What is a declaration of trust?
A declaration of trust is a kind of legal document, that outlines the terms on that based an asset or property is managed on trust. A declaration of trust mainly contains the property records, ownership details, and some other terms on which the parties agree.
This document defines specific property or funds being covered under the trust and narrates how it will be utilized and managed by beneficiaries. This document also defines any restrictions if they apply to beneficiaries’ use of an asset. In a declaration of a trust usually the property owner holds the beneficiary themselves.
In some cases, individuals can hold the property in trust for another person or persons, without getting benefits from the property. Some other terms may be contained in this document such as beneficiary, revocability, period of trust, etc.
An important feature of a declaration of trust is that it does not need to be signed by all parties involved. The signature of the trust creator is required to make the document legally binding.
What is the purpose of a declaration of trust?
The declaration of trust sets the outline of the terms on which the owner holds the property in a trust. It also has legal validity as evidence. After being signed by the grantor or creator, it becomes a legally binding document.
This document is used to manage the asset to conform to how it will be transferred managed or distributed to the beneficiaries. It also sets the outline for the management of the property, such as how to mortgage the property, bill collection, renovations other usage of the property.
How does the declaration of trust work?
The declaration of a trust is treated as a legal document, it may set new trust terms or utilize existing trust terms. After signed by the creator it becomes a legally binding agreement between the trustee and beneficiaries.
In a trust agreement, the trustee manages the trust assets, funds, and properties, on behalf of the beneficiary. Let’s understand with some examples, under the trust agreement the trustees manage a company, individuals, the institution’s financial securities, cash flow, etc. This document also specifies the terms of the trustee, and other clauses, such as who will be eligible in the case of the death of the existing trustee, illness, or retirement.
There is an amendment clause also mentioned in a trust agreement; under this clause, there is a possibility to make necessary changes in the current trust agreement. The state laws govern the trust agreement and apply to the operations of the parties involved.
The key takeaway of a declaration of trust
- The declaration of trust is a legally binding document that can be enforced under the law. It clarifies how the trustees manage, control, and distribute all the trust assets accordingly. It also specifies all the rights, duties, and responsibilities of the parties involved.
- There are some other components specified in a trust declaration document, such as the revocability clause, beneficiary’s names, trust period, and name of trustees.
- This document sets the duty and responsibility of the trustees.
Key components of declaration of trust agreement
Some key components have a declaration of trust agreement. Those are listed below:
The terms of the trust
The trust terms outline the conditions given by the settler related to the trust management. Under this, the trustees of the trust manage the trust assets and distribute them to the beneficiaries.
The settlor
The settlor also refers to the grantor, he is a key person who creates the trust and holds their property under the trust. He is a responsible person for the beneficiaries, trustees, and the terms of the trust agreement. In some cases, the settlor also be a beneficiary of the trust agreement.
Beneficiary
The beneficiary refers to who will get the benefits under the trust. They can be an individual or entity. The beneficiaries can receive a different level of rights under the trust. For example, some beneficiaries can be entitled to a certain part of the trust’s property.
Revocability
The trust can vary in different types of purposes. It depends on the choice of the grantor, it can be revoked or irrevocable. In a revocable trust, the grantor can change, alter, modify, or terminate as per their wish at the latter stage at any time. While, in irrevocable trust, the grantor cannot alter, change, modify, or terminate as per their choice. But, if they want to do so, need to get the permission of the court or consent of the beneficiaries.
The period of trust
The duration of trust refers to how long the trust will exist. That duration may vary and depend upon certain circumstances. The period of trust can be specific years, until the specific event is not met, or until the death of a beneficiary or creator.
The trust assets
The trust assets are the properties that are placed by the grantor in the trust. That can be any form of asset, such as movable, immovable properties, cash, deposits, insurance policy, etc.
The trust terms
The trust terms refer to the instructions, on that basis, they decide how the trustee can manage and distribute the trust asset among the beneficiaries.
Advantages of a declaration of trust
There are some benefits of a trust declaration document. That is listed below:
Offers clarity
The declaration of a trust is kind of a legal document; it provides a safeguard to the parties involved. It also specifies the duties of the trustee, and how the trust asset is managed and distributed among the beneficiaries. In this way, it reduces the risks, disputes, ownership and uncontrolled over the trust asset.
Providing privacy
The declaration of trust is a private document, not a public record. Held, that can provide more privacy compared to wills.
Provides control over the asset
In a declaration of trust, the settlor outlines the trust terms. Held, the whole control of the asset can be managed as per their wish. It provides more safety and security of assets.
Asset protection
A declaration of trust document provides asset protection. When an asset is held in trust, basically it protects the rights of beneficiaries and helps them to protect against creditors and land litigations. Some types of trusts may offer tax benefits to the settlor’s assets when they are attached to the trust.
Flexibility
The declaration of trust provides more flexibility compared to wills. Different types of trusts have specific purposes. For example, in a discretionary trust, the trustee is allowed to decide how the trust’s income or fund is distributed to the beneficiaries. It is helpful when the beneficiaries are minors or not capable of managing their financial decisions.
Estate planning
The trust is mainly used for estate planning. Through, the trust they can easily manage the trust’s assets as per their desire. It will also help to set up estate planning for minor or disabled beneficiaries.
Disadvantages of a declaration of trust
There are some disadvantages of a trust declaration document. That is listed below:
Create complexity
Trusts are governed under the trust law that provides specific guidelines. That’s the reason the grantor often needs to help from expert advice from financial, and tax consultants or legal advisors.
To complete all requirements under the trust, take more time and effort for the grantor. Even, if they make an error it will result in a negative impact on the asset, control, tax management, or beneficiaries’ rights among the trust asset.
Time-consuming process
Managing the day-to-day tasks of trust assets is not easy for trustees. It become a consuming process to coordinate and communicate with parties involved in the relations of asset management, and distributions.
Costs
Creating a trust becomes expensive, because it may include legal professional, registration, accountant, and financial expert fees.
It may also include, asset management expenses, tax-related expenses, and trustees’ salaries. All these expenses need to be considerable while establishing a trust.
Tax implications
The grantor can indeed take advantage by creating a well-structured trust. But it has also adverse effects if it is not established with planning. In some cases, it happens the income that comes from the trust may have higher tax rates compared to individual income.
Inflexibility
It is much more complex to make changes or alterations after the establishment of trust if it is irrevocable. In the future, depending on circumstances there are certain event comes and the trust needs to change during the period. Such as the evolution of beneficiaries, changes in laws, asset valuations, etc. If the structure of trust is not flexible, it is difficult to make these necessary changes.
Creating conflicts between the parties
When multiple parties are involved in a trust, there is a possibility to create conflict between them. It will sometimes result sometime create disagreement between trustees and beneficiaries, related to the trust management, distributions of assets, or benefits among them.
Legal risks
The maintenance and manage a trust depend upon the trustees’ duty and working method in the way of gaining the best interest of the beneficiaries. They are also liable for negligence or misconduct in trust management.
Types of declaration of trust
There are different types of declaration of trust used according to the particular purposes. Some of the common types are listed below:
Bare trust
In a bare trust, the trustees hold the asset title, but they have no power to decide on the trust’s asset. That right is held by the beneficiaries if they major in terms of law. In this type of trust, the assets are not transferred to the minors until they become major.
Discretionary trust
In this type of trust, the trustees hold discretion power of the distribution decision of trust’s income to the beneficiaries. This type of trust provides more flexibility, it is beneficial for those beneficiaries who can manage their financial matter wisely.
Interest in possession trust
In this type of trust, the beneficiaries hold the right to receive the income from the trust immediately, when it arises. But, they don’t need to hold the right to the trust funds. This type of trust is commonly used by the spouse, in their lifetime. They can preserve the funds for their child or other persons.
Accumulation Trust
In this trust, the trustee can build up the trust income in a trust’s capital. Accumulation trusts are often used when the beneficiaries are minor or not capable of managing the trust income.
Mixed Trust
Mixed trust refers to combinations of different types of trust. Here, the elements of this trust mixed up, such as some trust assets held as an interest of possession trust and others are held as a discretionary trust.
Settlor- Interested Trust
In this trust, the grantor retains an interest. The tax implications may apply to this trust. It is often used to manage asset planning.
Non-resident Trust
This type of trust is established when the trustees reside in a different jurisdiction. The non-resident trust is often used for tax reasons. The Rules related to this trust may vary according to the countries involved.
What are the differences between a Declaration of Trust and a Trust Agreement?
A declaration of Trust and a Trust Agreement look like the same thing, but there are differences between them. In legal terms, both are legal documents, but the creation purposes may vary and differ.
A declaration of trust is a kind of statement that declares the asset ownership held by one party to another party. A declaration of trust agreement creates a trust relationship between the parties. One party holds the title of the asset for the benefit of another, and another acquires the interest.
In contrast, the trust agreement outlines the terms and conditions on which the trust asset or property will be managed or distributed. It also defines the role of trustees, such as Their duties, power, how to manage the funds, and under which conditions the beneficiaries get the distributions of that asset or funds.
A declaration of trust sets up the ownership rights of trust assets. A trust agreement sets up a detailed outline under that how the trust will be operated.
The declaration of trust may be a simple statement. It can be made by an individual, and there is no formal requirements are required. In contrast, the trust agreement needs to meet the fulfillment of some necessary legal requirements that make it a legally enforceable document.
Conclusion
A declaration of trust is a document that sets up the outlined terms and conditions in the relations of the management of the trust asset. It defines certain properties that are attached to a trust and defines how to be utilized or managed by the trustees in the best interest of the beneficiaries. It also outlines the restriction if required concerning the asset management of the trust.
