The classical definition of a trust in accordance with Underhill & Hyton; Law of Trust and Trustees is as follows: “A trust is a legal obligation, binding a person, who is called a trustee, to deal with property which he holds and which is separated from the personal property of the trustee, for the benefit of persons, who are called the beneficiaries”.
When a trust is established, its creator or settlor, in accordance with the trust deed transfers part of his property to a trust, which is a separate subject of law and is managed by a trustee.
After the Trust Deed is signed, the property no longer belongs to the creator or settlor of the trust and is transferred to the trust’s ownership. The status of the trust as an independent owner is a specific feature of common law, which provides for trust relationship. In countries that have no trust legislation, only fiduciary management is considered, whereby there is a relationship where the initial owner still continues to own the property.
Though title to the trust property belongs to the trustee, the activities for the management of this property are regulated strictly by the relevant document being the Trust Deed or Trust Instrument signed between the settlor and the trustee, as well as by the laws of the country where the trust is established.
The Trust Deed defines the beneficiaries of funds or income derived by the trust.
A protector is not mandatory but may be appointed in accordance with the settlor’s instructions. The protector’s authority is defined in the Trust Deed such as for example, he may block the trustee’s actions under certain circumstances either where the transaction exceeds a particular amount, or under other conditions provided for in the Trust Deed.
Although the trust is an agreement and not a legal entity, many countries with trust law in place treat a trust as a separate subject of law. Accordingly, in the standard case the trust itself and its revenues are taxed in the country where the trust is established. Some jurisdictions exempt a trust from taxation under specific conditions such as for example if the settlor and the beneficiaries are non-residents of the jurisdiction.
In some countries, for existence of a trust it is sufficient to have an agreement such as a Trust Deed or Trust Instrument between the parties. In other countries, a trust may be subject to mandatory state registration but even in these cases, only the fact of existence of the trust is public, rather than the details of a particular Trust Deed including the names of the settlor and the beneficiaries.
The most popular types of trust:
- Fixed Trust : in this case the names of the beneficiaries and the principles of income distribution among them are strictly stipulated in the Trust Deed.
- Discretionary Trust : the trustee has more authority to take decisions on the income distribution among the beneficiaries, and in some cases even the right to determine the beneficiaries who will receive income in a particular case.
- Purpose Trust: this is created for a specific purpose such as for example for investment in a particular market segment or a commercial project.
- Protective Trust: this involves payments to the beneficiaries similar to the Fixed Trust but if the beneficiary fails to meet certain conditions specified in the Trust Deed, it can be turned into a Discretionary Trust where further payments to the beneficiaries are no longer fixed and are within the competence of the Trustee.
It is important to be aware that for any trust to exist the following criteria must be met:
- Intention. The settlor of the trust must express his wish to transfer or to dispose of the property transferred to the trust.
- Transfer of property. A trust is non-existent until the property is in actually transferred.
- Objects. It should be stated clearly for what objective the trust is established and in whose favour the property held by the trust is maintained.
In practice, there are cases where one or more of these criteria are not fulfilled. As an example:
- The settlor expects to retain actual control over the trust’s property, or
- The property is not actually transferred to the trust, because the latter is established only as a “backup instrument” in case something happens to the settlor, or
- The settlor wishes to be the only beneficiary of the trust.
In all these cases, a trust may be recognized to be null and void hence non-existent.