A trust can be defined as a legal obligation binding a person (the trustee) to deal with property of others which he/she has control (trust property) for the benefit of persons (beneficiaries). The beneficiaries may enforce the obligation created by the trust on the trustee even though they were not party to the agreement between the creator of the trust (settlor) and the trustee.
A trust is one of the more difficult business arrangements to understand as each one is different. Fundamentally a trust is a vehicle for minimising tax liability for the group of people it was created for. There is no Act of parliament to explain it - it depends on a trust deed and the rules of equity (this branch of law is based on justice, fairness and good conscience as interpreted by the courts).
Plans in the continuing taxation modernisation scheme are likely to remove some of the tax advantages from trusts, so a trading trust may cease to have the benefits for which it was set up. It is essential to ask your accountant for advice on the current state of tax affairs concerning trusts.
A trust is made up of the following elements:
- the settlor - the person who provides the trust property (which could be any assets) and creates the trust;
- the trustee - the person (often a company) who becomes the legal owner of the trust property and who manages it in accordance with the settlor's instructions;
- the trust property (may be real property i.e. land, and buildings on land or personal property i.e. personal goods and rights such as copyright, company shares and debts)
- the trust deed - a document carefully drawn up to show the way in which the trust is to be managed and the income from it distributed;
- the appointor - the person(s) who, under the trust deed, can replace the trustee (the position of appointor is the most important position held by any person involved in a trust); and
- the beneficiaries - the person(s) for whom the trust was created and to whom the trustee distributes the income and eventually (probably) the assets;
- An obligation enforceable in equity.
These elements are explained in more detail below.
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