FSRE 1
Trusts Cheat Sheet
Settlor, trustee and beneficiary roles, trust deed, main trust types, trustee borrowing and fiduciary duty.
A trust is a legal arrangement where assets are held by one party for the benefit of another. A trust separates legal ownership from beneficial ownership.
| Person | Role | Key Memory |
|---|---|---|
| Settlor | Creates the trust | Sets it up |
| Trustee | Manages the trust | Controls it |
| Beneficiary | Benefits from trust | Receives benefit |
The settlor:
- Creates the trust
- Transfers assets into trust
- Decides trust terms
- Appoints trustees
The settlor can also be
- A trustee
- A beneficiary (depending on trust type)
Trustees:
- Hold legal ownership
- Manage trust assets
- Follow trust deed
- Act for beneficiaries
Fiduciary Duty
- Legal duty to act in beneficiaries' best interests
Trustees must
- Act honestly
- Avoid conflicts of interest
- Invest carefully
- Follow trust law
- Keep records
- Follow trust deed
Trustees can be
- One person
- Several people
- A company / corporate trustee
Beneficiaries receive trust benefits, which may include:
- Income
- Capital
- Property
Beneficiaries hold
- Beneficial ownership — NOT legal ownership
- Trustees = Title
- Beneficiaries = Benefits
- Settlor = Sets up
The legal document containing:
- Trust rules
- Trustee powers
- Beneficiary details
- Distribution rules
Important
- Trustees MUST follow it
The beneficiary is fully entitled to the trust assets. Trustees only look after the assets until the beneficiary is old enough to take them. Trustees cannot choose another beneficiary.
Example
- Parents place money in trust for a child
- At age 18 the child can demand the money
- Because it legally belongs to them beneficially
Trustees decide who gets money, when they get it, and how much. Beneficiaries do not automatically receive anything — trustees have discretion (choice).
Example
- A grandparent creates a trust for grandchildren
- Trustees decide which grandchild receives money and when
A beneficiary has an immediate right to the income from the trust, but may not own the actual capital/assets.
Example
- A trust owns investments producing £5,000 income yearly
- The beneficiary receives the yearly income now
- The capital may later pass to children
Key Point
- Right to income ≠ ownership of capital
Usually used with life insurance policies. The policy is written into trust so money can be paid quickly to beneficiaries after death.
Why used
- Helps avoid probate delays
Example
- A life insurance payout goes straight to trustees after death
- Trustees then pass money to family
Key Point
- Common in mortgage protection and life cover
A person gives assets into certain trusts during their lifetime. This gift may immediately create inheritance tax.
Usually applies to
- Discretionary trusts
- Relevant property trusts
Example
- Someone places £400,000 into a discretionary trust
- Part may become taxable immediately
Key Point
- A lifetime transfer that may trigger inheritance tax
A trust where no beneficiary has automatic entitlement. Trustees control distributions. Most discretionary trusts fall into this category.
Why important
- Periodic inheritance tax charges
- Exit charges
Example
- A family trust where trustees decide which relatives receive money
Key Point
- No fixed beneficiary rights
Trustees may take out mortgages or borrow against trust property only if:
- The trust deed allows it
- Acting within powers
- Acting for beneficiaries' interests
Important Exam Point
- Trustees borrow as trustees — NOT personally
Usually NO (particularly in discretionary trusts). Trustees make decisions independently.
Exception
- In bare trusts, beneficiaries have stronger rights because entitlement is absolute
Acting in another person's best interests. Trustees must:
- Not profit personally
- Avoid negligence
- Protect trust assets
If trustees breach duties, beneficiaries may
- Sue trustees
- Take legal action
- Claim compensation
| Question | Answer |
|---|---|
| Who signs mortgage docs? | Trustees |
| Who owns property legally? | Trustees |
| Who benefits from property? | Beneficiaries |
| Can trustees borrow? | Yes, if permitted |
| Does trust deed matter? | Yes |