Although most people prefer not to think about their death, failure to plan in advance can mean that they leave their estate in disorder. This will then have to be sorted out by their successors – often at great expense and inconvenience, and at a time when they may be emotionally vulnerable.
Many people seek to order their affairs by making a will. Under this arrangement the executors named in the will apply for a grant of probate, take possession of the assets of the deceased and then distribute those assets according to the terms of the will. Such arrangements are perfectly in order but result in high administration costs (often around 4% to 6% of the total value of the estate), long time delays (even a simple estate would normally take at least one year to be wound up) and, very often, a large tax bill.
One effective alternative to a will is for the individual to set up a trust during their lifetime. With careful planning, this can eradicate delays, administration costs and tax liabilities, as well as bestowing a large number of additional benefits. For these reasons the use of trusts is increasing dramatically.
A trust is an arrangement whereby property is transferred from one person (the settlor) to another person or corporate body (the trustee) to hold the property for the benefit of a specified list or class of persons (the beneficiaries). A trust can be created solely by verbal agreement but it is normal for a written document (the trust deed) to be prepared. This evidences the creation of the trust, sets out the terms and conditions upon which the trustees hold the trust assets and outlines the rights of the beneficiaries. In essence, a trust is not dissimilar to a will except that assets are transferred to the trustees during the settlor’s lifetime rather than to executors upon the death of the owner. The trust deed is therefore similar to the will.
Those unfamiliar with the trust concept usually express concern at the idea of transferring ownership of their property to a trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood, and provided that the trust is governed by a reliable trust law that can be enforced in a reputable jurisdiction.
Legal and Beneficial Ownership
The practical advantages of a trust are derived from the fact that a distinction is drawn between the formal or legal owner of property and the person who has the use or benefit of the property – the beneficiary. For formal legal purposes the trustee is recognised as the owner whereas the persons who have the use or benefit of the property are the beneficiaries. It is possible for the settlor to retain an interest in the trust and to be an actual or potential beneficiary but this can have estate duty and tax disadvantages. It is vital that the trustee remains independent and exercises proper control over the trust property. The trust may be invalid if the settlor continues to exercise control over the trust assets by retaining benefit or control, or by giving directions to the trustees.
Accountability of Trustees
Trust law imposes strict obligations and rules on trustees. There is a basic rule that a trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust – for example, where he is a professional trustee and the trust provides for a right to charge for his services. Full disclosure of the basis and amount of charges is required. A professional trustee who derives some indirect commercial advantage that is not fully disclosed and approved will be acting in breach of trust and will have to account to the beneficiaries for the advantage gained.
Duty of Trustee to Obey Trust Document
Trustees must follow the trust deed and are subject to very strict rules governing the way in which their powers and discretion may be exercised.
Fiduciary Relationship of Trustee
The courts regard a trust as creating a special relationship that places serious and onerous obligations on the trustee. Trustees are therefore subject to the following rules:
No Private Advantage
A trustee is not permitted to use or deal with trust property for private direct or indirect advantage. The court will hold them liable to account for any profits made in breach of this obligation.
Best Interests of Beneficiaries
Trustees must exercise all their powers in the best interests of the beneficiaries of the trust, and disregard the interests of others, including the settlor.
Whether or not a trustee is remunerated, he must act prudently in the management of trust property and will be liable for breach of trust if – by failing to exercise proper care – the trust fund suffers loss. In the case of a professional trustee, the standard of care that the law imposes is higher. Professional trustees hold themselves out as having special expertise and the courts will expect them to exercise a high standard of competence. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustees will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling shareholding.