To Trust or not to Trust?

For many, Trusts are a great mystery. Trusts are not legal persons, but rather they are legal relationships between people and certain property. The subject matter of a Trust is property or assets. As well as that every Trust has at least one beneficiary and one trustee (usually two or three). A beneficiary is a person who receives the benefit of whatever property is in the Trust. This is where the term “held on trust” comes from. The trustees control or look after how the property is managed and distributed. The trustees must use or distribute the property for the benefit of either all or some of the beneficiaries, depending on the nature of the Trust and how it has been set up.

For a Trust to exist, property must be placed in the control of the trustees by a person called the settlor. The settlor is the person who sets up the trust and who has legal ownership of property that is going to be transferred into a Trust. To make things even more confusing, the settlor may also be either a trustee or beneficiary or even both. In effect, when property is transferred into a Trust, the settlor is actually giving up personal ownership of that property. A Trust Deed sets out the settlor’s intention as to how the property is to be managed by the trustees. The Deed also outlines the Trust’s purpose and the powers of the trustees. While this sounds scary, it isn’t really, because the settlors can also be the trustees, so control over property or assets is not entirely lost.

Unless the Trust Deed contains instructions to the contrary, trustees are not allowed to profit from Trust property. All profits are intended for the beneficiaries. Therefore, where money in a Trust is invested in shares, any gains made must return to the Trust for the benefit of the beneficiaries. This may sound confusing especially if the same person is the settlor, the trustee and also a beneficiary! But really it is just a matter of wearing different hats! Technically, you cannot benefit from a Trust while wearing the trustee hat but you are able to benefit while wearing your beneficiary hat.

Trusts are popular because, for example, third parties such as creditors or ex-partners have only limited options for accessing property owned by a Trust. The exception is the principle that property should not be protected by a Trust when others have pre-existing, legally recognised interests to that property. After separation, a husband cannot cheat his wife of her entitlement to half the house by hiding the family home in a Trust. Similarly, a business person, hoping to use a Trust to defeat the bank’s right to proceeds from the sale of a house in the event of a mortgage default, will be disappointed.

Trusts are also used as an estate planning tool to work alongside a Will. Estate planning is a topic in itself and is not covered in this article. Trusts are a form of asset protection and can be used to protect assets when individuals are assessed by their income and by what they own (for example – Residential Care Subsidy). They are a protection because in reality those assets or property is not owned by the individual, rather they are owned by a Trust.

Because Trusts are essentially a relationship, actions undermining that relationship may result in Court intervention, also known as “trust busting”. For instance, where a settlor enjoys both the benefit and full control of the property despite being bankrupt, the Court may refuse to recognise the Trust’s protective status (called a “sham trust”).

For all these exceptions, Trusts remain popular because they can remove important property or assets from the reach of third parties and creditors. They do not, however, last forever. Trusts must be wound up at the expiration of eighty years, if not earlier. But for their worth, they provide a form of long-term planning by one person for the sake of others.

 

March 2015