Trusts - How do they work?

 

The formation of a trust enables the person or persons setting it up to separate the legal ownership of their assets from their own names while still being able to use of them for their own benefit.

There are three main parties to a trust.

The Settlor/Settlors form the trust.
The Trustees manage the trust.
The Beneficiaries benefit from the trust.

 A person can be a settlor, a trustee and a beneficiary but not all three alone. If one person held these roles alone the trust would be a sham for obvious reasons.


The appointment of an independent trustee is recommended in most cases and depending on the type of activities the trust is going to be involved in the appropriate person may be a family member, a business associate, a friend or a professional trustee.

 

You need to ensure that the person you choose to act as an independent trustee is competent to handle the role.

The process of setting up the trust, selling assets to it and starting a gifting programme is explained as follows:

The assets are sold to the trustees of the trust by the settlors and there is debt recorded as owing to the settlors. This debt can then be reduced by a gifting programme over time or with the abolition of gift duty can now be writtren off in one transaction. The page dealing with gifting has further information about the consequences of gifting over time or in one transaction.


The benefits are:

  • The increase in value of those assets does not accrue to the owner but instead belongs to the Trust and this can then be distributed to the beneficiaries who would normally include the original owner and other family members.
  • By using a gifting programme, over time the owner can reduce the amount of the debt, and thus also transfer to the Trust the wealth accumulated up to the date of transfer.

When forming a trust, selling assets to it and commencing a gifting programme, the documents that will be prepared and signed are:

  • Trust Deed
  • Deed of Sale
  • Resolution of Trustees
  • Deed of Acknowledgement of Debt
  • Deed of Partial or Full Reduction of Debt
  • Memorandum of Wishes

A Trust is not a separate legal entity and because of this the assets are held in the names of the trustees and generally trustees are personally liable for all trust debts.

 

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