A trust is a legally enforceable arrangement, or structure, whereby a person or a body of persons (‘trustee’ or ‘trustees’) holds property for the benefit of another (‘beneficiary’). It is normally set up by deed or by will, although in some circumstances a trust may arise by operation of law.
Trustees and ownership
Normally when one talks about ‘owning’ property we denote an arrangement where a person is both the legal owner of that property, and entitled to use it for their own benefit. If I own a house, I am the person whose name appears on the legal title, and can sell it and deal with it as I will (I have the ‘legal estate’ in it). I am also the person entitled to live in it, or to let it and take the rent, and to use the sale proceeds for my own benefit (the ‘beneficial interest’).
But a trustee of property, while having the legal estate in the trust property, must deal with it on behalf of the person, or objects, for whose benefit the arrangement exists – the ‘beneficiary(ies)’. For example, a house held in trust will be ‘owned’, legally, by the trustees, and lived in by the beneficiary (who may or may not be entitled to the sale proceeds to some degree, depending on the terms of the trust). Similarly a charitable trust will have trustees holding the trust property in their name on trust for the objects of the charity, be they a group of disadvantaged people, an educational institution, a medical research establishment, a parish church, or whatever.
Different kinds of trusts
There are many different kinds of trust. Some of the more common are charitable trusts (which we have just mentioned); pension funds, where pension trustees hold property for the benefit of the present and future pensioners, who may (for example) be employees and former employees of the same employer; or will trusts, where the executors or ‘trustees’ of a will hold the deceased person’s property (or ‘estate’) for the benefit of those named in the will as beneficiaries.
The legal structure of a trust is a convenient way of serving the mutual benefit of a group of people who wish to use and maintain the trust property for a certain purpose. For example, the trustees of a pension fund hold the fund for the benefit of all its members who wish to secure an income for their retirement, and the rules of the fund restrict its use accordingly. Similarly, charitable trusts ensure that the property is set aside for a particular charitable purpose.
Protecting individuals
Another frequent use of trusts is for the protection of individuals who are in need of protection because they are unable to deal with property and financial matters themselves – for example minors, or people with a disability which inhibits them from looking after their own affairs. In a few cases trusts, both in the UK and overseas, are set up by wealthy people for members of their family in order to preserve the family wealth down the generations, or as part of a financial planning exercise.
It is with trusts set up for people with a disability that this part of our website is concerned. But before we move on to the tax issues for disabled trusts which we cover in our next section there is one final general point about the categorisation of trusts which is useful to know.
Categorising trusts
Lawyers tend to think of trusts in terms of the nature of the beneficiaries’ interest in the property subject to the trust.
- A trust where the beneficiaries are entitled to the use and enjoyment of the trust property, and their entitlement cannot be interfered with by the trustees or by anyone so long as the beneficiaries are alive, is often referred to as a trust with an ‘interest in possession’. The most common example is a life interest trust, or a liferent (in Scotland), where property is held on trust for a particular individual (the ‘life tenant’) who may use or enjoy the income from it during his or her life, then after their death the trust property is distributed among other beneficiaries (the ‘remaindermen’).
- A trust where there are named beneficiaries, or a class of beneficiaries (eg grandchildren of the late so-and-so), none of whom are entitled to any part of the trust property but where the trustees have power to decide who receives what, is often known as a ‘discretionary trust’ because of the overriding nature of the trustees’ discretion in deciding who will benefit and when.
This categorisation can also be important in understanding how trusts are taxed.
