When one thinks of trusts it’s typically as an instrument that protects the assets of minors where they receive an inheritance but do not have the capacity to administer it. However, there a many different types and uses of trusts, which may serve a similar or different purpose to that of a testamentary trust. This article will identify the different types of trusts and delve into the purpose of a trust for a business.
The purpose of a trust is usually to hold assets for the benefit of certain persons or entities being the beneficiaries or the business for which the trust is created. Holding of assets in a trust creates a certain level of protection for the assets in circumstances where the beneficiary or trustee thereof may become insolvent. This is because a trust is seen as a separate legal entity and assets found therein may not be attached where the beneficiary or trustee of a trust finds themselves insolvent.
When looking at a trust one must be aware that there are three main parties to a trust. The first being the founder, the second the trustees, and finally the beneficiaries. The founder being the one which created the trust. The trustees being the ones who control and administer the assets in the trust. The beneficiaries being the ones to whom the benefits of the assets in the trust accrue to. It may be possible for more than one role to be held by a single individual. However, it should be noted that where a trading trust or family trust consists of persons holding multiple positions, being the founder, trustee, and beneficiaries, this is seen as an irregularity. The trust may then be seen as a sham and would no longer be legally enforceable, thus the protections afforded to the assets put into the trust would no longer stand. In the case of Land and Agricultural Bank of South Africa v Parker the court found that trusts are created to protect the weak, being the beneficiaries. Thus, a trustee accepts the responsibility of safeguarding the assets on behalf of the beneficiaries.
There are two main types of trusts, an ordinary trust, and a bewind trust. An ordinary trust is one in which ownership and control of the trust are in the hands of the trustees. A bewind trust is where the beneficiaries of a trust have the ownership of the assets, but such assets are under the control of the trustees. A business trust is merely an ordinary trust which serves to protect the assets of a company and allow it to trade. A business trust allows for the trustee to have the power to trade with the assets placed in the trust. It also allows for the beneficiaries to have the right to sell their interest. These two factors separate business trusts from all other trusts as ordinarily, a trustee may not expose trust assets to fiduciary risks.
Should you have any further queries or require assistance with any commercial-related matters contact us and we will gladly assist.