English subtitles
At its simplest, trustees hold property for the benefit of others.
Holding wealth for and benefiting others is the principal purpose and central feature of any trust.
And trusts hold vast sums;
it is estimated that in 2021, $35 trillion was held in pension funds,
most of which are structured in some forms of trust-like ‘ring fenced’ manner.
Eye watering amounts are held in mutual funds, many of which are also trust-like structures.
In the English-speaking world, most charities are structured as trusts
and then there are trusts for private individuals which we're going to discuss today.
What is it about trusts that cause them to be so widely used?
The answer, in part, can be seen in the context of pension trusts I just mentioned.
An employee doesn't own the assets in a pension fund until he or she reaches pensionable age.
In the meantime, however, the assets are not owned by the employer either.
They're said to be ‘ring fenced’, this means that if the employer becomes bankrupt or insolvent
the assets do not go to the employer’s creditors.
Similarly, the assets are ring fenced in the sense that if the trustee becomes bankrupt,
the assets will never go to the trustee’s creditors.
There are other crucial features about trusts.
One is that trustees can make decisions
and we will come to look at the types of decisions trustees make in a moment.
But first a word about what is probably the central feature of any trust,
namely, the fact that the trustees are fiduciaries.
Trustees aren't the only fiduciaries;
lawyers are fiduciaries vis a vis their clients, doctors vis a vis their patients, parents vis a vis young children,
and it can be seen from this that there's an element of confidence, or confidentiality, in a fiduciary relationship.
And it is often said that a fiduciary has to act in the ‘best interests’ of his principal,
and that’s a good way and a useful way of looking at it,
but it's probably more accurate to say that a fiduciary cannot act in his or her own interests.
In that sense it's a self-denying ordinance. In the context of trustees, this means that a trustee, for example,
cannot buy or sell to himself without the fully informed consent of the beneficiaries,
or without express permission in the trust instrument or agreement.
Trustees can't benefit from opportunities which arise from acting as trustee without this fully informed consent.
Indeed, trustees aren't even allowed to charge a trustee fee without express agreement.
Trustees are special types of fiduciaries because they own property,
and in trust law, the definition of dishonesty is a trustee who acts in his own interests or of those non- beneficiary.
Private trusts are established by a person known as ‘the settlor’ for the benefit of people he cares about, usually close family and friends.
This can be done by will, which takes effect after the settlor’s lifetime, or during the settlor’s lifetime.
And the difference is important;
if one dies owning assets, the assets are said to fall into one's estate
and are subject to various rules which can limit the gifts that can be made.
The process can be public, expensive, and complicated, especially if there are assets in multiple jurisdictions.
On the other hand, if there is a lifetime transfer to trustees,
the trustees own the property and it's not usually affected by the death of the settlor,
therefore there is said to be ‘a smooth transition of assets’ on the settlor’s death.
Another feature is that the trustees can make distributions sometime after the settlor’s death,
maybe many years later. This is sometimes referred to as ‘a gift over the plane of time’.
In establishing lifetime trusts, settlors often want to retain the ability to benefit.
The trust may, for example, be revocable.
There's then a decision to make; will the trust be fixed or discretionary?
Under a fixed trust, the beneficiaries at the time of the settlor’s death will obtain fixed shares.
The alternative is to create a discretionary trust.
In a discretionary trust, the trustees have a decision-making function, they have a power.
They have the power to make distributions when they want, in the amounts they want, among the class of beneficiaries.
In doing this, they are guided by a letter or a memorandum of wishes of the settlor.
To understand the advantage of this, one has to look at the rights of these beneficiaries.
They have the right to ensure that the trust is appropriately and properly administered by the trustee,
but what they don't have is an ownership right, and that’s significant, because it means they can't call for the assets.
And it may be that the settlor doesn't want them to be able to call for the assets.
There may be concerns that they're not mature enough or that the assets should be given to them over a period of time.
It also means, because they don't own the assets, that in the event of their bankruptcy, their creditors cannot make a claim against the assets.
It may equally provide protection in the case of divorce.
Trustees are not the only people who can hold powers over a trust,
it's not uncommon for a settlor to also retain powers, these powers can be fiduciary or non-fiduciary.
If they are non-fiduciary, it's significant because it means that settlors can exercise these powers for their own benefit.
These powers can, for example, be powers to consent to distributions, that's quite common.
When a number of powers are held by the settlor or by another individual,
that person is often referred to as the protector of the trust.
The protector can hold a mixture of powers, some of which are fiduciary and impose obligations,
and some of which are personal and enable the protector to benefit.
One important trustee decision making power relates to investments.
Trustees have a duty to invest unless this is specifically removed by the terms of the trust.
“Invest” means income yield or capital appreciation.
Trustees, however, in making investments aren't allowed to speculate.
Whilst one is allowed to speculate with one's own property one isn't allowed to speculate with property one holds on behalf of another.
This requires a balanced and a diversified portfolio.
This is fine for many settlors, however, some settlors wish to be a bit more speculative.
If that's the case certain steps have to be taken.
It's possible for settlors or those they appoint, who aren't trustees, to hold the investment powers.
The investment powers are then stripped away from the trustee and they are absolved of responsibility in relation to investments.
This enables the holder of the power to be more speculative.
In doing this, however, it has to be remembered that the holder of the power of investment isn't allowed to benefit himself.
One should not, one cannot, establish a trust with the belief or intention of sheltering
or hiding assets from the tax authorities to which one is rightfully subject.
A major sea change has occurred in this century.
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.
I hope you find this video interesting.
However, it's for information purposes only.
Anyone intending to establish a trust should obtain and understand independent legal and tax advice
on the tax consequences for the settlor, the beneficiaries and the trustee, and also the reporting consequences.
