Trusts 101: The basics of Trusts

A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.

A family trust is therefore a relationship involving:

  1. A founder/trustor – who creates the trust and decides what goes into the trust deed
  2. Trustees, who hold title to the trust assets in their own names and deal with them as instructed in the trust deed
  3. The beneficiaries, who receive the benefits from the trust.

Beneficiaries may include:

  1. discretionary beneficiaries, who may receive a benefit at the discretion of the trustees;
  2. final beneficiaries, who are entitled to whatever funds are still left in the trust when it is wound up; and
  3. primary beneficiaries, who are discretionary beneficiaries given some sort of priority ahead of other beneficiaries.

Benefits of Family Trusts

The following are some of the advantages of setting up a family trust:

Asset Protection

Assets held in trust are usually protected from creditors of the beneficiaries, or the trustees personally. A usual situation in Zimbabwe is where the parents have personal liabilities (often related to their business interests), and wish to protect their family home from such liabilities in the event they are unable to meet them. In most circumstances a trust protects those assets from personal liabilities.

Protection Against Property Claims

If you give personal assets to your children during your life or in your will, those assets may, in certain circumstances, become available to their partners under the Property Act. However, if your assets are owned by a trust, or are given to your trust on death, your children can continue to receive the benefit of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners.

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Protecting Property from/for Beneficiaries – You may be reluctant to simply give your assets to your children during your life or on death if you have concerns about their ability to manage their financial affairs. If you give your assets to a family trust, then the trust can provide a vulnerable child with income and/or capital to meet their cash requirements as they arise. This can protect the long-term value of your family’s assets.

Protecting Assets for Future Generations from Potential Tax Law Changes

Family trusts may provide protection against various forms of wealth tax that may be introduced in the future, such as death duties or inheritance tax.

Reducing or Preventing Claims Against your Estate – The Courts can effectively rewrite your Will under the Family Law if it considers that members of your family have been disadvantaged by its provisions. However, the Court cannot rewrite your trust for Family Protection purposes.

General Flexibility to Deal with Law Changes – Modern trust deeds normally allow limited rights of variations to deal with changes in the law.

Confidentiality – Family trusts are not publicly registered and therefore can be kept confidential.

Other benefits

  • During a divorce, a trust can be used to provide for continued maintenance of the children
  • Protect surviving spouses and/or beneficiary (ies) against bad influences/investments.
  • Can be used to benefit special interests such as charities or educational bursaries, even after death, for an indefinite amount of time.

Disadvantages of Family Trusts

The following are possible disadvantages of having a family trust:

Loss of Ownership of Assets

If you transfer your personal assets to a trust, then the trustees of that trust will control the assets. Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to the trust are no longer your own. If you continue to treat the assets as your own, any trust could be open to challenge as a sham.

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You could possible choose the wrong trustees

You could expect problems if the trustees are fighting heirs/inheritors for control. This shows how important it is to have at least one independent trustee

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