A trust is an agreement between an individual, or group thereof, known as a settlors, who transfer their assets to a trustee, who is required to hold those assets for the benefit of another group of individuals, known as beneficiaries.
Throughout the years we have seen trusts used for several different reasons. Family planning or wealth management remain the two most important reasons as to why trusts are set up in the first place.
Trusts are commonly used amongst families, whereby the parents settle their assets (or some of their assets) in trust, so that it is the trustee who manages their wealth, which is not inherited by the children who might not be mature enough to deal with the family’s wealth. In certain situations, where one of the parents is the breadwinner, it is also a vehicle which is used to centralise the family’s wealth with one individual. This would make life much easier for the surviving spouse, since all the assets would be held by one trustee and is therefore easier to identify and manage. It is a fact that many times, a surviving spouse is not fully aware of all the assets which are owned, and it makes it very difficult for such assets to be identified and recovered.
We are more commonly seeing the use of trusts amongst sports persons. A number of athletes earn a lot of money in the early stages of their lives and their revenue, typically, declines drastically in their early 30s. According to Sports Illustrated, 78% of NFL players who are retired for only two years file for bankruptcy, and after five years of retirement, 60% of NBA players suffer the same fate. The use of trusts could ensure that the wealth which is generated by the athlete is properly managed for the rest of the athlete’s life, and sometimes even beyond that.
Whilst the role of the trustee could be quite straightforward at times, there are also many situations when this becomes an extremely complex role, particularly when you are dealing with several beneficiaries with different ambitions, and at very different stages of their lives. The trustees, as owner of the assets, must ensure that they are managing the assets in the best interests of the beneficiaries and simple choices such as deciding whether to sell an asset or not, could become complicated, and also subject to legal implications. It is therefore important for the trustees to document every decision taken, and also the rationale as to why certain decisions had been taken and how they viewed such decisions as being in the best interests of the beneficiaries. In certain situations, the settlors also provide letters of wishes to the trustees, explaining how they wish the assets to be managed. Whilst such letters do not impose any legal requirements on the trustee, they must be taken into consideration when making certain decisions, and thereby adding to the ‘pressure’ being placed on the trustee.
Trusts will continue to be used more frequently, not simply by high-net-worth individuals or families, but by anyone looking to ensure proper management of their assets, both during their lifetime and after death.
The writer is a co-founding partner of Seed, an internationally focused research-driven advisory firm based out of Malta, Europe.
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