FAQ

FAQ

What is a trust?

A trust is not a legal entity, but rather a private legal arrangement where the ownership of someone’s assets (which might include property, shares or cash) are transferred to someone else (usually, in practice, not just one person, but a small group of people or a trust company) to look after and use to benefit a third person (or group of people).

Why have a trust?

There are a number of reasons why one should have a trust, some of which are as follows:

  • Trusts are flexible, varied and complex; depending upon the type of trust which is being used. It is often said “that a trust can do anything an individual can”
  • In using a trust you can leave your estate to your heirs in a way that is not directly and immediately payable to them upon your death. For example, you may want to stipulate that they receive their inheritance in three parts, or upon certain conditions being met, such as reaching a specific age, graduating from a university or getting married
  • You may want, on your demise, to support a surviving spouse but also ensure that the principal or remainder of your estate goes to your chosen heirs (e.g. your children from a first marriage) after your spouse dies. A trust is a perfect vehicle for giving effect to your wishes
  • Atrust may be used to protect beneficiaries (for example, one’s children) against their own inability to handle (administer wisely) money
  • Providing funds via a trust to benefit a disabled relative, e.g. a child, whom you would like to provide for, does not necessarily disqualify the child from receiving government financial assistance
  • Trusts assist in keeping an individual’s personal affairs confidential from the general public and minimise the expense and delay in seeking probate of a Will
  • One can use a trust to create a pool of investments that can be managed by professional advisers
  • Trusts are an effective way of providing short and long term benefits to charity or charitable causes
  • A trust can be used to prevent assets gifted to children as being classified as matrimonial property
  • A family trust can help you protect your assets against future claims by creditors, spouses, de-facto partners, and challenges against your estate
  • Trusts often help aged parents deal with issues associated with providing benefits to different family members and sibling rivalry
  • Trusts can assist in estate planning, where a liability to tax is more often deferred rather than avoided

Who is involved with a trust?

The principal parties involved with establishing and administering a trust are:

  • The Settlor(s);
  • The Trustee(s);
  • The Beneficiary(s); and
  • The Protector.

Who is the settlor of a trust?

A Settlor is someone who gifts (“settles”) property on the terms of a trust for the benefit of the beneficiaries.  In some legal systems a settlor is also known as a “creator” (as in Israel), “donor” (as in Ireland), “grantor” (as in the United States) or in legal and financial terms, “trustor”.

A Settlor is therefore not only the person named and identified as such in the trust deed of a trust, but any person that settles assets into a trust during its perpetuity period.

Who can be a trustee and what do they do?

A trustee may be either a person (individual) or a legal entity such as a company.  A trust may have a number of trustees.  A trustee has many rights, responsibilities and obligations (some fiduciary) and these vary from one type of trust to another.

Where there is more than one trustee, the trustees must act in unison, i.e. together.

A trustee is usually someone that is known to and with whom the settlor “trusts”, i.e. is able to rely upon and has the integrity, strength, ability and surety, to look after the funds vested [gifted] into the trust for the benefit of the trust’s beneficiaries.

Who can be a Protector and what do they do?

A protector, who may be an individual or a company, is a person who has some control or influence over the trustee(s) and/or the trust.

The powers and responsibilities of a protector are set out in the trust deed of a trust and it is usual, if the protector has no other power, for a protector to be able to remove a trustee as well as to appoint additional or replacement trustees.  The trust deed of a trust may also provide that the protector has some degree of control over whom the trustee may use as investment adviser to the trust, or who may become a beneficiary of a trust from the family of a settlor after a given event, e.g. such as on the death of the settlor or any principal beneficiary.

A protector will usually seek to ensure that the trustee administers the trust in accordance with the provisions of the trust deed, makes a suitable account to the beneficiaries of the trust’s income and expenditure and investments and to act as an independent intermediary between the trustee and any of the beneficiaries to resolve any misunderstanding and disputes.  If the actions of a trustee are found wanting, then a protector may well seek to appoint an additional or replacement trustee.

What is a trust deed?

A trust deed is an instrument in writing (sometimes referred to as the trust instrument) executed by a settlor setting out the terms upon which the trust is established and administered, what is being put into the trust initially and who is to benefit from it.

Who owns the assets within a trust?

One common misconception is that the assets in the trust fund are legally owned by the trust. In fact, a trust, unlike a company, cannot own assets and instead the trustees are the legal owners of the assets.

The distinctive feature of a trust is therefore the separation of legal ownership and beneficial ownership of the assets in the trust fund. The trustees are the legal owners of the assets, but the trustees must at all times put the interest of the beneficiaries above their own. Thus, the settlor of trust can be a trustee, but they must still act in the interests of the beneficiary(s), not themselves.

What types of family trust are there?

The more common type of family trust are:

  • Accumulation and Maintenance
  • Interest in Possession
  • Discretionary
  • Special Disability

Such trusts are specifically created (often referred to as “express trusts”) by a person based on an oral or, as is more common, a written statement (“trust deed”) which can be in any language.

What is an Accumulation and Maintenance Trust?

An accumulation and maintenance trust (an “A&M”) is one where the property in the trust is held for the maintenance, education or benefit of the beneficiaries or accumulated, i.e. saved and added to the trust fund, until the beneficiaries reach a specific age, e.g. 18, whereupon the beneficiary becomes absolutely entitled to the property in the trust.

What is an Interest in Possession Trust?

An interest in possession trust (“an “IIP”) is one where the beneficiary has an immediate and automatic right to the income from the trust after expenses. The trustee(s) must pass all of the income received, less any trustees’ expenses, to the beneficiary.

The beneficiary who receives income (the “income beneficiary”) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. The trustee(s) might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income. However, this will depend on the terms of the trust.

What is a Discretionary Trust?

A discretionary trust is one where the trustees are responsible for the administration of a trust and its assets (the “trust fund”) for the benefit of the beneficiaries.  Unlike an A&M or IIP trust, the trustees have “discretion” as to how to use the trust’s income and to utilise or distribute (appoint) the trust’s capital to beneficiaries and the conditions, if any, they may impose on the recipients.

What is a Special Disability Trust?

A special disability trust is one that allows parents and immediate family members to plan for the current and future needs of a person with severe mental and/or or physical disability.

Such trusts can generally pay for the reasonable care, accommodation and other discretionary needs of the beneficiary during their lifetime without having any adverse impact on any tax and social security concessions.

What commercial applications are trusts put to?

Whilst trusts are often seen as family orientated they are used commercially and their application falls into three broad categories, namely:

  • Investment;
  • Security; and
  • Business purpose.

Investment Trusts

A trust used as an investment vehicle may take the form of a:

  • Unit trust;
  • Personal Pension fund trust
  • Occupational pension schemes

Security Trusts

Security orientated trusts are essentially “a vehicle” for holding money or other property (separately from any others) for a specific purpose.  Typically one would see these used as security for loan finance or as a form of self-insurance to address potential future claims against the beneficiaries of a trust.  Typical examples of a security trust are:

  • Debenture and bond trusts
  • Sinking fund trusts
  • Employee benefit trusts

Business Trusts

Trusts for pure business purposes fall within a very broad category and can include several kinds of arrangements, including:

  • Voting trusts
  • Trading trusts
  • Orphan trusts as used in aviation financing and group unlimited company structures

How do I know a trust is valid?

For a trust to be valid, the trust deed must show certainty of intention, subject matter and object.

“Certainty of Intention” means that it must be clear that the Settlor (the donor) wishes to create a trust.  This is normally reflected by the signing of a suitably worded trust deed.

“Certainty of Objects” means that it must be clear who are to be the beneficiaries (the“objects”) of the trust.Trusts normally benefit more than one person and these are collectively referred to as the “Class of Beneficiaries”.

“Certainty of Subject Matter” means that it must be clear what property is being gifted, i.e. placed in the trust and which is to be held subject to its terms as set out in the trust deed.

What does settling funds into trust mean?

The act of putting an asset such as money, land or buildings into a trust is often known as ‘making a settlement’ or ‘settling property’.  The assets being settled into your trust may happen at the time your trust is established.  When you sign the trust deed setting up your family trust you indicate in the deed what it is you are going to place in the trust by way of an initial gift.  This initial settlement may be one of many that you may make to the trust during your and its lifetime.

What is meant by the term “duly constituted” when reference to a trust is made?

The trust obligation [by the Trustee(s)] is owed to the beneficiaries of the trust once the trust is duly constituted by the transfer of property to the trustee(s).

Whilst the three certainties necessary for a trust to exist may be present and clear within the trust deed of the trust, unless and until assets are placed into the trust, the trust will not be duly constituted.

What does “trust corpus” mean?

The term “trust corpus” refers to all the property which has been transferred to a trust.  When reference to a trust’s corpus is made, it is usually to those initial funds and/or assets the settlor of a trust intends to gift to the trust on or shortly after its creation as provided in the trust deed.

Trust Law

Trusts are normally subject to the law of the jurisdiction in which they are created and administered, although the trust deed of a trust will usually enable the trustee to change the law should the administration of a trust be moved to another jurisdiction.

How long does a trust last?

Common law jurisdictions, such as the Isle of Man, had for many years rules against perpetuities, which required that the life of a trust could not continue indefinitely.  Trust deeds would therefore provide that a trust’s perpetuity period could not exceed a given number of years (the trust’s “perpetuity period”), being usually the maximum permitted under law or such shorter period as the trustee(s) may at their discretion consider appropriate (“trust period”).

On 16 June 2015 the rule against perpetuities in the Isle of Man was abolished abolished and as such a trust subject to the laws of the Isle of Man can continue indefinitely.

Memorandum or Letter of Wishes

A memorandum or letter of wishes is something that a settlor or principal beneficiary of a trust may give to the trustees and is more commonly associated with discretionary trusts.  The memorandum or letter, which is not contractually binding on the trustees, sets out the rationale for the creation of the trust and without wishing to interfere or control the discretion of the trustee seeks to provide guidance as to what the settlor or principal beneficiary would like the trustee to consider when and if their discretion is exercised.

SETTING UP A TRUST AND ASSOCIATED FEES

What’s involved if I want to set up a trust?

Make an appointment. We’ll have a meeting together and assess what it is you are trying to do for you and your family.

Following the meeting we will summarise the key points you have highlighted, put forward our proposal as to how best we think your objectives and that of your family can be achieved and invite you to another meeting to go through everything.

We want to make sure that you are happy with the proposal and what’s involved. So at our next meeting (assuming there are no further issues needing further time and consideration) we will agree with you an action list of the things we need to do to set up the trust.

When you are happy with the wording of the trust deed and the lawyers and ourselves have answered any queries to your satisfaction then we will get everything executed and all ancillary matters over setting up the trust will be attended to.

What happens when a trust is set up?

On setting up a trust various matters will need to be attended to and whilst not exhaustive, the following would typically be addressed:

  • After the trust deed of a trust is signed by its Settlor(s) and the Trustee(s) it is important that the trust is duly constituted and so the Settlor(s) will be encouraged to transfer the assets he and/or she intends to place in the trust as soon as possible.
  • At the signing of the trust deed or shortly thereafter, the Settlor(s) will also be encouraged to execute a Memorandum or Letter of Wishes setting out their intention and rationale for establishing the trust and what he/she would like the trustee(s) to consider as and when they exercise their discretion.
  • The trustees will also be seeking, having regard to any verbal or written representations within any Memorandum or Letter of Wishes to:
    1. Open a bank account for the trust to receive any cash which is to be settled into the trust
    2. Approach and engage the services of any investment adviser
    3. Take possession of any land and/or buildings, inspect them (where possible and/or appropriate) and see to any insurance
    4. Have a meeting with any protector that has been appointed
    5. Have a meeting with any of the trust’s beneficiaries if considered appropriate
    6. Address any particular issues as regards other assets which have been settled on the trust, e.g. fine art work or jewellery and organising any security which may be required

Am I in control of my trust?

Whilst there may be tax or other issues which may need consideration, there is nothing to prevent you from being a trustee and/or a protector of the trust you establish.  As such, if you are a trustee you will have an ongoing day to day involvement with administration of the trust’s affairs or as protector a periodic involvement when reviewing any accounts for the trust or addressing any issues raised by the trust’s beneficiaries.

If you are not a trustee of any trust you establish and there are no “reserved powers” that you hold then you are not, in “lay terms”, in control of your trust or rather, more appropriately, certain aspects of its day to day operation.  This is why it is important to appoint as trustee someone who you trust.  If is often said “there is a clue in the word trust[ee].”

Why have Fulcrum as trustee?

Choosing the right trustee is extremely important for you and your family.  Some of the key elements you should consider in making your decision as to who should fulfil that role are:

  • Have they professionally the necessary experience and qualifications
  • Are they people:
  1. You believe you can trust
  2. Who are going to have your and your family’s best interests at heart
  3. You believe are going to be good to deal with and helpful
  4. Likely to be minded when making any decisions to your rationale in establishing the trust and be sympathetic of your wishes in spirit, thought and deed
  5. Likely to take their fiduciary role seriously
  • Are they regulated as a Trustee and thus accountable to a statutory body as well as any of the beneficiaries
  • Do they have professional indemnity insurance to compensate for acts of negligence and theft

We believe Fulcrum “fits the bill” on all accounts as:

  • Its directors are professionally qualified and have over 100 years of experience in managing trusts and corporate entities
  • Our clients like to deal with us and some we have dealt with us in relation to other family and business matters for over 30 years
  • We are sympathetic to clients problems, concerns and needs
  • Whilst a client’s Memorandum or letter of Wishes is not contractually binding on us where we act as trustee, we do take note, we are good at listening and we will help
  • Fulcrum is regulated by the Department of Justice and Equality and subject to its supervision and accountable under various other statutory acts and provisions
  • Whilst we hope we will never need to rely upon it, Fulcrum has substantial professional indemnity insurance

How do I alter the plans for a trust?

The Settlor(s) behind a trust have their own rationale for setting it up.  The reasons why the trust was set up and the guidance they wish the trustees to consider being set out and expressed in a suitably worded Memorandum or Letter of Wishes.

If you are not a trustee or protector where you would have direct input as to what you would like to change, then the simple approach would be to make formal representations to the trustee(s) and the protector.

It is not unusual for a Settlor(s) to execute several Memorandum or Letter of Wishes during the life of a trust to reflect changes in, for instance:

  • The Settlor(s) own circumstances, financial or otherwise
  • Changes in individual beneficiaries circumstances
  • Further assets being settled into the trust and what the Settlor(s) would like to happen to them
  • A request for additional beneficiaries to be added to the trust’s Class of Beneficiaries or the removal of same

and whilst a Memorandum or Letter of Wishes is not contractually binding on a trustee, a trustee will be mindful of what any Settlor(s) has said.

Do you offer Tax advice?

We do not provide any tax advice, but rather we seek such advice when needed from suitably qualified firms of accountants, lawyers or consultants.  We are able to recommend suitably qualified firms and which are aside from those professional accounting firms with which our directors are associated.

Does setting up and/or contributing to a trust effect my pension?

The answer is simple; No.  Whatever you wish to do from a family trust perspective does not alter any lifetime restrictions and/or tax relief on any personal pension contributions you or your employer may wish to make.

What are your fees?

Our scale of charge fees are set out in the services section of this web-site (Click Here).

Costs in relation to a trust fall to those in two parts.  There are those costs associated with the setting up of a trust and thereafter those that are met on an ad hoc or annual basis.

Typical costs when setting up a trust include:

  • Initial consultation costs – although there is usually no charge the first meeting (up to an hour);
  • Legal costs in drafting a suitably worded trust deed and meetings in this respect;
  • Fees in undertaking Customer Due Diligence on any Settlor(s), Protector(s) and named beneficiaries which will include the determination of your source of wealth and funds/assets you would like to “settle” into trust; and
  • Trustee responsibility fee of UHY in accepting the position and responsibility of acting as trustee.

Annually, the costs of administering a trust include:

  • The cost of preparing accounts for the trust and making any statutory submissions;
  • The cost of preparing and submitting the trust’s Irish tax return and any other returns;
  • Third party fees in respect of any professional advisers, e.g. investment manager, although these are usually accounted for as a deduction from any annual investment returns;
  • The annual trustee responsibility fee for acting as trustee and being accountable from a regulatory perspective and meeting any statutory requirements; and
  • Any costs in administering the trust on a day to day basis.

Is the Trustee subject to any Rules or Regulations?

The simple answer is yes.

A Manx Trustee such as Fulcrum Limited is licensed by the Isle of Man Financial Services Authority and is subject to its supervision.

The trust deed of a trust sets out the scope of a trustee(s) administrative and discretionary powers.  The scope of these powers are usually drafted to enable the trustee to deal with all envisaged needs of the trust in providing benefits to its beneficiaries and managing the trust’s assets and investments.  Certain powers the trustee may seek to exercise may also require the consent of the Settlor and/or any Protector, or be reserved solely for the Settlor or any Protector to authorise.

Trustees are also subject to a variety of other requirements imposed by both common law and statute. Importantly, a trustee has a fiduciary relationship with the beneficiaries. This relationship exists because of the trust placed in the trustee. To protect those in a vulnerable position (those putting trust in the trustee) the law recognises this special relationship and places duties on the trustee to ensure they act in good faith and the best interests of the trust and its beneficiaries.

What’s the difference between a Trust with a Corporate Trustee and one without a Corporate Trustee?

A trust without a corporate trustee will have one or more individuals who act as trustees and they legally own the property in the trust for its beneficiaries.

A corporate trustee is a company that holds the legal title to the property in trust for the beneficiaries.

What’s the advantages and disadvantages of having non-corporate to corporate trustees?

There are pluses and minuses to having individuals or corporates acting as a trustee of a family trust some of which are as follows:

  • Individuals: Choosing an individual to act as a trustee means you can have yourself and/or family members/friends to act as trustees. The directors of corporate trustee may be unknown to you and therefore there is no initial personal relationship
  • Acting together: Trustees have to act in unison, i.e. together and so if a trustee is away on holiday or is ill, a decision may have to wait until the absent trustee returns. This is not an issue for a corporate trustee as it normally authorises a minimum of two of its directors
  • Replacing a Trustee on death: A trust deed will invariably provide that a retiring trustee may nominate his/her replacement and that on death any successor trustee will be such party(s) named in the deceased’s trustee’s Will. Alternatively the remaining trustees have the ability to appoint a trustee.  A corporate trustee has a legal existence distinct from its directors and shareholders and therefore the demise of a director of the corporate trustee is not an issue
  • Legal Ownership: The legal ownership of trust property is held by the trustees or a number of them. When an individual trustee dies there are administrative and potentially other costs invariably incurred in re-registering the ownership of land, property, shares etc. and changing any signatory provisions on bank accounts or investment agreements.  These issues do not arise with a corporate trustee which has a separate legal existence
  • Security: Separating an individual’s own personal assets from those owned subject to a trust can, at times, have legal complications, especially where the individual trustee is indebted to others and has entered for instance mortgage debenture, personal guarantees or pledge arrangements or is subject to third party creditors claims/bankruptcy. Assets held by a corporate trustee are more easily segregated and loan/debenture documentation for instance usually reflects in what capacity the security is being provided and notes any trust interest.
  • Record keeping: Regulated trustees, such as Fulcrum, are expected to keep detailed records of trustee decisions, financial transactions and meet reporting requirements. In addition, a corporate trustee is usually run by professionally qualified individuals who have many years of experience in administering trusts.  Individual trustees tend not to be as good at keeping trust records, financial or otherwise, recording any decisions they make and if family members have little experience in administering a trust and dealing with any personal conflicts which may arise because they are perhaps members of the same family.

Professional Indemnity Insurance: Corporate trustees are generally licensed and as they provide regulated services are required to meet and conform to certain regulatory obligations; one of which is that they must have a suitable level of professional indemnity insurance to cover any negligence or theft claims.  Individual trustees may not be required to hold such insurance, especially where they act as trustee pursuant to any licensing exemptions because they belong to a professional body.

Could I incorporate and own a company to act as the sole corporate trustee of my family trust?

One could incorporate and own a company to be the sole trustee of a family trust.  However, being a corporate trustee is a licensable activity in the Isle of Man and the people who administer such a company have to have the appropriate “skill set” (experience and qualifications) and comply with all the statutory and regulatory issues that a corporate trustee must abide by.  Some of these requirements, where applicable, such as reporting under the OECD Common Reporting Standard (“CRS”) and the Financial Accounts Tax Compliance Act (“FATCA”) are very onerous and failure to report correctly is a criminal offence and subject to fines and/or imprisonment.

Who owns the assets in a trust?

Unlike an individual or a company, a trust is not a legal entity.  A trust cannot own property because a ‘trust’ is just a relationship between the legal owner of a trust’s assets (the trustee) and the beneficial owners (the beneficiaries). Documents such as a property transfer or share certificate will list the trustee(s) as the owner of the property. For example, if Mr Smith was the trustee of a trust and purchased a house, the owner would be listed as Mr Smith or perhaps “Mr Smith as trustee for the XYZ Family Trust”. If the trust had a corporate trustee, then the owner would be listed as “ABC Pty Ltd as trustee for the XYZ Family Trust”.

What’s the difference between a Family Trust and a Discretionary Trust and do all the beneficiaries have to be from the same Family?

A family trust and discretionary trust are essentially the same. The trustee retains the discretion to distribute income and/or capital as it deems appropriate. Generally speaking, non-commercial trusts are set up by individuals to benefit members of his/her family. The term “family trust” is simply a commonly used term.  There is no legal requirement for beneficiaries of a discretionary trust or “family trust” to all be from the same family.

Can a trustee also be a beneficiary of a Trust?

Yes, a trustee can be one of the beneficiaries of a trust. For example, an individual could set up a trust to benefit members of his/her family, appointing him/herself as a trustee and thereafter determine (with any other trustee(s)) to whom any income or capital appointments should be made. However, a trustee cannot be the sole beneficiary of a trust. This is because they would have the legal ownership of property for the benefit of themselves, which is problematic from a legal perspective.

Can beneficiaries claim distributions?

Save in respect of an Interest in Possession Trust, where one or more named persons known as the “life tenants” have an absolute right to a trust’s income, beneficiaries of a discretionary trust do not have a claim to any trust distributions.  Rather, they have a ‘mere expectancy’ (hope) that the trustee may distribute income and/or capital if they so choose (hence the term “discretionary” trust).  The interest of a discretionary beneficiary is often said to be defeasible and have no value, because the trustee(s) can exercise their discretion to benefit any one or more of the trust’s other beneficiaries.

How are trust assets invested?

Ultimately, it is the intention and purpose behind the creation of the trust that determines how the assets it holds are invested.  It is the responsibility of the trustee to see that the intention and purpose is carried out.

Fulcrum does not offer investment advice but seeks it, where appropriate, from suitably qualified firms of investment advisers and/or consultants.

In the majority of instances the person who creates a trust will name a professional investment manager who he/she would like the trustee to work with and make investment recommendations based on the “goals of the trust” (investment criteria such as capital growth and distribution of income), the needs of its beneficiaries and any time factors to be met.

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