Trusts are recognised as one of the most flexible and versatile vehicles for holding and managing assets. It has been suggested that around 50% of the independent wealth globally is held in one form of trust or another.
They are often and quite wrongly associated only with the extremely wealthy. In reality, a trust fund can be a useful financial tool for people from all walks of life, and with wealth ranging from low to moderate to high net worth.
What is a Trust?
In essence, a Trust is a legal arrangement where one or more people or a company (called the Trustees) controls money or assets (called the Trust property) which they must use for the benefit of one or more people (the beneficiaries). The person or party that provides the assets of the trust and determines the rules is called the settlor, donor or grantor.
A Trustee can be a professional with financial knowledge, a relative or loyal friend or a corporation. And there are pluses and minuses for each type of Trustee. An individual Trustee may provide a more personal touch. A corporate Trustee may be less personal but provides experience, investment skills, permanence and impartiality. However, more than one Trustee can be named by the grantor if they wish.
Benefits of a Trust
A Trust may be the answer to your planning needs. It will enable you to:
- Provide for children or family members who lack financial experience or who are unable to manage their assets
- Provide for the management of your assets should you become unable to oversee them yourself
- Avoid probate and transfer your assets immediately to your beneficiaries upon death
- Reduce estate taxes or provide liquid assets to help pay for them
It is recommended to take the time to evaluate carefully what you are trying to accomplish and then consult a firm experienced in estate planning. Turner Little have considerable experience in this field. We know that a well-written Trust can provide peace of mind for you and your beneficiaries for years to come.
Types of Trust
There are two basic forms of Trusts: After-Death (or Testamentary) and Living (or Inter Vivos).
After-death Trusts come into existence usually as requested in a will. The assets to fund these Trusts usually go through the probate process.
If a parent left land to their child in their will, the will would establish the Trust for the land to be transferred and administrated by a Trustee until the child reached a previously determined age. The land would then be transferred from the trust to the child outright when the child achieves the previously determined age.
A Living Trust, on the other hand, is a Trust made while the person establishing the Trust is still alive. In this case, a parent could establish a Trust for their child during their lifetime, designating themselves as Trustee and their child as Beneficiary. As the Beneficiary, the child does not own the property but can receive income derived from it.
Living Trusts can be revocable or irrevocable. The most popular type of Trust is the Revocable Living Trust, which allows the individual to make changes to the Trust during their lifetime. Revocable Living Trusts avoid the often lengthy probate process but, by themselves, do not provide shelter for assets from taxes.
When an Irrevocable Living Trust is set up, ownership of the assets is turned over to the Trustee. The Trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can changes be made by the grantor. This type of Trust often is used by individuals to reduce taxes and avoid probate. However, if the grantor names themselves as Trustee or is entitled to Trust income, the tax benefits will be lost.
Establishing a Trust
To establish a Trust, a Trust Deed must be drawn up. A Trust Deed specifies your wishes, lists grantor, beneficiaries and Trustees to manage the assets. It also describes what the Trustee or Trustees may and may not do.
The Trust document may also name a protector who, while having no responsibility for the day to day running of the Trust, can have the power to veto certain Trustee decisions along with the ability to dismiss and appoint new Trustees.
As soon as the Trust is set up, you may transfer assets straight away. In the case of certain assets, such as property, you may incur stamp duty and capital gains liability at the time of transfer.
In certain jurisdictions, you are required to register a Trust. This depends on local legislation. Generally speaking, there is no legal responsibility to register.
Role of a Trustee
Once the Trust is established, the Trustees legally own the assets held in the Trust. They are required to handle the assets as predetermined by the grantor, manage the Trust, and pay any taxes due. Trustees are also responsible for investing or deciding how to use assets in the best interests of the beneficiaries. The trustees have an absolute obligation under law to always act in the best interests of the beneficiaries providing of course that their actions in doing so are lawful.
Trustees are paid for their services because of the amount of work involved in managing a Trust along with the threat of potential liability if assets are mismanaged. How much a Trustee is to be paid should always be agreed upon in advance.
When appointing a Trustee, be sure that the individual or corporate entity will agree to serve as a Trustee and can and will comply with the terms of the Trust. Because there is generally such a high standard of duty and liability imposed on Trustees, you may choose to use the services of a Corporate Trustee. The selected company should be checked out to verify its ability to perform the task in hand as well as its respectability and whether it is likely to be around in the long-term.