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PREAMBLE
This article is prepared in two parts and at the most basic level for readers to appreciate what does a “Trust” mean in commercial transactions and how it is used(i).
Part One of this article
1. What is a trust?
From the Oxford dictionary, the definition of the word Trust (信) is “a firm belief in the reliability, truth, or ability of someone or something” (ii).
For a Trust to exist, there must be a person who is a “firm believer” in another person.
Trust is therefore a relationship between two separate entities, these entitles can be an individual or any other legal person (including an incorporated body).
A Trust must therefore involve two or more people before it can exist. It is common to form a Trust in the commercial world i.e. a Trust Fund (信托资金或基金). However, there are mandatory requirements for a Trust Fund to be legally recognised, as mentioned below.
2. What elements are required to form a valid trust structure?
A trust structure must have these three basic elements:
(a) Trust Property;
(b) Trustee; and
(c) Beneficiary
Trust Property – is an asset capable to be held by a person on behalf of another(iii). The Trust Property must be kept at all time for the Trust to exist(iv). Some Trusts can be settled with Trust Property in the form of a nominal value known as a Settled Sum and must be preserved at all time for the Trust to exist.
A Trustee – is an entity who holds a legal or equitable interest in the Trust Property. However, the Trustee must consent to deal with the Trust property for the benefit of the Beneficiary.
The power of the Trustee is usually stipulated in a trust instrument usually known as a Trust Deed. The Trustee must act within that given set of power when dealing in the Trust Property(v).
The Trustee can be one of the beneficiaries however the Trustee cannot be the sole Beneficiary as there is a merger of legal and equitable interest in the Trust Property(vi).
A Beneficiary – is the individual or group of individuals for whom the trust is created and who will eventually receive the benefits of said Trust.
3. How does trust integrate with the legal framework?
A Trust (as mentioned previously) is a relationship between the Trustee and Beneficiary. This relationship is not a contractual relationship and therefore cannot be recognised by contract or other laws.
A Trust is not a legal entity, it cannot enter into any contracts nor any lawsuits. The Trustee is the legal owner of the Trust Property, the Trustee is solely responsible for any legal liabilities incurred from the Trust transactions(vii).
The Trust is governed by the Equity Law and an enacted Statute. These laws govern the Trustee’s performance. The actions available to Beneficiaries to protect its equitable interests in the Trust Property can be directed against the Trustee(viii).
Part Two in the next PRISM publication will cover these topics
4. How trust differs from other business structures?
5. Why using a trust?
6. How does a trust end?
7. What taxation implications or advantages from the use of a trust structure?
In the next PRISM article, we will briefly touch on “Anstalt” (establishment of representatives) or “Stiftung” (a foundation) that operate in most of those German speaking countries.
