Trust law

History

Ancient examples

English common law

Significance

Basic principles

Terminology

• Appointer: This is the person who can appoint a new trustee or remove an existing one. This person is usually mentioned in the trust deed.
• Appointment: In trust law, "appointment" often has its everyday meaning. It is common to talk of "the appointment of a trustee", for example. However, "appointment" also has a technical trust law meaning, either:
• * the act of "appointing" an asset from the trust to a beneficiary ; or
• * the name of the document which gives effect to the appointment.
• 'As Trustee For' : This is the legal term used to imply that an entity is acting as a trustee.
• Beneficiary: A beneficiary is anyone who receives benefits from any assets the trust owns.
• 'In Its Own Capacity' : This term refers to the fact that the trustee is acting on its own behalf.
• Protector: A protector may be appointed in an express, inter vivos trust, as a person who has some control over the trustee—usually including a power to dismiss the trustee and appoint another. The legal status of a protector is the subject of some debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities, then the courts—if asked by beneficiaries—could order him or her to act in the way the court decrees. However, a protector is unnecessary to the nature of a trust—many trusts can and do operate without one. Also, protectors are comparatively new, while the nature of trusts has been established over hundreds of years. It is therefore thought by some that protectors have fiduciary duties, and by others that they do not. The case law has not yet established this point.
• Settlor: This is the person who creates the trust. Grantor is a common synonym.
• Terms of the Trust means the settlor's wishes expressed in the Trust Instrument.
• Trust deed: A trust deed is a legal document that defines the trust such as the trustee, beneficiaries, settlor and appointer, and the terms and conditions of the agreement.
• Trust distributions: A trust distribution is any income or asset that is given out to the beneficiaries of the trust.
• Trustee: A person who administers a trust. A trustee is considered a fiduciary and owes the highest duty under the law to protect trust assets from unreasonable loss for the trust's beneficiaries.

  Creation

1. a written trust instrument created by the settlor and signed by both the settlor and the trustees ;
2. an oral declaration or promise;
3. the will of a decedent, usually called a testamentary trust; or
4. a court order.

Formalities

1. Intention. A mere expression of hope that a trust be created does not constitute an intention to create a trust. Conversely, the existence of terms of art or the word "trust" does not indicate whether an instrument is an express trust. Disputes in this area mainly concerns differentiating gifts from trusts.
2. Subject Matter. The property subject to the trust must be clearly identified. One may not, for example state, settle "the majority of my estate", as the precise extent cannot be ascertained. Trust property may be any form of specific property, be it real or personal, tangible or intangible. It is often, for example, real estate, shares or cash.
3. Objects. The beneficiaries of the trust must be clearly identified, or at least be ascertainable. In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries. Beneficiaries may include people not born at the date of the trust. Alternatively, the object of a trust could be a charitable purpose rather than specific beneficiaries.

   Trustees

Beneficiaries

Purposes

• Employee ownership: Shares in a company may be held by the trustee of an employee trust, often indefinitely, as part of the employee ownership of that company.
• Employee share ownership: Shares in a company may be held by the trustee of an employee trust as part of an employee share or share option plan.
• Privacy: Trusts may be created purely for privacy. The terms of a will are public in certain jurisdictions, while the terms of a trust are not.
• Spendthrift clauses: Trusts may be used to protect beneficiaries against their own inability to handle money. These are especially attractive for spendthrifts. Courts may generally recognize spendthrift clauses against trust beneficiaries and their creditors, but not against creditors of a settlor.
• Wills and estate planning: Trusts frequently appear in wills. Conventional wills typically leave assets to the deceased's spouse, and then to the children equally. If the children are under 18, or under some other age mentioned in the will, a trust must come into existence until the 'contingency age' is reached. The executor of the will is the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
• Charities: In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also. In most jurisdictions, charities are tightly regulated for the public benefit.
• Unit trusts: The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust.
• Pension plans: typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.
• Remuneration trusts: for the benefit of directors and employees or companies or their families or dependents. This form of trust was developed by Paul Baxendale-Walker and has since gained widespread use.
• Corporate structures: Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities in their structure.
• Asset protection: Trusts may allow beneficiaries to protect assets from creditors as the trust may be bankruptcy remote. For example, a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore in theory protected from creditors. In addition, the trust may attempt to preserve anonymity with a completely unconnected name. These strategies are ethically and legally controversial.
• Tax planning: The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route. In many cases, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. For an example see the "nil-band discretionary trust", explained at Inheritance Tax.
• Co-ownership: Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.
• Construction law: In Canada and Minnesota monies owed by employers to contractors or by contractors to subcontractors on construction projects must by law be held in trust. In the event of contractor insolvency, this makes it much more likely that subcontractors will be paid for work completed.
• Legal retainer – Lawyers in certain countries often require that a legal retainer be paid upfront and held in trust until such time as the legal work is performed and billed to the client, this serves as a minimum guarantee of remuneration should the client become insolvent. However, strict legal ethical codes apply to the use of legal retainer trusts.

  Types

Alphabetic list of trust types

• Asset-protection trust: The concept of an asset-protection trust encompasses any form of trust that provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts may be proscribed or limited in their effect by governments and the courts.
• Constructive trust: Unlike an express trust, a constructive trust is not created by an agreement between a settlor and the trustee. A constructive trust is imposed by the law as an "equitable remedy". This generally occurs due to some wrongdoing, where the wrongdoer has acquired legal title to some property and cannot in good conscience be allowed to benefit from it. A constructive trust is, essentially, a legal fiction. For example, a court of equity recognizing a plaintiff's request for the equitable remedy of a constructive trust may decide that a constructive trust has been created and simply order the person holding the assets to deliver them to the person who rightfully should have them. The constructive trustee is not necessarily the person who is guilty of the wrongdoing, and in practice it is often a bank or similar organization. The distinction may be finer than the preceding exposition in that there are also said to be two forms of constructive trust, the institutional constructive trust and the remedial constructive trust. The latter is an "equitable remedy" imposed by law being truly remedial; the former arising due to some defect in the transfer of property.
• Discretionary trust: In a discretionary trust, certainty of object is satisfied if it can be said that there is a criterion which a person must satisfy in order to be a beneficiary. In that way, persons who satisfy that criterion can enforce the trust. Re Baden’s Deed Trusts; McPhail v Doulton
• Directed trust: In these types, a directed trustee is directed by a number of other trust participants in implementing the trust's execution; these participants may include a distribution committee, trust protector, or investment advisor. The directed trustee's role is administrative which involves following investment instructions, holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating trust participants and offering dispute resolution among the participants
• Dynasty trust : A type of trust in which assets are passed down to the grantor's grandchildren, not the grantor's children. The children of the grantor never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets were transferred to his or her children first. Generation-skipping trusts can still be used to provide financial benefits to a grantor's children, however, because any income generated by the trust's assets can be made accessible to the grantor's children while still leaving the assets in trust for the grandchildren.
• Employee trust: A trust for the benefit of employees. A United States example is a trust established to operate an Employee Stock Ownership Plan.
• Express trust: An express trust arises where a settlor deliberately and consciously decides to create a trust, over their assets, either now, or upon his or her later death. In these cases, this will be achieved by signing a trust instrument, which will either be a will or a trust deed. Almost all trusts dealt with in the trust industry are of this type. They contrast with resulting and constructive trusts. The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. In the USA Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate.
• Fixed trust: The entitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. Common examples are:
• * a trust for a minor ;
• * a 'life interest' ; and
• * a 'remainder'
• Grantor retained annuity trust : an irrevocable trust whereby a grantor transfers asset, as a gift, into a trust and receives an annual payment from the trust for a period of time specified in the trust instrument. At the end of the term, the financial property is transferred to the named beneficiaries. This trust is commonly used in the U.S. to facilitate large financial gifts that are not subject to a 'gift tax'.
• Hybrid trust: Combines elements of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries.
• Implied trust: as distinct from an express trust, is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist. A resulting trust may be deemed to be present where a trust instrument is not properly drafted and a portion of the equitable title has not been provided for. In such a case, the law may raise a resulting trust for the benefit of the grantor. In other words, the grantor may be deemed to be a beneficiary of the portion of the equitable title that was not properly provided for in the trust document.
• Improvement trust: can be set up by urban or local government to hold funds for the development or improvement of an area. The trust is often run by a committee, and can act similarly to a development agency, depending on the provisions of its charter.
• Incentive trust: A trust that uses distributions from income or principal as an incentive to encourage or discourage certain behaviors on the part of the beneficiary. The term "incentive trust" is sometimes used to distinguish trusts that provide fixed conditions for access to trust funds from discretionary trusts that leave such decisions up to the trustee.
• Inter vivos trust : A settlor who is living at the time the trust is established creates an inter vivos trust.
• Irrevocable trust: In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed. Although in rare cases, a court may change the terms of the trust due to unexpected changes in circumstances that make the trust uneconomical or unwieldy to administer, under normal circumstances an irrevocable trust may not be changed by the trustee or the beneficiaries of the trust.
• Land trust: A private, nonprofit organization that, as all or part of its mission, actively works to conserve land by undertaking or assisting in land or conservation easement acquisition, or by its stewardship of such land or easements; or an agreement whereby one party agrees to hold ownership of a piece of real property for the benefit of another party.
• Offshore trust: Strictly speaking, an offshore trust is a trust which is resident in any jurisdiction other than that in which the settlor is resident. However, the term is more commonly used to describe a trust in one of the jurisdictions known as offshore financial centers or, colloquially, as tax havens. Offshore trusts are usually conceptually similar to onshore trusts in common law countries, but usually with legislative modifications to make them more commercially attractive by abolishing or modifying certain common law restrictions. By extension, "onshore trust" has come to mean any trust resident in a high-tax jurisdiction.
• Personal injury trust: A personal injury trust is any form of trust where funds are held by trustees for the benefit of a person who has suffered an injury and funded exclusively by funds derived from payments made in consequence of that injury.
• Private and public trusts: A private trust has one or more particular individuals as its beneficiary. By contrast, a public trust has some charitable end as its beneficiary. In order to qualify as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable trust, by analogy. Charitable trusts are entitled to special treatment under the law of trusts and also the law of taxation.
• Protective trust: Here the terminology is different between the UK and the USA:
• * In the UK, a protective trust is a life interest that terminates upon the happening of a specified event; such as the bankruptcy of the beneficiary, or any attempt by an individual to dispose of his or her interest. They have become comparatively rare.
• * In the US, a 'protective trust' is a type of trust that was devised for use in estate planning. Often a person, A, wishes to leave property to another person B. A, however, fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it. A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B. The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remainders, and is frequently used as an alternative to them.
• Purpose trust: Or, more accurately, non-charitable purpose trust. Generally, the law does not permit non-charitable purpose trusts outside of certain anomalous exceptions which arose under the eighteenth-century common law. Certain jurisdictions have enacted legislation validating non-charitable purpose trusts generally.
• QTIP Trust: Short for "qualified terminal interest property". A trust recognized under the tax laws of the United States which qualifies for the marital gift exclusion from the estate tax.
• Resulting trust: A resulting trust is a form of implied trust which occurs where a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets; or a voluntary payment is made by A to B in circumstances which do not suggest gifting. B becomes the resulting trustee of A's payment.
• Revocable trust: A trust of this kind may be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the US as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death.
• Secret trust: A post mortem trust constituted externally from a will but imposing obligations as a trustee on one, or more, legatees of a will.
• Semi-secret trust: A trust in which a will demonstrates the intention to create a trust, names a trustee, but does not identify the intended beneficiary.
• Simple trust:
• * In the US jurisdiction this has two distinct meanings:
• ** In a simple trust the trustee has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust. This is also called a 'bare trust'. All other trusts are special trusts where the trustee has active duties beyond this.
• ** A simple trust in Federal income tax law is one in which, under the terms of the trust document, all net income must be distributed on an annual basis.
• * In the UK a bare or simple trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland.
• Special trust: In the US, a special trust, also called complex trust, contrasts with a simple trust. It does not require the income be paid out within the subject tax year. The funds from a complex trust can also be used to donate to a charity or for charitable purposes.
• Special Power of Appointment trust : A trust implementing a special power of appointment to provide asset protection features.
• Spendthrift trust: It is a trust put into place for the benefit of a person who is unable to control their spending. It gives the trustee the power to decide how the trust funds may be spent for the benefit of the beneficiary.
• Standby Trust ': The trust is empty at creation during life and the will transfers the property into the trust at death. This is a statutory trust.
• Statutory Business Trust: A trust created pursuant to a state's business trust statute used primarily for commercial purposes. Two prominent variants of Statutory Business Trusts are Delaware statutory trusts and Massachusetts business trusts. The Uniform Law Commission promulgated a final amended draft of the Uniform Statutory Entity Act in 2013. As of 24 January 2017, no states have adopted the Uniform Statutory Entity Act of 2009.
• Testamentary trust : A trust created in an individual's will is called a testamentary trust. Because a will can become effective only upon death, a testamentary trust is generally created at or following the date of the settlor's death.
• Unit trust: A trust where the beneficiaries each possess a certain share and can direct the trustee to pay money to them out of the trust property according to the number of units they possess. A unit trust is a vehicle for collective investment, rather than disposition, as the person who gives the property to the trustee is also the beneficiary.

  Country specific variations

Cyprus

• The settlor must be of sound mind and of the right age.
• The settlor must not be a resident of Cyprus for at least 1 year prior to the establishment of the Cyprus International Trust.
• The beneficiaries must not be residents of Cyprus for at least 1 year prior to the establishment of the Cyprus International Trust.
• At least one trustee must be residing in Cyprus during the whole duration of the trust.

Settlor Powers provided by law

• to revoke or amend the terms of a trust or any trusts or powers arising wholly or partly under it
• to advance, distribute, pay or otherwise apply income or capital of the trust property or to give directions for the making of such advancement, distribution, payment or application
• to exercise the powers of a director or officer or issue binding directions as to the appointment or removal of a director or officer of any company, wholly or partly owned by the trust;
• to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property or the exercise of any powers or rights arising from such property;
• to appoint or remove any trustee, enforcer, protector or beneficiary;
• to appoint or remove any investment manager or investment adviser;
• to change the applicable law governing the trust or the forum for the administration of the trust;
• to restrict the exercise of any power or discretion of a trustee by requiring that they are only exercisable with the consent of the settlor or any other person expressly specified in the terms governing the trust.

  Duration of Cyprus International Trust

Charitable Trust and Purpose Trust

• the prevention or relief of poverty
• the advancement of education
• the advancement of religion
• the advancement of health or the saving of lives
• the advancement of citizenship or community development
• the advancement of the arts, culture, heritage or science
• the advancement of amateur sport
• the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
• the advancement of environmental protection or improvement
• the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantages
• the advancement of animal welfare and protection of animals;
• any other purpose beneficial to the public in general or which may reasonably be considered to be relevant to any of above

  Confidentiality of Cyprus International Trust

Stamp Duty Commissioner for validating the creation of the Cyprus International Trust

Regulatory Disclosure of ASPs managing a Cyprus International Trust

• The date the trust was created
• The name of the trust
• The name and particulars of the trustee
• The governing law of the trust

Cyprus Beneficial Owner Register and Cyprus International Trust

• The settlor
• The trustee
• The protector
• The beneficiary or the class of beneficiaries if they have not been identified yet
• Any other person exercising control over the trust

FATCA

CRS

Taxation of Cyprus International Trust

South Africa

Asset protection

Tax considerations

United States

Estate planning

Estate tax effect

Jurisdiction specific

• Argentinian Legal System, law number 24.441 of 1994.
• Australian trust law
• Henson trust
• Italian trust law
• Trust law in Civil law jurisdictions
• Trust law in England and Wales