Trust Beneficiaries
Overview
There is enormous flexibility in relation to the terms on which trusts can be created. The main constraints are those of public policy.
The former rules regarding the duration of trusts have been amended. It is now possible to apply to Court to vary trusts under new legislation, which commenced in 2010.
Trusts allow a person to separate the ownership and control of his assets, either during his lifetime or indeed after his death. They may maintain a degree of control in relation to the point of time at which the assets are vested in others.
Trusts are commonly used to manage family assets. There is very wide freedom and flexibility to set the terms of the trust as desired, subject only to a limited number of constraints. Trusts may be used to mitigate, avoid or plan the timing and incidence of tax liability.
See the separate section on trusts of land and on the deemed statutory trust of land that arises under the 2009 land law reforms. This statutory trust replaces the artificial device of trusts for the sale of land with a power to postpone, which was employed to avoid the Settled Land Acts, where land was held within a trust, which might otherwise undermine the trust, by giving the beneficiary the right to sell.
Rights and Interests of Beneficiaries
The trust set out the obligations of the trustees and the rights of beneficiaries. As mentioned in other sections, the rights of beneficiaries in respect of the trust assets may vary from complete ownership to the right to be considered in respect of receiving a prospective share of the trust assets.
They may have rights to a fixed income or income for a certain period. They may have a right at some future date, for example, after the death of persons who enjoy the income at present, etc.
The rights of beneficiaries may be contingent. That is to say, they may be conditional upon certain conditions such as living to a certain age, surviving a certain person, etc.
The rights may be for members of a class of persons, for example, the children, grandchildren and other relatives of the settlor, the person who has created the trust. The trust may be a discretionary trust so that the beneficiaries may receive a benefit if but only if and when but only when the trustees decide to exercise their discretion in favour of that particular beneficiary.
Termination and Transfer
It is a fundamental principle that if all (actual and potential) beneficiaries of a trust (all must have mental capacity and be of full age) agree collectively to terminate the trust, the trust may end, and the trust assets may be vested in the beneficiaries in accordance with their entitlement or as they agree. However, it may not be possible to terminate the trust because beneficiaries or potential beneficiaries are under age, or have not yet been born.
The rights of a beneficiary under a trust can be transferred. The Statute of Frauds requires that the transfer be in writing.
In practice, an interest under a trust would only be saleable if it is of sufficient and certain duration and is substantial. For example, a person may be the owner of a property absolutely where the trustee is a mere nominee. In this case, the interest under the trust is a valuable asset. In other cases, the interest of the beneficiary may be contingent and conditional and have little value.
Vesting of Trust Assets
It is common, particularly in trusts and wills for the benefit of children and grandchildren, to provide the power to make advances from trust assets. This power may cut across the rights of beneficiaries by reducing the trust funds.
It is commonly the case that a share of assets is left to children to vest in them upon attaining the age of majority, or more commonly, older ages, such as 21, 25 or 30 years of age. In such cases, the trustees are commonly given the power to make an advance of capital or income, or both, to the beneficiary.
The income or capital (depending on the wording of the trust) may be used for the education, maintenance or advancement of the beneficiary, pending and prior to the trust asset becoming vested in them. Such advances are generally taken into account when the assets vest or on the ultimate division of the assets, for example, when the person attains the requisite age.
Power to Advance
There is statutory power to make advancements from trusts funds for child (under 18 years) beneficiaries or prospective child beneficiaries. Many trusts are set up informally or in simple wills, by which assets are to vest to a child on attaining a specified age, without provision for advancement before that age. The statutory power relieves the trustee of the requirement to accumulate the income of the asset until the person reaches the designated age and allows access for the purpose of education, maintenance or advancement generally.
Sometimes there is an overriding power for the trustees to make advancements to a particular beneficiary, notwithstanding that it reduces the share or prospective share of other beneficiaries. This is useful if, for example, a particular child or beneficiary has special needs that may not have been anticipated when the trust or will was made.
In this case, the power of advancement, in effect, treats the assets as a family fund so that one child or beneficiary may be benefited more than others. The trustee’s right to use this power may not necessarily be limited to cases where there are special needs. Usually, the power exists and it is a matter for the trustees as to whether to use it. A letter of wishes may give guidance.
Discretionary Trusts
Discretionary trusts afford advantages in terms of flexibility. They allow the enjoyment and ownership of assets to be split. They are commonly made in favour of younger beneficiaries, typically under the age of majority.
They may be useful in dealing with the unknown needs of a family in the future. They may allow the flexibility to make benefits available to beneficiaries with special or unpredictable needs.
Generally, the Courts will not interfere with the exercise by the trustees of discretion unless it is manifestly unfair or is being abused. Trustees must act impartially and balance the interests of the various beneficiaries.
This involves acting equitably and fairly between present-day and future beneficiaries. These interests of fairness may, for example, require a balancing of present needs against possible future needs, with a consequent emphasis on the maintenance of capital.
Trust assets may be directed to be sold at either an early date or a later date (which may commonly be postponed indefinitely) so that the cash proceeds continue to represent the trust fund and to be subject to the terms of the trust. There is usually a power to postpone the sale and to permit the assets to be enjoyed or permitted to be enjoyed by beneficiaries in their present form.
Protective Trusts
Discretionary trusts are a mechanism which may protect family members from the consequences of personal problems, such as addiction or insolvency. Beneficiaries may be protected from their own foolishness. Assets within a discretionary trust are assets of the beneficiary and thereby subject to seizure on enforcement, to the extent only that they have been appointed to him.
A trust may grant rights and interests to a person for so long as certain conditions are satisfied. If the interest is so created from inception, its automatic termination will be less vulnerable to being set aside for public policy reasons.
So-called protective trust involves fixed interests or rights for the beneficiary, which terminate if an event, such as insolvency, occurs, at which point, the interest becomes subject to a discretionary trust.
In other jurisdictions, such as the United States, England and Wales and Northern Ireland, protective trusts can be created in a short format. In Ireland, it is necessary to execute a more complex document.
Protective trusts are more readily valid in the case of a transfer of an asset to a third party on terms that protect against that third party’s insolvency. Attempts to transfer assets which are already held in order to protect one’s own insolvency again, will often be invalidated under insolvency legislation.