How do you establish a valid trust?

In order to establish a valid trust, it is important to understand what a trust is in the first instance. A trust is established when one party (the “Settlor”) divests themselves of the legal ownership of certain property and transfers the property to another party (the “Trustee”). Equity then obliges and binds the Trustee to hold the property (the “Trust Fund”) and act for and within the best interests of the beneficiaries. The Trust Fund shall always be held separately from the Trustee’s own personal assets and estate.

In this simplified definition of a trust, there are indirect references to the three certainties. The three certainties are essential in creating a valid trust – if any of these certainties fail, the trust fails. 

Certainty No. 1: Certainty of Intention 

An individual will approach a corporate trustee upon receiving tax or legal advice in their tax resident jurisdiction, which advises them that an Isle of Man trust would be beneficial in their circumstances. 

It is important as part of the advice process the client understands the concept of a trust and all it entails. For this reason, it would be advantageous for the corporate trustee and appropriate advice to provide the client with some context and explain the concept of a trust, the requirements and the various roles. By doing this, the client will be more educated in whether they would like to proceed with establishing an Isle of Man trust, thus assisting in their intention to continue in creating a valid trust. 

Once the Settlor understands the concept of a trust, they can clearly show their intention via the drafting and execution of a trust instrument. The Settlor is the architect of the instrument, since this document shall lay out all the duties the Trustee is bound by and all the powers the Trustee may have over the Trust Fund. 

It is very important that the Settlor understands the trust instrument before executing the document, ensuring it contains the requirements they deem necessary. The Settlor may wish to seek the advice of a legal expert to ensure they fully understand the document, and to guarantee that the instrument includes all the terms they feel relevant – as long as it is in accordance with the trust law of the offshore jurisdiction the trust is to be established. 

Unfortunately, the certainty of intention can be brought into question after the establishment of the trust, if the Settlor of the trust is seen to be maintaining control or heavy influence over the Trustee and the Trust Fund. 

Although it is not uncommon for the Settlor to keep in contact or continue a relationship with the Trustee after the trust’s creation, it is imperative that the Settlor respects that the Trustees must be the ones to make the decisions over the Trust Fund (in accordance with the terms of the trust instrument). If the Settlor would like the Trustee to execute a certain power over the assets of the trust, the Settlor must be careful not to be seen to instruct the Trustee, but rather request the consideration of certain proposals, which can then be reviewed and executed by the Trustee at their discretion, if they think it fit.

Certainty No. 2: Certainty of Subject Matter 

In order to satisfy this certainty, the assets that make up the Trust Fund must be recognisable.

To have a Trust Fund, the property must be legally owned by the Trustee. Therefore, there must be proof of the legal transfer of assets from the Settlor to the Trustee. Some examples are;

  • Electronic bank transfer;
  • Property deeds;
  • Stock transfer forms;
  • Share certificates; and
  • Deeds of assignment/appointment.

The trust instrument, and other supplementary deeds (if applicable), will likely provide a schedule of assets which explain what Trust Fund consists of. However, the Settlor must transfer the property to the Trustee in accordance with whatever legal terms make the transfer of ownership effective.

Certainty No. 3: Certainty of Objects 

When a valid trust is established, the beneficiary or beneficiaries of a trust must be easily identifiable; a trust cannot be validly created without a beneficiary, with the exception of purpose trusts. 

A beneficiary of a trust can be an individual, a company, a charity, another trust or any other recognisable and identifiable entity. 

Since a trust cannot be validly established without a beneficiary, the easiest way of meeting the requirements of this certainty is to clearly identify the beneficiary (or beneficiaries) in the trust instrument. 

If the trust instrument permits, beneficiaries can be added or removed at a later date by whatever means the trust instrument stipulates. 

In conclusion, creating a trust is not a simple matter and should always be treated with attention to detail.  One of the most efficient ways of assisting in the creation of a valid trust is to ensure the Settlor understands the concept of a trust and what it means to create one. Additionally, it would always be recommended that the proposed client receive professional advice before proceeding. 

Get in touch

If you’d like to learn more about how Peregrine can help you, please get in touch with Laura Pover (laura.pover@peregrine.co.im) or Martin Hall (martin.hall@peregrine.co.im) who will be able to help. 

Peregrine Corporate Services Limited is licensed by the Isle of Man Financial Services Authority.

 

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