A trust is a company that acts as an asset manager (fiduciary) for another business. It is a legal arrangement whereby the settlor transfers his or her assets (real estate property, dividends, savings or other assets) to another person — the trustee — so that they may be used to benefit the beneficiaries (who can be either a single individual or a group).
A trust is a company that acts as an asset manager (fiduciary) for another business. The activity of a trust is characterised by two features:
- A trust is an independent decision maker.
- A trust does not own the assets it manages.
In other words, one person gives the property to a second for the benefit of a third. A trust is a legal arrangement whereby the settlor transfers his or her assets (real estate property, dividends, savings or other assets) to another person — the trustee — so that they may be used to benefit the beneficiaries (who can be either a single individual or a group). Trusts are widely used to protect and pass down wealth through the generations.
Although generally guided by the beneficiary, a trust is ultimately an independent decision maker. A trust acts in accordance with the rules and provisions set out in the relevant agreements, and aims to obtain the best results for the beneficiaries. The strategy for achieving those results, however, is determined by the trust itself. The scope of these activities is practically unlimited, ranging from investing to donating to selling an estate.
As for ownership, a trust is limited to management, and trustees do not own any of the assets. The actual ownership of these assets will vary by jurisdiction. In some jurisdictions, e.g. Russia, the assets belong to the company or individual using the trust's services. In others, the assets acquire a special status and do not belong to the user of the services, the trust or the beneficiaries.
Functions of a trust
The main function of a trust is to manage assets on behalf of their owner for the benefit of the beneficiaries. For this purpose, a trust may choose any activities it deems effective and advantageous, unless the relevant contract specifies otherwise. Some of the functions of a trust include:
- Managing finances
- Managing investments
- Paying bills
- Accounting
- Preparing financial reports
- Distributing profits
In addition, a trust can perform almost any other management function specified by the contract. Depending on the particular case, they may also offer financial planning, tax optimisation schemes and similar services.
Trusts can be useful to anyone who possesses considerable assets. Trusts are usually set up to secure assets and property and to optimise taxation. They also have inheritance applications: assets held in trust do not require probate as they are no longer part of the settlor’s estate, and so are unaffected by the contents of his/her will.
Benefits and features of trusts
Other than the specific purposes for which trusts can be used, there are some common benefits that apply to all types of trust:
- Anonymity. In most countries, the content of wills as well as the names of the owners of real estate or other assets are publicly available. The names of the beneficiaries of the trust usually remain unknown, and therefore using a trust to hold real estate or distribute assets allows you to maintain your privacy.
- Suppression of income. The ability to transfer all property and assets to the trust allows you to declare an insufficient availability of personal assets and to apply, for example, for a lower tax rate.
- Tax avoidance. In many offshore jurisdictions, trustees are not obliged to report the income of the trust to the tax authorities of the country in which the beneficiaries reside.
- Charity. In some countries, all property handed over to a charity is required to be managed under a trust.
- Capital preservation. Trusts can be used to protect the beneficiaries (for example, the settlor's children) from their own inability to manage the funds. The conditions of the trust can prescribe limits on the use of the money or the age when the beneficiaries acquire the authority to dispose of the funds and utilise the assets.
Types of trust
There are many forms of trust, which can be set up in various situations. However, generally trusts can be divided into two main groups:
- Beneficial trusts
- Target trusts
Beneficial trust
A trust whose beneficiaries are explicitly specified or which has a limited circle of beneficiaries.
Target trust
A trust created in order to achieve some specific purpose. There are two subtypes: charitable or private (non-charitable), which is used for asset protection purposes.
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