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Why trust a trust?
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Business
by MeLANIE ORR  
December 10, 2016

Why trust a trust?

The answer could be as simple as: “I just simply do not want anyone to know my business!” That being said, before we jump into the complexities that are trust arrangements, we will take a brief look at the definition of a trust so that we can wrap our minds around how we can use them to our benefit.

A trust can be described as an obligation on a person (a trustee) to act in good conscience when dealing with property over which he has been given control (called the trust property) for the benefit of another person (called the beneficiary). The trustee therefore holds the property on trust for the beneficiary and is said to be vested with the legal right to the trust property, though he need not be entitled to any beneficial right to same.

Therefore, on any documentation illustrating ownership of the trust property, the trustee is the legal owner but there exists a separate document, known as a trust deed, which sets out who truly has the benefit of the trust property.

Let’s use an example to illustrate: Mr A appoints Mr B in a trust document to act as his trustee to hold property known as Fern Gully for the benefit of Mr A’s daughters, Miss M and Miss P. Mr A would then transfer legal ownership in Fern Gully to Mr B, so that on the title to Fern Gully Mr B is the legal owner of the property.

The limitation(s) on Mr B’s powers in relation to Fern Gully, however, would be set out in a trust deed entered into between Mr A and Mr B. In this trust deed, Mr A would set out, inter alia, the purpose of this trust relationship and the guidelines governing how his daughters, Miss M and Miss P, should benefit from same.

In legal practice, we as attorneys often use creative avenues to introduce the use of trust arrangements to the benefit of our clients. Trusts are created for numerous reasons, each of which addresses needs peculiar to a particular individual or group of individuals, but we will discuss the more traditional uses below.

Providing for extra marital partners or children

Dating back to olden times when discretion was heralded and outside children not so much, “secret trusts” were born as a means of keeping the true beneficiaries (usually an extramarital partner, or a child or children born outside the matrimonial home) secret and thereby protecting loved ones from shame and ridicule.

By way of example, a gentleman may leave an asset to a friend in his Last Will and Testament. What would not be known is that the asset ostensibly bequeathed to the said friend in the will is subject to a trust arrangement for the benefit of the partner or child/ children outside the marital home. The terms of the trust would have been communicated to the trustee during the life of the deceased, who would have been the settlor (creator) of the trust.

So ostensibly, the gift is made to the friend though the gift is for someone else, and it is expected that the trustee will act with discretion in fulfilling his duties.

Protecting family wealth

Though not provided for in local legislation, there are other jurisdictions which allow for a professional trustee to hold shares of a company incorporated in those jurisdictions for the benefit of family members. The family would transfer specific assets to the company, and the trustee would hold shares in the company for the benefit of specified beneficiaries. Upon the occurrence of an event set out in the trust deed, the trustee would transfer the shares in the company to the beneficiaries.

This type of trust is particularly useful in providing for minors or other vulnerable beneficiaries, as the trustee may be given the power for example to retain legal ownership of the property until a beneficiary becomes of legal age or has graduated from college (or has reached whatever milestone the settlor may think that the beneficiary will be better able to handle ownership of the property).

One of the benefits of using this type of structure is that a company may exist into perpetuity and therefore may hold such assets into perpetuity with one or more trustees holding the shares over time for the benefit of a beneficiary or beneficiaries.

3. Management of conflicts

There may be occasions where a person is faced with a conflict of interest and may use trust structures to legitimately resolve such conflicts by absolving himself of legal ownership of certain assets.

Administrative efficiency

Where lenders float a debt security (such as bonds) which are secured by assets such as real property, it may be difficult if not impossible to register a multiplicity of separate mortgage interests on title.

The appointment of a trustee with whom a trust deed has been created to acknowledge the participating interest of each investor may prove to be a practical and useful tool which homogenises the terms of the securities and lends to more efficient administration.

Charity

Charitable purpose trusts are the popular go-to trusts where a settlor does not wish to designate named individuals as beneficiaries to a trust property, but instead creates an avenue through which to express his philanthropic intentions, potentially beyond the grave.

Trustees may be given the control over trust property which may be invested or divested to the benefit of a class of individuals that meet certain criteria which may be identifiable by a description contained in the trust deed but are not named beneficiaries.

For example, going back to our settlor above, Mr A, he may create a second trust whereby the same trustee, Mr B, would be the legal owner of funds. In a trust deed Mr B would be directed to award, by way of a scholarship and over a five-year period, a certain sum of money to students attending the University of the West Indies aged 18-22, who demonstrate a certain level of financial need in order to fulfil their studies and who have performed at a high academic level over a pre-determined period.

IN OTHER WORDS, the key to trusting a trust is trusting a trustee. A trustee is the legal owner of property and therefore should be selected after much careful and thorough consideration. The terms of his or her powers must be detailed with a fine-tooth comb to ensure your wishes are in fact relayed and come to fruition.

Engaging the services of a knowledgeable, analytical and smart attorney to help you to identify a structure to best suit your needs and to guide you with regard to providing for your loved ones will go a long way in ensuring that your trust is not misplaced.

Melanie Orr is an Attorney-at-Law practising at MH&CO, Attorneys-at-Law, a corporate law firm. She may be contacted at: legal@mhcolegal.com

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