A trustee, or third party, is the legal owner of property held in a trust for the benefit of another trust beneficiary. A trust can also allow assets to avoid probate, saving time and money and potentially reducing inheritance or estate taxes.
Trusts can be created during life through a drafted trust instrument or after death in a will. Beliefs may also be implied by law as resulting or constructive trusts.
Beneficiaries
As stated in the trust agreement, the trust’s beneficiaries are the persons who have the right to assume ownership and management of the trust’s capital and income. The beneficiaries can be individuals or entities such as corporations. Trustees have fiduciary duties to the beneficiaries that require them to act in good faith, with care and sound judgment. They also must disclose any conflicts of interest to the beneficiaries.
Sometimes, the trustee can allow a beneficiary to use the trust’s assets in certain circumstances. It is called a power of appointment and is usually limited in scope by the trust deed. In addition, the beneficiaries of a trust can be granted other rights in the property by the trustee. It protects the beneficiaries’ interests by making the property bankruptcy remote.
Often, family members will sell or spend assets, putting beneficiaries at risk of financial loss. Trusts are used to safeguard assets. It can also secure assets for a specific purpose, such as education or a business venture.
It is also a common feature of complex corporate structures and is sometimes used to preserve anonymity. The California trust law outline is a distinct body of law not quickly subsumed under general property and agency laws.
Management and Disposal
Although trusts are often associated with high-net-worth individuals and families, they can be helpful for anyone of reasonable means. Young parents with limited assets may create trusts either during life or in their wills to ensure that their children are provided for if both of them die before the youngest child reaches an age deemed by the parents to indicate sufficient maturity to handle property (which typically is older than the age of majority under state law).
Trusts can also be used to provide asset protection from divorce and creditor claims, to make charitable gifts, or to limit taxes. Because of the unique functions performed by trusts, their operation is more like that of property law than contract law. It means that, unlike contracts, trusts are not enforceable solely on their written terms and that the courts have substantial discretion to depart from express provisions of a Trust if doing so is necessary to accomplish a significant social good or to avoid harm to the public interest.
As an example, many states have statutes allowing the courts to remove assets from a trust that are being mismanaged or embezzled by the trustee. However, a court can only do this if the trustee acts outside the scope of the express terms of the Trust instrument.
Conversion of Untrusted Property
A trust is an arrangement that severs the legal ownership of property from its beneficial owner. A trust allows the settlor to transfer the legal title of property to a trustee while retaining distant control over the assets. This control can be shaped by the terms of the confidential trust deed or other arrangements between parties, such as using a protector. The separation of legal and beneficial ownership makes trusts a valuable tool for those seeking to distance their connection with property or assets that may have been generated through illegal activities.
A trustee must ensure that the trust’s assets are not used for unauthorized purposes, such as money laundering. It is the primary function of a trustee and a reason that trusts are commonly used for estate and inheritance planning, asset protection, and as vehicles for tax avoidance.
Trusts can be set up during the settlor’s lifetime (a living trust) or through their will (a testamentary trust). These trusts can also be established for particular purposes, such as charitable or data trusts. An everyday use of trusts facilitates joint ownership between two or more persons.
It is commonly effected by setting up a marital home trust with each partner as a beneficiary and one or both owning the legal title as trustee. Trusts are also widely used for family tax planning and to mitigate the effects of divorce and bankruptcy on beneficiaries.
Bankruptcy Isolation
Commercial mortgage lending transactions are structured through unique purpose entities to satisfy lender, bondholder, and rating agency requirements. These entities are often ring-fenced as independent silos of specific assets and associated liabilities to protect against a strategic bankruptcy filing by the corporate parent. The entity’s organizational documents usually include a laundry list of separateness covenants and an independent director/manager requirement to insulate the entity from the risks of its corporate parent. However, these practices are controversial, mainly because the concept of “bankruptcy remoteness” is misinterpreted.
These provisions aim not to make a particular purpose entity “bankruptcy proof,” as many have been legitimately insolvent and voluntarily or involuntarily filed for bankruptcy. Instead, they are intended to reduce the likelihood of a bankruptcy filing by a corporate parent by requiring that a particular purpose entity be able to file for bankruptcy without the consent of the parent’s equity holder.
Conclusion
In conclusion, the most common tactics employed to accomplish this is the issuance of a non-consolidation opinion in which legal counsel opines that the separation covenants and other bankruptcy remoteness protections included in the entity’s transaction documents will be sufficient to insulate the borrower from the risk of substantive consolidation with its bankrupt affiliates.
However, there has yet to be a court consensus on the enforceability of this strategy. Specifically, it is unclear whether a creditor holding a “golden share” guaranty will have sufficient incentive to vote against a particular purpose entity’s bankruptcy to protect its interests.
