What is a Trust?

A Trust is created by the execution of an agreement, the Deed, by which the Settlor transfers the legal ownership of assets to a trustee, who then holds the assets under the terms of the agreement for the benefit of the beneficiaries, who may include the Settlor.

In its earliest form, a trust was used to avoid medieval forms of taxation and tax planning continues to be an objective of many modern trusts. However, many more purposes for the use of a trust have been developed including:

  • To enhance protection against the possible implementation of exchange controls or the seizure of assets due to nationalization or similar measures.
  • To allow for the continuity and retention of family business and property.
  • To shelter property from potential creditors and the forced heirship laws of certain countries.
  • To hold foreign investments, patents and copyrights or insurance policies.
  • For pre-nuptial arrangements and divorce settlements.
  • To protect the family fortune from dissipation by less responsible family members.
  • To make provisions for spouses, family, friends or charities, including broad classes of beneficiaries such as unborn grandchildren.
  • To consolidate family interests in one estate planning vehicle.
  • To provide protection for families or individuals seeking diversification via the transfer of a portion of their assets to an offshore jurisdiction.

Trusts are also widely used by corporations principally:

  • For securitisation transactions.
  • To hold employee benefits and pension arrangements.
  • For charitable purposes.
  • As an escrow agent in the sale of a company.

Main Features of a Trust

The provisions regarding the administration, investment and distribution of the assets in trust are laid out in the Settlement Deed. The Deed names the beneficiaries and states the beneficial provisions. The Deed also typically allows for broad classes of beneficiaries, such as “the children of the Settlor and their issue.”

Traditionally trusts were very restrictive and contained fixed provisions that allowed little flexibility if circumstances altered. Now trusts normally give the trustee wide discretionary powers. Amongst the powers commonly found in a discretionary trust are: (1) wide powers to invest or to delegate investment management, (2) power to add or exclude beneficiaries, (3) power to amend the Deed, (4) power to borrow or lend and(5) power to create sub trusts.

The Settlor usually provides the trustees with a letter outlining his wishes. Often this Letter of Wishes will name an individual to whom the trustees can turn for guidance in the exercise of their discretion.

The Deed can also include provisions for the appointment of Protector, sometimes a trusted friend or relative of the Settlor, on whom the Settlor can confer certain powers, such as the power to remove and appoint trustees. The trustees can also be required to obtain the Protector’s consent prior to exercising certain powers. For example the Protector’s consent might be required prior to the trustees making distributions or adding or excluding beneficiaries.

Trusts can be irrevocable while others can be revoked by the Settlor. The distinction is usually determined by the estate and financial planning being undertaken, and often by tax considerations.

Purpose Trusts

Trusts can also be established for purposes rather than naming individuals as beneficiaries. The purpose of the trust is defined in the Deed and can be any purpose that is specific, reasonable, not immoral under law and not contrary to public or unlawful. Purpose trusts are typically used for commercial transactions (such as for securitization purposes or in the sale of a company), for charitable purposes or as part of a family private trust company structure.

The trustee often establishes these trusts by declaration (i.e. the trustee acts as the Settlor of the trust) although an individual or corporation or other legal entity can act as the Settlor of the trust.
Purpose trusts have an Enforcer appointed (this person is appointed in the deed). The Enforcer’s role is to ensure that the purposes of the trust are carried out.