EXAMPLE

Mrs Green wishes to give her collection of prints to her grandson, Timothy.

As Timothy is only 7 years old, she is concerned he will not understand how to look after them. Rather than making a direct gift, she passes them to Timothy's parents, Freddy and Rosemary to take care of until Timothy reaches age 18.

In other words she puts them in trust for Timothy.

The trustees are Timothy's parents Freddy and Rosemary, the beneficiary is Timothy , the settlor is Mrs Green and the trust property is the prints.

In order to prove that a trust exists it would be sensible to evidence this arrangement in writing, this document is the trust instrument. If the trust property is not land this instrument is not essential but it is preferable to prove the trust's existence.

Before any trust can be valid there are 3 conditions which must be met:-

In plain terms this means that it must be over 18 years of age and be of sound mind. Apart from land there is no maximum number of trustees (for land the maximum is 4) where they are appointed at outset. Where their appointment is in the future then the maximum is 4.

The settlor will in many cases be the first trustee enabling them to keep some control of the trust property. Although it is possible for a beneficiary to be a trustee it is generally considered that this could lead to a conflict of interest and should be considered carefully.

A trustee does not have to be a person it could be a limited company. These companies are known as trust corporations.

The beneficiary need not to be an individual. It could be a charity or another body provided that this body was, by law, entitled to be a beneficiary.

Once the trust is established the trust property is "owned" by the trustees who hold it in trust for the beneficiaries, the trustees are not allowed to use the property or deal with it for their own benefit.

While the property is held in trust the beneficiaries have what is known as beneficial or equitable ownership, in other words they have the right to "enjoy" or "benefit" from the trust property.

In some cases a trust will have capital which is money entrusted to the trustees by the settlor and this capital can be added to or reinvested in accordance with the terms of the trust deed. Any dividends or interest earned by the trust is referred to as trust income. In some cases the beneficiaries will have right to receive or have this income applied for their benefit. The following diagram illustrates the operation of a trust.

The trust is often referred to as a flexible trust, it's flexibility comes from the fact that if no other beneficiaries are appointed by the trustees from the Categories available then the default beneficiaries receive the trust property.

Some trusts have different types of beneficiaries. One such trust is where the trust property is held by a life tenant.

When the life tenant dies the trust property will be held for benefit of the beneficiary, this beneficiary is often referred to as the "remainderman" as they get when remains of the trust property. This beneficiary is said to have had a reversionary interest as they only benefit on the death of the life tenant.

Contingent Beneficiary-Is someone whose interest depends on the occurrence of a particular event (the "contingency"). This event may never occur in which case the individual will not benefit. For example, trust property is held for James if he is alive at the time of Timothy's death, and not for the benefit of George. George is the contingent beneficiary and will only benefit if James dies before Timothy.