The concept of a 'trust' is unique to common law or English speaking jurisdictions. Historically, it developed from the English laws of equity and sought to separate the creator of the trust, known as the Settlor, from specified real or personal property usually for the benefit of future heirs and/or to ensure that any future dispositions Would be made in a manner generally in keeping with the original intentions of the Settlor.
Once a Settlor has decided what property he wishes to transfer to the hypothetical trust (normally a complex written document) he must decide upon its administrators, the 'Trustees'.

It is vital to understand that these must have full autonomy to independently manage and control the transferred property in favour of either known or unknown beneficiaries. If full autonomy is not granted then it could be claimed that the trust was not settled and therefore, was not properly constituted.

If this happened then the Settlor would still be legally deemed the owner of the trust assets - defeating the-raison d' étre behind the trust in the first place. Obviously, given this requirement to totally deny the Settlor direct control over what were formally his assets demands great trust' in the Trustees.

Fortunately, Trustees are not totally free of control since they must normally strictly adhere to the trust instrument unless such instrument involves an illegal act or is in breach of some current public policy. Certainly, it is normally open to interested, or potentially interested parties, to seek the assistance and interpretation of the applicable courts.

In almost all common law jurisdictions, they have reserved the right to vary, abrogate or otherwise change the terms and conditions in a deed of trust including the originally designated 'Trustees' and/or beneficiaries.

Notwithstanding the above, it must be understood that the courts in, most common law jurisdictions will do everything in their ability to carry out the wishes of the Settlor and, bar some malfeasance, are unlikely to interfere with a deed of trust.

It is clear that all Trustees implied through circumstances or clearly designated, have a fiduciary duty to act honestly and in good faith for the benefit of the trust even if such responsibility denies them personal opportunities. The best analogy is probably afforded by the fiduciary duty owed to a shareholder by a company director.

However, unlike a director a Trustee must not be directly answerable to any third party since this would infer that the Trustee was in reality a mere 'nominee' acting as a catalyst for someone else. If the Settlor was the instructing party then the trust would not have legally settled ' Further, unlike most dispositions a Trustee is not the direct legal recipient of the transferred assets.

In fact, whilst the Trustee has the right to deal with the aforementioned as if he was the owner - subject to the deed of trust conditions and perhaps other Trustees - he cannot use them for his own personal use and, as a corollary, no third party creditor can sequestrate trust assets simply because of a dispute with a Trustee.

In other words, proprietary title is in limbo despite the existence of trustees who are responsible for the same as if they were directors and/or shareholders in a company. At the time of the creation of the trust instrument, the deed of trust, it is common that the Settlor provides the trustees with a 'Letter of Wishes' which, as its name implies, express's the wishes and desires of the Settlor at the time of the original disposition.
This 'Letter' is not meant to be slavishly followed by the trustees since to do so would threaten the independence of the trust but rather it is a 'deciphering' document meant to assist the trustees carry out their independent functions.

Of course, it does carry weight and should be read in conjunction with the deed - these often being standardized documents - but it should never result in the Settlor having de facto control. In recent years there has also been a growing propensity to use 'Protectors' as an additional safeguard against any wrongdoing by trustees.

In most cases, the protector will be a lawyer or accountant known by the Settlor who will be granted co-signatory rights, together with the trustees, over the trusts bank account facilities. Of course, a protector also should never be the Settlor or anyone else too closely connected with the trust since this could, once again, compromise the independence of the trustees.

Certainly, various obiter statements in English cases appear to be ascribing 'Protectors' with fiduciary duties akin to those of trustees (See I. R. C v. Schroeder 1983 STG 480 ) Therefore, for safety reasons any modern trust should, if employing protectors, ensure that they are independent from the Settlor or other relevant parties.

The exact description of trusts can vary throughout common law jurisdictions; however, most can be broken down into three basic types:

1. An 'Interest in Possession' Trust: As its name implies this provides for a beneficiary to have a distinct right to the income from a particular part of the trusts capital assets. The capital asset may or may not be passed on to the beneficiary.

2. A 'Discretionary' Trust: This gives the trustees total discretion to decide, subject to their fiduciary duty, how, when and to whom the income, and perhaps capital, of a trust is transferred.

3. An 'Accumulation and Maintenance Trust': This is basically a combination of the other two trust types. Generally, it will start as a discretionary instrument but will have provisions to change into an interest in possession trust normally when the beneficiaries have reached a particular age.

Examples - Traditional Uses for Trusts
'A' has a wife 'B' and 2 children 'C' (Age 10) and 'D' (Age 18). 'A' wishes to keep the family assets for the benefit of future generations, however, 'D' has shown himself to be frivolous and incapable of acting in the best interests of the family. In addition, 'A' wants to ensure that should he die his wife 'B' will have the right to remain in the family house.

ANSWER: A trust should be prepared outlining the long-term objectives of 'A' either during his life, an inter vivos trust, or upon his death by means of a will. The instrument could provide for 'B' to have a life interest in the family home with this interest reverting back to the trust or to 'C' and/or 'D' depending on circumstances. In fact, in such a situation it might be decided to give the trustees adequate 'Discretion' to take account of all possibilities.

During the interim period such a trust would generally empower the trustees to pay a certain amount to 'B', 'C' or 'D' to cover all day-to-day expenses. Other possibilities would include provisions that 'C' or 'D' should directly inherit a given proportion of the trusts assets on the attainment of a given age or circumstance i.e. upon marriage. Obviously, the possibilities are endless but the great advantage is that once an appropriate trust has been created, 'A' will have some control over the disposition of family assets even from the grave! Obviously, the first example only takes into account the most simple of trust objectives.

However, the trust soon developed as a very effective 'tool' for circumventing, in particular, capital gains and inheritance taxes. The concept being that if for example, 'C' and 'D' above did not directly receive any pecuniary benefit, then ho could a government seek to tax them. Of course, once a trust did make a direct disposition 'C' and 'D' would have to pay taxes but remember that the trustees would, if we accept the discretionary model, be able to control the amount and time of the payment to ensure the most tax efficient result.

It goes without saying that a trust is a taxable entity, however, traditionally and logically it needs only to pay income and not capital gains or inheritance orientated taxes. Remember, in common law whilst assets may have been transferred to a trust the said assets are not owned by anyone until future dispositions have been made. In other words, it was the ideal 'holding' vehicle and could considerably postpone any tax liability.

Unfortunately, as will be shown later on, many of the advantages of trusts have been lost as a result of aggressive legislation in common law jurisdictions. However, possibilities still exist for those in some civil law countries and also for non-tax objectives such as asset protection.

The Rule Against Perpetuities
In the above examples it can be seen that significant powers of control over the future use of assets were granted -to the original Settlor, however, from a logical point of view this could have a disastrous effect on the availability of capital for future generations. To prevent this, most common law jurisdictions have developed specific limitations on the perpetual control of trust assets.

In the United Kingdom, a trust cannot remain active for more than 80 years after it has been settled or 21 years after the demise of an identifiable person who was alive at the time of the creation of the said trust.

Onshore Application
In common law countries the use of onshore trusts for those locally domiciled and resident, at least for tax mitigation purposes, has greatly diminished. In the United Kingdom, for example, there has been a rash of legislation in recent years (such as S.739-740 of The Taxes Act, 1988, S. 110 of The Parliament (Finance) Act, 1989 and S. 87-97 of The Taxation of Chargeable Gains Act, 1992)- which has prevented the use of tax avoidance mechanisms unless there existed a genuine commercial reason, ascribed British residence to foreign trustees and made Settlor's personally liable for their trusts capital gains.

However, as will be discussed later, there can still be considerable advantages available for those not domiciled, even if resident, in countries such as the United Kingdom.

Offshore Application
Today, the majority of tax mitigation trusts are established outside of high taxation common law countries like the United Kingdom. The principle reason is that 'tax friendly' jurisdictions such as Jersey and the Isle of Man provide respectability, greater confidentiality and hence protection against the ubiquitous reverse burden of proof principle employed in most high tax countries. If one on the other hand is domiciled, or perhaps resident, in a civil law jurisdiction one must be careful that trusts are recognized.

The International Recognition of Trusts
The main problem with the international recognition of trusts is that civil law countries have difficulty coming to terms with the concepts involved. Certainly, the idea of property ownership being in limbo for a given duration is alien as is that of beneficial, or true, ownership not necessarily resting with the shareholders. In addition, most civil codes (at least in Europe) adopt the Legitima Portia Principle; a 'Principle' which seeks to prevent a free disposal of ones assets in favour of guaranteeing specific proportions to ones next of kin.

These facts, together with a reluctance to tie up capital and/or property for future generations, can result in civil law countries refusing to recognize trusts. Nevertheless, as a general rule Western European civil law jurisdictions will often accept a validly constituted foreign trust so long as its enforcement does not cause a breach of indigenous law.

The Hague Convention 1984 Effective 1st of January 1992
In an attempt to introduce greater harmony between the laws of common and civil law jurisdictions an international-meeting was held in the Netherlands. This set out to establish the acceptance of certain principles, which should be applied by the courts of the signatory nations. To date, it has been ratified by the United Kingdom, Canada, Australia and, more surprisingly, Italy. In respect to the latter this should provide greater certainty for those with trust assets in this jurisdiction.

The attributes to be ascribed to a trust are elucidated in Article 2, however, it will be noted that they may still differ from those of an established trust jurisdiction. For example, it is quite common for English and Irish courts to imply a trust even if there are no written documents.

Article 2 'Trust Characteristics' as laid own under The Hague Convention 1984
(i) It is accepted that a trustee has no direct proprietary interest in a trust and that it is not part of his own estate.

(ii) Notwithstanding the above, title to the trust assets can be in the name of the trustee or held on his behalf by another.

(iii) A trustee has a fiduciary duty to manage, dispose or employ trust assets in the manner prescribed by both the trust instrument and applicable law .

Advantages
Can transfer legal ownership from a Settlor to trustees without giving the aforementioned direct beneficial interest in the trust property. Can provide an effective mechanism of distributing trust capital and/or income to minimize tax consequences for beneficiaries. Prevents immature or frivolous beneficiaries from dissipating family assets and, therefore, 'protecting' future generations.

May be able to prevent the application of the Legitima Portia Principle in respect of assets in civil law jurisdictions. May still be very useful for tax mitigation purposes especially for those not domiciled in a common law area where anti-trust legislation may exist. The use of 'Protectors' can significantly reduce problems caused by dishonest or incompetent trustees.

Disadvantages
Many of the traditional tax benefits no longer exist for those resident and domiciled in common law countries because of antitrust legislation. In the United States such benefits are not normally available even for those merely resident. There may be difficulty in getting a civil law jurisdiction, particularly in Eastern Europe, to accept the validity of a trust instrument even if this does not cause any conflict with indigenous laws.

By definition the employment of a trust must result in the former 'owner(s)' of the trust property losing direct control over their former assets. Whilst the settlement of a standard format trust may not be prohibitively expensive the maintenance may be if the trustees have to play an active role and/or have specialist skills.