Cecily Zamora
Trusts are a legal entity set up by an individual (the settlor) to allow another person (the beneficiary) to benefit from an asset without being its legal owner. The settlor puts assets into the control of a trustee, who then holds those assets on trust for the beneficiary. Trusts can be created during the lifetime of the settlor or upon their death and are used for a wide variety of personal and commercial purposes, including family wealth protection, business structures, and investments. Trustees have a fiduciary duty to hold property for the benefit of others and must exercise their powers in accordance with the terms of the trust deed. Trusts can be complex structures with significant tax implications, so expert legal advice is recommended when considering their use.
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What You'll Learn
Types of trusts: statutory, resulting, constructive, pension, will, lifetime
A trust is a legal arrangement where a settlor places assets under the control of a trustee, who manages them for the benefit of a beneficiary or beneficiaries. Trusts can be created during a person's lifetime or upon their death.
Statutory Trusts
These are trusts imposed by law in specific circumstances. For example, trusts can be created by the laws of intestacy where the deceased did not leave a will, or when land is jointly owned. These trusts arise automatically according to legislation.
Resulting Trusts
Resulting trusts can either be presumed or arise automatically. They are typically established when a settlor fails to properly dispose of the entire beneficial interest in a property, which then "results" back to them. Resulting trusts are based on the presumed intention of the parties, as implied by their actions or transactions.
Constructive Trusts
Constructive trusts are created by the law of equitable obligations (law of equity) to remedy unjust enrichment or to address fraud or wrongdoing. They arise by operation of law, regardless of the parties' intentions. A constructive trust is imposed to prevent the wrongdoer from benefiting from their actions, with the property being held in trust for the next of kin.
Pension Trusts
Pension trusts are a type of trust that holds pension fund assets for the benefit of plan participants. They offer flexibility and expansive powers to trustees, but also have regulatory controls in place.
Will Trusts
Trusts can be created through a will, allowing the settlor to specify their wishes for the distribution of their assets after their death. Trustees named in the will are responsible for managing these assets in accordance with the settlor's instructions.
Lifetime Trusts
Also known as living trusts, these are created during the settlor's lifetime, allowing them to maintain control over the trust property while they are alive. Upon the settlor's death, the trust becomes irrevocable, and a co-trustee or successor trustee takes over the administration of the trust property without waiting for probate.
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The role of a trustee
Trusteeship is a demanding and rewarding role that requires a commitment to serving the interests of a trust's beneficiaries. Trustees are responsible for managing the money and assets held in a trust, ensuring that they act in the beneficiaries' best interests and comply with the relevant laws and trust agreements. Trusteeship involves a significant amount of work and responsibility, and trustees can be held liable for any losses incurred by the trust if they fail to fulfil their duties properly.
Before accepting the position of trustee, individuals must ensure they understand the nature of the trust and the beneficiaries' personal circumstances. They must also be aware of any potential conflicts of interest and ensure compliance with the duties and directions set out in the trust deed. Trustees are subject to fiduciary duties, meaning they must exercise their powers with honesty, integrity, loyalty, and good faith. They must also maintain an appropriate level of skill and prudence when carrying out their duties and making decisions.
In the context of charities, trustees have additional responsibilities. They must ensure that the charity complies with relevant laws, including employment, pension, equality, and health and safety laws. Trustees are also responsible for implementing appropriate procedures and policies and ensuring that staff and volunteers receive proper training. Furthermore, they must act in the charity's best interests and manage any conflicts of interest that may arise.
Trustees may also have tax obligations, such as reporting to HMRC and ensuring that any taxes, such as Capital Gains Tax, are paid. While trustees typically do not receive compensation for their services, they may be entitled to compensation in some cases as determined by applicable law or the trust document. However, it is important to note that compensation will be taxed as income.
Overall, the role of a trustee involves a high level of responsibility and a commitment to acting in the beneficiaries' best interests while complying with legal and ethical obligations. Trustees must carefully consider their duties and seek professional advice when needed to ensure they fulfil their role effectively and in accordance with the law.
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Trustee compensation
A trust is a legal arrangement where a settlor places assets under the control of a trustee, who then holds those assets for a beneficiary. Trustees have a fiduciary duty to hold and manage the assets for the benefit of the beneficiaries. They must exercise skill and prudence when administering the trust and avoid conflicts of interest.
Trustees are not typically paid for their services, particularly if they are acting outside of a professional capacity (lay trustees). The principle behind this is to prevent trustees from deriving any benefit from trust property and to avoid potential conflicts of interest. However, there are exceptions where trustees can receive compensation for their work.
Professional trustees, such as solicitors, accountants, or trustee companies, are usually paid for their services. The compensation payable to a trustee is typically determined by the applicable law unless the Will or trust document specifies otherwise. In some cases, a Will or trust document may include a formula for calculating compensation, such as an annual lump sum or an hourly rate.
For lay trustees, remuneration may be allowed if it is in the best interests of the trust administration. Additionally, certain non-charitable trusts may provide for the remuneration of lay trustees under specific circumstances outlined in the relevant legislation.
Charity trustees generally serve on a voluntary basis, and payment is only permitted in specific situations. A charity trustee may be paid if it is clearly in the charity's interests and provides a significant advantage over other options. The charity's governing document, the Charity Commission, or the courts may provide the necessary authority for such payments. The compensatory arrangements should be recorded in a written agreement and kept as part of the charity's accounting records.
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Creating a trust
A trust is a way of managing assets (money, investments, land or buildings) for people. Trusts can be used for a wide variety of personal and commercial purposes. A trust is created when a settlor puts assets into the control of a trustee, who then holds those assets on trust for a beneficiary. The creation of a trust means that the legal ownership of an asset is separated from the beneficial interest. The trustees become the legal owners of the trust property from the point of view of third parties. However, the beneficiaries can expect the trust to be managed for their benefit.
When creating a trust, it is important to choose someone trustworthy as a trustee. Other factors should also be considered, such as whether the trustee has relevant skills and experience, their relationship to the beneficiaries, and whether their personal or financial circumstances might interfere with their duties. The law imposes several responsibilities on trustees, including the duty to act exclusively for the benefit of the beneficiaries and maintain an appropriate level of skill and prudence when carrying out their duties.
The settlor decides how the assets in a trust should be used and this is usually set out in a document called the 'trust deed'. Sometimes the settlor can also benefit from the assets in a trust, which is called a 'settlor-interested' trust with special tax rules. Trusts can be created in a person's lifetime or upon their death and are generally irrevocable unless the trust deed states otherwise. Trusts can also be created automatically by law in certain circumstances, such as in cases of intestate or jointly owned land.
Setting up a trust can be complicated and challenging, and it is recommended to involve experienced legal professionals to ensure the trust is valid. The cost of setting up a trust in the UK can range from £1,500 to £2,500 plus VAT for legal advice and assistance. Trusts must be registered within 90 days of their creation or becoming liable for tax, and trustees must obtain a Unique Taxpayer Reference (UTR) for tax-related purposes.
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The role of beneficiaries
A trust is created when a settlor places assets under the control of a trustee, who holds those assets for the benefit of a beneficiary or beneficiaries. The trustee becomes the legal owner of the assets, but they are held separately from the trustee's property and are not considered part of it. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, and they must manage the assets in accordance with the terms of the trust deed.
The role of a beneficiary is primarily to receive benefits, assets, income, or other entitlements as outlined in the trust document. They do not have the same active responsibilities as a trustee, but their passive role is nonetheless crucial. The number of beneficiaries can vary, but there is usually more than one.
Beneficiaries have a right to information about the trust and its assets. Trustees are obliged to keep trust accounts and provide them to beneficiaries or the court upon reasonable request. However, beneficiaries do not have an automatic right to disclosure of all trust documents. Trustees should exercise discretion and consider the relevant information when dealing with requests for information. Trustees must also keep records of the trust beneficiaries and any potential future beneficiaries.
In certain circumstances, beneficiaries can contest or challenge a trust in court if they believe it is not being administered properly or was created under duress, fraud, or undue influence.
Finally, beneficiaries with an interest in the matter must approve the compensation payable to a trustee unless otherwise specified in the will or trust document.
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Frequently asked questions
A trust is a legal entity set up by an individual (known as the settlor) which allows another person (the beneficiary) to benefit from an asset without being its legal owner. The settlor puts assets into the control of a trustee, who then holds those assets on trust for the beneficiary.
There are various types of trust, including lifetime trusts, will trusts, resulting trusts, constructive trusts, statutory trusts, and pension trusts. Trusts can be used for a wide variety of personal and commercial purposes.
Trustees are responsible for managing the trust on a day-to-day basis and must pay any relevant taxes. They are the legal owners of the assets held in the trust and must manage the trust for the benefit of the beneficiaries. Trustees are subject to fiduciary duties and must act with skill and care when administering the trust. They can change the terms of the trust if there is a clause allowing this in the trust deed or if all beneficiaries give express consent.
