What it means
When a trust is created, the person setting it up, the settlor, transfers assets to the trustee. From that point the trustee holds legal title, which means the assets are in the trustee's name, but must use them for the benefit of the beneficiaries, who hold what is called beneficial interest.
The property can be almost anything of value, including bank balances, investments, houses, art, business interests and life insurance policies. The trust document names it, or lists how it can change, as new assets are added or old ones sold.
The trustee must be able to identify the property clearly, usually by keeping it in separate accounts. Keeping trust property separate from the trustee's own money is a core duty.
If the trustee goes bankrupt, the trust property should not be available to the trustee's personal creditors. Likewise, the trustee must not mix trust money with personal funds, because doing so can make the trustee personally liable for any loss.
Trust property is also shown in accounts. A trust normally keeps records of its assets and liabilities, income and expenses, and the trustee gives beneficiaries regular reports.
Property is valued at market value for most reporting, which can differ from what the settlor originally paid. Tax follows the property.
Income and gains on trust property may be taxed in the trust or passed to the beneficiaries, depending on the trust type and local law. Because rules vary, trustees take advice on how each asset is treated.
A good trustee also keeps an up-to-date asset register. It lists each item, when it was added, its value and any restrictions, which makes reporting and any later change of trustee much easier.
In practice
Real-world examples.
Example
A father transfers his holiday home and $300,000 in shares to a trustee for his children. The trustee holds both as trust property and can rent the house to cover its costs.
Example
A founder places 20% of her company's shares into a trust so they pass to her family in a controlled way. The trustee votes the shares and pays dividends to the beneficiaries under the trust deed. The shares appear on the trust's asset register at their market value.
Example
A solicitor holds a client's $50,000 deposit for a property purchase in a client account. The money is trust property and must be kept apart from the firm's own funds until it is paid to the seller. If the firm failed, the deposit would still belong to the client, not to the firm's creditors.
Formula
Calculation
Net trust property = Total assets held - Liabilities of the trust
A trust holds a house valued at $600,000, an investment portfolio of $900,000 and cash of $100,000, giving total assets of 600,000 + 900,000 + 100,000 = $1,600,000. It owes a mortgage of $200,000 on the house.
Net trust property = 1,600,000 - 200,000 = $1,400,000. If the trust pays out $56,000 a year, that is 56,000 / 1,400,000 = 4% of the net property.Case study
Seen in the real world.
Elmhurst Family Trust is an illustrative, fictional trust whose property consisted of a $700,000 rental building and $500,000 of investments. The trustee was an individual who also owned a small business of his own.
When the business faced a cash shortage, he borrowed $40,000 from the trust account without telling the beneficiaries. The beneficiaries found the transfer when reviewing the annual report, and the trustee had to repay it with interest and was removed.
The illustrative lesson is that trust property must be kept separate. The new professional trustee set up distinct accounts, got the property valued each year and put a rule in place requiring two signatures for withdrawals above $10,000. The beneficiaries also received a short quarterly statement, which made problems easier to spot early.
Watch out
Common mistakes.
- Treating trust property as the trustee's own, when the trustee only holds legal title for the beneficiaries.
- Mixing trust money with personal funds, which can make the trustee personally liable.
- Forgetting to transfer assets into the trust, when an asset still in the settlor's name may not form part of it.
Questions
People also ask.
Who owns trust property?
The trustee holds legal title, while the beneficiaries hold the right to benefit from it.
Can trust property be sold?
Yes, if the trust deed and the law allow it, and the trustee must act in the beneficiaries' interests and record the sale. Selling at a fair price and keeping records are the main protections.
Is trust property safe from the settlor's creditors?
It depends on the type of trust and the timing, since transfers made to avoid creditors can be reversed by a court, and the trustee remains responsible for the property in the meantime.
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