Trusts


1. What is a Trust? Who is involved in a trust?

 

A trust is a legal relationship created by an individual ('trustor'), whereby a trustee is appointed to hold the property in a way that ensures that another person ('the beneficiary') will receive 'benefits' arising out of the property.

 

2. Types of Trust

 

 

(a) Inter Vivos vs Testamentary:

 

Firstly, we can categorise a trust as an ‘inter vivos’ or ‘testamentary’ trust.

 

An inter vivos trust is a trust which is created to operate during the lifetime of the trustor. As it operates during the lifetime of the trustor, it is also called a ‘living trust’. An inter vivos trust is created through documentation that is distinct from the will. This type of trust can be ‘revocable’ or ‘irrevocable’.

 

A testamentary trust is created to operate after the death of the trustor. A trustor can create a testamentary trust by including terms to this effect in his will. This type of trust is ‘irrevocable’ - the trustor being dead, obviously has no capacity to alter the terms of the trust or revoke it completely (see below). Assets that are the subject of the trust are those assets that the settlor owns at the time of his death. 

 

(b) Revocable vs Irrevocable:

 

Secondly, we can categorise a trust as a ‘revocable’ or ‘irrevocable’ trust.

 

In a revocable trust, the trustor retains the ability to amend or change the terms of the trust whenever he/she wants. They also retain the power to end and rescind the trust arrangement, wherein the assets that are the subject of the trust will return to their ownership.

 

In an irrevocable trust, the trustor does not reserve such a power to amend the terms of the trust or rescind the arrangement altogether.

 

(c) Fixed vs discretionary:

 

Thirdly, we can categorise a trust as a 'fixed' or 'discretionary trust'.

 

A ‘fixed trust’ is a trust in which the trustee has no discretion as to how to distribute the trust assets to its beneficiaries. The trustor, in creating the trust, will clearly stipulate what property has to go to which beneficiary. The trustee, in a fixed trust, must follow these instructions issued by the trustor.

 

A ‘discretionary trust’ however, affords some freedom for the trustee in deciding how the trust’s assets should be distributed amongst the trust’s beneficiaries. Such discretion depends on what the trustor has stipulated. It can range from giving the trustee absolute freedom, to decide how much of the assets each beneficiary should receive if any, to requiring the trustee to give each beneficiary some property, yet leaving it to the trustee to determine how much each beneficiary should receive.

 

3. What are trusts for?

 

The following are examples of when would you use a trust:

  • Estate planning 

    • To avoid probation, as proceedings in courts may be very time-consuming and costly. Putting your assets into a trust deed may be an efficient way to save on estate duty. You may want to check your local law on the rate of estate duty and whether there are any threshold for estate duty exemption (e.g. the US threshold is US$1.2 million).

  • To prevent beneficiaries from misusing or wasting assets

    • Sometimes, the beneficiaries are minors and do necessarily know how to fully utilise their assets. For example, a trustor can then stipulate that the trustee will manage an asset until the beneficiaries are of age to manage these assets on their own.

  • Commercial use of assets

    • One of the most common uses of trusts is for taking security on loans. In a sale of goods context, banks often take security over goods through a trust. These arrangements often involve a borrower holding the goods purchased using a loan from the bank, on trust for the benefit of the bank (the beneficiary). This is often done through a Security Trust Deed.

 

 

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Trusts

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