UK: An Introduction to Trusts

Last Updated: 29 September 2016
Practice Guide by Verfides

What is a Trust?

The principal definition of a Trust is: “An equitable obligation on a person (“the Trustee”) to deal with property (“the Trust Fund”) over which he has control, for the benefit of a person or persons (“the Beneficiary or Beneficiaries”) of whom he may himself be one and any one of whom may enforce the obligation.”

The reality of this definition is that a person (“the Settlor”) gives property (“the Trust Fund”) to another person (“the Trustee”) to hold for the express benefit of another person or persons (“the Beneficiaries”).

The most important fact of this particular relationship is that to make an effective Trust, the Settlor must divest, that is give away, his legal interest in the property to the Trustees. It is possible for the Settlor to retain a beneficial interest should he be appointed as a Beneficiary, but unless he divests himself of his legal interest, then the Trust may in certain jurisdictions be open to challenge, although it would not necessarily invalidate the Trust.

The Three Certainties

For a Trust to be valid it must adhere to what are referred to as “the Three Certainties”:

  1. Certainty of the Intention to create a Trust.
  2. Certainty of the property, referred to as the Subjects of the Trust.
  3. Certainty in respect of the beneficiaries, referred to as the Objects of the Trust.

The Trust must maintain each of these Certainties at all times or the Trust will immediately be invalidated should any one of these Certainties cease to exist.

1. Certainty of Intention

The Settlor must have a clear understanding and intention that he is in fact giving up his legal ownership of the Trust Property to the Trustees to hold for the benefit of the Beneficiaries.

2. Certainty of Subjects (“Trust Property”)

The Trust Property must be clear and identifiable.

3. Certainty of Objects (“Beneficiaries”)

The Beneficiaries must be clear and identifiable.

There may be certain classes of Beneficiary, for example “the family and future family of a Settlor”. In this case the Beneficiaries are clearly defined, and already exist. It would be unreasonable for a class of Beneficiaries to be stated as, for example, “a charity to be decided upon in the future”, as this would not provide an existing Beneficiary and would potentially invalidate the Trust for remoteness and uncertainty. There must be clarity.

Where any of the Three Certainties cannot be established, a trust would effectively become invalid or void. However, in certain circumstances with the intervention of the Courts it may be possible to clarify the validity and rectify this situation to create an effective trust.

Administering a Trust

The activities of a Trustee are governed by certain legislation, in the UK most notably by the Trustee Act 1925, but the specific powers of a Trustee and terms of administration of the Trust generally are governed by those specific terms contained in the Trust Deed itself. It is the responsibility of a Trustee to administer the Trust under the strict governance of the terms and powers conferred by the provisions of the Trust Deed.

Trustees

The duties of a trustee

  1. The fiduciary duty and responsibility of a Trustee is owed to the Beneficiaries.
  2. To administer the Trust Property prudently, including:-
  1. acting with care and diligence
  2. acting to the best of his ability
  3. acting in good faith
  4. preserving the value of the trust property
  1. To comply strictly with the terms of the Trust Deed.
  2. Not to make any secret profit from his position. A Trustee is only entitled to be paid for his services on behalf of the trust if there is a specific provision to this effect in the Trust Deed. A Trustee can however lawfully be reimbursed out of the Trust Fund for expenses incurred on behalf of the Trust. Failure to carry out these duties properly may be construed as a breach of trust and ultimately in liability being incurred to the Trustees directly.

Liability for Breach of Trust

  1. A Trustee may be sued by the Beneficiaries for damages for any loss which his breach of trust has caused.
  2. An injunction can be sought ordering the Trustee to cease acting in breach of trust.
  3. Criminal prosecution for theft or fraud is possible (if the Trustee has acted dishonestly in relation to the Trust Fund).
  4. The Settlor may also have a claim under any contract or client agreement he has with a professional Trustee.
  5. The Trustee could be forced to reinstate the Trust to the position it was in prior to the breach of trust.

When can a Trust be challenged?

In certain circumstances the validity of a Trust could be open to challenge by a third party, including a Beneficiary. Examples of such an occurrence are as follows:

  1. A Trust is established to defraud creditors or may result in prejudice to creditors.
  2. A Trust is established under threat or undue influence.
  3. The purpose for which a Trust is established offends morality.
  4. A Trust is created to defeat legal provisions providing for dependants (e.g. divorce).

Termination of a Trust

The standard duration of a discretionary Trust in the UK is 125 years. On the expiration of this period the remaining Trust Fund must be distributed to the beneficiaries and the Trust would automatically be terminated.

A Trust may however be terminated earlier by the Trustees on the distribution of all of the Trust Fund, but this must be carried out in accordance with the terms of the Trust Deed.

Reasons to have a Trust

  • To reduce the exposure of foreign assets to taxation, exchange control and government authorities worldwide.
  • To ensure anonymity of ownership or to consolidate ownership of assets.
  • To simplify the administration of foreign estates and reduce exposure to estate duties or probate requirements.
  • To reduce exposure to local inheritance laws or to divest assets from attachment by the heir’s country of residence (for instance, during the imposition of exchange control regulations).
  • To vest assets in trustees who are better able to administer them than those entitled to the beneficial interests.
  • To ensure that the wishes of the Settlor will be carried out in the future, even in the case of incapacity, senility or death.
  • To act as an asset protection trust designed specifically to avoid forced heirship rules in certain jurisdictions.

Disclosure Requirements

Under UK law, private trust documentation falls outside of the public domain, meaning that Trust documentation is not available for public inspection and therefore confers anonymity and confidentiality for both the Settlor and Beneficiaries. However, like all business activities, money laundering and know your customer requirements still apply and the Trustees must know the identity of all of the associated parties to a Trust.

Trusts created by UK resident and domiciled individuals must be reported to the UK tax authorities on creation, but there is no such requirement in respect of the establishment of a UK trust by a non-UK domiciled individual provided that the assets settled into trust are not UK assets.

Definitions/Terminology

Beneficiary

A person or persons for whose express benefit the Trust Property is held by the Trustee. Any beneficiary

may enforce the obligations of a Trustee imposed by the Trust Deed. There may be a valid trust even though the Beneficiary is an unborn person, or group or class of persons, whose exact identity at the time of the trust creation cannot be determined.

Discretionary Beneficiary

With a discretionary trust, a beneficiary has no specific rights to force a Trustee to undertake actions; these decisions being entirely at the discretion of the Trustee. This can prove extremely beneficial for a potential settlor as there is no necessity to inform a discretionary beneficiary of his potential interest in the Trust until such time as the Trustees exercise such discretion as to make a specific distribution in favour of the particular beneficiary.

Letter of Wishes

It is usual on the creation of a Discretionary Trust for the Settlor to issue to the Trustees a letter of guidance for the future administration of the Trust Fund. Such a letter is referred to as a Letter of Wishes. A Letter of Wishes is not legally binding on the Trustees, but provides guidance to the Trustees as to the intention of the Settlor when establishing the Trust.

Protector

A person usually appointed by the Settlor at the time of creating a Trust with the specific power to oversee the management of the Trust Fund by the Trustees. A Protector would usually be named in the Trust Deed, although it is in certain circumstances possible to appoint a Protector to an existing Trust, if specific provision exists within the Trust Deed.

A Protector would not have any control over the Trust Fund, their role being restricted to that of having the power to veto certain actions of the Trustee, as specified in the Trust Deed. A Trust does not need to appoint a Protector.

Settlor

The person or persons whose intention it is to create a Trust and who gives the property to a Trustee to provide the Trust Fund. A Settlor may also be a Beneficiary of the Trust. Also referred to as a Grantor or Donor.

Trustee

An individual, group of individuals or company which holds the legal ownership of the Trust property for the benefit of the Beneficiaries. A Trustee must be able to exercise sufficient control over the Trust Property in order that he can manage it for the benefit of the Beneficiaries. Anyone of full legal capacity can be a Trustee. An individual must generally be over 18 years of age to have full legal capacity.

Trust Deed

The document which constitutes a trust. It should be in a proper legal form and signed and witnessed by those parties to it, namely the Settlor and Trustee. A Trust Deed can be in the form of a Deed of Settlement which specifically names the Settlor in the Deed or a Declaration of Trust which does not name the Settlor in the Deed. These are referred to further below.

Trust Fund

There must be some specific interest in some specific property which can be the subject of the Trust. The nature of the property is irrelevant so long as it is certain; it may be tangible or intangible, real or personal, but it must have some form of value.

Types of Trust:

Fixed Interest / Interest in Possession

A Fixed Interest trust, also referred to as an Interest in Possession Trust, has express provisions relating to specific “fixed” benefits for the beneficiaries. Generally such provisions would be for the life of the beneficiary or for a specific period. UK fixed interest trusts have become less effective for tax purposes since the passing of the 2006 Finance Act.

Discretionary Trust

A Discretionary Trust has no express fixed benefit stated for beneficiaries. The distribution of benefits is entirely at the discretion of the Trustees. These are extremely flexible trusts and allow for increased anonymity and confidentiality for the Settlor, as there is no obligation to advise a beneficiary of his potential interest in the trust until such time as the Trustees exercise the appropriate discretion to make a distribution.

Maintenance & Accumulation Trust

A Maintenance and Accumulation trust may be a suitable vehicle for establishing a fund to be used for children. They were tax favoured in the UK (for UK Settlors), but have not been available since Finance Act 2006. They may still be established in other jurisdictions such as the Isle of Man.

Purpose Trust

A Purpose Trust is a trust created to achieve a specified purpose rather than for the specific benefit of certain beneficiaries during its trust life. Such trusts are generally void in the UK unless established for charitable purposes. However, we can help arrange such vehicles in other jurisdictions where they are available – for instance the Isle of Man.

Deed of Settlement / Declaration of Trust

There are principally two forms of trust deed that would be used to establish a trust’s terms and regulations. These are:

  1. Deed of Settlement – where the Settlor is named in the trust deed and is a signing party.
  2. Declaration of Trust deed – where the Settlor is neither named nor is a signing party to the trust deed.

However, the terms and regulations for both forms of trust deed are virtually identical in relation to the administrative provisions provided to the Trustee.

Revocable / Irrevocable Trust

A trust would generally be stated as irrevocable in the trust deed, whereby the settlor has no right to reclaim the trust assets, these being held by the trustees under the provisions of the deed for the benefit of the respective beneficiaries. This specifically protects the integrity of the trust, making it difficult to challenge the validity of the trust by claiming the settlor did not divest his legal interest in the trust assets. In certain circumstances, a trust can be established that can be revocable, whereby the settlor may reclaim the trust assets upon giving the appropriate notice. Special care needs to be taken in the case of a revocable trust to ensure that a valid trust is created.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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Useful Resources
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