A trust is a relationship which arises where assets are transferred from one person, known as the settlor, to another person, known as the trustee, who is obliged to administer these assets for the benefit of a class of persons, known as the beneficiaries.
A trust is able to own immovable property, as well as movable assets, such as cash, shares, investments, an art collection and intellectual property.
The terms under which the trustee may administer the assets are governed by the trust deed, which is the document through which the trust is created and by the provisions of applicable law.
Depending on the preference of the settlor, a protector may be appointed, whose role is to oversee the actions of the trustee.
The main uses of trusts are for asset protection and estate planning purposes.
Assets which are transferred into a trust will be protected from the risk of litigation, as they no longer form part of the estate of the person being sued. This is of particular importance to individuals whose nature of businesses may give rise to personal litigation risk, such as doctors, lawyers or directors of public companies.
When used as an estate planning tool, trusts allow for the preservation of family wealth and the controlled transition of assets from one generation to the next. By creating a trust, the settlor can control the distribution of his/her estate upon death, thus avoiding forced heirship rules, probate and inheritance taxes. This can help to safeguard the continuation of a family business and the preservation of family wealth, for example by protecting assets from spendthrift beneficiaries or from falling into the hands of a divorced spouse.
Other reasons for which a trust may be created could be to provide for the benefit of a charitable cause, to provide pensions for retired employees or to allow for property to be held by a minor, who is not otherwise able to do so before reaching legal age.
A trust can be discretionary or fixed.
Under a discretionary trust, the trustee has discretion to deal with the trust assets as the trustee thinks appropriate for the benefit of the beneficiaries. The trustee is not obliged to follow any directions of the settlor or the beneficiaries. Consequently, as the beneficiaries may only benefit from the trust assets if and to the extent that the trustee so decides, the trust assets would fall outside the reach of any creditors in the case of a beneficiary’s bankruptcy. At the same time, the beneficiaries cannot be taxed on the income or assets of the trust, as they are not legally entitled to any such income or assets until the trustee exercises his/her discretion to make a distribution to the beneficiaries.
The settlor may issue a “letter of wishes” to the trustee. Although the trustee is not legally obliged to follow the settlor’s wishes, the trustee may refer to the letter of wishes for guidance at the time of exercising the trustee’s discretionary powers.
With a fixed trust, the trust deed stipulates how assets are to be distributed to the beneficiaries, thus not providing any discretion to the trustee. As such, a fixed trust does not provide the asset and tax protection which are available through a discretionary trust. For this reason, most trusts created are discretionary trusts.
Another type of trust is referred to as an “accumulation and maintenance trust”. In this case, the assets and income of the trust are accumulated for the benefit of a child. These are then distributed once the child reaches a certain age or upon a certain event taking place, such as the child’s marriage or the birth of their first child.
Mercury has substantial experience in the establishment and administration of trusts. We provide trustee services and can also help you in setting up a private trustee company, which will act as the trustee of your own family trust.
Please contact us for a confidential discussion of your asset protection or estate planning needs.