How Trusts Work

How trusts work

A trust works in the following way. If A asks B to look after a chocolate bar and give it to C the following day. If during the night B eats the chocolate bar, in the morning when C asks B for the chocolate bar, B will have to provide another chocolate bar to C. In this example A is the settlor, B is a trustee and C is the beneficiary.

Trusts allow for assets to be placed in them, such as property or money which is then held upon trust by the trustees for the beneficiaries. Beneficiaries could be the settlor, relatives, friends or a charity. 

The legal ownership of the assets is transferred to the trustees, which places a responsibility upon them to manage appropriately the asset entrusted to them. Where this involves land two trustees are required. 

How trusts operate

Trust documents are drafted to allow the trustees to appropriately manage the items placed into the trust. In most instances a regular set of administrative provisions are used. Albeit specific administrative powers may be given to the trustees as instructed by the settlor. 

Trustee’s obligations

A person appointed as a trustee holds the assets on behalf of the beneficiaries. Although in law they legally own the property or assets, this ownership is recognised as temporary in nature. Trustees have fiduciary obligations which include; not profiting from their position, ensuring there is no conflict of interest when making decisions, only reimbursing themselves for incurred expenses from the trust unless the trust document provides for them to charge.

Breach of trust by trustees

Trustees ideally should be chosen with care as they are being entrusted usually with significant assets or property. Where a trustee abuses their position, the beneficiaries may personally seek compensation against the errant trustee.

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