FI Financial

Group of Companies

Trusts: History, Mechanics & Applications


A trust may be described as a fiduciary relationship in which rights
to property are divided between a trustee, who holds legal title, and
a beneficiary, who holds equitable title. However, this summary
begins at an elementary level with a historical examination of trusts.
With this base, the discussion turns to the mechanics of trusts and
what role they may occupy in an offshore structure.

The concept of the trust finds its origins in English common law
dating from the Middle Ages. Trusts derive from a system employed
in that era known as "uses." While this system is no longer existent,
a cursory understanding of use law aids in understanding the
modern trust law. The use was implemented to solve the problem of
property ownership faced by Franciscan Friars. The Friars were
bound by a vow of poverty, which prohibited them from owning real
property. While important to their faith, the practical reality was that
the vow made it difficult for the friars to satisfy material needs.

This conflict between spiritual sacrifice and earthly requirements
was solved by splitting the concept of ownership into two distinct
realms: one was the right to hold title to property while the other was
the right to "use" the property. Thus, while their vow would not permit
them to hold title to property, the friars could enjoy the right to use
the property. In this way, the friars became beneficiaries of the
"use" mechanism, which became widespread because it permitted
a person to enjoy the benefit of property, without being subject to
the consequences holding legal title.

The trust derived from this arrangement and was implemented to
assuage the burden of heavy feudal taxes on property transfers,
including inheritance. The early prototypes allowed the transfer of
title to assets to be passed to a trustee, who would administer on
behalf of beneficiaries, who were often spouses and children. The
essence of a trust, both then and now, is that it allows people to
reconfigure ownership of assets such that they avoid the
consequences of legal ownership. After establishing a trust, an
individual may continue to enjoy the benefits of the underlying asset.
A trust, like a corporation, is a legal entity with its own property,
distinct from the individuals associated with it.

There are three central participants, or roles, to be fulfilled in a trust
arrangement. These are "settlor," "trustee" and "beneficiary." The
settlor, who may also be known as the the trustor, donor or grantor,
is the person who establishes the trust. The trustee is the individual
or entity who holds legal title to the trust property. If a trust is
"passive," the trustee has no duties beyond holding title, but if the
trust is "active," the trustee has affirmative duties. A beneficiary is
the person for whose benefit the trust is established and the for
whose benefit the trustee holds the property. Usually, there are
several beneficiaries.

A trust is established when the four basic elements have been
established. These elements include: intent, identification of
property, designation of parties and articulation of trust purpose.
Intent is satisfied when the settlor has objectively manifested
definite and specific intent to establish a trust with regard to
property. Identification of trust property, or "res," requires that the
settlor’s interest be an existing interest and that the property be
capable of being owned and adequately identified. In designating
the parties, the settlor must have mental capacity, the trustee must
have the capacity to take and hold title, and the beneficiaries must
either be identified, or be reasonably ascertainable within a
specified period of time. The trust purpose may generally be
anything which is not illegal or contrary to public policy.

A trust is usually established through a written legal document
which, depending on the jurisdiction in which it is formed, may or
may not be registered with a governmental agency. A modern trust
is usually expressed by a written "Trust Agreement" or "Deed of
Settlement" which specifies how the trust's capital and income are
to be held, managed and distributed. It is a living concept supported
by law from thousands of cases and legislative enactment's. It is
extremely flexible and can provide for almost any eventuality. There
are few restrictions and therefore most trust agreements are
customized to accommodate the personal wishes of the settlor.

Because the trust is a separate legal entity created when the settlor
transfers assets by deed to a trustee for the benefit of named
beneficiaries, the need for probate or letters of administration on
the death of the settlor is eliminated. After a trust is established, the
general rule is that creditors cannot reach the trust assets unless the
creation of the trust was a fraud on such creditors. A trust may be
challenged as being invalid if it can be shown that the settlor was
attempting to accomplish an end that is illegal, requires the
commission of a crime or tortuous act, or generally offends public

Today, people typically use trusts to achieve the following

1) Administer family wealth for investment purposes ("Family
2) Provide for the needs of a limited group of individuals under
strict conditions which are imposed for the protection of the
group ("Protective Trust");
3) Fulfill a charitable objective ("Charitable Trust");
4) Provide for oneself and others through life ("Inter Vivos
Trust"); and
5) Provide for others post mortem ("Testamentary Trust").

Offshore trusts serve a central role in estate planning and asset
protection for citizens of all nations. Although recent legislation has
modified the effectiveness that trusts offer American citizens in tax
planning, they may continue to have significant applicability, within a
greater offshore structure.

If you have questions or need any additional
information, please feel free to contact
Keith L. Hatton (780)-482-2745

Call us toll-free at (866) 444-2745 with questions or comments about this web site.
Copyright © 1996-2015 Hatton Financial Inc.
Last modified: September 07, 2011