Trust property (or trust in English) in common law is a system of relations in which the property originally owned by the founder is transferred to the trustee (manager or trustee), but the beneficiaries (beneficiaries) receive the income from it. The founder (who can be both a beneficiary and / or, in some cases, a manager) within the framework of a special agreement transfers the valuables belonging to him to the control of the trustee, who is obliged to perform transactions with them, which bring maximum benefit to the beneficiaries or correspond to other instructions of the founder.
Features of the Trust
The peculiarity of the trust as a different form of holding property is that the property of the trust does not belong to the founder (he loses ownership of it since the transfer of the property to the manager) or the manager (he only manages this property and is a formal holder of the title to the property), nor to the beneficiaries until the date of termination of the trust. We can say that the trust is an independent owner, inextricably linked to its creator (the founder of the trust) and beneficiaries. In a number of countries, including Ukraine, the property transferred to trust is not considered a separate type of property – the property continues to be the property of the principal, to which its obligations may extend.
The services of a trustee are paid by the beneficiaries or the founder of the trust, usually in the form of a percentage of the profits received.
The property of trust property can be any property, whether movable or immovable. Objects of intellectual property can also be transferred to the trust. Excluded from these relations is only property that is expressly prohibited by the legislation of the country where the trust is established.
The founder is entitled to transfer his property as during life (lifetime trust), and provide for such a transfer after his death (testamentary trust). The trustee is responsible for the fulfillment of the terms of the trust agreement and, as a rule, receives extensive powers to manage the assets of the founder, but may also receive specific instructions on the distribution of trust income and capital between the beneficiaries upon the occurrence of certain conditions known to the founder or determine how the time of termination will be determined trust and distribution of property to the beneficiaries. Such conditions, as a rule, are included by the founder in the so-called letter of wishes, addressed to the trustee. The founder also has the right to provide for the conditions for the replacement of the trustee, to specify the transfer of this right to another person, and so on.
Trust property can be used to achieve the following objectives:
Anonymity. In most countries, the contents of the will (after the death of the testator) and the names of property owners are public information. The names of the beneficiaries of the trust are usually unknown, so owning real estate or distributing the bequests through the trust allows you to keep secrecy.
Joint ownership of property. The trust is a convenient mechanism for joint ownership of property (for example, real estate) by several owners.
Preservation of capital from embezzlement. Trusts can be used to protect beneficiaries (for example, the founder’s children) from their inability to spend money. Thus, the terms of the trust may limit the use of money or the age at which the child is entitled to dispose of the property.
Charity. In some countries, all property turned to charitable purposes must be in trust.
Retirement plans. Corporate pensions are often organized as a trust in which the enterprise is the founder and the employees are the beneficiaries.
Complex corporate structures. In the field of finance and insurance, trusts are often used as legal entities along with companies.
Concealment of property. The Trust grants anonymity whereby the same person can be a founder and a beneficiary (but not a trustee), thereby obtaining all the benefits from the property, but hiding it from the creditors.
Tax avoidance. Anonymity and separation of the founder, beneficiaries and trustees make the trust a convenient mechanism for tax evasion. So, the trustee in many offshore countries is not obliged to report the income of the trust of the tax inspection (other) of the country in which the beneficiaries live. These same features of the trust are also used for money laundering. Another way to evade taxes with the help of the trust is possible in the case of progressive income tax, when the property that generates income formally belongs to the trust (in many countries this loophole is closed and the tax rate for the trust is very high). Also, the transfer of property through the trust frees the beneficiaries of the inheritance tax, which exists in virtually all countries that use trusts.
Concealment of income. Acquisition or transfer of all significant assets to the name of the trust allows you to declare the absence or insufficient availability of your own assets and claim, for example, to use a lower tax rate or to receive assistance from the state.
Security of property. When transferring property to a trust, the founder of the trust loses all rights to this property if the trust agreement is properly drawn up. Thus, this property becomes inaccessible to creditors of the founder of the trust, for claims in the division of property and allows to separate personal property from business assets. The latter is especially important in the countries of the Anglo-Saxon system of law, where an individual can be declared bankrupt in person with the subsequent collection of personal property for debts.
Advantages and disadvantages of trust management of investments
If we limit ourselves to the stock market only, the trustee performs the same function as the manager of the unit investment fund (MIF) – buys / sells securities and does so in such a way as to obtain investment income from them. However, trust management has other legislative regulation than Mutual Funds. The trustee is not required to hold part of the funds in securities, you can use futures and options. When prices decline, it is possible to sell all the securities and wait for the fall. There are no requirements for portfolio diversification either. The trustee can not use margin trading (including play on falling prices), as it requires a loan of money or securities from the broker. These operations are also prohibited for Mutual Funds, as they substantially increase the risks of losses.
Potentially, trust management may be more profitable than Mutual Fund, but the lack of requirements for diversification and too strong influence of the “human factor” makes it more risky.
Communication with the trustee allows you to more accurately and quickly fulfill the wishes of the principal, while the mutual funds are limited in their actions by the investment declaration and are not at all obliged to fulfill the wishes of the clients.
An important plus is the speed of I / O funds. In the mutual fund, especially in the interval or closed, it is difficult to quickly buy or sell an investment share. In trust management, the manager buys / sells shares at the current price and can ensure the fastest possible flow of funds.
Sometimes broker companies offer a PAMM-account service for more convenient control over assets from the side of principals.