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).
There are a number of reasons why one should have a trust, some of which are as follows:
The principal parties involved with establishing and administering a trust are:
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.
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.
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.
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.
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.
The more common type of family trust are:
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.
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.
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.
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.
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.
Whilst trusts are often seen as family orientated they are used commercially and their application falls into three broad categories, namely:
A trust used as an investment vehicle may take the form of a:
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:
Trusts for pure business purposes fall within a very broad category and can include several kinds of arrangements, including:
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.
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.
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.
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.
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.
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.
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.
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.
On setting up a trust various matters will need to be attended to and whilst not exhaustive, the following would typically be addressed:
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].”
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:
We believe Fulcrum “fits the bill” on all accounts as:
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:
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.
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.
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.
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:
Annually, the costs of administering a trust include:
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.
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.
There are pluses and minuses to having individuals or corporates acting as a trustee of a family trust some of which are as follows:
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.
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.
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”.
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.
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.
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.
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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