A trust is a legally enforceable arrangement, or structure, whereby a person or a body of persons (‘trustee’ or ‘trustees’) holds property or assets 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.
In this commentary we use the expression 'property' or 'trust property' to denote any type of property or assets that are subject to a trust – whether land and buildings, stocks and shares or other investments, cash, etc.
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.
For example, you might own a house. You are the person whose name appears on the legal title, and you can sell it and deal with it as you will (you have the ‘legal estate’ in it). You are also the person entitled to live in it, or to let it and take the rent, and to use the sale proceeds for your 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 similar.
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 some cases trusts, both in the UK and overseas, are set up to preserve the family wealth down the generations, or as part of a financial planning exercise.
Categorising trusts
There are two many types of trust.
- A trust with an interest in possession, perhaps more commonly referred to as a 'life interest' trust, or a 'liferent' (in Scotland). 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. After their death the trust property is distributed among other beneficiaries (the ‘remaindermen’).
- A discretionary trust. There are named beneficiaries, or a class of beneficiaries (eg grandchildren of a common grandparent), none of whom are entitled to any part of the trust property but where the trustees have power to decide who receives what. The trustees have an overriding discretion in deciding who will benefit and when.
This categorisation can also be important in understanding how trusts are taxed.
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