Trust Establishment Guide
Important information and definitions.
What is a Trust
A trust is a relationship where a trustee (an individual or a company) carries on business or investment activity for the benefit of other people (the beneficiaries). For instance, a trustee may carry on a business for the benefit of a particular family and distribute the yearly profit to them.
A trust is not a separate legal entity. A trust may be discretionary (i.e. the trustee decides how profit will be distributed among beneficiaries) or have fixed interests (i.e. it will benefit certain people in predetermined proportions). Commonly, the trustee is a company (a corporate trustee); often this business structure provides better asset protection.
Advantages of a Trust
A trust provides asset protection and limits liability in relation to the business.
Trusts separate the control of an asset from the owner of the asset and so may be useful for protecting the income or assets of a young person or a family unit.
Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the distribution of income and capital gains among beneficiaries.
Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships.
Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates.
What is an Appointer
The Appointor is the person or persons with the power to remove and appoint the Trustee(s). Usually this can be done at any time by signing a document of removal and/or appointment. It is common for the Appointor of a discretionary family trust to be one or both parents.
What is a Trustee
The trustee holds the assets of the trust for the benefit of the beneficiaries in the terms set out in the trust deed. The trustee usually has the power to determine how the income and the capital of the trust will be allocated amongst the beneficiaries. The trustee also usually decides the activities to be conducted by the trust. The trustee can be one or more individuals or a company (a corporate trustee).
Types of Trustees
Most people will probably be familiar with a trustee who is appointed by a settlor of a private or charitable trust in accordance with the trust instrument or trust deed. Trustees may also take the form via statutory trustee companies as well as the public trustee. The classification of trustees can also be made according to the role they are to perform and can include bare, custodian, and advisory trustees and can arise by implication of law, as in the case of a resulting trust, and by the operation of law, in the case of a constructive trust.
Public trustees: irrespective of what label is used in regards to a public trustee, the role fulfils a number of public functions that can involve such duties as the administering of wills, small estates, or estates of the mentally incapable.
Trustee companies: depending on the jurisdiction, trustee companies must act within their statutory capacity in their position as executors and administrators of an estate. The essence of the role of a trustee company is the investment and management of the funds on behalf of their clients.
Bare trustees: a bare trustee is where a person holds a trust property for the absolute benefit and disposal of a beneficiary who is of full age and capacity. However, the trustee must have no interest in the property outside of the legal title, nor does the trustee have any further duties to perform, besides conveying upon demand to the beneficiaries, or per their instructions.
Custodian trustees: a number of jurisdictions make specific reference for the appointing of custodian trustees to hold any trust property to be managed by the managing trustees. In the absence of a specific provision, a trust instrument can provide for a custodian trusteeship in accordance to the terms expressed by the settlor.
Advisory trustees: some jurisdictions make an allowance for advisory trustees to be appointed who can act with the Public Trustee, or as in the case of Western Australia, any trustee. The basic role of an advisory trustee is to provide advice to trustees because the role does not have any property vested in it, nor do advisory trustees have any power of management or administration of property.
How are Trustees Appointed
Trustees can be appointed via the express terms of a trust instrument, statute, or by the courts.
Appointment by a trust instrument: trustees appointed upon the creation of a trust are sometimes referred to as original trustees, and it is common practice for a trust instrument to include provisions guiding the occasion and manner in which a trustee is to be appointed.
Appointment by a statutory power: all jurisdictions have statutory provisions in place to appoint a trustee in the absence of an express power of appointment under the trust instrument. The statutory provisions in all jurisdictions provide for the circumstances in which an appointment can be made, and the class of persons who may make the appointment.
Appointment by the court: courts can appoint new trustees because a trust will not fail for want of a trustee. Generally speaking, legislation gives the courts the power to appoint, remove or replace a trustee if it is satisfied that such an action is in the interests of a beneficiary, or to advance the purposes of the trust. The primary consideration of the courts when making an appointment is the welfare of the beneficiaries, taking into account whether the trust property will be safe, or whether the trust property will not be executed in the manner that will serve the interests of any beneficiaries.
What is a Beneficiary
A beneficiary is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures. With the exception of charitable trusts, and some specific anomalous non-charitable purpose trusts, all trusts are required to have ascertainable beneficiaries. Generally speaking, there are no strictures as to who may be a beneficiary of a trust.
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