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What is a Trust ?
Introduction
The Trust Deed
The Settlor
The Trustee
The Beneficiaries
Benefits of a Trust
Taxation
Asset Protection
Family Protection
Anonymity and Flexibility
Introduction
A Trust is simply a legal relationship in which someone (the "Settlor") arranges for another person (the "Trustee") to hold assets "in trust" for a third person (the "Beneficiaries"). A Trust is usually created by a written agreement known as a Trust Deed.
The Trust Deed
This agreement between the Settlor and the Trustee reflects their relationship to each other and the Beneficiaries, and it is created to meet the varying requirements of the Settlor. The complexity of the Trust Deed varies from situation to situation but it is important that it accurately describes how the Trust will be managed because once the Trust is established, it can be very difficult to alter its terms. Although the Beneficiaries obtain all the benefits from the assets in the Trust, they do not sign the Trust Deed.
The Settlor
The Settlor is the person who settles the Trust by giving away legal ownership of some assets to the Trustees, to be dealt with in accordance with the terms and conditions of the Trust Deed. In order to make the Trust official, the Settlor must establish the Trust through a transfer of assets to the Trust, which is traditionally a gold or silver coin. The Settlor usually determines what specific and general terms and conditions the Trust Deed will contain, and who the Beneficiaries will be. By the terms and conditions of the Trust Deed, the Settlor may choose to continue being involved with decisions regarding whether or not additional property is added to the Trust over time, and may also participate in some of the discretionary decisions that the Trustee makes pursuant to the Trust. The Settlor is usually a person who has a close connection to the Beneficiaries, but this may not be the case in some situations.
The Trustee
The Trustee agrees to accept title to the Trust assets and to deal with them according to the terms and conditions of the Trust Deed. Although the Trustee holds legal ownership of the assets that have been transferred into the Trust, they do not have beneficial ownership of those assets. The beneficial ownership rights to the Trust's assets belong to the Beneficiaries. The Trustee has a fiduciary duty to the Beneficiaries to ensure the Beneficiaries' interests are protected. This duty sets an extremely high standard of conduct for the Trustee, with the Courts imposing stiff penalties on trustees that breach that duty. In British Columbia, there is legislation governing the actions of the Trustee, in addition to the terms of the Trust Deed itself. The Trustee is entitled to be paid for their services to the Trust, in accordance with legislation in British Columbia.
The Beneficiaries
The Beneficiaries are the people who will benefit from the assets held in the Trust. When the Trust is being created, there is some flexibility in determining who the Beneficiaries may be. They may be named specifically by the Settlor and their benefits clearly defined or, on the other hand, the Settlor may merely name a class of persons (e.g. sons, daughters, grandchildren or other defined eligible beneficiaries).
Benefits of a Trust
The benefits of a Trust can basically be grouped into the following categories.
Taxation
Many families use Trusts to distribute income among different family members. Very often family members need to fund extracurricular activities or schooling, and the money that is used to pay for those activities comes from the after tax dollars of the family member with the highest marginal tax rate. The use of a properly established family Trust will allow the income to be distributed to and taxed in the hands of the family member who is using the income. This can result in substantial income tax reduction to the family as an entire entity because that family member usually has a lower marginal tax rate.
An Offshore Trust can be established in a jurisdiction outside of Canada which provides income tax concessions that either relieve the income tax burden on a Trust entirely, or significantly reduce the amount of income tax paid. Furthermore, such jurisdictions usually provide that no local taxes or duties are charged on the death of the Settlor or Beneficiaries. This can allow someone to either reduce the Settlor's or Beneficiaries' worldwide tax burden, or to defer indefinitely tax payments.
Asset Protection
The Settlor is able to use a Trust to provide for the long-term protection of the assets held in the Trust from exposure to seizure by creditors of the Beneficiaries or the Settlor. The assets properly held and administered in a Trust are not subject to seizure to satisfy the debts of the Settlor or any of the Beneficiaries. This feature is important to Settlors or Beneficiaries whose activities may expose them to significant potential liabilities. The assets are held in the name of the Trustee and asset protection is obtained, while still allowing the Beneficiaries to enjoy the benefit of the assets.
Family Protection
The Settlor can advise on the administration of the assets held in the Trust up to his death, who is to benefit thereafter and in what proportions, by addressing this in the Trust Deed. This latter aspect is particularly attractive to people concerned about their family members being residents of countries which have strict laws on inheritance and can enable payments to be made to people who might have to be excluded from a Will made in the Settlor's homeland. In addition a Trust can be used to ensure that assets to be used for the benefit of family members do not form part of a matrimonial property division with that family member's spouse.
Anonymity and Flexibility
The Trust Deed is a secret document. It is not recorded anywhere and is not available for viewing by the Beneficiaries or members of the public.
Careful writing of the Trust Deed may allow: the Trust to be revoked or terminated; the Trustee to be removed; with respect to an Offshore Trust, the location of the Trust can be transferred to another jurisdiction should it be felt that political developments make this a prudent precaution; and the policies on administration and disposition of the assets can be changed at any time.
This flexibility is a very attractive feature because it means that the Settlor is able to customize the Trust to meet specific needs without being subject to significant terms and conditions which are implied by legislation.
I have tried to explain Trusts simply, however they are very sophisticated when being implemented. It is important to get qualified accounting and legal advice before creating a Trust to avoid adverse income tax consequences or legal difficulties by setting the Trust up incorrectly.
It should be noted that the impact of the law on any given situation depends upon each individual's circumstances and the opinions contained in this article should not be relied on for assessing anyone's legal position.
The opinions set out in this article reflect generally on this area of law. The impact of the law on any given situation depends upon each individual's circumstances and the opinions contained in this article should not be relied on for assessing anyone's legal position. Advice should be obtained directly from our lawyers regarding your personal situation before you make any decisions about the law.
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