A ‘trust’ is an obligation annexed to the ownership of a property, and arising out of a confidence reposed in and accepted by the trustee, or declared and accepted by him, for the benefit of another or of another and the owner.
The above definition of trust brings out a few important concepts –
- It is an obligation attached to the ownership of the property. The obligation can be to utilize the incomes in a particular way, to transfer the property after a specified time or some other obligation which can be met from the trust property.
- arising out of a confidence reposed in and accepted by the trustee: This means that the obligation should be accepted by the trustee of the property.
- The obligation is directed to the benefit of others which may include the trustee himself.
The parties involved in this definition are
- Author: The person who reposes the confidence and transfers the asset in favour of trustee.
- Trustee: The person on whom a confidence is reposed. The trustee is also the owner of the property (ie. The property is transferred in the name of the trustee once the trust is created)
- Beneficiary: The person towards whose benefit the property is utilized. The beneficiary can be any 3rd person including the trustee.
- Trust Property: The property in question on which the obligation is attached.
Types of Trusts:
A trust can have all or any of the following features:
- Revocable: Implying that the trust can be dissolved at the option of the author at any time during the lifetime of the beneficiary.
- Irrevocable: Means that the trust cannot be dissolved by the author. However, if the objective of the trust is met it may be dissolved.
- Determinate: This means that the beneficiaries and their respective shares are known at the time of trust formation. If their shares are unknown, then the trust is an indeterminate trust.
- Discretionary: implying that the trustee has a discretion on applying the income and trust property to the benefit of the beneficiary in any proportion he deems fit. However, in a discretionary trust, the trustee cannot apply the trust property to the benefit of a person not a beneficiary.
What does ring-fencing the assets mean?
Ring-fencing implies that the assets of an individual are protected from depletion and no interest can be created on them. The protection of the assets may be from creditors, divorce settlements, family disputes and wealth and estate taxes to name a few.
As the assets of the trust lies with a separate person (ie. trustee) and not under the control of the author or beneficiary, the creditors cannot lay claim on the asset. Similarly in case of divorce as the asset is not owned by the husband, the wife’s claim on the asset for maintenance and division is not there. In many countries there is an estate tax at the time of death (ie. US has 50% estate tax and any transfer at the time of death requires a 50% tax to be paid). India too is contemplating reintroducing this tax.
Strategy for ring fencing assets through trust structure-
Structure: The trust should ideally be an irrevocable trust which implies that the transferor should not be having the rights to cancel the transfer once the trust is formed. In case of a revocable transfer, in case of insolvency, the official liquidator gets all the rights of the transferor and can revoke the transfer. At that time the trust property becomes the asset of the transferor and the creditors can lay claim on it. A similar situation cannot happen in case of a irrevocable transfer.
Discretion: The trust can either be discretionary or non-discretionary. If the Trust is a non-discretionary trust and any claims on the beneficiary *****, the creditors can claim the beneficial portion of the beneficiary hence getting the trust asset. As a discretionary trust, the Trustee has the authority to decide what will be the beneficial stake of the beneficiary, the claims of the creditors can be kept at bay and the family property may be protected.
Documentation: The trust document and the appointment of trustee is a matter of solicitation based on the nature of asset, the objective of the trust and beneficiary situations. Other objectives may include safeguarding interest of family members (special needs children), tax efficiencies, attaching conditions to gifts, bequeathing wealth to charitable / religious purposes and avoiding family disputes.
Important Notice: The views expressed are personal views of the author. The author will not be liable for any tax / legal implications on the individual, the investor or any other person. This is not a legal advice. The article should not be construed as a legal advice and the readers should consult their legal advisors before taking any decision.