A declaration of trust (also known as a trust deed or formal trust agreement) is a legally binding document which states the intention of the parties to hold property, assets, or money as a trustee for another party, the beneficiary. The document sets out the rights of the parties and the terms under which the trust assets are to be held and managed. This type of document is often used in a legal context to give legal effect to the relationship between the parties, particularly in matters relating to ownership, succession, and the enforcement of creditors’ interests.
Understanding what a declaration of trust is and its implications can be difficult. Here are seven suggestions to help make the understanding of a declaration of trust more manageable:
1. Definitions
The term “declaration of trust” often appears in many legal documents. A brief definition of the term would be as follows: “A formal written agreement between parties intended to place a legal duty on the parties to take reasonable care of property, assets, or money as a trustee for another party, the beneficiary.”
2. Distinguishing Features
A declaration of trust is distinct from other legal documents due to its specific purpose. Its specific language and context set it apart from contemporary documents like contracts, deeds, and wills. Knowing which document type to use in a given situation can help avoid confusion and potential disputes.
3. Key Elements – Trustees and Beneficiaries
A declaration of trust requires two parties to create and execute it: the trustees and the beneficiaries. The trustees are those responsible for managing and possessing the trust assets, while the beneficiaries are those who are entitled to the trust assets either immediately or in the future.
4.Benefits of Declaration of Trust
The most obvious benefit to establishing a declaration of trust is that it creates a legal obligation for trustees to protect and manage assets on behalf of a beneficiary. Additionally, declarations of trust can protect beneficiaries from creditors, as the trust assets are placed out of the reach of creditors and cannot be attached. Lastly, declarations of trust can be tailored to the specific needs of the parties involved.
5. Disadvantages of Declarations of Trust
As with any legal document, there are potential drawbacks to using a declaration of trust. One drawback is that trust assets may be taxed differently than if they were held outright by the beneficiary. Additionally, as trust documents are often considered contracts, they require consideration and the parties involved can be held liable if any of the terms of the trust are not met.
6. Commonly Initiated Situations
Declarations of trust can be used in several situations to protect assets for the lifetime of the trust, such as for succession planning where wealth is transferred to the next generation, or to create charitable trusts, retirement trusts, or estate trusts. Some other examples include establishing trusts to protect assets in cases of bankruptcy, fraud, or divorce.
7. Practical Examples
In a practical sense, declarations of trust are commonly used when couples buy a property together and wish to record their respective contributions by way of a declaration of trust. There are also trusts initiated for the benefit of dependents or for tax and succession planning purposes. These trusts may be used to provide income or capital for certain circumstances, such as educational expenses, business startup costs, or inheritance.
Declarations of trust are a legally binding document with specific implications and must be created and managed very carefully. Knowing what it is and how it works is essential for keeping assets protected and in good legal standing.