What is a trust?

What is a trust?
Published on: 31 October 2023

Table of contents

A trust is a legal and financial arrangement in which one person or entity (the settlor) transfers control and ownership of certain property or assets to another person or entity (the trustee) to manage for the benefit of a third party (the beneficiary).

The trustee has the responsibility to manage the assets in accordance with the terms of the trust agreement and to meet the interests of the beneficiary. Depending on the terms of the trust, the trustee may have broad decision-making powers over the trust assets or be restricted in its actions.

Trusts are commonly used to protect assets, ensure fair distribution of property, administer charitable funds, and generally for a variety of financial and legal purposes.

It is important to note that trusts can be highly customised and tailored to the specific needs of the settlor and beneficiaries. Therefore, it is important to speak with a trust lawyer to determine what type of trust would be appropriate for your needs.

Advantages and disadvantages of a trust

The advantages and disadvantages of a trust vary depending on the objectives and circumstances of the settlor, the trustee and the beneficiary. The following are some of the common advantages and disadvantages:

Advantages of trusts

  • Asset protection: Trusts can protect settlors' assets from lawsuits, creditors and other risks.
  • Efficient management: Trusts can simplify asset management by transferring responsibility to the trustee.
  • Control over distribution: Trusts allow settlors to control how assets are distributed to beneficiaries, which can be useful to ensure that assets are distributed fairly or for specific charitable purposes.
  • Privacy: Trusts can be a way to maintain privacy in the transfer of assets and distribution of property.

Disadvantages of trusts

  • Costs and complexity: Establishing and administering a trust can be costly and complex due to legal and tax requirements.
  • Loss of control: By transferring assets to the trustee, settlors lose some control over the assets, which can be a problem if they do not trust the trustee or if circumstances change.
  • Taxation: Trusts may be subject to special taxes and additional reporting requirements.
  • Limited duration: Some trusts have a limited duration, which can be an issue if assets need to be managed for longer periods.

It is important to note that the decision to establish a trust should be made after careful consideration of individual circumstances and consultation with specialist legal and financial advice.

Types of trusts

There are several types of trusts, and each has its own specific characteristics and objectives. Some of the most common types of trusts are as follows:

  1. Testamentary trust: is established in a will and comes into effect after the settlor's death. Assets are transferred to the trust on the settlor's death, and are then administered and distributed according to the instructions in the will.
  2. Succession trust: used to transfer the assets of a company or business from one generation to another. The trust maintains ownership and control of the business and ensures the continuity of the business.
  3. Charitable trust: is established for charitable purposes and can provide tax benefits to the settlor. Assets are transferred to the trust and then distributed to charities as specified in the trust agreement.
  4. Wealth management trust: is established to protect and manage the assets of an individual or family. The trust can provide asset protection against creditors, divorce and other risks, and ensure fair distribution of assets to beneficiaries.
  5. Revocable trust: allows the settlor to revoke or modify the trust during its lifetime. The assets transferred to the trust remain the property of the settlor, with the trustee acting only as trustee.
  6. Irrevocable trust: cannot be revoked or modified by the settlor after its establishment. Assets transferred to the trust become the property of the trust and are administered according to the instructions in the trust agreement.
  7. Living benefit trust: used to provide income to an individual during his or her lifetime. Assets are transferred to the trust, which then pays an income to the beneficiary for a specified period of time.

How is a trust created?

The creation of a trust generally involves the following steps:

  1. Identify the settlor: The person setting up the trust (settlor) must decide what assets he or she wishes to transfer to the trust.
  2. Identify the trustee: The settlor must choose a trustworthy person or entity to act as trustee and manage the trust assets in accordance with the terms of the trust agreement.
  3. Draft the trust agreement: The settlor should draft a trust agreement that sets out the terms and conditions of the trust, including who the beneficiaries are, how the assets will be managed and distributed, and any other relevant provisions.
  4. Transfer the assets to the trust: Once the trust agreement has been drafted and the trustee has been identified, the settlor must legally transfer the assets to the trust. This may involve transferring ownership of real estate, opening bank accounts in the name of the trust, transferring securities and other assets.
  5. Registration of the trust: The trust must be registered with the tax authorities and relevant registries to ensure its validity and legal compliance.

Who is involved in the trust?

The trust involves a number of different parties, each with an important role in the establishment and administration of the trust. These parties include:

  • Settlor: The person who creates the trust and transfers the assets to the trust.
  • Trustee: The person or entity that is responsible for administering and managing the trust assets in accordance with the instructions in the trust agreement and applicable laws. The trustee has a legal obligation to act in the best interests of the trust and the beneficiaries of the trust.
  • Beneficiaries: the persons or entities who receive the benefits of the trust, whether in the form of regular payments, lump-sum payments, or as otherwise specified in the trust agreement.
  • Investment adviser: In some cases, the trust may have an investment adviser who is responsible for managing the trust's assets and making investment decisions on behalf of the trustee.

It is important to note that, in some cases, a single person may have several roles in relation to the trust. For example, the settlor may act as trustee or investment advisor, or the trustee may appoint a beneficiary as investment advisor. In general, however, each party involved in the trust has a distinct and separate role to be considered in the administration and management of the trust.

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