In its simplest form, a trust is created when a settlor transfers property to a trustee to hold it for the benefit of one or more beneficiaries. There are three legal capacities to bear in mind in this context: the settlor who settles the property, the trustee who holds the property on trust, and the beneficiary who enjoys the benefits of the trust.
It is not uncommon for the settlor of a trust to be the beneficiary- Albert Cilia
It may be tempting to picture each legal capacity in this three-way relationship as a separate person but this is often not the case in reality. Confusing legal capacities with individuals, in the context of a trust, may be as misleading as it is convenient. It is not uncommon for the settlor of a trust to be the beneficiary (or to belong to a class of beneficiaries), or for the settlor to be also the trustee. The only situation which is not legally possible in trusts law is that in which the settlor is the sole trustee holding the property for himself as sole beneficiary because all the rights to the trust property would be consolidated in a single person.
Our trust law defines a settler as “a person who makes the trust and includes a person who provides trust property or makes a disposition on trust or to a trust”. In simple terms, the settlor is the person who initiates the process leading to the creation of a trust and establishes the terms of the trust. The settlor, may either transfer property to a trustee to be held in trust or he may declare a trust of the property which he already holds.
For instance, a father intending to create a trust of his house for the benefit of his children may either settle the property with a third party trustee to hold it on trust, or he may declare a trust of the property and continue to hold it as trustee. If the father opts to declare a trust of the property and remain the trustee, as in the latter example, he will remain the owner of the property for the benefit of his children but his ownership of the property will be subject to the terms of the trust he declared.
The law defines a trustee as “the person or persons holding or in whom the property is vested on terms of trust in accordance with the provisions of the Trusts and Trustees Act or is otherwise deemed to be a trustee under the Act”.
On the settlement or declaration of the trust, title to the trust property is vested in the trustee and held by the trustee on trust for the beneficiaries according to the terms of the trust.
This means that legal ownership of the property has been transferred from the settlor to the trustee and that the trustee will manage such property in the best interest of the beneficiaries and in accordance with terms of the trust deed.
The house in the previous example is registered in the name of the trustee and the trustee holds all the rights and obligations of an owner at law. As the owner of the property, the trustee will appear on any lease agreement in respect of property and if any disputes arise, the trustee will sue or be sued as owner of the property.
However, the trustee may only deal with the property in accordance with the terms of the trust and solely for the benefit of the beneficiaries. If the terms of the trust require that the property be rented and that the rental income be paid to the beneficiaries annually, the trustee may not decide to dispose of the property. He must follow the terms of the trust.
The Trust and Trustees Act defines a beneficiary as “a person entitled to benefit under a trust or in whose favour a discretion to distribute property held in trust may be exercised”.
Effectively a beneficiary is any person who enjoys a benefit under a trust. The benefit attributable to a beneficiary depends largely on the settlor’s intention when creating the trust and on the extent of the property held in trust.
A settlor wishing to settle the trust property for the benefit of his three children in equal parts will create a fixed trust and name each beneficiary as the beneficiary of a third part of the trust property.
However, a father of three children intending to settle his property with a trustee to distribute it as the trustee deems appropriate to help whichever one of the children earns the least in any given year, will name the three children as beneficiaries of the trust subject to the discretion of the trustee to apply the said disposition appropriately.
Albert Cilia, FCCA, is trust manager at Ganado Trustees & Fiduciaries Limited.
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