WHO’S THE BOSS?
BY SIMON REED, EXECUTIVE DIRECTOR
Trusts are frequently misunderstood. For some, they are seen as highly complex structures that only the very wealthy need to worry about. For others, there is confusion about how a trust actually works, especially who has control over it and the assets it holds. It is difficult to blame anyone for this confusion – much of what people think about trusts likely comes from television and the news media, rather than from a wealth manager.
The debate over who is truly in charge of a trust is an important discussion point – particularly for families that may have differing opinions about how wealth should be passed to the next generation. Think of trust funds that have been set up for children to receive when they turn 18, or a trust designed to leave assets to family members on death. For all intents and purposes, the person receiving the assets – the beneficiary – does not have any control until the trustees decide to do so. Yet in many ways, beneficiaries may see themselves as being the eventual owner, and therefore they will want to exert some control over the trust.
So what are the roles and responsibilities of each party involved in a trust?
When someone sets up a trust, they are known as the settlor (in the UK), and the assets they place within it become legally owned by the trustee. The settlor has the responsibility of sending clear instructions for the assets to be held for the benefit of a third party, who is known as the beneficiary. The settlor sets out the purpose of the trust, as well as how and when the assets will be distributed. For example, this may be when the settlor becomes incapacitated or dies, or it may be when the beneficiary reaches a certain age.
Depending on the type of trust structure used, the settlor can retain an element of control over the assets during their lifetime. If a revocable living trust is used with assets passing at death, the settlor is considered the beneficiary during their lifetime and can make changes while they are still alive. This means the settlor can add or remove beneficiaries if necessary.
In simple terms, the trustee’s role is to take care of the trust assets for the beneficiary. While the trustee is the legal owner, this is not a situation where they gain from it personally – they are simply acting as a steward rather than a permanent owner. This creates a situation where the legal ownership and the beneficial ownership of the assets are separated – the trustees therefore must act in the best interest of the beneficiary. With that in mind, a trustee cannot use the trust assets for their own benefit.
There are several duties that trustees need to carry out. They need to be loyal in that they are managing the assets for the beneficiary in line with the settlor’s wishes. They need to manage the assets effectively, which includes appointing investment managers and carrying out proper due diligence during this process. And they also need to make decisions about the trust that are in line with the settlor’s wishes, while ensuring that all decisions are impartial. Along with this, the trustee needs to keep accurate accounts and records, and make sure the trust is managed in accordance with all laws and regulations. In other words, it’s a fairly big job and frequently best left to professionals – family members who take on this role can easily become overwhelmed.
Now we get to the beneficiary. If the settlor sets out the purpose of the trust and the trustee manages the assets according to those wishes, what role does the beneficiary have? The answer is that it is complicated. Many family trusts have multiple beneficiaries who have a vested interest in the assets and may therefore want to be involved in managing them. They may have competing interests or differences in opinion, and in situations where some family members are also trustees, things can get messy.
Generally speaking, the beneficiary has no official role to play in setting up or managing the trust’s assets, but in certain jurisdictions they do have rights. A common right is the right to ask for information about the trust, such as how it is invested and managed. What is inescapable is that many beneficiaries will want to be involved in the trust, and it will depend on the nature of the trust and the settlor’s wishes if they will be allowed any meaningful involvement.
How it all comes together
As you can see, the relationships between the settlor, beneficiary and trustee are, to a certain extent, interconnected. Each one needs the other for the trust to be managed effectively until the assets are distributed to the beneficiary. In practice, the beneficiary has the least important role in the management of the trust, except to take an interest in what the trust holds and to be present when it comes time for distribution.
The trustee holds the most important position as the legal owner responsible for managing the assets. They not only act on the settlor’s instructions, but they must also deal with day-to-day management and, potentially field information requests from beneficiaries. In a way, it is the trustee who is truly in control the trust – but only until they have to distribute the assets.
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