Relationship between trustee and trustor

relationship between trustee and trustor

A trust is the legal relationship created when a person (the "settlor") places assets under the control of a person (the "trustee") for the benefit of some other. Although there is no difference between a settlor and grantor, the relationship between other parties can be a bit more complicated. Learn more. The concept of fiduciary duty is central to the relationship between the trustor and trustee. The trustor transfers his or her fiduciary to a trustee.

In many cases, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. For an example see the "nil-band discretionary trust", explained at Inheritance Tax United Kingdom. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.

In Canada [27] and Minnesota monies owed by employers to contractors or by contractors to subcontractors on construction projects must by law be held in trust. In the event of contractor insolvency, this makes it much more likely that subcontractors will be paid for work completed. Legal retainer - Lawyers in certain countries often require that a legal retainer be paid upfront and held in trust until such time as the legal work is performed and billed to the client, this serves as a minimum guarantee of remuneration should the client become insolvent.

relationship between trustee and trustor

Types[ edit ] Alphabetic list of trust types[ edit ] Trusts go by many different names, depending on the characteristics or the purpose of the trust. Because trusts often have multiple characteristics or purposes, a single trust might accurately be described in several ways.

For example, a living trust is often an express trust, which is also a revocable trust, and might include an incentive trust, and so forth. The concept of an asset-protection trust encompasses any form of trust that provides for funds to be held on a discretionary basis.

relationship between trustee and trustor

Such trusts are set up in an attempt to avoid or mitigate the effects of taxationdivorce and bankruptcy on the beneficiary. Such trusts may be proscribed or limited in their effect by governments and the courts. Unlike an express trust, a constructive trust is not created by an agreement between a settlor and the trustee.

A constructive trust is imposed by the law as an "equitable remedy". This generally occurs due to some wrongdoing, where the wrongdoer has acquired legal title to some property and cannot in good conscience be allowed to benefit from it. A constructive trust is, essentially, a legal fiction. For example, a court of equity recognizing a plaintiff's request for the equitable remedy of a constructive trust may decide that a constructive trust has been created and simply order the person holding the assets to deliver them to the person who rightfully should have them.

The constructive trustee is not necessarily the person who is guilty of the wrongdoing, and in practice it is often a bank or similar organization. The distinction may be finer than the preceding exposition in that there are also said to be two forms of constructive trust, the institutional constructive trust and the remedial constructive trust.

The latter is an "equitable remedy" imposed by law being truly remedial; the former arising due to some defect in the transfer of property. In a discretionary trust, certainty of object is satisfied if it can be said that there is a criterion which a person must satisfy in order to be a beneficiary i.

In that way, persons who satisfy that criterion who are members of that class can enforce the trust. In these types, a directed trustee is directed by a number of other trust participants in implementing the trust's execution; these participants may include a distribution committee, trust protector, or investment advisor. The directed trustee's role is administrative which involves following investment instructions, holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating trust participants and offering dispute resolution among the participants Dynasty trust also known as a 'generation-skipping trust': A type of trust in which assets are passed down to the grantor's grandchildren, not the grantor's children.

The children of the grantor never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets were transferred to his or her children first. Generation-skipping trusts can still be used to provide financial benefits to a grantor's children, however, because any income generated by the trust's assets can be made accessible to the grantor's children while still leaving the assets in trust for the grandchildren.

An express trust arises where a settlor deliberately and consciously decides to create a trust, over their assets, either now, or upon his or her later death.

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In these cases this will be achieved by signing a trust instrument, which will either be a will or a trust deed. Almost all trusts dealt with in the trust industry are of this type.

They contrast with resulting and constructive trusts. The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. In the USA Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate.

The entitlement of the beneficiaries is fixed by the settlor. The trustee has little or no discretion. At the end of the term, the financial property is transferred tax-free to the named beneficiaries. This trust is commonly used in the U. Combines elements of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries.

A resulting trust may be deemed to be present where a trust instrument is not properly drafted and a portion of the equitable title has not been provided for. In such a case, the law may raise a resulting trust for the benefit of the grantor the creator of the trust.

In other words, the grantor may be deemed to be a beneficiary of the portion of the equitable title that was not properly provided for in the trust document. The trust is often run by a committee, and can act similarly to a development agencydepending on the provisions of its charter.

A trust that uses distributions from income or principal as an incentive to encourage or discourage certain behaviors on the part of the beneficiary. The term "incentive trust" is sometimes used to distinguish trusts that provide fixed conditions for access to trust funds from discretionary trusts that leave such decisions up to the trustee.

Inter vivos trust or 'living trust': A settlor who is living at the time the trust is established creates an inter vivos trust. In contrast to a revocable trust, an irrevocable trust is one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed.

Although in rare cases, a court may change the terms of the trust due to unexpected changes in circumstances that make the trust uneconomical or unwieldy to administer, under normal circumstances an irrevocable trust may not be changed by the trustee or the beneficiaries of the trust. A private, nonprofit organization that, as all or part of its mission, actively works to conserve land by undertaking or assisting in land or conservation easement acquisition, or by its stewardship of such land or easements; or an agreement whereby one party the trustee agrees to hold ownership of a piece of real property for the benefit of another party the beneficiary.

Strictly speaking, an offshore trust is a trust which is resident in any jurisdiction other than that in which the settlor is resident. However, the term is more commonly used to describe a trust in one of the jurisdictions known as offshore financial centers or, colloquially, as tax havens. Offshore trusts are usually conceptually similar to onshore trusts in common law countries, but usually with legislative modifications to make them more commercially attractive by abolishing or modifying certain common law restrictions.

By extension, "onshore trust" has come to mean any trust resident in a high-tax jurisdiction. A personal injury trust is any form of trust where funds are held by trustees for the benefit of a person who has suffered an injury and funded exclusively by funds derived from payments made in consequence of that injury. Private and public trusts: A private trust has one or more particular individuals as its beneficiary. By contrast, a public trust also called a charitable trust has some charitable end as its beneficiary.

In order to qualify as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable trust, by analogy.

Charitable trusts are entitled to special treatment under the law of trusts and also the law of taxation. In the UK, a protective trust is a life interest that terminates upon the happening of a specified event; such as the bankruptcy of the beneficiary, or any attempt by an individual to dispose of his or her interest.

They have become comparatively rare. In the US, a 'protective trust' is a type of trust that was devised for use in estate planning. In another jurisdiction this might be thought of as one type of asset protection trust.

Often a person, A, wishes to leave property to another person B. A, however, fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it.

How to understand trusts

A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B.

The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remaindersand is frequently used as an alternative to them.

Or, more accurately, non-charitable purpose trust all charitable trusts are purpose trusts. Generally, the law does not permit non-charitable purpose trusts outside of certain anomalous exceptions which arose under the eighteenth century common law and, arguable, Quistclose trusts.

Certain jurisdictions principally, offshore jurisdictions have enacted legislation validating non-charitable purpose trusts generally. Short for "qualified terminal interest property. A resulting trust is a form of implied trust which occurs where 1 a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets; or 2 a voluntary payment is made by A to B in circumstances which do not suggest gifting.

relationship between trustee and trustor

B becomes the resulting trustee of A's payment. A trust of this kind may be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the US as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death.

A post mortem trust constituted externally from a will but imposing obligations as a trustee on one, or more, legatees of a will. A trust in which a will demonstrates the intention to create a trust, names a trustee, but does not identify the intended beneficiary. In the US jurisdiction this has two distinct meanings: In a simple trust the trustee has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust.

This is also called a 'bare trust'.

relationship between trustee and trustor

All other trusts are special trusts where the trustee has active duties beyond this. A simple trust in Federal income tax law is one in which, under the terms of the trust document, all net income must be distributed on an annual basis.

In the UK a bare or simple trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland. In the US, a special trust, also called complex trust, contrasts with a simple trust see above. It does not require the income be paid out within the subject tax year.

The funds from a complex trust can also be used to donate to a charity or for charitable purposes. A trust implementing a special power of appointment to provide asset protection features. It is a trust put into place for the benefit of a person who is unable to control their spending.

It gives the trustee the power to decide how the trust funds may be spent for the benefit of the beneficiary. Standby Trust or 'Pourover Trust ': The trust is empty at creation during life and the will transfers the property into the trust at death. This is a statutory trust. A trust created pursuant to a state's business trust statute used primarily for commercial purposes.

Two prominent variants of Statutory Business Trusts are Delaware statutory trust s and Massachusetts business trust s.

The Difference Between a Trustor, a Trustee, and a Beneficiary – Trial Lawyer Money

A trust created in an individual's will is called a testamentary trust. Because a will can become effective only upon death, a testamentary trust is generally created at or following the date of the settlor's death. A trust where the beneficiaries called unitholders each possess a certain share called units and can direct the trustee to pay money to them out of the trust property according to the number of units they possess.

A unit trust is a vehicle for collective investmentrather than disposition, as the person who gives the property to the trustee is also the beneficiary. Trust law in civil law jurisdictionsgenerally including Continental Europe only exists in a limited number of jurisdictions e. The trust may however be recognized as an instrument of foreign law in conflict of laws cases, for example within the Brussels regime Europe and the parties to the Hague Trust Convention.

Tax avoidance concerns have historically been one of the reasons that European countries with a civil law system have been reluctant to adopt trusts. United States trust law State law applies to trusts, and the Uniform Trust Code has been enacted by the legislatures in many states.

In addition, federal law considerations such as federal taxes administered by the Internal Revenue Service may affect the structure and creation of trusts. In the United States the tax law allows trusts to be taxed as corporations, partnerships, or not at all depending on the circumstances, although trusts may be used for tax avoidance in certain situations. The Dodd-Frank Wall Street Reform and Consumer Protection Act changed this somewhat by not allowing these assets to be a part of large banks' regulatory capital.

Estate planning Living trusts, as opposed to testamentary will trusts, may help a trustor avoid probate. Both living trusts and wills can also be used to plan for unforeseen circumstances such as incapacity or disability, by giving discretionary powers to the trustee or executor of the will. Unlike trusts, wills must be signed by two to three witnesses, the number depending on the law of the jurisdiction in which the will is executed.

Legal protections that apply to probate but do not automatically apply to trusts include provisions that protect the decedent's assets from mismanagement or embezzlement, such as requirements of bondinginsuranceand itemized accountings of probate assets. Estate tax effect[ edit ] Living trusts generally do not shelter assets from the U.

Married couples may, however, effectively double the estate tax exemption amount by setting up the trust with a formula clause. Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. Therefore, testamentary will trusts often leave assets in a trust for the benefit of these minor children. There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts.

In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times as to how much and when each beneficiary is to benefit. You should obtain legal advice before setting up a trust. Your lawyer will assist you with, in particular, drawing up the principal document creating the trust, which is called the "trust deed". The Essential Requirements of a Trust Introduction A trust must have the following essential elements: Therefore a valid trust cannot come into being by accident.

The settlor The settlor creates the trust. The settlor must be an adult 20 or over and be of sound mind. The settlor may be a company or even another trust. There can be more than one settlor of a trust. Trustees Any person who can own property may be a trustee. A minor someone under 20 can be a trustee, but a court would have to appoint someone to act as trustee until the minor turns Usually an independent trustee is included as one of the trustees, and this will often be the settlor's lawyer or accountant.

Having an independent trustee helps avoid any suggestion that the settlor continues to have control of the trust assets, in which case Inland Revenue may argue that the trust is a "sham" and therefore invalid. Trustees have a duty to acquaint themselves with the terms of the trust deed, and also with who the possible beneficiaries may be and what the assets and liabilities of the trust are.

Trustee decisions must be unanimous, unless the trust deed allows for majority decisions. Trustees must ensure that proper records are kept of their decisions. Trustees may not delegate their duties or powers to others unless the trust deed allows this. Trustees may be paid for their services only if the trust deed specifically provides for this.

A trustee will not be liable for any losses suffered by the trust if he or she acts prudently and considers the interests of all beneficiaries discretionary or otherwise.

For more information about trustees and their duties, see How to be a trustee. The beneficiaries These are the people who benefit under the trust. Under a discretionary family trust, the beneficiaries are usually the immediate and extended family. If the trustees breach their duties, this is called a "breach of trust".

Only the beneficiaries have a right to bring an action in the courts against the trustees for a breach of trust.

See How to be a trustee for information on the duties of trustees. What should be included in it? The trust deed the legal document that sets up the trust should deal with the following matters: For example, if you had personally guaranteed a bank loan or the lease of the business premises, a claim could be made against you personally.

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In that case, all of your personal assets would be available to the person claiming against you. But if your personal assets had been transferred to a trust, these assets may be protected. But to be protected, the transfer of the assets to the trust must not be seen to have been carried out to defeat creditors. The transfer could certainly be set aside if it could be proved that when you set up the trust you were insolvent or a creditor was pursuing a major claim against you.

Claims by family members or others If your assets are transferred into a trust during your lifetime, those assets will not be subject to claims after your death from family members or others whom you do not wish to share in those assets. This Act sets up a presumption that all relationship property will be split equally between you if you split up. If the assets are first transferred to a family trust, then your spouse or partner would not be able to claim a share of those assets.

See generally How to: The division of property when a marriage or de facto relationship ends. A different but related situation can occur with your children. If you have gifted assets to a child who later separates from a spouse or partner, half of that child's assets may be taken by the ex-spouse or ex-partner.

But if those assets were held by a family trust for the benefit of that child, rather than being held by him or her directly, those assets may be protected. Income tax There may be tax advantages in placing income-earning assets in a trust. The income earned by a trust is taxed at 33 percent.

This is the same as the rate imposed on companies but lower than the current highest marginal rate for individuals 39 percent. The trust income can also be allocated to beneficiaries including your children who may earn little or no other income, and may therefore be liable to pay tax at a rate lower than the 33 percent trust rate.

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Asset-testing by the government One of the longer term advantages of a trust is that the capital funds of the trust may be exempt from assessments for rest home subsidies or other government benefits: Rest home subsidies "Residential Care Subsidy" - Gifting assets to a trust may assist you to qualify for this subsidy.

For more information on how gifting to trusts or directly to family members can achieve this, see How to apply for a rest home subsidy Residential Care Subsidy and How to set up a family trust.

The NZ Superannuation Surcharge has now been abolished, but some other form of means test may well be applied in the future. Transferring income-earning assets to a trust can reduce your income, and previously this avoided or reduced the surcharge liability. A trust arrangement would almost certainly confer the same benefits if a future means test is imposed. The value of income-earning assets given to the trust would be owed by the trustees to you, the settlor, and that debt could be repaid by the trustees; as repayments, they would be capital and therefore be tax free.