Many people associate trusts with the aim of preserving capital from one generation to another to ensure that it is not dissipated by one particular generation. Trusts have also had the reputation of being inflexible structures which, once established, could not be amended to take into account changes in a family's circumstances.

For modern trusts, these perceptions could not be further from the truth. Today trusts, especially those established offshore, are used as a planning tool by an increasing number of professional advisers to protect and enhance the wealth of their clients. Their terms often include significant flexibility so that the trust may adapt to changes in law and taxation or a client's family situation.

While trusts are certainly growing in use, it must be said that they continue to be a concept which is not familiar to many people. It may be helpful to quote a generally accepted definition of a trust:-

"A trust, or a settlement as it is sometimes known, is a legally binding arrangement usually evidenced in writing by a deed, under which a body of individuals or a corporate body, known as trustees, own assets transferred to them by an individual known as the settlor, not for the trustees' own benefit but for the benefit of others who are known as beneficiaries."

Thus the vital element of a trust is that the trustee is the legal owner of the trust's assets but is unable to benefit personally from them. Instead the trustee must utilise the assets for the benefit of the beneficiaries.

A further problem when discussing trusts, which is highlighted by the above definition, is that it is difficult to explain their features without making reference to legal terms used by professional advisers. Some explanation of these terms may be helpful:-

The Trust Deed

A trust deed is primarily evidence that the trust exists. The deed will set out the requirements of the person establishing the trust as to how the assets are to be dealt with and who should ultimately benefit from them. It will also identify the trustees and describe the way in which they can be replaced. The trust deed will specify the length of time the trust can exist which, for example, under Guernsey Law must be less than 100 years unless the trust is charitable. The deed also acts as a receipt for the assets transferred to the trustees. It is important that wording of the trust deed is drafted by a trust lawyer.

The Trustees

A high degree of trust and confidence is needed between the person establishing the trust and the trustees as they are responsible for the administration of the trust and legal ownership of the assets will pass to them. It can clearly be seen that the trustee must be an institution of the utmost reliability and integrity. It is common for at least one professional trustee to be appointed in view of the legal and tax issues relating to trusts.

The Settlor

The person establishing the trust and transferring the assets to the trustees is known as a settlor. Most trust deeds allow for a trust to be augmented by the addition of further property once the trust has been established. It is also possible for more than one person to place assets into a trust and thus a trust may have more than one settlor.

The Beneficiaries

The beneficiaries are persons whom the settlor wishes to benefit from the assets transferred to the trustees. They may be individuals or corporate entities and it is permissible for the deed to refer to a class or group of beneficiaries such as any future issue. The fact that a beneficiary may not have been born when the trust was established will not preclude the person from benefiting in the future.

Trusts Today

Many different objectives can be accomplished by the transfer of assets to an independent trustee and defining how those assets can be used in the future. At one end of the scale a small gift can be held in trust for an infant until attaining majority or, at the other end, a million dollar pension fund can be held in trust to protect the interests of employees. High levels of personal taxation, the impact of political changes such as the imposition of exchange controls, the desire to bequeath assets without restriction or a wish to increase confidentiality are all influences behind the establishment of trusts today.

Whilst trusts may be a centuries old concept, their increasing use demonstrates their ability to resolve many of the problems currently encountered by wealthy individuals.

This article provides a general outline on the subject at the time of writing. It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.