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Many people, often without realising it, will come into contact at some point of their lives with a trust in one form or another. Yet trusts are widely misunderstood and often seen as something just the rich need be concerned with. This leaflet aims to give a quick overview of how trusts work, what they are most commonly used for and to correct some of the widespread misconceptions held about trusts. Trusts are found around the world, but particularly in those countries where the legal system has its roots in the English system. The exact technical details of trusts, how they are set up and how they are taxed vary from country to country, so this guide focuses only on some of the broad principles. If you need to know more you should contact a professional advisor.
What is a Trust?
Trusts are, in principle, a very simple concept. A trust is a private legal arrangement where the ownership of someone’s assets (which might include property, shares or cash) is transferred to someone else (usually, in practice, not just one person, but a small group of people or a trust company) to look after and use to benefit a third person (or group of people).
The person giving the assets is usually known as the “settlor” in the UK or a “grantor” in the US (but can also sometimes be called the “trustor” or the “creator”). The people asked to look after the assets are called the “trustees” and the person who benefits from the trust is called the “beneficiary”. The details of the arrangement are usually laid out in a “trust deed” and the assets placed in the trust are the “trust fund”. One common misconception is that the assets in the trust fund are legally owned by the trust. In fact, a trust, unlike a company, cannot own assets and instead the trustees are the legal owners of the assets. The distinctive feature of a trust is therefore the separation of legal ownership and beneficial ownership of the assets in the trust fund. The trustees are the legal owners of the assets, but the trustees must at all times put the interest of the beneficiaries above their own. Thus, the settlor of trust can be a trustee, but they must still act in the interests of the beneficiary, not themselves.
Trusts can take effect during the lifetime of the settlor (in which case in the UK they are be called a “lifetime settlement”) or shortly after the death of the settlor (in which case in the UK they are called a “will trust”). There is also a wide-range of different types of trust depending, for example, on how the benefits of the trust fund are to be distributed. The basic principle that a trust contains assets owned by someone for the benefit of someone else nevertheless remains true in all forms of trust.