Formation of Trusts
When forming a trust it is relevant to understand the history so as to choose the correct jurisdiction and type of trust for your structure.
The trust is a creation of the English common law. One of its earliest known uses was in medieval times when a knight departing for battle might leave his property with a trusted third party to be used for the benefit of the family he left behind. Its terms are generally set out in writing but it can be expressed verbally.
For a trust to exist there are three requirements, all of which must be satisfied:
- There must be a Settlor, being a person wishing to confer a benefit on others, the exact nature of this benefit will be set out in the trust
- There must be a Trustee and the assets, which will be used to provide the above benefit, must be transferred under the control of the trustee. Trust assets must be segregated from those of the trustee and cash, for example, will be deposited in an offshore banking account.
- There must be beneficiaries. If more than one it must be possible to ascertain at any time who these persons may be and when they will receive their benefits
In more recent times countries with different legal systems have enacted legislation permitting the formation of trusts and there have been international conventions which provide for the recognition of trusts in countries where, otherwise, they do not exist. Most trusts are, however still found in countries, which derive their law from association with English law.
Although the original purpose of the formation of a trust may have been, generally speaking, estate planning, permitting assets to be held for the benefit of persons who were not themselves capable of managing assets and enabling a simple transfer to successors, trusts have in more recent times also become instruments of tax planning. The ability to separate the legal and beneficial interests in property and the rights to income from the rights to the capital has assisted in the growth of the entire financial planning industry.
There are a large selection of types of trusts to choose from including life interest, discretionary, accumulation and maintenance and so forth. Often jurisdictions utilise different terminology to describe the types of trusts, as well as the components of the trust, which can be confusing.
There has been substantial development in trust design and many jurisdictions and expert trust providers have been very successful in the design of creative trust products specific to a trust jurisdictions invaluable in modern international structuring.
It is therefore an important aspect of trust formation to understand the purpose and design of the trust which the client wishes to establish and to choose a jurisdiction with appropriate trust rules to facilitate the establishment of the optimal trust for the client.