Trust Law - Purposes

Purposes

Common purposes for trusts include:

1. Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families, this alone makes the use of trusts ideal.
2. Spendthrift Protection. Trusts may be used to protect beneficiaries (for example, one's children) against their own inability to handle money. It is not unusual for an individual to create an inter vivos trust with a corporate trustee who may then disburse funds only for causes articulated in the trust document. These are especially attractive for spendthrifts. In many cases, a family member or friend has prevailed upon the spendthrift/settlor to enter into such a relationship. However, over time, courts were asked to determine the efficacy of spendthrift clauses as against the trust beneficiaries seeking to engage in such assignments, and the creditors of those beneficiaries seeking to reach trust assets. A case law doctrine developed whereby courts may generally recognize the efficacy of spendthrift clauses as against trust beneficiaries and their creditors, but not against creditors of a settlor.
3. Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
4. Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).
5. Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust.
6. Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.
7. Remuneration Trusts. Trusts for the benefit of directors and employees or companies or their families or dependents. This form of trust was developed by Paul Baxendale-Walker and has since gained widespread use.
8. Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g., corporations) in their structure.
9. Asset Protection. The principle of "asset protection" is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g., "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset protection is legal and (arguably) moral, while some asset protection is illegal and/or (arguably) immoral.
10. Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal tax avoidance. For an example see the "nil-band discretionary trust", explained at Inheritance Tax (United Kingdom).
11. Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.
12. Construction law. In Canada and Minnesota monies owed by employers to contractors or by contractors to subcontractors on construction projects must by law be held in trust. In the event of contractor insolvency, this makes it much more likely that subcontractors will be paid for work completed.