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The law is an asset

I have a wealthy friend who has set up a trust for his children. I have been considering establishing a trust for some time now but I am unsure of the main benefits in doing so. Could you please advise me of the background to trusts, the various types of trust and whether any of them might be of use to me in my planning.

The concept of a trust has its origins in Anglo Saxon common law and was first employed as a means of avoiding the impact of medieval statutes or the payment of feudal dues.

In the 16th Century, the concept of “uses” as they were then named became popular. For example, land was transferred from one person “to the use of” another. This enabled the legal ownership of assets and property to be assigned to a third party (the “feoffee to uses”, the equivalent of the trustee in current terms) who continued to manage the assets for the benefit of the original owner of the assets and his family. This was the forerunner of modern day trust.

It was further developed in the 18th and 19th Centuries when trusts were used to tie up land or wealth for succeeding generations of a family.

Although the legal framework has obviously been refined and has subsequently been standardised in the form of statute law, the fundamental concept of a trust remains unchanged.

It is very important in understanding the trust concept to realise that there are two forms of ownership or right to the assets within a trust.

Legal ownership means the assets of the trust are registered in the name of the trustee and are under his or her control. They are legally owned by the trustee.

With equitable interest, the beneficiaries of a trust have certain rights under the terms of the trust but have no rights to ownership of, or legal title to, the assets. These rights constitute an equitable interest under the rules of equity which originated in English law.

The type of trust most commonly used in financial planning is known as an express trust. In order for such a trust to be created validly, it is necessary for the so-called three certainties to be present:

Certainty of intention or words – it should be clear that there is an intention for the trust to be created.

Certainty of subject matter – there must be certainty as to the property forming the subject matter of the trust (the trust fund).

Certainty of objects – there must be one or more legal persons as beneficiaries.

The trust deed can take one of two forms.

A deed of settlement which is executed by the settlor (the client – the person who is transferring the assets into the trust) and the trustee.

A declaration of trust to which the person transferring the assets into the trust is not a party. Here, the deed is a declaration by the trustee only (and also sometimes by the protector) confirming that he is holding certain assets within the trust.

The modern trend is for the latter form of deed to be used, mainly because many clients wish to preserve their confidentiality by not being a party to the deed.

Trusts can be of great assistance in financial planning, particularly for protecting wealth. The main benefits are as follows. The assets placed in trust remain entirely separate from a person&#39s estate. The trustee holds the assets entirely separate from his own property.

Title to the trust assets remains in the name of the trustee or another person acting under him. Also, control of the assets therefore remains with the trustee.

Trusts usually fall into two distinct groups – discretionary trusts and life interest trusts.

The discretionary trust gives the trustee a wide discretion to benefit one or more of those named as beneficiaries. This gives the greatest flexibility and under, for example, the laws of Guernsey, such a trust may operate for up to 100 years, although a charitable trust may endure for a longer period.

A discretionary trust may be created with or without a protector. In the latter case, a third party is granted certain authority, without which the trustee may not act.

Under a life interest trust, the person settling assets will normally enjoy the income from them during his lifetime, with perhaps an option to the trustees also to provide the settlor with capital from the trust. Upon the settlor&#39s death, the assets would normally go to his or her descendants in such proportions and upon such terms as are provided for in the deed.

Trusts can play an important role in financial planning but whether they are suitable for you will depend on your precise objectives. We should meet to discuss these in depth before I can advise on the use of any particular type of trust

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