A trust, like a corporation, is a legal entity with
its own property distinct from the assets of the individuals
behind it. A person (known as the Settlor or Grantor)
creates a trust by transferring assets to an independent
third party (known as the Trustee). The trustee then
administers and manages the assets on behalf of other
individuals (known as the Beneficiaries).
For estate and tax planning purposes, the trust will
normally be evidenced by a written document called either
a Trust Deed or Declaration of Trust. This document
lays down the foundations of how the trustees are to
administer and manage the trust assets and how they
are to distribute and dispose of trust assets during
the lifetime of the trust. Beneficiaries have recourse
in Law to compel the Trustees to act in accordance with
the terms set forth in the Trust Deed.
A Settlor can provide the Trustees with an informal
and confidential Letter of Wishes which provides guidance
as to how the Trustees might exercise their discretion.
The Letter of Wishes does not form part of the Trust
Deed and can, therefore, be amended at any time.
The principle goal of any trust is to create a legal
barrier of separation between trust assets and both
the original owner and the eventual beneficiaries. In
simple terms, assets transferred to a trust no longer
form part of the property owned by the settlor. If the
settlor or beneficiaries experience financial problems
- bankruptcy, dissolution of marriage or lawsuit - the
trust assets cannot be claimed by creditors. Thus, although
the settlor or beneficiary may be declared insolvent,
a portion of his assets might be safeguarded by the
Trustees have a fiduciary duty to act in accordance
with a trust deed and for the benefit of the beneficiaries.
It is important to understand that trustees not only
should, but also are obliged to manage and control the
trust property independently for the benefit of the
beneficiaries in accordance with the trust deed. If
a settlor retains de facto control of the assets through
arm's length control of the trustee, it could be deemed
that the trust is a sham, and thus invalid.