What is a trust?
What is a trust?
Trust law imposes strict obligations and rules on the Trustees.
May 3, 2016

The Concept

At first glance, those unfamiliar with the trust concept may be concerned about transferring various assets to Trustees, however, this concern can be alleviated if the distinction between legal and beneficial ownership is properly understood and that the trust is governed by sound law, enforced in a reputable jurisdiction.

Legal and Beneficial Ownership

For formal purposes, Trustees are recognised as the legal owner of the property but the crucial delineation is that the persons who have the benefit of the property are the Beneficiaries. These are important and fundamental distinctions. The Trustees are essentially “stewards” only and must remain independent and exercise proper control over all assets (the Trust Property). If the person or company who sets up the trust (the Settlor) continues to excise control over the trust assets the trust may be rendered void.

Accountability of Trustees

Trust law imposes strict obligations and rules on the Trustees. A Trustee may not derive any direct or indirect advantage from a trust unless expressly permitted by the Trust Deed. For example, a professional Trustee may charge for services, but these charges – and the basis for them – must be fully disclosed and agreed with the Settlor.

Duty of Trustees to Obey Trust Documents

The Trustees are required to follow the directions contained in the Trust Deed, which governs the management of the Trust Property and the entitlements of beneficiaries. Trustees are also subject to very strict rules governing their use of their powers and discretions.

Fiduciary Relationship of Trustee

The Trustees have serious and onerous obligations and are subject to the following rules:

  1. Best Interests of Beneficiaries – Trustees must exercise all their powers in the best interests of the Beneficiaries of the Trust. They must disregard the interests of others – including the Settlor.
  2. Act prudently – Trustees must act prudently in the management of Trust Property. If by failing to exercise proper care, the trust fund suffers loss, the Trustees will be liable for breach of trust. Professional Trustees are expected by the courts to exercise a high standard of skill and failure to do this will constitute a breach of trust for which the Trustees may be liable to compensate the beneficiaries, if a loss results.

Some Examples of Trusts

The concept of a Trust is perhaps quite abstract, and those familiar with a ‘limited company’ may see some similarities with how an abstract construction can take on legal form and undertake activities.

It may help to example some trusts to see how they can work in practice:

  • The National Trust – various properties and land of cultural and social interest have been gifted over the years to be maintained and made available for the general public.
  • Pensions – all pension funds are essentially trusts. Your contributions are pooled together (although separately measured) in whichever fund is chosen by your IFA and managed on your behalf for your benefit in retirement.
  • Private Client Trusts – in family estates, trusts are often used to set aside funds for subsequent generations although, for example, intended beneficiaries may not be of an age or ability deemed appropriate to financially manage the funds. In these circumstances, the trustees would manage the Property until the criteria set out in the Trust Deed allows full interest in the Trust Property to be passed to the beneficiaries.

If you have any questions about trusts, please call us on 01872 300232 or email us at hello@hivebusiness.co.uk.

The information contained in this article is based on the opinion of Hive Business and does not constitute formal tax advice. Any tax outcomes will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future. You should seek specific advice before embarking on any course of action. Hive Business does not provide regulated Financial Advice, including advice on investment, insurance or lending products or their suitability for you. This article is provided for information only and does not constitute, and should not be interpreted as, investment advice or a recommendation to buy, sell or otherwise transact, or not transact, in any investment including Bitcoin and other crypto. Any use you wish to make of any information contained within this article is, therefore, entirely at your own risk.

By Team Hive
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