Trust Law - R. Vrahimis & Associates

A fiduciary structure can help, not only preserve your wealth but can also offer you greater flexibility over the management and distribution of your assets.  The most common type of fiduciary structure is a trust.  This type of structure is governed by Trust Law which governs the duties and responsibilities of a three-party fiduciary relationship.  In Trust law the first party, called the Settlor (or trustror/grantor), grants (transfers/settles) assets (e.g. stock, bonds, money, real estate, etc.) to the second party, called the Trustee, who holds these assets for the benefit of the third party called the beneficiary (who can be a person or a charity).  Complex trusts may have many settlors, many trustees and many beneficiaries.

Trusts are a form of deed/contract made without consideration by the beneficiary i.e. without the Beneficiary giving something in exchange for the assets he/she receives.  Thus the Settlor gives some or all of his assets to a Trustee who holds them for the benefit of a Beneficiary who shall in turn enjoy the trust property according the provisions of the trust deed.

A trust is a binding arrangement between the Settlor and the Trustee whereby assets are transferred to the trustee who then becomes the legal owner of the assets that form the property of the trust, but holds this trust property as a fiduciary of the beneficiary who in turn is the equitable owner of the assets.  Therefore trustees have a fiduciary duty to manage and distributing the trust assets to the benefit of the equitable owners (the beneficiaries), and such management must be performed with due diligence.  The terms upon which the Trustees administer the trust property are detailed in a trust deed. Trust legislation that governs formations, administration and taxation of trusts has been enacted in many common law jurisdictions.  The Trustee is required to administer the trust assets for the benefit of specified beneficiaries strictly in accordance with the terms of the trust.  Trustees are not only responsible for managing the trust fund, but must also regularly provide accounting of the income and expenditures of the trust property.  Intentional or reckless breach of fiduciary duty can also be charged and tried as criminal offences in most jurisdictions.  Professional Trustees are may be compensated and their expenses reimbursed.  A trustee can be a natural person such as a friend or relative, an accountant, a financial advisor or a lawyer, or it may be an estate management corporation, a financial business entity or a public body.

Trusts may be open, half-secret or secret according to the wishes of the Settlor.  In an open trust, the existence of the trust, the trustee and the beneficiary is known to everyone.  In a half secret trust, the existence of the trust and the Trustee is common knowledge but the beneficiary is undisclosed.  In secret trusts the Trustee is thought by everyone to be the legal owner of the trust property whereas in reality he/she is just a trustee and the property belongs in secret to a secret beneficiary.  Trusts may also be Testamentary and Inter Vivos.  Testamentary trusts are created after the death of the settlor (usually under a will that creates a trust fund for the benefit of the legatee) and as such, the property of the trust fund is not available to the beneficiary until the Settlor’s death.  Inter vivos trusts are made during the lifetime of the Settlor and the property of the trust is usually available to the beneficiary when a specific event occurs e.g. upon enrolment in University, upon coming of age of a minor etc.  There are different reasons for using different types of trusts, depending on an individual’s circumstances.  Most people form inter vivos open trusts so as to settle their children or their loved ones on one hand, but also to control and specify the times or circumstances when these beneficiaries shall have access to the trust property, even if by that time the Settlor has passed away.  Testamentary trusts are not used often because the trust property shall be subject to inheritance or probate taxes and fees and the terms of the will may be contested in probate actions with legal fees dissipating a large portion of the money that the testator would like to see used in a way that would benefit his/her loved ones.  Writing a will costs much less money than trust administration but there may be such taxes savings that would fully justify the formation of a trust.  Also with a will, the testator shall not have as much control over how the assets are used.  

Any person may set up a trust fund for a variety of reasons and the trust fund does not have to be set up with millions in assets.  A trust fund may be set up with an initial capital of as little as €1 euro, when the parents start saving on the day their child is born and keep investing money in that trust fund as years go by.  So trusts are not useful only for very rich individuals.  Middle-class people may also create trust funds, and setting one up may be financially feasible and sometimes even recommended.

A correctly structured and administered trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.  Trusts are a powerful tax-planning tool but they also have many other uses that are of equal if not greater importance.  A properly drafted and managed trust can be advantageous for many reasons and trusts may be set up by individuals who: