Overview
A trust is a financial arrangement whereby one or more persons (the trustees) hold and manage property for the benefit of one or more other persons (the beneficiaries). While the trustee is the legal owner of the property, the beneficiary holds an equitable interest in it. Trusts are commonly used in estate planning, asset protection, and commercial settings.
Key Components of Trusts
- Trustees: The individuals or institutions responsible for managing the trust property. They are the legal owners.
- Beneficiaries: The individuals or entities that benefit from the trust, holding an equitable interest in the property.
- Trust Deed: The legal document that codifies the terms and conditions of the trust.
Types of Trusts
- Discretionary Trust: Trustees have discretion over how trust income or capital is distributed among the beneficiaries.
- Interest-in-Possession Trust: A trust where the beneficiary has a right to the income from the trust property.
- Relevant Property Trust: Trusts that do not fall into any exempt categories and are subject to inheritance tax.
- 18-25 Trust: A trust where the beneficiary is a minor under the age of 18, which provides for the welfare of minors up to the age of 25.
Examples
- Family Trust: Parents can set up a trust to manage their property for their children’s benefit, ensuring they have financial support.
- Pensions Trust: Companies create pension trusts to manage retirement funds for their employees.
- Charitable Trust: Assets are held in a trust to support charitable causes.
Frequently Asked Questions (FAQs)
Q1: What is the main purpose of creating a trust? A1: Trusts are created to manage and protect assets, often for family members or charitable purposes, and to ensure that assets are distributed according to the trust creator’s wishes.
Q2: Can a trustee also be a beneficiary? A2: Yes, a trustee can also be a beneficiary, although it is crucial to clearly define roles and responsibilities to avoid conflicts of interest.
Q3: How is a trust different from a will? A3: A trust can manage and distribute assets during the grantor’s lifetime and after death, whereas a will only takes effect after the testator’s death.
Q4: Is it necessary to involve a lawyer in creating a trust? A4: It is advisable to involve a lawyer to ensure the trust is legally sound and meets all legal requirements, especially in complex situations.
Q5: What is a “constructive trust”? A5: A constructive trust is imposed by the court to address situations where one person unfairly holds property rightfully belonging to another, ensuring the rightful owner benefits.
Related Terms
- Discretionary Trust: A trust where trustees decide on the distribution of income or capital among beneficiaries.
- Interest-in-Possession Trust: Trust giving a beneficiary the right to enjoy trust property income.
- Relevant Property Trust: Trust subject to inheritance tax laws.
- Constructive Trustee: A trustee appointed by a court to rectify wrongdoing or prevent unfair enrichment.
Online Resources
Suggested Books for Further Studies
- “Trust Law: Text and Materials” by Graham Moffat
- “Understanding Trusts and Estates” by Roger W. Andersen
- “Wills, Trusts, and Estates” by Robert H. Sitkoff and Jesse Dukeminier
- “The Law of Trusts” by Geraint Thomas and Alastair Hudson
- “Complete Guide to Wills, Trusts & Estate Planning” by Robert Fass and Carol Word
Accounting Basics: “Trust” Fundamentals Quiz
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