What is a trust?
A trust is a legal relationship. It is created by a person called a settlor who transfers assets to trustees. The trustees hold those assets for the benefit of other people, known as beneficiaries. A trustee is commonly either an individual or a trust company that provides its professional services for a fee. Offshore trusts usually also have a protector. A protector is given powers of oversight and their consent is required for any significant changes to be made to the terms of the trust and how it is administered.
What are the different types of trust?
Common types of trust are bare trusts, interest in possession trusts and discretionary trusts.
A bare trust means that the trustee simply holds assets on behalf of a beneficiary. An interest in possession trust, also known as a life interest trust, entitles a beneficiary to receive income from trust assets or have use and enjoyment of a trust asset such as a house.
A discretionary trust is where the beneficiaries have no automatic right to receive capital or income from the trust assets. Instead the trustees exercise their discretion in deciding what distributions are made to the beneficiaries and when. In doing so, they will take into account a document called a letter of wishes. This is prepared by the settlor and sets out what they would like to happen. It is not binding and is not a set of instructions. The trustees exercise their own discretion and the settlor is no longer in control of the assets they have transferred to the trustees.
What are the general duties of trustees?
Trustees must act in the best interests of the beneficiaries and in accordance with the terms of the trust instrument. Amongst other duties, trustees have a duty to act with skill and care, which will take into account any special knowledge they have and whether or not they are acting in a professional capacity.
Can a trust be varied?
Yes. This can be done by unanimous agreement of the beneficiaries or as ordered by the court.
Can beneficiaries obtain information about their trust?
Beneficiaries are not automatically entitled to documents and information about their trust. They do, however, have a legitimate expectation that these will be disclosed to them. It is up to the trustees to balance their own interests with those of the beneficiaries and any third parties in deciding whether or not to provide certain information and documents.
Can a beneficiary challenge a decision made by trustees?
Yes. The main reasons for making a challenge are that the trustees have acted outside of their powers, incorrectly exercised their powers (referred to as breach of trust or fraud on a power), are conflicted or have made a mistake.
Can a new trustee be appointed and an existing one removed?
Trustees can appoint a replacement for any trustee who retires.
If a trustee behaves improperly or there is a breakdown in their relationship with the beneficiaries, an application can be made to court to order their removal and replacement.
Beddoe applications
When a trustee wants to obtain approval from the court before taking a significant decision, it will make a Beddoe application. The name comes from the case of Re Beddoe decided in 1893. An application is usually made when there are court proceedings. Taking a significant decision with the court’s approval gives trustees the right to use trust assets to pay any costs incurred under those proceedings.