What Are the Purposes and Functions of Trusts?

by **Ponee** Sun Dec 08, 2013 9:13 pm

Common purposes for trusts include:

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.

Spendthrift protection. Trusts may be used to protect beneficiaries (for example, one's children) against their own inability to handle money. These are especially attractive forspendthrifts. Courts may generally recognize spendthrift clauses against trust beneficiaries and their creditors, but not against creditors of a settlor.[citation needed]

Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). Conventional wills typically leave 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.[13]

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).

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.

Pension plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.

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.[14]

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.

Asset protection. Trusts may allow beneficiaries to protect assets from creditors as the trust may be bankruptcy remote. For example, 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 in theory protected from creditors. In addition, the trust may attempt to preserve anonymity with a completely unconnected name (e.g., "The Teddy Bear Trust"). These strategies are ethically and legally controversial.

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).

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.

Construction law. In Canada[15] and Minnesota[16] 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