, or in your lifetime, selecting the trust type and its terms are very important. A trust which might last for 80 years or even 800 years needs careful planning, but the benefits can last just as long if you take specialist advice beforehand.
This article was written by Mark Nierada, a solicitor, trust and estate practitioner (TEP) specialising in estate and succession planning for individuals and companies and Director of Legal Consultancy firm, The Wills Specialists, Licensed by Dubai Legal Affairs Department and The Rulers Court, Government of Dubai.