When one thinks of the Middle Ages, knights, Magna Carta, Dante, Chaucer, wars, Marco Polo, churches and the Black Death come to mind. Rarely is the creation of the concept of trusts mentioned in that list. However, in the modern days when even chivalry has been pronounced dead by many, trusts remain relevant, especially for those who wish to protect family wealth and plan for succession.
The concept of trusts developed because there was a practical need. During the Crusades between the 11th and 15th centuries, knights needed someone trustworthy to administer their land and property while they were gone. Since women and children could not hold titles, the trusted individual would hold the titles and manage the knight’s affairs until the knight returns, or if he dies, until the knight’s sons are old enough to take ownership over the land, property and affairs.
Although knights and crusades seem like tales from the past, the essence of the trust remains the same today – a separation of legal and beneficial ownership. A trust is a relationship created at the direction of the settlor (the knight), in which the trustee (the trusted individual) holds the settlor’s property for the benefit of the beneficiaries (the knight, the knight’s wife and children). The trustee holds the legal title of the trust property, manages the trust, and carries out the settlor’s wishes (takes care of the knight’s family). However, the beneficial title is with the beneficiaries (i.e. the true owners of the assets held in trust).
Unfortunately, not all trusted individuals remain trustworthy and some refuse to give back title when the knights return or when the knights’ sons come of age. The aggrieved knights and/or their adult sons sought justice but common law recognizes the title holder as the owner. The solution was the Courts of Chancery whereby the Lord Chancellor (the King’s representative) would decide on the merits of each case – whether it would be inequitable for the title holder to retain the assets held in trust. Even though the trusted individual is the legal owner, conscience and fairness demand he be bound by his commitment in equity to fulfill his obligations towards the beneficiaries. A trustee owes fiduciary duties towards beneficiaries and must always act in the latter’s best interests.
The situation nowadays
In the past, the knights had no choice but to appoint a trusted individual to hold title when they were away. Does the modern-day settlor still need a trust? The answer is it depends on the settlor’s family circumstances and estate planning needs. Contrary to bequests under a will (which only take effect upon the testator’s passing and is subject to the completion of the probate process), a beneficiary under a trust is eligible to enjoy the benefit once the settlor has transferred assets into the trust. If properly drafted, a trust can also carry additional benefits such as asset protection against creditors, succession and tax planning. It is particularly useful when there are young or incapacitated beneficiaries who are not able to manage their affairs or when the trust property is expected to benefit many generations (i.e. long trust period). Another common scenario is the use of a foreign grantor trust to avoid US federal gift and estate tax for non-US settlors who wish to benefit US beneficiaries.
Despite the many potential benefits of a trust, some clients find it difficult to give up control and have complete trust in a third-party to manage the property or assets. However, in order for a trust to be valid, there must be a genuine alienation of the trust assets. It is acceptable for the settlor to be a beneficiary and retain some control, such as investment decisions, but if the settlor retains too much control, the trust may be challenged. In administering the trust, the trustee can take into account the settlor’s guidelines and suggestions but they must still have independent thought and action when the trust deed empowers them with such discretion.
Nowadays, a settlor can retain some control in the trust by (1) writing a letter of wishes to set out detailed guidance for the trustee, (2) appointing a protector of the trust to monitor the trustee and even have the power to remove the trustee after the settlor’s passing, and (3) reserving certain powers in the settlor or other trusted persons, typically investment management powers. However, it is important to bear in mind that given that there could be unexpected events that may occur in the future, it is advantageous for the trustee to be able to retain some discretion to deal with various contingencies in the best interests of the beneficiaries.
In addition to the separation of legal and beneficial ownership, a trust can only be enforceable if the ‘three certainties’ are fulfilled. These are: (1) certainty of intention – the settlor must have demonstrated a clear intention to create a trust, (2) certainty of subject matter – what constitutes the trust property, (3) certainty of object – the beneficiaries under the trust must be ascertainable. For example, unborn future children of the settlor can constitute a class of beneficiaries but ‘close friends of the settlor’ is too vague. Although a trust can be created orally, in order to minimize ambiguity and potential disputes, a trust should be governed by a trust deed which sets out the beneficial provisions as well as duties and powers of the trustee so that certainty and predictability can be achieved. Assistance from a qualified professional is strongly recommended.
You may not be a knight to need a trust. If you want to explore the option of utilizing a trust as part of your estate planning or if you have an existing trust that needs reviewing as it may no longer suit your needs, we have experienced lawyers who can assist you and ensure that your estate planning is as complete as possible.
Our team at Hugill & Ip has extensive experience in dealing with Estate Planning and Trust issues – so if you need further advice on these subject, get in touch with us.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.