Money Matters: Where do trust assets come from?

So, how did you go muddling through the case note last blog? (That was the short version - trust us!). We hope it was helpful to see how some of the things we've discussed interact in practice!

You will see in Money Matters that a lot of the features of trusts we have considered interact constantly throughout a trust's operation.

Cast your mind back

Let's go back to our initial definition of a trust: "...a trust is a mechanism through which a person (the trustee) owns and must deal         with specified property for the benefit of a certain person, people or purpose (the beneficiary)."

There's a few key points in there. One of them is that the trustee owns and deals with trust property.

By now we're comfortable with those concepts. We know that the trustee has a legal interest in the trust assets and operates the trust for the benefit of the beneficiaries. We know that the trustee has wide-ranging powers to manage the trust and invest trust monies.

But the trustee is not the person that establishes the trust; that's the settlor. So how does the trustee come to own the assets?

Show me the money!

There is no trust without trust assets, and the trustee needs to (legally) own the trust assets in order to operate the trust. So in true Jerry McGuire style, it's time to say "show me the money!" and find out how this comes about!

On inception of a trust, the settlor will make a gratuitous transfer (i.e. not a sale) of assets to the trustee, to be held on trust for the benefit of the beneficiaries. If the transfer of trust assets to the trustee is not gratuitous then the trust will be void.

Common assets held on trust include (but are not limited to):

(a)  Land, transferred in accordance to a 'transfer of land' deed in accordance with the specified rules in each State;

(b)  Shares, transferred by an 'instrument of transfer' plus compliance with any other rules for transfer contained in the relevant company's constitution;

(c)  Right to receive debt, transferred by:

                    (i)        the settlor assigning the debt absolutely to the trustee in writing; and

                   (ii)        express written notice of the transfer to the debtor by the settlor or the trustee; and

(d)  Other goods, for which physical delivery of the good with intention to transfer legal title is usually sufficient.

However, usually the settlor only settles about $10 on trust. It is paid as a gift to the trustee to hold on trust for the benefit of the beneficiaries. The trust is then established and can acquire other assets.

How does a trust obtain other assets?

A trust will obtain other trust assets in the usual commercial ways - the trustee will buy the assets in its capacity as trustee (i.e. buy the assets on behalf of the trust).

If the trust is newly formed then the money to acquire assets will probably be obtained in the form of a loan. A trustee may also simply choose to finance a purchase in this way. Remember that trustees take on liabilities personally (on behalf of the trust) because the trust does not have its own legal personality. Consequently all the personal assets of the trustee are exposed to claims by creditors of the trust. Allawdocs recommends that a company should act as the trustee to protect the personal exposure of the trustee.

The trustee may borrow money from a commercial institution or an individual - more on this in the coming weeks!

When a trust is operating

Once a trust is operating, it may generate cash inflows from:

(a)  income from investment of trust assets;

(b)  proceeds from sale of trust assets.

See next time for a discussion of the trustee's dealings with assets.

The trustee will then have a choice:

(a)  whether to distribute these inflows to beneficiaries, or to reinvest them (use them to purchase other investments);

(b)  when purchasing new assets, whether to finance the purchase with these inflows or by a loan.

In making these decisions the trustee must always act in accordance with the trust deed and its trustee duties. Allawdocs recommends that the trustee execute a declaration of trust to clearly define that the asset is held for the benefit of the trust and not for the trustee personally.

Money money money

Must be funny! Now we know where trust money and assets come from, we can move to the next step: dealing with the assets. More on this next time! Adios!

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