In common law legal systems, a trust is a
relationship whereby property is held by one party for the benefit of another. A trust
is created by a settlor, who transfers some or all of his or her property to a trustee.
The trustee holds that property for the trust’s beneficiaries. Trusts have existed since Roman
times and have become one of the most important innovations in property law.
An owner placing property into trust turns over part of his or her bundle of rights to
the trustee, separating the property’s legal ownership and control from its equitable ownership
and benefits. This may be done for tax reasons or to control the property and its benefits
if the settlor is absent, incapacitated, or dead. Trusts are frequently created in wills,
defining how money and property will be handled for children or other beneficiaries.
The trustee is given legal title to the trust property, but is obligated to act for the
good of the beneficiaries. The trustee may be compensated and have expenses reimbursed,
but otherwise must turn over all profits from the trust properties. Trustees who violate
this fiduciary duty are self-dealing. Courts can reverse self dealing actions, order profits
returned, and impose other sanctions. The trustee may be either an individual, a
company, or a public body. There may be a single trustee or multiple co-trustees.
The trust is governed by the terms under which it was created. In most jurisdictions, this
requires a contractual trust agreement or deed. History Roman law had a well-developed concept of
the trust in terms of “testamentary trusts” created by wills but never developed the concept
of the inter vivos trusts which apply while the creator lives. This was created by later
common law jurisdictions. The waqf is a similar institution in Islamic law, restricted to
charitable trusts. Personal trust law developed in England at the time of the Crusades, during
the 12th and 13th centuries. In medieval English trust law, the settlor was known as the feoffor
to uses while the trustee was known as the feoffee to uses and the beneficiary was known
as the cestui que use, or cestui que trust. At the time, land ownership in England was
based on the feudal system. When a landowner left England to fight in the Crusades, he
conveyed ownership of his lands in his absence to manage the estate and pay and receive feudal
dues, on the understanding that the ownership would be conveyed back on his return. However,
Crusaders often encountered refusal to hand over the property upon their return. Unfortunately
for the Crusader, English common law did not recognize his claim. As far as the King’s
courts were concerned, the land belonged to the trustee, who was under no obligation to
return it. The Crusader had no legal claim. The disgruntled Crusader would then petition
the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could
decide a case according to his conscience. At this time, the principle of equity was
born. The Lord Chancellor would consider it “unconscionable”
that the legal owner could go back on his word and deny the claims of the Crusader.
Therefore, he would find in favor of the returning Crusader. Over time, it became known that
the Lord Chancellor’s court would continually recognize the claim of a returning Crusader.
The legal owner would hold the land for the benefit of the original owner, and would be
compelled to convey it back to him when requested. The Crusader was the “beneficiary” and the
acquaintance the “trustee”. The term “use of land” was coined, and in time developed
into what we now know as a trust. “Antitrust law” emerged in the 19th century
when industries created monopolistic trusts by entrusting their shares to a board of trustees
in exchange for shares of equal value with dividend rights; these boards could then enforce
a monopoly. However, trusts were used in this case because a corporation could not own other
companies’ stock and thereby become a holding company without a “special act of the legislature”.
Holding companies were used after the restriction on owning other companies’ shares was lifted.
Significance The trust is widely considered to be the most
innovative contribution of the English legal system. Today, trusts play a significant role
in most common law systems, and their success has led some civil law jurisdictions to incorporate
trusts into their civil codes. In Curaçao, for example, the trust was enacted into law
on 1 January 2012; however, the Curaçao Civil Code only allows express trusts constituted
by notarial instrument. France has recently added a similar, Roman-law-based device to
its own law with the fiducie, amended in 2009; the fiducie, unlike a trust, is a contractual
relationship. Trusts are widely used internationally, especially in countries within the English
law sphere of influence, and whilst most civil law jurisdictions do not generally contain
the concept of a trust within their legal systems, they do recognise the concept under
the Hague Convention on the Law Applicable to Trusts and on their Recognition. The Hague
Convention also regulates conflict of trusts. Although trusts are often associated with
intrafamily wealth transfers, they have become very important in American capital markets,
particularly through pension funds and mutual funds.
Basic principles Overview
Property of any sort may be held in a trust. The uses of trusts are many and varied, for
both personal and commercial reasons, and trusts may provide benefits in estate planning,
asset protection, and taxes. Living trusts may be created during a person’s life or after
death in a will. In a relevant sense, a trust can be viewed
as a generic form of a corporation where the settlors are also the beneficiaries. This
is particularly evident in the Delaware business trust, which could theoretically, with the
language in the “governing instrument”, be organized as a cooperative corporation, limited
liability corporation, or perhaps even a nonprofit corporation, although traditionally the Massachusetts
business trust has been commonly used. One of the most significant aspects of trusts
is the ability to partition and shield assets from the trustee, multiple beneficiaries,
and their respective creditors, making it “bankruptcy remote”, and leading to its use
in pensions, mutual funds, and asset securitization as well protection of individual spendthrifts
through the spendthrift trust. Terms Appointer: This is the person who can appoint
a new trustee or remove an existing one. This person is usually mentioned in the trust deed.
Appointment: In trust law, “appointment” often has its everyday meaning. It is common to
talk of “the appointment of a trustee”, for example. However, “appointment” also has a
technical trust law meaning, either: the act of appointing an asset from the trust
to a beneficiary; or the name of the document which gives effect
to the appointment. The trustee’s right to do this, where it exists,
is called a power of appointment. Sometimes, a power of appointment is given to someone
other than the trustee, such as the settlor, the protector, or a beneficiary.
As Trustee For: This is the legal term used to imply that an entity is acting as a trustee.
Beneficiary: A beneficiary is anyone who receives benefits from any assets the trust owns.
In Its Own Capacity: This term refers to the fact that the trustee is acting its own.
Protector: A protector may be appointed in an express, inter vivos trust, as a person
who has some control over the trustee—usually including a power to dismiss the trustee and
appoint another. The legal status of a protector is the subject of some debate. No-one doubts
that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities
then the courts—if asked by beneficiaries—could order him or her to act in the way the court
decrees. However, a protector is unnecessary to the nature of a trust—many trusts can
and do operate without one. Also, protectors are comparatively new, while the nature of
trusts has been established over hundreds of years. It is therefore thought by some
that protectors have fiduciary duties, and by others that they do not. The case law has
not yet established this point. Settlor: This is the person who creates the
trust. Trust deed: A trust deed is a legal document
that defines the trust such as the trustee, beneficiaries, settlor and appointer, and
the terms and conditions of the agreement. Trust distributions: A trust distribution
is any income or asset that is given out to the beneficiaries of the trust.
Trustee: A person who administers a trust. A trustee is considered a fiduciary and owes
the highest duty under the law to protect trust assets from unreasonable loss for the
trust’s beneficiaries. Creation
Trusts may be created by the expressed intentions of the settlor or they may be created by operation
of law known as implied trusts. An implied trust is one created by a court of equity
because of acts or situations of the parties. Implied trusts are divided into two categories:
resulting and constructive. A resulting trust is implied by the law to work out the presumed
intentions of the parties, but it does not take into consideration their expressed intent.
A constructive trust is a trust implied by law to work out justice between the parties,
regardless of their intentions. Typically a trust can be created in the following
ways: a written trust instrument created by the
settlor and signed by both the settlor and the trustees;
an oral declaration; the will of a decedent, usually called a testamentary
trust; or a court order.
In some jurisdictions certain types of assets may not be the subject of a trust without
a written document. Formalities
Generally, a trust requires three certainties, as determined in Knight v Knight:
Intention. There must be a clear intention to create a trust
Subject Matter. The property subject to the trust must be clearly identified. One may
not, for example state, settle “the majority of my estate”, as the precise extent cannot
be ascertained. Trust property may be any form of specific property, be it real or personal,
tangible or intangible. It is often, for example, real estate, shares or cash.
Objects. The beneficiaries of the trust must be clearly identified, or at least be ascertainable.
In the case of discretionary trusts, where the trustees have power to decide who the
beneficiaries will be, the settlor must have described a clear class of beneficiaries.
Beneficiaries may include people not born at the date of the trust. Alternatively, the
object of a trust could be a charitable purpose rather than specific beneficiaries.
Trustees A trust may have multiple trustees, and these
trustees are the legal owners of the trust’s property, but have a fiduciary duty to beneficiaries
and various duties, such as a duty of care and a duty to inform. If trustees do not adhere
to these duties, they may be removed through a legal action. The trustee may be either
a person or a legal entity such as a company, but typically the trust itself is not an entity
and any lawsuit must be against the trustees. A trustee has many rights and responsibilities
which vary based on the jurisdiction and trust instrument. If a trust lacks a trustee, a
court may appoint a trustee. The trustees administer the affairs attendant
to the trust. The trust’s affairs may include prudently investing the assets of the trust,
accounting for and reporting periodically to the beneficiaries, filing required tax
returns, and other duties. In some cases dependent upon the trust instrument, the trustees must
make discretionary decisions as to whether beneficiaries should receive trust assets
for their benefit. A trustee may be held personally liable for problems, although fiduciary liability
insurance similar to directors and officers liability insurance can be purchased. For
example, a trustee could be liable if assets are not properly invested. However, in the
United States, similar to directors and officers, an exculpatory clause may minimize liability;
although this was previously held to be against public policy, this position has changed.
In the United States, the Uniform Trust Code provides for reasonable compensation and reimbursement
for trustees subject to review by courts, although trustees may be unpaid. Commercial
banks acting as trustees typically charge about 1% of assets under management.
Beneficiaries The beneficiaries are beneficial owners of
the trust property. Either immediately or eventually, the beneficiaries will receive
income from the trust property, or they will receive the property itself. The extent of
a beneficiary’s interest depends on the wording of the trust document. One beneficiary may
be entitled to income, whereas another may be entitled to the entirety of the trust property
when he attains the age of twenty-five years. The settlor has much discretion when creating
the trust, subject to some limitations imposed by law.
Purposes Common purposes for trusts include:
Privacy: Trusts may be created purely for privacy. The terms of a will are public and
the terms of a trust are not. In some families, this alone makes the use of trusts ideal.
Spendthrift protection: Trusts may be used to protect beneficiaries against their own
inability to handle money. These are especially attractive for spendthrifts. Courts may generally
recognize spendthrift clauses against trust beneficiaries and their creditors, but not
against creditors of a settlor. Wills and estate planning: Trusts frequently
appear in wills. Conventional wills typically leave assets to the deceased’s spouse, and
then to the children equally. If the children are under 18, or under some other age mentioned
in the will, a trust must come into existence until the contingency age is reached. The
executor of the will is the trustee, and the children are the beneficiaries. The trustee
will have powers to assist the beneficiaries during their minority.
Charities: In some common law jurisdictions all charities must take the form of trusts.
In others, corporations may be charities also. In most jurisdictions, charities are tightly
regulated for the public benefit. Unit trusts: The trust has proved to be such
a flexible concept that it has proved capable of working as an investment vehicle: the unit
trust. Pension plans: Pension plans are typically
set up as a trust, with the employer as settlor, and the employees and their dependents as
beneficiaries. Remuneration trusts: Trusts for the benefit
of directors and employees or companies or their families or dependents. This form of
trust was developed by Paul Baxendale-Walker and has since gained widespread use.
Corporate structures: Complex business arrangements, most often in the finance and insurance sectors,
sometimes use trusts among various other entities in their structure.
Asset protection: Trusts may allow beneficiaries to protect assets from creditors as the trust
may be bankruptcy remote. For example, a discretionary trust, of which the settlor may be the protector
and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement
the settlor may be in a position to benefit from the trust assets, without owning them,
and therefore in theory protected from creditors. In addition, the trust may attempt to preserve
anonymity with a completely unconnected name. These strategies are ethically and legally
controversial. Tax planning: The tax consequences of doing
anything using a trust are usually different from the tax consequences of achieving the
same effect by another route. In many cases, the tax consequences of using the trust are
better than the alternative, and trusts are therefore frequently used for legal tax avoidance.
For an example see the “nil-band discretionary trust”, explained at Inheritance Tax.
Co-ownership: Ownership of property by more than one person is facilitated by a trust.
In particular, ownership of a matrimonial home is commonly effected by a trust with
both partners as beneficiaries and one, or both, owning the legal title as trustee.
Construction law: In Canada and Minnesota monies owed by employers to contractors or
by contractors to subcontractors on construction projects must by law be held in trust. In
the event of contractor insolvency, this makes it much more likely that subcontractors will
be paid for work completed. Types
Alphabetic list of trust types Trusts go by many different names, depending
on the characteristics or the purpose of the trust. Because trusts often have multiple
characteristics or purposes, a single trust might accurately be described in several ways.
For example, a living trust is often an express trust, which is also a revocable trust, and
might include an incentive trust, and so forth. Constructive trust: Unlike an express trust,
a constructive trust is not created by an agreement between a settlor and the trustee.
A constructive trust is imposed by the law as an “equitable remedy.” This generally occurs
due to some wrongdoing, where the wrongdoer has acquired legal title to some property
and cannot in good conscience be allowed to benefit from it. A constructive trust is,
essentially, a legal fiction. For example, a court of equity recognizing a plaintiff’s
request for the equitable remedy of a constructive trust may decide that a constructive trust
has been created and simply order the person holding the assets to deliver them to the
person who rightfully should have them. The constructive trustee is not necessarily the
person who is guilty of the wrongdoing, and in practice it is often a bank or similar
organization. The distinction may be finer than the preceding exposition in that there
are also said to be two forms of constructive trust, the institutional constructive trust
and the remedial constructive trust. The latter is an “equitable remedy” imposed by law being
truly remedial; the former arising due to some defect in the transfer of property.
Discretionary trust: In a discretionary trust, certainty of object is satisfied if it can
be said that there is a criterion which a person must satisfy in order to be a beneficiary.
In that way, persons who satisfy that criterion can enforce the trust. Re Baden’s Deed Trusts;
McPhail v Doulton Directed trust: In these types, a directed
trustee is directed by a number of other trust participants in implementing the trust’s execution;
these participants may include a distribution committee, trust protector, or investment
advisor. The directed trustee’s role is administrative which involves following investment instructions,
holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating
trust participants and offering dispute resolution among the participants
Dynasty trust: A type of trust in which assets are passed down to the grantor’s grandchildren,
not the grantor’s children. The children of the grantor never take title to the assets.
This allows the grantor to avoid the estate taxes that would apply if the assets were
transferred to his or her children first. Generation-skipping trusts can still be used
to provide financial benefits to a grantor’s children, however, because any income generated
by the trust’s assets can be made accessible to the grantor’s children while still leaving
the assets in trust for the grandchildren. Express trust: An express trust arises where
a settlor deliberately and consciously decides to create a trust, over their assets, either
now, or upon his or her later death. In these cases this will be achieved by signing a trust
instrument, which will either be a will or a trust deed. Almost all trusts dealt with
in the trust industry are of this type. They contrast with resulting and constructive trusts.
The intention of the parties to create the trust must be shown clearly by their language
or conduct. For an express trust to exist, there must be certainty to the objects of
the trust and the trust property. In the USA Statute of Frauds provisions require express
trusts to be evidenced in writing if the trust property is above a certain value, or is real
estate. Fixed trust: In a fixed trust, the entitlement
of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. Common
examples are: a trust for a minor;
a life interest; and a remainder Grantor retained annuity trust: GRAT is an
irrevocable trust whereby a grantor transfers asset(s), as a gift, into a trust and receives
an annual payment from the trust for a period of time specified in the trust instrument.
At the end of the term, the financial property is transferred to the named beneficiaries.
This trust is commonly used in the U.S. to facilitate large financial gifts that are
not subject to a gift tax. Hybrid trust: A hybrid trust combines elements
of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain
amount of the trust property to each beneficiary fixed by the settlor. But the trustee has
discretion as to how any remaining trust property, once these fixed amounts have been paid out,
is to be paid to the beneficiaries. Implied trust: An implied trust, as distinct
from an express trust, is created where some of the legal requirements for an express trust
are not met, but an intention on behalf of the parties to create a trust can be presumed
to exist. A resulting trust may be deemed to be present where a trust instrument is
not properly drafted and a portion of the equitable title has not been provided for.
In such a case, the law may raise a resulting trust for the benefit of the grantor. In other
words, the grantor may be deemed to be a beneficiary of the portion of the equitable title that
was not properly provided for in the trust document.
Incentive trust: A trust that uses distributions from income or principal as an incentive to
encourage or discourage certain behaviors on the part of the beneficiary. The term “incentive
trust” is sometimes used to distinguish trusts that provide fixed conditions for access to
trust funds from discretionary trusts that leave such decisions up to the trustee.
Inter vivos trust: A settlor who is living at the time the trust is established creates
an inter vivos trust. Irrevocable trust: In contrast to a revocable
trust, an irrevocable trust is one in which the terms of the trust cannot be amended or
revised until the terms or purposes of the trust have been completed. Although in rare
cases, a court may change the terms of the trust due to unexpected changes in circumstances
that make the trust uneconomical or unwieldy to administer, under normal circumstances
an irrevocable trust may not be changed by the trustee or the beneficiaries of the trust.
Offshore trust: Strictly speaking, an offshore trust is a trust which is resident in any
jurisdiction other than that in which the settlor is resident. However, the term is
more commonly used to describe a trust in one of the jurisdictions known as offshore
financial centers or, colloquially, as tax havens. Offshore trusts are usually conceptually
similar to onshore trusts in common law countries, but usually with legislative modifications
to make them more commercially attractive by abolishing or modifying certain common
law restrictions. By extension, “onshore trust” has come to mean any trust resident in a high-tax
jurisdiction. Personal injury trust: A personal injury trust
is any form of trust where funds are held by trustees for the benefit of a person who
has suffered an injury and funded exclusively by funds derived from payments made in consequence
of that injury. Private and public trusts: A private trust
has one or more particular individuals as its beneficiary. By contrast, a public trust
has some charitable end as its beneficiary. In order to qualify as a charitable trust,
the trust must have as its object certain purposes such as alleviating poverty, providing
education, carrying out some religious purpose, etc. The permissible objects are generally
set out in legislation, but objects not explicitly set out may also be an object of a charitable
trust, by analogy. Charitable trusts are entitled to special treatment under the law of trusts
and also the law of taxation. Protective trust: Here the terminology is
different between the UK and the USA: In the UK, a protective trust is a life interest
that terminates upon the happening of a specified event; such as the bankruptcy of the beneficiary,
or any attempt by an individual to dispose of his or her interest. They have become comparatively
rare. In the USA, a protective trust is a type of
trust that was devised for use in estate planning. Often a person, A, wishes to leave property
to another person B. A, however, fears that the property might be claimed by creditors
before A dies, and that therefore B would receive none of it. A could establish a trust
with B as the beneficiary, but then A would not be entitled to use of the property before
they died. Protective trusts were developed as a solution to this situation. A would establish
a trust with both A and B as beneficiaries, with the trustee instructed to allow A use
of the property until they died, and thereafter to allow its use to B. The property is then
safe from being claimed by A’s creditors, at least so long as the debt was entered into
after the trust’s establishment. This use of trusts is similar to life estates and remainders,
and are frequently used as alternatives to them. Purpose trust: Or, more accurately, non-charitable
purpose trust. Generally, the law does not permit non-charitable purpose trusts outside
of certain anomalous exceptions which arose under the eighteenth century common law. Certain
jurisdictions have enacted legislation validating non-charitable purpose trusts generally.
QTIP Trust: Short for “qualified terminal interest property.” A trust recognized under
the tax laws of the United States which qualifies for the marital gift exclusion from the estate
tax. Resulting trust: A resulting trust is a form
of implied trust which occurs where a trust fails, wholly or in part, as a result of which
the settlor becomes entitled to the assets; or a voluntary payment is made by A to B in
circumstances which do not suggest gifting. B becomes the resulting trustee of A’s payment.
Revocable trust: A trust of this kind may be amended, altered or revoked by its settlor
at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming
increasingly common in the US as a substitute for a will to minimize administrative costs
associated with probate and to provide centralized administration of a person’s final affairs
after death. Secret trust: A post mortem trust constituted
externally from a will but imposing obligations as a trustee on one, or more, legatees of
a will. Simple trust:
In the US jurisdiction this has two distinct meanings:
In a simple trust the trustee has no active duty beyond conveying the property to the
beneficiary at some future time determined by the trust. This is also called a bare trust.
All other trusts are special trusts where the trustee has active duties beyond this.
A simple trust in Federal income tax law is one in which, under the terms of the trust
document, all net income must be distributed on an annual basis. In the UK a bare or simple trust is one where
the beneficiary has an immediate and absolute right to both the capital and income held
in the trust. Bare trusts are commonly used to transfer assets to minors. Trustees hold
the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland. Special trust: In the US, a special trust,
also called complex trust, contrasts with a simple trust. It does not require the income
be paid out within the subject tax year. The funds from a complex trust can also be used
to donate to a charity or for charitable purposes. Special Power of Appointment trust: A trust
implementing a special power of appointment to provide asset protection features.
Spendthrift trust: It is a trust put into place for the benefit of a person who is unable
to control their spending. It gives the trustee the power to decide how the trust funds may
be spent for the benefit of the beneficiary. Standby Trust: The trust is empty at creation
during life and the will transfers the property into the trust at death. This is a statutory
trust. Testamentary trust: A trust created in an
individual’s will is called a testamentary trust. Because a will can become effective
only upon death, a testamentary trust is generally created at or following the date of the settlor’s
death. Unit trust: A trust where the beneficiaries
each possess a certain share and can direct the trustee to pay money to them out of the
trust property according to the number of units they possess. A unit trust is a vehicle
for collective investment, rather than disposition, as the person who gives the property to the
trustee is also the beneficiary. Regional variations
Trusts originated in England, and therefore English trusts law has had a significant influence,
particularly among common law legal systems such as the United States and the countries
of the Commonwealth. Trust law in civil law jurisdictions, generally
including Continental Europe, typically does not exist, but arises due to conflict of laws.
Tax avoidance concerns have historically been one of the reasons that European countries
have been reluctant to adopt trusts. United States State law applies to trusts, and the Uniform
Trust Code has been enacted by the legislatures in many states. In addition, federal law considerations
such as federal taxes administered by the Internal Revenue Service may affect the structure
and creation of trusts. The common law of trusts is summarized in the Restatements of
the Law, such as the Restatement of Trusts, Third.
In the United States the tax law allows trusts to be taxed as corporations, partnerships,
or not at all depending on the circumstances, although trusts may be used for tax avoidance
in certain situations. For example, the trust-preferred security is a hybrid security with favorable
tax treatment which is treated as regulatory capital on banks’ balance sheets. The Dodd-Frank
Wall Street Reform and Consumer Protection Act changed this somewhat by not allowing
these assets to be a part of banks’ regulatory capital.
Estate planning Living trusts, as opposed to testamentary
trusts, avoid probate. Avoiding probate may save costs and maintain privacy and living
trusts have become very popular. The probate courts may charge a fee based on a percentage
net worth of the deceased time, and probate records are available to the public while
distribution through a trust is private. Both living trusts and wills can also be used to
plan for unforeseen circumstances such as incapacity or disability, by giving discretionary
powers to the trustee or executor of the will. Negative aspects of using a living trust as
opposed to a will and probate include upfront legal expenses, the expense of trust administration,
and a lack of certain safeguards. The cost of the trust may be 1% of the estate per year
versus the one-time lump-sum fee of 1 to 4% for probate, which applies regardless of whether
lack of drafted will. Unlike trusts, wills must be signed by two to three witnesses,
the number depending on state law. Legal protections which apply to probate and not trusts include
provisions which protect the decedent’s assets from mismanagement or embezzlement, such a
requirements of bonding, insurance, and itemized accountings of probate assets.
Estate tax effect Living trusts generally do not shelter assets
from the U.S. federal estate tax. Married couples may, however, effectively double the
estate tax exemption amount by setting up the trust with a formula clause.
For a living trust, the grantor may retain some level of control to the trust, such by
appointment as protector under the trust instrument. Living trusts also, in practical terms, tend
to be driven to large extent by tax considerations. If a living trust fails, the property will
usually be held for the grantor/settlor on resulting trusts, which in some notable cases,
has had catastrophic tax consequences. South Africa
In many ways trusts in South Africa operate similarly to other common law countries, although
the law of South Africa is actually a hybrid of the British common law system and Roman-Dutch
law. In South Africa, in addition to the traditional
living trusts and will trusts there is a ‘bewind trust’ in which the beneficiaries own the
trust assets while the trustee administers the trust, although this is regarded by modern
Dutch law as not actually a trust. Bewind trusts are created as trading vehicles providing
trustees with limited liability and certain tax advantages.
In South Africa, minor children cannot inherit assets and in the absence of a trust and assets
held in a state institution, the Guardian’s Fund, and released to the children in adulthood.
Therefore testamentary trusts often leave assets in a trust for the benefit of these
minor children. There are two types of living trusts in South
Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of
the beneficiaries are set out in the trust deed, whereas in discretionary trusts the
trustees have full discretion at all times as to how much and when each beneficiary is
to benefit. Asset protection
Until recently, there were tax advantages to living trusts in South Africa, although
most of these advantages have been removed. Protection of assets from creditors is a modern
advantage. With notable exceptions, assets held by the trust are not owned by the trustees
or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against
the trust. Under the Insolvency Act, assets transferred into a living trust remain at
risk from external creditors for 6 months if the previous owner of the assets is solvent
at the time of transfer, or 24 months if he/she is insolvent at the time of transfer. After
24 months, creditors have no claim against assets in the trust, although they can attempt
to attach the loan account, thereby forcing the trust to sell its assets. Assets can be
transferred into the living trust by selling it to the trust or donating cash to it.
Tax considerations Under South African law living trusts are
considered tax payers. Two types of tax apply to living trusts, namely income tax and capital
gains tax. A trust pays income tax at a flat rate of 40%. The trust’s income can, however,
be taxed in the hands of either the trust or the beneficiary. A trust pays CGT at the
rate of 20%. Trusts do not pay deceased estate tax.
The taxpayer whose residence has been ‘locked’ into a trust has now been given another opportunity
to take advantage of these CGT exemptions. The Taxation Law Amendment Act of 30 Sept.
2009 commenced on 1 Jan. 2010 and granted a 2-year window period from 1 Jan. 2010 to
31 Dec. 2011 affording a natural person the opportunity to take transfer of the residence
with advantage of no transfer duty being payable or CGT consequences. Whilst taxpayers can
take advantage of this opening of a window of opportunity is not likely that it will
ever become available thereafter. See also
Blind trust Foundation
Knight v Knight Rabbi trust
STEP, the international professional association for the trust industry
Trusts & Estates Totten trust
Jurisdiction specific: Argentinian law number 24.441 of 1994.
Australian trust law Henson trust
Italian trust law Trust law in Civil law jurisdictions
Trust law in England and Wales Trust Law of the People’s Republic of China,
Studio legale Tedioli, 28 April 2001 Notes References
Books Hudson, A. Equity and Trusts. Cavendish Publishing.
ISBN 1-85941-729-9. Mitchell, Charles; Hayton, DJ. Hayton and
Marshall’s Commentary and Cases on the Law of Trusts and Equitable Remedies. Sweet & Maxwell.
Mitchell, Charles; Hayton, DJ; Matthews, P. Underhill and Hayton’s Law Relating to Trusts
and Trustees. Butterworths.