What is a trust?

In broad terms, a trust is an arrangement where the owner of property ("the settlor") transfers it to the ownership of another person ("the trustee"), on condition that the trustee uses the property only for the benefit of others ("the beneficiaries").

So while the trustee is the actual legal owner of the property (be it land, money, shares or any other kind of property), he or she must use that property not for his or her own benefit, but for the benefit of the beneficiaries.

Trust law arises from the fact that there are two kinds of ownership of property:  legal ownership and beneficial ownership.  Usually, the legal owner and the beneficial owner are the same person; e.g. when I say “I own my car”, what I mean is that I am the legal owner and the beneficial owner.  I am the registered owner of the car and I own it for my own use.  However, in the trust situation, the legal owner of property and the beneficial owner are different people.

A simple example of trusts is found in a typical Will; if you are the Executor of your father’s Will, and he dies owning a house property, then the house is transferred into your name;  your name is registered on the title.  You then deal with the estate, calling in the assets, paying the liabilities and in due course, you transfer the house to the beneficiaries your father has named in his Will.

During the period when you are registered on the title to the house property, although you are the legal owner of it, you are not the beneficial owner.  You hold it in trust for the beneficial owners, who are the beneficiaries of your father’s Will.

So during that period the two kinds of ownership of the house run in parallel:  yours as executor and legal owner, and the beneficiaries as the beneficial owners.

There can, of course, be more than one trustee.  Often your father might have named two executors of his Will.  In that case, both names go on the title and they have the legal ownership jointly.

Family trusts follow the same principles (except that nobody has died!).  A typical example is where the owners of a house property transfer it to trustees to hold for the benefit of beneficiaries.  The owners themselves might well be two of the trustees and  (just to complicate matters) they can also be beneficiaries.  That is lawful but the trust will fail if the trustees are also the only beneficiaries; so long as there are other beneficiaries then it does not matter that the trustees are also beneficiaries.

Clients setting up family trusts are often surprised that the property they are putting into trust is not registered in the name of their trust.  When they look at the title, they see only the names of the trustees as owners.  The title does not even record that the owners hold the property as trustees.  The reason for that is trusts are not entities like companies or incorporated societies.  There is no register of trusts.  As a result, the law does not allow the name of a trust, e.g. ‘Smith Family Trust’, to be recorded on the title to land or shares.  It is not the Smith Family Trust that owns the land or shares, but the trustees of the Smith Family Trust who own it, so their names are used.

In order to prove a property is held by the registered owners as trustees, the other trust documents need to be produced.  Usually that is the Trust Deed and evidence of the transfer from the original owners to the trustees.

While trust law can be complicated, the essential element of it is that the legal owner of the property holds it not for his or her own benefit but for the benefit of others, being the beneficiaries of the trust.

For more information

If you’d like more information, or want to talk to us about setting up and running a trust, please contact Claire Byrne on +64 4 916 7483 or Email: claire.byrne@gibsonsheat.com, or any of our other trust specialists.