What is a trust?
by Jacqui Brauman
This is a complex area, because there are many forms that a trust can take. I have previously prepared a downloadable fact sheet on this website about trusts, too, so that would be worthwhile looking at.
Basically, a trust exists when someone holds property for the benefit of someone else. One useful metaphor I have heard is that you can think of a trust like a childâ€™s little red toy cart. The child puts all their toys and possessions into the cart. The child can pull the cart around himself, or could get someone else to pull it around for him. If the child falls over, then his possessions are safe in the cart. In this example, whoever has control of the cart is the trustee of the trust. The child falling over could be likened to someone going bankrupt or some other crisis in their life.
Trusts have traditionally been used as a tax minimisation vehicle, and this is still one of the reasons why a family discretionary trust (“family trust”) is so popular with accountants, along with the income splitting ability. Over the years, quite a few of the tax advantages of various types of trusts have been scaled back, but they are still used as a structure for investment, operating a business or for asset protection and wealth creation.
There are a few main roles to be aware of when dealing with a trust:
- the trustee is the legal owner of the trust property. This is the person in control of the cart, using the above example. The trustee administers the trust, does the tax returns, controls distributions of income and capital, and runs any business that the trust operates. There can be more than one trustee, and the trustee can be an individual person or a company.
- the beneficiary is the person who benefits from the trust. They could hold a fixed percentage of the total value of the trust, or their interest could be at the discretionary of the trustee (like with a family discretionary trust). There are usually multiple beneficiaries and categories of potential beneficiaries who entitlements may vary. The trustee of the trust can also be a beneficiary (though this can remove some of the protection to assets that the trust could offer).
- the appointor is a role often used with a discretionary trust. This is a specific person, or sometimes a company, who has the power to remove or replace a trustee. Hence, this is a very powerful position.
- the settlor is an old fashioned role. This is generally a third party, such as the professional helping to set up the trust, and their only purpose is to found the trust by paying the first minimal payment in to the trust, and signing original documents. That is usually the extent of their involvement.
Trusts can be fixed or discretionary; they can be set up whilst youâ€™re alive (inter vivid) or in your Will (testamentary); they can be set up by deed or they can arise automatically due to operation of the law;Â and trusts can be for the benefit of a person or they can be for a charitable purpose.
So you can see that there are many types of trusts, and that they can be used for many things. If you want further advice or information, please donâ€™t hesitate to contact us through our website or by direct email.
Contact us to arrange a chat. It doesnâ€™t hurt to ask.