The settlor must intend to create an existing trust. The desire to create confidence in the future is legally ineffective. If a settlor does not immediately designate the beneficiary, trustee or trust, a trust is not created until the designations have been made. Support trusts A trust that orders the trustee to pay or use only the amount of income and capital necessary to train and support a beneficiary is a support trust. The beneficiary`s interests cannot be transferred. Paying money to an assignee of the beneficiary or to creditors would defeat the objectives of the trust. Support trusts are primarily used in jurisdictions that prohibit profligate trusts. In general, a private express trust requires three elements to be secured, collectively referred to as the «three certainties». These elements were determined in Knight v Knight as intent, object, and objects. [15] Certainty of intent allows the court to establish the true reason for the establishment of the trust by a trustee. Certainty of purpose and purpose allows the court to manage trust when trustees do not. [16] The court determines whether there is sufficient certainty by interpreting the language used in the trust indenture. These words are objectively interpreted in their «reasonable sense»[17] in the context of the instrument as a whole.
[15] Although the intention to express trusts is an integral part of it, the court will try not to let trusts go bankrupt due to a lack of security. [18] State laws and court decisions regulate trust law. The validity of an immovable property trust is determined by the law of the State in which the property is located. The law of the State in which the grantor has permanent residence (domicile) of the grantor often governs a personal property trust, but courts also consider a number of factors – such as the grantor`s intention to determine the State in which the grantor lives, the state in which the trustee lives, and the location of the trust`s assets – when making decisions, which state has the greatest interest in regulating fiduciary assets. Living trusts, as opposed to testamentary trusts, can help a trust avoid inheritance. [45] Avoiding discounts can reduce costs and preserve privacy,[46] and living trusts have become very popular. [47] The estate can be expensive, and estate records are publicly available, while distribution through a trust is private. Life trusts and wills can also be used to plan for unforeseen circumstances such as incapacity for work or disability by granting discretionary powers to the trustee or executor. [46] Special trusts may be fixed trusts or discretionary trusts; a fixed trust is a trust in which each beneficiary has a fixed and defined interest in the trust, which creates rights that can be invoked against trustees; An example of firm trust is when ownership is limited to X and Y to trust for A for life, while the rest is absolutely limited to B.
A and B both have claims on income and capital by virtue of their particular interests, respectively, which may be exercised against the trustees. In contrast, a discretionary trust is a trust in which trustees have the discretion to decide whether beneficiaries, if any, should receive which portion of the trust. These trusts usually come with power, so the beneficiaries have no interest in the trust unless discretion or power is exercised in their favour. An example would be if the property is held in trust at X and Y, for those of Z`s children, who should name X and Y at their sole discretion. See also CHANGE IN CONFIDENCE. Under South African law, living trusts are considered taxpayers. There are two types of taxes for living trusts, namely income tax and capital gains tax (CGT). A trust pays income tax at a flat rate of 40% (individuals pay according to income scales, usually less than 20%).
However, the income of the trust may be taxed either in the hands of the trust or in the hands of the beneficiary. A trust pays CGT at the rate of 20% (individuals pay 10%). Trusts do not pay estate tax (although trusts may have to repay outstanding loans to a deceased estate when the loan amounts are taxable with the deceased`s estate tax). [42] There are strong restrictions on a trustee in a conflict of interest. Courts can annul a trustee`s actions, reject profits and impose other sanctions if they find that a trustee has failed in any of his or her duties. Such a breach is called a breach of trust and can leave a negligent or dishonest trustee with severe liability for their breaches. It is strongly recommended that settlors and trustees consult with qualified legal counsel before entering into a trust agreement. The failure of a settlor to appoint a trustee does not result in the extinction of a trust. The court appoints a trustee to administer the trust and orders that the person who has legal title to the property transfer it to the appointed trustee. Trust law in civil courts, generally including continental Europe, exists only in a limited number of jurisdictions (e.g.
Curaçao, Liechtenstein and Sint Maarten). However, trust may be recognised as an instrument of foreign law in matters of conflict of laws, for example within the Brussels (Europe) regime and the parties to the Hague Trust Convention. Concerns about tax evasion have always been one of the reasons why European countries with civil law systems have been reluctant to introduce trusts. [10] Individuals can control the distribution of their wealth during their lifetime or after their death through a trust. There are many types of trusts and many purposes for their creation. A trust may be established for the financial benefit of the person establishing it, a surviving spouse or minor children, or for a charitable purpose. Although various trusts are legally permitted, trust agreements that attempt to circumvent creditors or legal liabilities are overturned by the courts. In the case of a living trust, the settlor may retain some degree of control over the trust, for example by becoming a protector under the trust indenture. In practice, living trusts are also largely determined by tax considerations.
When a living trust goes bankrupt, ownership is typically held for the settlor or settlor on the resulting trusts, which in some notable cases has had disastrous tax consequences. [ref. needed] The trust fund is an age-old instrument of feudal times, sometimes greeted with contempt because it is associated with the idle rich (as in the pejorative «baby trust fund»). But trusts are very versatile vehicles that can protect assets and put them in good hands now and in the future, long after the original owner of the asset dies. Fiduciary Any person who has the legal capacity to take, hold and manage property for his or her own use may acquire, hold and manage property in trust. Non-residents of the state in which the trust is to be administered may be trustees. State law determines whether a foreigner can act as a trustee. A company can act as a fiduciary. For example, a trust company is a bank appointed by a settlor to act as trustee in the administration of a trust.
A partnership may act as a trustee if permitted by state law. An unregistered association, such as a trade union or social association, cannot normally serve as a trustee. In trust law, a fiduciary relationship always exists when the settlor relies on the trustee and places particular trust in him. The trustee must act in good faith with strict honesty and consideration to protect and serve the interests of the beneficiaries. The trustee also has a fiduciary relationship with the beneficiaries of the trust. To create an explicit trust, the settlor must possess or have the power to own or power of attorney over the property that will become trust property. The settlor must have legal jurisdiction to establish a trust. Trusts can also be used for tax planning. In some cases, the tax consequences of using trusts are less than other alternatives.
As a result, the use of trusts has become an integral part of individual and business tax planning. In South Africa, in addition to traditional living trusts and testamentary trusts, there is a «bewind trust» (inherited from the Romano-Dutch bewind managed by a bewind truster),[40] where the beneficiaries hold the trust, while the trustee manages the trust, although this is not considered a real trust under modern Dutch law. [41] Bewind trusts are created as commercial instruments that provide limited liability and certain tax benefits to trustees. [ref. needed] Although trusts are often associated with intrafamilial wealth transfers, they have become very important in U.S. capital markets, particularly through pension funds (essentially still trusts in some countries) and mutual funds (often trusts). [10] Trust law is broad and often complicated, but it is generally a question of whether a trust has been established, whether it is a public or private trust, whether it is legal and whether the trustee has lawfully managed the trust and trust.