Page 2 - Guide-To-Discretionary-Family-Trusts

Many people are unfamiliar with the concept of a “Trust”. It is however a relatively simple legal concept
whereby property is owned and managed by one party‐ the trustees‐ for the benefit of others‐ the
beneficiaries. The trustees have legal title to the property but they are required to deal with the property in
the interests of the beneficiaries. The beneficiaries do not have legal title to the property. The property in
the trust can be anything – a house, money, heirlooms or investments.

The arrangement is set up by a document called a Deed of Trust The person or persons who set up the trust
are called the “settlors” The Deed of Trust will state who the trustees are and will contain a list of the powers
of the trustees i.e. what they can and cannot do with the property. It is of critical importance however
that the powers are exercised at the trustees’ discretion is left to the trustees if this type of trust is to work
properly. The deed will also state who the beneficiaries are and why the trust was set up.

So far so straightforward – you can think of the three separate roles, settlor, trustees and beneficiaries.
However just to make things a little more complex somebody could set up a trust (making him or her a
“settlor”) but he or she could also be a trustee operating the trust and a beneficiary as well! So why then
would anyone bother to set up a trust making themselves trustees and beneficiaries?

The reason people do this is that trusts can be very useful devices for many families. Separating the
ownership and control of assets legally from the people who are entitled to use and enjoy these assets can
produce various benefits. It is perhaps easier to explain these by first describing what happens in a standard
Discretionary Family Trust – which sometimes is called variously a “Property Protection Trust” or an “Asset
Protection Trust”. These latter two names effectively describe the overriding benefit of such trusts – which
is that by being in a trust, an asset can be protected from threats which might affect it were it to be held by
individuals.

What actually happens when a family discretionary trust is set up? Typically the settlors will be a married
couple and they will appoint themselves and one or more of their children as trustees, but they will probably
appoint professional parties as trustees also e.g. solicitors. A group of trustees acts just like a committee in
charge of something, and the trust deed will usually set out rules as to how decisions should be made by
trustees. Usually the settlors will ensure that they make up a majority of the trustees (e.g. themselves and
one professional trustee) so that they effectively keep control of the assets albeit they are owned by the trust.
Usually the beneficiaries in the trust will be all the settlors’ children and the settlors themselves but of course
every case is different. Like all committees, trustees should meet or communicate to keep the trust live and
operating. If there is a large amount of property in the trust with lots of decisions to be taken there may be
more regular meetings or communications between trustees. If there is perhaps only a house in the trust
with few on‐going decisions to make trustees may meet or communicate very infrequently.

Once the trust is set up and the property (say a house) is transferred into the trust, no individual owns that
property. The trust deed would normally include a provision that the settlors can live in the property
throughout their lives. The trustees’ duties to the beneficiaries include looking after and preserving the assets
in the trust. With a professional party as a trustee, guiding the other trustees, clearly sensible decisions should
be made which would help preserve the assets in the trust.

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