What Is A Trust?

WHAT IS A TRUST?

Trusts have been used by families for centuries.

A trust is a mechanism whereby one person (the ‘settlor’) may give away the enjoyment of assets to another or to a group of individuals (the ‘beneficiaries’) while control and decisions on the administration and investment of those assets lies with others (the ‘trustees’).

The settlor is the person who provides the assets of the trust. Unless he is a beneficiary or reserves powers to himself in the trust deed, he has no rights over the trust assets once they are transferred to the trustees.

The beneficiaries are the persons entitled or potentially entitled to the benefit of the capital and income of the trust fund. The extent of their entitlement depends on the precise terms of the trust.

The trustees hold the legal title to the assets upon trust for the beneficiaries. Their duty is to administer the assets in the trust and, eventually, to distribute them in accordance with the terms of the trust deed. They are in a strict fiduciary position vis-à-vis the beneficiaries, i.e. they must always exercise their powers in the best interests of the beneficiaries and, in particular, must not allow their own interests to conflict with those of the beneficiaries. If they commit a breach of trust (i.e. break the trust imposed on them by acting in a way that is not for the benefit of the beneficiaries) they may be liable to make good any loss out of their own pockets. It is possible for the settlor to be one of the trustees (but this may be undesirable in certain circumstances) and it is also possible for a beneficiary to be a trustee (whether this is desirable will depend upon the nature and purpose of the trust).

Problem: Parents, grandparents and others have always been concerned that children and grandchildren are at risk if they receive or inherit too much too soon. In addition, families are becoming increasingly concerned about protecting assets in the event of a child's divorce.

Solution: Create a trust to hold the assets until the children are older and wiser and seek to 'ring fence' family wealth.

In law, the trustees are the legal owners of the trust assets and have effective control of them. The beneficiaries, as beneficial owners, merely have rights against the trustees. While these rights give the beneficiaries full power to enforce the trust in their favour, the fact that a particular beneficiary cannot be said to own or have control over the assets can be very useful in tax and estate planning.

If the trust is to be made in your lifetime, to take immediate effect, then it is usually evidenced by a trust deed. ‘Trust’ and ‘settlement’ have broadly the same meaning. If it is to be created on or shortly after your death then the trust provisions must be set out in your will – a ‘Will Trust’. Whether by lifetime settlement or by will, the trust document states who are responsible for looking after the gifted assets (the trustees), who are to benefit (the beneficiaries) and any rules or conditions that the trustees and beneficiaries must adhere to. Additionally it must specify clearly the initial trust property, sometimes called the ‘trust fund’. How long a trust shall last is entirely as you think is appropriate but you must stipulate the trust period in the trust document. It might be for just a few years, perhaps during a person’s widowhood or until a child attains a certain age or marries. However, trusts can last for much longer. Since 1 December 2013, Hong Kong trusts are capable of existing in perpetuity. It is usually advisable to give the trustees the power to terminate the trust at their discretion.