Trusts and foundations

A trust is a fiduciary arrangement where an appointed trustee holds property or assets for the benefit of others. They are widely used for holding significant sums of money for private estates and their families. Many pension funds, mutual funds and  charities are also structured in a trust-like manner. The primary purpose of a trust is to 'ring fence' assets to protect and manage them for the benefit of the beneficiaries, even in situations like bankruptcy or insolvency.

A fiduciary is an individual or entity who has the legal responsibility to act in the best interests of another party. Trustees are fiduciaries who manage and make decisions about the trust's assets on behalf of the beneficiaries. Other examples of fiduciary relationships include lawyers/clients, doctors/patients, and parents/young children. Fiduciaries cannot act for personal gain, and require fully informed consent of the beneficiaries, or act with express permission of the trust instrument or agreement.

Wealth succession planning governs the transfer of assets upon an individual's death. In the context of trusts, this can affect how and when beneficiaries receive their inheritance. Trusts can be established to provide a smooth transition of assets, avoiding the complexities, expenses, and public nature of probate. Trusts can be set up during the settlor’s lifetime  or through a will.

There are four major types of trusts:

1. Fixed Trusts: Beneficiaries receive fixed shares of the trust assets.
2. Discretionary Trusts: Trustees have the power to decide how and when to distribute the trust assets among the beneficiaries, guided by the settlor's wishes.
3. Revocable Trusts: The settlor retains the ability to alter or revoke the trust.
4. Irrevocable Trusts: Once established, the settlor cannot change or dissolve the trust.

Trustees have a duty to invest unless this is specifically removed by the terms of the trust, aiming for income yield or capital appreciation. They must avoid speculative investments and maintain a balanced and diversified portfolio. If the settlor wishes to engage in more speculative investments, they can strip investment powers from the trustees, appointing others to manage the investments.

It’s now the norm for trustees to disclose information about trusts to tax authorities. They disclose the fact of the trust, the settlor and the distributions to beneficiaries. Nowadays this is done under the rules developed by the OECD

Anyone intending to establish a trust should obtain and understand independent legal and tax advice on the tax implications for the settlor, the beneficiaries and the trustee, and also the reporting consequences.