Trusts are a Common Law concept, the nature of which date back to the Middle Ages, when soldiers left England to fight abroad and would entrust assets to a friend on the understanding that the friend would keep the assets safe and manage them to benefit the soldier’s family during his absence. These assets would then be transferred back to the soldier on his safe return to England.

Over time, legal provision was introduced which gave greater protection to the soldier and his family, who often found that the assets were not returned by the trusted friend. This legislation accordingly provided that the persons for whom the property should be applied (i.e. the beneficiaries) where viewed as having an equitable interest in that property, including the right to demand the legal rights of those assets at any time.

The modern law of trusts has developed significantly since that time, but the basic principles remain fundamental to how trusts are established and ultimately administered today; drawing a line between legal ownership and that of an equitable interest in an asset held by a trustee.

In essence, a trust is a legally binding promise, made by a person, entrusted with assets to hold and manage those assets, under terms agreed with the original owner of those assets, these assets being managed on behalf of persons nominated by the original owner.

To create a valid trust, there are three things that need to be certain:

  • i) It must be clear that the person has the intention to create a trust and not any other form of arrangement such as a power of attorney or agency arrangement.
  • ii) The assets - or subject - to be transferred to the trust must be fully identifiable and capable of being clearly identified
  • iii) The person – or object - who has a benefit from the trust must be clearly identified, even if they are not mentioned by name.

The modern law of trusts has developed significantly since that time, but the basic principles remain fundamental to how trusts are established and ultimately administered today; drawing a line between legal ownership and that of an equitable interest in an asset held by a trustee.

The person who is instigating the setup of the trust and transferring the assets into trust is called the settlor or, in some circumstances, a grantor.

The person entrusted with the asset is called the trustee. The trust is not a legal person in its own right but operates through a legal entity i.e. the trustee. In the past a trusted person was appointed as the trustee; however nowadays people tend to use the services of professional trustees.

The persons for which the assets are transferred to the trustee are called the beneficiaries. A settlor can name himself as a beneficiary and/or member of his family. In reality, he can appoint anyone he wants; this may even be a defined class of people, such as people who have not been born. It is also possible under the terms of the trust to have people added or removed overtime, as circumstances change.

It is possible, under the terms of a trust, for a settlor or third person to act as a protector, subsequently holding important powers under the terms of the trust such as the power to change trustees; or to approve or refuse certain decisions made by the trustees.

This is one way that the settlor can maintain certain powers over the trustee and therefore maintain comfort on how the trust is managed.

A professionally administered trust will have the terms written in a document called the trust instrument or deed of trust. This will cover the terms of the agreement between the trustee and the settlor. The assets transferred to the trust are called the trust fund or trust property. As previously mentioned, a trust cannot exist unless there are trust assets.

Another term referred to in the setup and administration of trusts is the letter of wishes. A letter of wishes is relevant when a trustee is given discretion over the investment of a trust’s assets, or over how to apply the trust assets to the benefit of the beneficiaries. This confidential letter provides guidance to

trustees and can be prepared or updated by the settlor at any time, as circumstances change. It should be stressed that these letters of wishes are not usually binding on the trustee as they are merely for guidance purposes.

If a settler wants to have greater control over the trust – for instance, veto decisions of the trustee, make investment decisions or remove the trustee - then s/he can elect to have curtain reserved powers, which are included in the trust deed.

A key reason for electing to use a trust is wealth preservation: a trust allows assets to be held by one legal owner indefinitely and avoids an asset being divided up or subject to a forced sale on the death of the owner. For example, a family trading business can continue to trade under the professional oversight of a trustee, with the family still being able to enjoy the benefits of the business without directly managing it or selling it.

  • A trust allows an asset to be managed professionally and impartially which can help maximize its economic value and limit unwanted family interference;
  • A trust avoids family members inheriting excess wealth at a young age, which can be potentially damaging;
  • A trust can protect the vulnerable members of a family, ensuring that they receive much needed attention through their lives;
  • A trust can diversify a family’s economic or political risk. For example, by having those assets moved to be professionally managed in a tax neutral, secure and highly regulated jurisdiction; • a trust can simplify the succession process – and avoid the need for an expensive probate exercise;
  • A trust can also be used to protect against credit claims but cannot be used against paying a legitimate creditor

Various types of trust have been developed over time and the most appropriate structure for the settlement will depend on the settlor's particular circumstances and objectives. Some of the more common types of trust are described below:

Discretionary Trust

The discretionary trust is the most common form of trust and is often the most efficient structure for both settlor and beneficiaries. Under the terms of a discretionary trust the trustee is given wide discretionary powers as to when, how much and to which beneficiaries he should distribute the income and capital of the trust. Such a form of trust is useful where at the time of creation of the trust the future needs of beneficiaries cannot be accurately determined. The beneficiaries are not regarded as having any direct legal rights over any particular portion of the trust fund but only a right to be considered to benefit when the trustee exercises his discretion.

Fixed Interest in Possession Trust

Under the fixed interest trust the principal beneficiary will normally be granted a vested interest in the income of the trust fund throughout his/her lifetime. For example, a spouse may receiving income from the trust during his/her lifetime, after which distributions may then be split between the surviving children.

Charitable Trusts

Generally, in order for a trust to be valid there must be identifiable beneficiaries. However, an exception to this general rule is a trust which has been established in favour of charitable purposes such as the relief of poverty, or the advancement of education.

Purpose Trusts

A purpose trust is a trust which has no beneficiaries and is instead established for a specified purpose. In certain jurisdictions, statute allows for the creation of purpose trusts for broad purposes, including for private benefit. For example, they could be set up for the purpose of maintaining a family business These trusts are useful for a settlor who does not want to confer rights upon beneficiaries, although they do require the appointment of an enforcer who can ensure that the terms of the trust are being followed.