What is a trust?

By Caragh Deery - Law Student @ St Hilda's College, Oxford

If you’ve been keeping up with the news lately, you might have read about Anna Sorokin – a German “fake heiress” who conned New York’s high society. Sorokin climbed the social ladder by pretending that she was a “trust fund baby”, entitled to a share of an imaginary fortune. We’ve all heard of “trust funds”, but what do we actually mean by a “trust”?

In formal terms, a trust is an instrument through which one person is able to hold rights meant for the benefit of another person. There are three main players involved in the creation of a trust. First, there must be a “settlor”. This is the person creating the trust, i.e., wishing to divest himself of assets (whether land, money, shares, etc.) to be held for the benefit of another. Second, there must be a trustee (or trustees). This is the person who will be entrusted with the legal title of the trust property. They are the owner of the assets in law but hold them subject to fiduciary duties.

In essence, this just means that a trustee is not allowed to spend or invest the money for their own benefit, rather only under the terms of the trust. There is no reason why the settlor cannot also be the trustee, but it could also be another person (or persons) of the settlor’s choosing. Third, there must be a beneficiary. This is the person for whom the trust property is held, and the person who benefits from the trust property. For example, if the trust property is shares, any dividends (returns on the investment) will be paid to the beneficiary (or held for his benefit).

Why would somebody set up a trust? If you want to divest yourself of some of your property to benefit another, why not just give it to them directly? There are in fact numerous reasons why a settlor might opt to create a trust. The main incentive is usually to reduce tax payable on the disposition, or to “control and protect” assets as the UK government prefers to phrase it. It might also be that the person who you want to benefit from the property is too young, or otherwise unable to manage their own affairs. Many people also set up trusts to fund charitable purposes.

A final point to end on is that in the UK, the concept of a “trust fund baby” does not exist. Where a beneficiary is an adult of sound mind, he may choose to terminate the trust and to have the whole of the trust property transferred to him. This means that he will be free to spend, invest and deal with the trust property as he pleases. Where there are multiple adult beneficiaries, they may do the same, so long as they all consent to terminating the trust. The trust property will then be divided between the beneficiaries in proportion with their interests.

Further reading:

  1. A brief overview on trusts from the UK government: https://www.gov.uk/trusts-taxes

  2. A news article on Anna Sorokin https://www.nytimes.com/2019/05/10/nyregion/anna-delvey-sorokin.html - note: this case raises many other legal issues, so it might be worth doing some further research

  3. An FT article on some of the reasons why somebody might create a trust: https://www.ftadviser.com/tax-efficient-investments/2017/07/14/five-reasons-to-use-a-trust/