Originating in medieval England, where knights would entrust their properties to trusted individuals before heading to the crusades, trusts, or trust funds, remain relevant and in demand today. They offer entrepreneurs and investors numerous opportunities for business structuring. Moreover, these instruments allow for the flexible management and distribution of assets according to specific tasks and needs. But what exactly is meant by the term “trust”?
Trust and Trust Fund: What’s the Difference?
The concept of a trust is elaborately developed in Anglo-Saxon law, where it is understood as a fiduciary relationship involving the following parties:
- Settlor: the person who creates the trust and transfers assets,
- Trustee: the person to whom the settlor transfers assets, and
- Beneficiary: the person for whose benefit the trustee owns and manages the transferred assets.
Thus, establishing a trust does not involve creating a separate legal entity. A trust is established based on a trust deed or trust agreement, which obligates the trustee to manage the transferred assets according to the conditions of the trust agreement.
A trust is sometimes referred to as a trust fund, which can lead to confusion as the term “foundation” is also used in international practice. Unlike a trust, a foundation is a separate legal entity that must be registered with the relevant government body before it can manage and dispose of its assets.
Some jurisdictions allow for the creation of both trusts and foundations. We will explore the institution of trusts in more detail.
Key Characteristics of a Trust
Despite the variety of trusts, some key features are typical for trusts in general according to the English legal system, concerning the roles of beneficiaries and the settlor:
| Trust Characteristic | Explanation |
|---|---|
| Presence of Beneficiaries |
Essentially, from the moment of its creation, the trustee’s activity is focused on protecting the interests of the beneficiaries. Therefore, the trust agreement must clearly define the specific beneficiaries of the trust or a category of persons from which the trustee can select beneficiaries (in the case of a discretionary trust). Otherwise, the trust is considered invalid. The only exception to this rule is a purposeful charitable trust, which does not have beneficiaries. |
| Role of the Settlor |
After creating the trust, the settlor loses control over the property transferred to the trust. The settlor cannot directly control the trustee’s activities. The only way for the settlor to control the trustee’s activities is to become one of the beneficiaries. In this case, the settlor will have the rights of a beneficiary, including the right to demand the fulfillment of the trustee’s obligations. However, these rights arise from the status of the beneficiary, not the settlor. |
| Possibility of Appointing a Protector | Not all settlors are ready to fully transfer control over assets to an external trustee, even one with a good reputation. A solution can be to appoint a protector—a trusted person of the settlor, who is not connected with the trustee and is meant to monitor the interests of the beneficiaries. In some jurisdictions, a trust protector may have quite broad powers. |
These features emphasize the central role of beneficiaries in the structure of the trust and the limited influence of the settlor after its creation, ensuring independence and efficient management of the trust.
Types of Trusts
There are many different parameters for classifying trusts. We will consider just a few of them.
| Criterion | Classification |
|---|---|
| Possibility of Returning Rights to Property to the Settlor |
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| Method of Distributing Income Among Beneficiaries |
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| Specialized Trusts |
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Using a Trust
Trusts are a flexible instrument, allowing them to be used for family, commercial, and charitable purposes, for example, in the following situations:
- Managing property in the interests of minor family members;
- Assisting family members: building capital to provide support to family members as their financial needs arise;
- Creating an investment instrument;
- Creating an instrument for incentive payments and rewards to employees;
- Achieving specific goals, which are not necessarily charitable, through the creation of a purpose trust;
- Supporting charitable goals and projects;
- Within commercial transactions, for example, to protect the interests of creditors and ensure the fulfillment of financial obligations.
Thus, trusts allow more effective management of assets and protection of interests for both individuals and organizations in various situations.
How to Create a Trust?
In general, the procedure for creating a trust can be represented through the following steps:
| Stage of Creating a Trust | Description |
|---|---|
| Identify Assets | It is necessary to list all property or assets that will be transferred into the trust, as well as their value. |
| Appoint a Trustee | Choosing a trustee should be approached responsibly, as significant legal powers regarding the assets of the trust are transferred to them, as mentioned above. Often, banks or other reputable management companies act as trustees, although an individual can also serve as a trustee. |
| Define the Beneficiaries of the Trust | Recall that only in certain cases can a trust have no beneficiaries. As a general rule, it is necessary to compile a list of persons who are entitled to receive income or other benefits from the assets of the trust, as well as the assets themselves in the event of the termination of the trust. |
| Specify Conditions in the Trust Agreement | A trust is created through a trust agreement, which contains the main conditions regulating the trust and the powers of the trustee. In particular, the trust agreement may contain:
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Jurisdictions Where You Can Establish a Trust
Since the institution of trust originates in English law, it is currently possible to establish a trust in a number of jurisdictions that have adopted the Anglo-Saxon legal system. Let us briefly consider some of them.
United Kingdom
The UK recognizes various types of trusts, each of which is subject to certain requirements. However, in general, the process of creating trusts in the UK involves the steps mentioned above.
In the UK, there is a Trust Registration Service, and since 2022, all trusts (with some exceptions) must be registered in the specified registry. The obligation to register the trust is imposed on the trustee.
When registering in the registry, the following information is transmitted:
- Information about the trust itself (name, date of its creation, and other details),
- A list and description of the trust’s assets,
- Information about all persons related to the trust: the trustee, settlor, beneficiaries, and other persons or organizations (for example, a protector).
This information will be available to the governmental authorities of the UK.
Seychelles
Seychelles trusts are created in accordance with the Trust Act of 2021, which replaced the previously effective International Trusts Act of 1994. The main change concerns the duration of the trust’s existence: under the new legislation, it can exist for an unlimited period of time.
Like in the UK, a trust in Seychelles must be registered with the provision of all information about the trust and the persons involved in it. This information is not publicly accessible, but any person can review it upon payment of a set fee.
Any person can act as the settlor of a trust, and approved persons or organizations that meet certain requirements can act as trustees.
In Seychelles, there is also the possibility of creating private foundations in accordance with the Foundations Act of 2009. Unlike a trust, a foundation is a legal entity and must be registered in the Companies Registry.
Cyprus
A trust in Cyprus is also created based on the principles of English law under the International Trusts Laws of 1992, which were amended in 2012.
The law contains requirements for the residency of persons involved in the trust, namely:
- The settlor and beneficiaries of the trust must not have been residents of Cyprus for the year preceding the creation of the trust. However, relocation to Cyprus after the establishment of the trust is allowed;
- At least one trustee must be a resident of Cyprus.
Trusts in Cyprus are subject to registration by submitting to the Cyprus Securities and Exchange Commission (CySec) basic information about the trust, the trustee, and the beneficiaries. The trust registry remains closed, but access to it may be granted to persons who have proven a legitimate interest in the relevant information. The final decision on access is made by CySec.
British Virgin Islands (BVI)
Since 2003, a special type of trust, VISTA, has existed in the BVI, provided for by the Virgin Islands Special Trusts Act, as amended in 2021. The peculiarity of this type of trust is that the trust’s assets can only be shares of a company registered in the BVI, and the trustee’s powers are limited in terms of managing such shares.
In addition to this, the creation of “classic” trusts based on the principles of English law is also possible in the BVI.
Currently, registration of trusts created in accordance with BVI legislation is not required. Moreover, the trustee has no obligations to submit reports or documents concerning trusts.
Thus, trusts find their application in various jurisdictions that have adopted the Anglo-Saxon legal system. Although the creation of trusts is based on the same principles, each jurisdiction has its own peculiarities and requirements for creating and managing trusts.
Conclusion
Trusts are a multifunctional tool for management, protection, distribution, and transfer of assets. Typically, trusts involve the presence of beneficiaries, limitation of the settlor’s role, and special functions and obligations of the trustee.
Originating in English law, trusts have become an integral part of the legal systems of many jurisdictions, the choice of which should be made taking into account the specific needs of settlors and beneficiaries.