A useful legal instrument that everyone would benefit from gaining greater awareness of is that of a trust. In this article, we will elaborate on what a trust is, its relevant terms and how useful it can be.

The Concept of a Trust and Its Relevant Terms

In ordinary circumstances, when one purchases assets such as property, they would be both the legal and equitable owner of that property. A trust is a legal arrangement that allows the legal title and equitable title of an asset to be held by different people or entities.

Illustration

To build off the scenario where a property is being purchased, a properly drafted trust instrument will allow a parent to purchase a property, with the intention of having it belong to their minor child. In this example, the parent would be the individual with the legal title while their child holds the beneficial interest.

In practical terms, the parent would remain in charge of managing the property for the child, while the child will receive the benefit of the property. In other words, having legal title means bearing the responsibilities of managing the asset, whereas owning equitable title can be seen as having the right to enjoy the use of the asset.

The above illustration can also be used to explain the following legal terms:

•  Settlor – this refers to the individual or entity who makes the trust. In the above scenario, the settlor is the parent.
• Trustee – this refers to the individual or entity who the settlor appoints to hold the legal title. In the example above, the trustee is the parent. This is so because the settlor can appoint themselves to be the trustee.
• Beneficiary – this refers to the individual or entity who the settlor intends to benefit from the trust and will be awarded equitable title. The trustee will manage the trust property on behalf of the beneficiary.

Why Create a Trust?

The ability to separate legal title and equitable title leads to benefits and possibilities that one would not ordinarily realise. Some benefits of making a trust are summarised as follows:

• Parents may purchase property on behalf of their child (under 21 years of age);
• Parents may create an education or medical trust for their child, which can only be used for such intended purposes;
•  Testamentary trusts work in conjunction with Wills to ensure that the settlor’s assets are easily identifiable and can be distributed in accordance with the settlor’s wishes, in the event of his passing; and
•  By having a professional trust company manage the trust, the assets that constitute the subject of the trust can increase in value.

The benefits listed above can have the effect of facilitating proper family planning and wealth management.

There are, however, instances where one may seek to abuse the trust mechanism by attempting to ring-fence certain assets during divorce or bankruptcy proceedings. In such cases, the Family Courts will examine the facts and events surrounding the creation of the trust to determine the settlor’s true intentions. If the Family Courts find that the trust was created for deceitful purposes, it will be voided.