A trust is a legal arrangement in which a certain amount of properties or assets is held by a person or entity for the benefit of one or more other people. 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 whereby 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.
WHY WOULD YOU WANT TO CREATE A TRUST?
- 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);
- Protecting your estate (and your beneficiary’s or beneficiaries’ estate)
- To save on estate taxes;
- To avoid probate;
- 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;
- 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.
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:
- It is crucial that the trust deed be drafted with the needs of the estate planners mind;
- The parties to the trust should be identified if one consider the potential benefits which may be available;
- The tax consequences surrounding the use of a trust must be considered.
THE CREATION
Typically a trust can be created in the following ways:
- 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);
- an oral declaration;
- the will of a decedent, usually called a testamentary trust; or
- a court order (for example in family proceedings).
PARTIES TO A TRUST
Parties involved in the creation of a trust deed are exceptionally important and each has 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 three categories, namely;
- The founder of the trust;
Individual that created the trust and makes the initial donation of funds to the trust.
- The trustees of the trust;
Individuals or entities that is responsible for the effective administration of the trust. They handle the day to day activities of the trust.
- The beneficiaries of the trust;
Individuals or entities that may benefit from the trust.
Of the above only the founder and the trustees will have a role in the creation of the agreement to create the trust and the conclusion of the agreement to create the trust will make the parties enter into an agreement.
CONCLUSION
The importance of ensuring that one obtains expert advice when dealing with an estate planning exercise cannot be emphasised enough. Every step taken in this process, from the first consultation with your client to the final draft of a trust deed needs to cater for the specific needs of each individual client. To achieve this level of personal service one must ensure that you have a skilled advisor who can assist you throughout the entire process.
By: KN Peterson (LL.B)