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Settlor, Trustee, or Trust Beneficiary: Who Has the Most Power?

A trust is a legal instrument that can help solve various tasks. A trust can be used by an international business company to reduce the tax burden, for example. You can hand down your possessions to your heirs with the help of a trust, manage your real property or your finances, and so on. In general, trusts are efficient instruments for protecting your assets and your family fortune.  

Trust management

But who is eligible to distribute the profits made by a trust and to make other important decisions? The answer to the question will depend on the type of the trust.

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What types of trusts are there?

A trust is not a legal entity but a fiduciary agreement between parties. In general terms, one person (the Settlor) surrenders his/ her property to another person (the Trustee) who manages the property in the interest of a third party (the trust Beneficiary). The Trustee often follows the recommendations issued by the Settlor and abides by the trust agreement. 

Trusts can be divided into types by their legal structure and by their purposes. The type of trust will determine the authorities of the agreement participants.

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The powers of trust members

The prototypical trust agreement will have three parties:

  • The Settlor who puts his/ her property in trust.
  • The Trustee who manages the property and distributes the incomes made by the trust to the beneficiaries. A natural person or a legal entity can act as the Trustee. Depending on the trust type, the Trustee may be able or unable to manage the property at his/ her own discretion. Depending on the trust type, the Settlor may be able or unable to change the structure of the trust and amend the list of trust beneficiaries.   
  • Trust Beneficiary in whose interests the property is managed. The property may include money, real estate, inheritable assets, and other types of possessions. In some cases, trust beneficiaries have the power to dissolve the trust prematurely and claim their parts of the property before the term of the trust agreement expires. In some other cases, the beneficiary may sue the trustee if he or she can prove that the trustee has misused the property and violated the terms of the trust agreement.

In some jurisdictions, the law requires that trusts have protectors in addition to the three trust members specified above. This requirement applies in Panama and Liechtenstein, for example. The Protector is normally appointed by the trust Settlor and he/ she oversees the activities performed by the Trustee.

The fact that corporate entities can enter trust agreements alongside physical persons make trusts efficient instruments for solving different tasks and avoiding risks.

Please learn more about trusts and their types by following the link.

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You should be aware that a trust can have a bank account that can be used to accumulate funds and to distribute them to the trust beneficiaries. It is possible to open a bank account for a trust in many different countries. Please contact our experts to choose the optimal solution.

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Types of trusts and distribution of authority between trust members

Nobody has absolute powers in a trust: all parties have to carry out their duties and comply with the law. The distribution of authority will depend on the type of the trust. With some trusts, the Settlor will have the most power, with some other types of trusts, the most important decisions will rest with the Trustee. As far as the trust beneficiary is concerned, he or she does not have any authority unless they fulfill an additional role and act as the Settlor, the Trustee, or the Protector. In rare cases, the Beneficiary can take the Settlor of the Trustee to court.

Revocable trust

In a revocable trust, the Settlor is entitled to change the list of property kept in trust, the list of beneficiaries, and the conditions of the trust agreement. He or she is also free to exit the agreement. Therefore, it’s the trust Settlor who has the most power in a revocable trust.

Irrevocable trust

In an irrevocable trust, the Settlor is NOT entitled to change the list of property kept in trust, the list of beneficiaries, or the conditions of the trust agreement during the period when the agreement is valid. Therefore, it’s the Trustee who has the most power in an irrevocable trust. Irrevocable trusts are normally created in family circles or for inheritance purposes. However, an irrevocable trust can be used for business management as well. For example, an offshore company can be put in trust and the company shareholders will act as trust beneficiaries in this case.  

The authority of the Trustee can be limited by the trust Protector if this is one of the conditions specified in the trust agreement. A close friend or a relative of the trust Settlor often acts as the Protector. Thus, the Settlor can influence the Trustee’s decisions via the Protector.

Fixed Trust

A fixed trust is a non-discretionary trust, which means that the Trustee has to do exactly what the Settlor tells him/ her. The Trustee has to manage the property kept in trust in the interest of the beneficiaries but he/ she has little space to maneuver. The list of property in trust is fixed, the list of beneficiaries is fixed, and the trust Settlor remains the boss.

Discretionary Trust

As the term suggests, the Trustee is free to manage the property kept in trust at his/ her discretion. The Trustee has the following powers in particular:

  • To decide what share of profits each beneficiary will receive;
  • To decide how much money each beneficiary will receive;
  • To change the list of the trust beneficiaries.

All the trust Settlor can do is issue recommendations to the Trustee or try to influence him/ her via the Protector. Unlike with a fixed trust, the names of the beneficiaries are not usually specified if the trust is discretionary. Rather, the beneficiaries are defined as a group of people, for instance, ‘the Settlor’s children’, ‘the Settlor’s grandchildren’ and so on.

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Please note that large corporations and wealthy individuals often establish offshore trusts to protect their assets and reduce their tax burdens.

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Blind Trust

Blind trust means full trust and in this case, the Settlor knows very little about the ways in which the property in trust is managed. A blind trust is created when the Settlor has other issues to attend to and the Trustee is the boss in this case.

Things become a bit more complicated, however, if a blind trust is simultaneously a revocable trust. In this case, the Settlor does have considerable powers.

We would like to note that the distribution of powers in a trust largely depends on whether it is a revocable or an irrevocable trust. The Settlor has more powers in the first case and less in the second.

Who owns the assets kept in trust and who controls them?

In a trust, the property is owned by one person and managed by another person. This fact turns a trust into a very powerful instrument when it comes to resolving various disputes about inheritance or business management matters. The same fact also serves asset protection purposes very well and it can reduce your tax burden as well.

Let us recap on the main ideas presented in the text above:

  • The trust Settlor has maximum powers if the trust is revocable and the Settlor is free to change the terms of the trust agreement.
  • In an irrevocable trust, the Trustee has maximum powers but they can be limited by the Protector (if appointed). If the protector is a close relative of the Settlor, his/ her lawyer, or a beneficiary of the trust, the structure becomes highly flexible and minimal risks are associated with it.
  • A trust Beneficiary has no power in decision-making unless he or she also acts as the Trustee or the Protector.

Trusts come in many types and the distribution of authority is going to be different in each particular case. You have to study the issue carefully before you create a trust of a certain type.

If you would like to set up a trust for a concrete purpose, please request a personal consultation with our experts on the matter. We provide complex assistance to corporate entities and private individuals. Please find out about other offshore products and services that we offer by following the link.

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