There is no one comprehensive definition of a trust. In broad terms, a trust may be defined as an equitable relationship created when an individual (the settlor) gifts his property to another person (the trustee), directing him to account for the benefit of that property either to persons (the beneficiaries) designated by the settlor, or for some object permitted by law, such as relief against poverty, which qualifies as a charitable trust. The above highlights three important areas: firstly, the legal rules which bind trustees are equitable in nature; secondly, the trustees do not personally own the property they hold for beneficiaries, they simply own the legal interests with the beneficiaries having the beneficial interest in the property subject to the terms of the trust deed; and thirdly, the equitable obligation binding the trustees may be enforced in the courts, primarily by the beneficiaries themselves.

A trust is usually created by a written document, i.e., a deed or will, and in certain cases it must be created in that way. Any such document is a means by which the trust is created and is referred to as a trust instrument.

There are two main types of trust. These are known as discretionary trusts and interest-in-possession trusts. A discretionary trust is one where no one is absolutely entitled to either the income or the capital held by the trustees. Although the beneficiaries may be specified, the trustees have discretion as regards the payment of income and capital between the beneficiaries. This can be varied in the case of trusts for children whereby fixed interests may be conferred on certain specified dates. Where, on the other hand, the beneficiaries have an absolute right to income arising in the trust, the trust will be an interest-in-possession trust. The discretionary trust therefore provides maximum flexibility to the trustees in assessing the changing future needs of the beneficiaries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Jonathan G. Hooley on Tel (indirect line): + 44 (0) 1481 721000, Tel (direct line): +44 (0) 1481 719544, Fax: +44 (0) 1481 722373.