When planning a will the vast majority of people simply decide how they wish to divide up their estate, and then they outline this in writing. Generally, their chosen path of inheritance runs directly to their spouse. Some others, however, particularly those with potentially larger estates, choose instead to set up a trust.
Three PartiesThe concept of a trust revolves around three key parties. The first of these is known as the ‘trustee’, and the second as the ‘beneficiary’. Finally, and perhaps most importantly, there is also a ‘settlor’ (or, in the United States, a ‘trustor’). In the first instance, the settlor creates the trust by indicating their wishes, generally in a will but sometimes verbally. In their will, they will outline what will be put into the trust; this could be money, buildings, or other property. They will also appoint a trustee and beneficiary, and may add a stipulation as to when the trust should pass to the beneficiary; for example, they might add that the beneficiary must be eighteen years old.
Once this has happened, the settlor has reduced the size of their total estate by giving up his legal right to the contents of the trust, and the ownership of those contents is now divided between two parties. In legal terms, this is known as ‘split title’. The trustee now has legal ownership of the assets in trust, while the beneficiary has what is known as equitable ownership. This means that the name of the beneficiary will appear on legal documents such as deeds of ownership, but that the only party permitted in law to benefit from the trust is the beneficiary. There are conditions of their benefiting, though; generally, these involve the settlor having died, and the beneficiary reaching a certain age.
Various FormsThere are various forms of trust – in fact, there are more distinct types than one could count. However, there are two main forms which are of particular interest to those who are writing a will.
The first of these is a fixed trust. In a fixed trust, the settlor stipulates exactly who should benefit, and exactly what conditions should be met before they can do so. For example, if the settlor wishes for a child to receive the assets in the trust when they reach a certain age, or if they wished to create a life interest (that is, an arrangement whereby the beneficiary receives a certain income regularly for the rest of their life), then they would create a fixed trust. Within these arrangements, the trustee has no power over the choice of beneficiary or the manner in which the assets are disbursed.
Another common type of trust seen in wills is a ‘discretionary trust’. Under this arrangement, the trustee may exercise their discretion as to who should benefit and when that should happen. Their decision, however, should always be based on the principle that they are working solely in the best interests of the beneficiaries, and are informed by the wishes of the settlor. This is known as the ‘fiduciary duty’, and is designed to ensure that the trustee does not gain from the trust unless explicitly permitted to do so by the settlor.
Discretionary trusts have great benefits for minimising tax and ensuring the safety of the contents of the trust; these benefits are explained in more detail elsewhere on this site.