What is a Trust?

 October 1, 2022


A TRUST is a contract by which a person (settlor) transfers the ownership of certain assets to another person (trustee) to manage them for the benefit of one or more third parties (beneficiaries) and to transfer them definitively to the latter upon the fulfillment of a predetermined term of time, or in the event that a particular event occurs (generally – but not necessarily – the death of the settlor).

The Hague Conference on Private International Law in 1984 defined the TRUST as follows: “a Trust is a set of legal relationships by virtue of which one person, to whom the ownership of property has been transferred, is obliged to administer such property for the benefit of another”.

What are the main components of a Trust?

  1. Settlor: the grantor, or person to whom the assets belong and who creates the Trust by transferring the assets to the trustee. In certain jurisdictions, such as the United States, he is also called trustor, grantor, donor or creator, and in other non-English-speaking jurisdictions founder.
  2. Trustee: The administrator to whom property or assets are entrusted to be administered for the benefit of another. The English definition: A person who holds property on trust. But he is not only a simple trustee, he is also considered the legal owner of the property he administers.
  3. Beneficiaries: they are those who give meaning to the existence of a Trust, they are the third parties in favor of whom the Trust is constituted and the assets of the Trust are maintained for.
  4. Property/Assets: the goods or assets held by the Trust.
  5. Protector: This figure is usually used in the United States, it is a third party appointed (usually by the settlor) to guide and supervise the trustee and his functions. It is an optional, but highly recommended figure, whose main function, among others, is to remove the trustee if he/she breaches the terms or spirit of the Trust. We have previously published an article related to this figure.
  6. Trust Instrument (deed): the deed or document that executes and registers the terms of the Trust.

What are Trusts used for?

This figure allows an adequate management of the assets that are transferred to it, and also allows to determine with precision the circumstances that will determine the transfer of the ownership of the assets to the beneficiaries. Additionally, from the very moment the Trust is established, the ownership of the assets held in the Trust leave the settlor’s estate, which implies a series of advantages, depending on the client’s objectives. These advantages may be succession, tax or wealth protection/privacy. And depending on the client’s objectives, a type of Trust will be established, in addition to defining the jurisdiction where the Trust will be established.

What are the main precautions to be considered when forming a Trust?

In several Latin American countries this issue has been analyzed in depth and we could take some general precautions common to countries such as Mexico, Argentina, Chile, among others:

  • Define the jurisdiction in which the Trust will be established (USA/NZ/UK).
  • Know how to define the type of Trust taking into account settlor’s personal, family and economic circumstances and its beneficiaries’ (it can be a foreign or domestic Trust (USA), revocable, irrevocable, discretionary or not).
  • Identify and correctly classify the assets to be contributed to the Trust (such as shares in companies, cryptocurrency, financial assets, real estate, among many others).
  • Appoint an independent third party as trustee (natural person or company dedicated to provide professional Trust services) to avoid being considered a transparent Trust. There are also Private Trust Companies (PTC), which are private companies created to act as trustee for a single family. In a separate article we will be analyzing this figure.
  • Clearly define the beneficiaries and the conditions of succession, this can be defined in the body of the Trust or in a separate letter of wishes.

As the figure of the Trust is completely versatile and broad, everyone can create a Trust tailored to their personal, family, geographic, and economic circumstances.

By Florencia Ribes.