A trust is a legal arrangement in which certain amount of properties or assets are held by a person or entity for the benefit of others. It involves the exchange of assets for a complete separation of ownership and enjoyment of these assets from the personal estate of the estate planner which in turn leads to enhanced protection from creditors. It can also be referred to as a relationship where property is held by one party for the benefit of another.
A trust is created by a founder (settlor), who transfers property to a trustee. The trustee holds that property for the trust’s beneficiaries.
A trust is governed by the terms under which it was created. In most jurisdictions, this requires a contractual trust agreement or deed.
Trusts can accomplish a range of goals. The type of trust you set up will depend on what your goals are.
2. Why would you want to create a trust?
2.1 To maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness);
2.2 Protecting your estate (and your beneficiary’s or beneficiaries’ estate)
2.3 To save on estate taxes;
2.4 To avoid probate;
2.5 To reduce estate duty payable by an estate planner in the future as these assets that form part of a trust can no longer be attributed to the estate planner;
2.6 When a large amount of assets are involved trusts may also be established to maintain control over these assets even after the original owner has died;
3. Key elements
There are some key elements that must be present before a trust will be able to serve the needs of the estate planner effectively. These elements are as follows:
3.1 It is crucial that the trust deed be drafted with the needs of the estate planners mind;
3.2 The parties to the trust should be identified if one consider the potential benefits which may be available;
3.3 The tax consequences surrounding the use of a trust must be considered.
4. The creation
Typically a trust can be created in the following ways:
4.1 a written trust instrument created by the settlor and signed by both the founder (settlor) and the trustees (often referred to as an inter vivos or living trust);
4.2 an oral declaration;
4.3 the will of a decedent, usually called a testamentary trust; or
4.4 a court order (for example in family proceedings).
5. Parties to a trust
Parties involved in the creation of a trust deed are exceptionally important and each have their own unique consideration to take into account. It should be noted that all of the parties involved in the trust deed will be involved in the administration of the trust.
The parties to a trust can be divided into four categories, namely;
5.1 The founder of the trust;
Individual that created the trust and makes the initial donation of funds to the trust.
5.2 The trustees of the trust;
Individuals or entities that are responsible for the effective administration of the trust. They handle the day to day activities of the trust.
5.3 The principal of the trust;
The property or assets themselves, including money, which is held in the Trust and managed by the Trustee
5.4 The beneficiaries of the trust;
Individuals or entities that may benefit from the trust.
Of the above (parties to a trust) only the founder and the trustees will play a role in establishing the agreement to create the trust.
6. Types of trusts
The type of trust that is to be created will depend on the type of assets you are trying to protect or the goals in setting up a trust. Some trust that will better meet your needs than others.
6.1 Living Trusts
When a trust is created and then immediately become effective, it is known as a “Living Trust.”
6.2 Testamentary Trusts
Testamentary trusts only become effective at the death of the founder. In the case of testamentary trust, you as the person creating the trust is called the “testator.” Testamentary trusts are often created within Wills.
6.2.1 How Do You Fund It?
Testamentary trusts are generally funded only after your death and are often funded with the assets of your estate. In order to fund a testamentary trust your will must state the estate assets that should be moved into the trust upon your death. The estate assets can then be distributed and managed according to the terms of the trust.
6.3 Revocable Trusts
You retain ownership and control of the property in the trust and can change the terms of the trust including the trustees and beneficiaries.
6.3.1 How Do You Fund It?
If you are setting up a revocable trust you will likely be the sole trustee of your trust. As the sole trustee you can move assets into the trust and out of the trust as you wish without too much hassle.
For example, many people with revocable living trusts put a large portion of their assets to be held in trust including real estate, financial accounts (stocks, bonds, etc.), and even bank accounts, such as a savings account.
6.4 Irrevocable Trusts
You give ownership and control of the property in the trust to others (trustees) and therefore you no longer have control over the property.
6.4.1 How Do You Fund It?
By putting assets into an irrevocable trust you are essentially giving up ownership and control of those assets. These assets should therefore be chosen carefully. The assets will be used to fund an irrevocable trust and are generally determined by the goals of the trust. Choosing a funding method that supports the goals of the trust is something that you should decide with the help of a trust and estates attorney. Transferring property to an irrevocable trust also requires a formal transfer of property to be completed. The property must therefore be re-titled in the trustee’s name. An attorney can help you complete and manage a re-titling of property.
The importance of ensuring that one obtains expert advice when dealing with estate planning cannot be emphasised enough. Every step taken in the process from the first consultation with an attorney to the final draft of a trust deed has to cater for the specific needs of each individual instructing an attorney to establish a trust.
To achieve this level of personal service one must ensure that you have a skilled advisor who can assist you throughout the entire process.
• The Ten Things You Need to Know About Trusts
ABA Chartered Accountants
Access date: 29 November 2017
• All You Need To Know About Trusts
Website name: Everplans
Access date: 29 November 2017
Written by : Kristle Peterson (LL.B)