WHAT IS A TRUST?

WHAT IS A TRUST?

A Trust is a mechanism whereby one person (the ‘settlor’) may give away the enjoyment of assets to a group of individuals (the ‘beneficiaries’), while control and decisions on the administration and investment of those assets lie with others (the ‘Trustees’).

The Settlor is the person who provides the assets of the trust. Unless he is a beneficiary or reserves powers to himself in the trust deed, he has no rights over the trust assets once they are transferred to the Trustees.

The Beneficiaries are the persons entitled or potentially entitled to the benefit of the trust fund’s capital and income. The extent of their entitlement depends on the precise terms of the trust.

The Trustees hold the legal title to the assets upon trust for the beneficiaries. Their duty is to administer the assets in the trust and, eventually, distribute them according to the terms of the Trust deed. They are in a strict fiduciary position vis-à-vis the beneficiaries, i.e. they must always exercise their powers in the best interests of the beneficiaries and, in particular, must not allow their interests to conflict with those of the beneficiaries. If they commit a breach of trust (i.e. break the trust imposed on them by acting in a way that is not for the beneficiaries’ benefit), they may be liable to make good any loss out of their own pockets. 

Who can be a Trustee?

The Settlor can be one of the Trustees (but this may be undesirable in certain circumstances). It is also possible for a Beneficiary to be a Trustee (whether this is desirable will depend upon the nature and purpose of the Trust).

If the Trust is to be made in your lifetime, to take immediate effect, then it is usually evidenced by a Trust Deed. ‘Trust’ and ‘settlement’ have broadly the same meaning. If it is to be created on or shortly after your death, then the Trust provisions must be set out in your will – a ‘Will Trust’. 

TRUST DOCUMENTS AND TERMS

Whether by lifetime settlement or by will, the Trust document states who is responsible for looking after the gifted assets (the Trustee or Trustees), who are to benefit (the Beneficiaries) and any rules or conditions that the Trustees and Beneficiaries must adhere to. 

Additionally, the trust document must specify the initial trust assets, sometimes called the ‘Trust Fund’. Depending on the Trust type, these assets can be property, investments, cash, any collectables, such as art, wine or jewellery, and even company stocks. 

You must also stipulate the trust period in the trust document. It might be for just a few years, perhaps during a person’s widowhood or until a child attains a certain age or marries. However, trusts can last for much longer. Since 1 December 2013, Hong Kong trusts are capable of existing in perpetuity. It is usually advisable to give the Trustees the power to terminate the Trust at their discretion.

WHY ESTABLISH A TRUST?

Throughout their history, trusts have been used for a wide range of purposes:

Trusts for the avoidance of probate

Probate can cost between 5% to 7% of your estate’s value. Where assets are transferred to a Trust, they are outside the estate of the Settlor. This avoids the need to deal with those assets in the event of the settlor’s death. 

Child Trust Fund

Parents or grandparents often create flexible trusts for the benefit of children or grandchildren who may be too young or financially unsophisticated to benefit from an outright gift. Trusts provide a mechanism for the long-term retention and control of assets.

Trusts for those under a disability

A Trust can be used to hold and administer assets for those who are unable to hold assets themselves, e.g. minors or the mentally disabled.

Trust for family company shares

A Settlor may wish to encourage his or her children to become involved in the family company but is perhaps unsure of the relative extent to which one child or another should benefit. Suppose he or she transfers the shares to a Trust. In that case, the settlor can remain in control of the company (subject to tax considerations) by acting as one of the Trustees and can thereby continue to exercise voting control over the shares gifted into the Trust. The Settlor may also continue to exercise management control as a Director (but their salary must be restricted to commercial levels).

Trusts to protect assets

Trusts can be used in certain limited circumstances to protect the Settlor’s assets from creditors, disinherited heirs, claims by the ex-spouses or former civil partners of children or grandchildren and the risks associated with political instability. Often it is sensible to use trusts based in a different country from the settlor for this purpose. How far they are adequate to protect assets will depend on the law in the Settlor’s country of domicile or residence and the law under which the Trust is established. With this type of Trust, it’s common to appoint a Protector who will balance the Trustees’ powers. The Trust deed can provide that the Trustees obtain the Protector’s approval before exercising certain powers or taking certain decisions.

Problem:
Parents, grandparents and others have always been concerned that children and grandchildren are at risk if they receive or inherit too much, too soon. In addition, increasingly, families are concerned to protect assets in the event of a child’s divorce.

Solution:
Create a Trust to hold the assets until the children are older and wiser and seek to ‘ring fence’ family wealth.

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