Business law- trust Essay Example

  • Category:
    Business
  • Document type:
    Assignment
  • Level:
    Undergraduate
  • Page:
    2
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    1133

Establishing A Family Trust 6

ESTABLISHING A FAMILY TRUST

Mr. and Mrs. Smith want their family members to share in the profits of the business in order to reduce the payable income tax and to eliminate unlimited liability through establishment of a trust, in order to distribute the business’ profits to their two children and three grandchildren.

What is the appropriate trust that will suit their need?

A trust is an agreement in form of a document that dictates the rules that are supposed to be followed for money or property held up in a trust by the person establishing it towards his or her beneficiaries (Blois 1999, p. 197). The basic objectives of trusts are reducing estate tax liability, protection of property in a business or estate, and avoiding probation. For the case of Mr. and Mrs. Smith, the most suitable trust to open up for their beneficiaries is the family trust.

Family Trust

The business owned by the Smiths can generally be passed to their heirs in case of death of either of the business owners. The decision to create an exclusion or family trust can be advantageous due to the agreement applicable upon the death of either of the spouses. This trust provides an income in the entire lifetime of the surviving family members (Blois 1999, p. 200).

The trustee is supposed to be the business owners. In this case, Mr. and Mrs. Smith are the trustees because they possess the source of income necessary to set up the family trust. Mr. and Mrs. Smith thus have trust powers.

Principle Clause: Mr. & Mrs. Smith Trust

The trust is set up by developing a trust deed, which is drawn up, and dictating the real trustees (Mr. and Mrs. Smith), the beneficiaries (their children Alice and George, alongside their grandchildren, Eric, John and Henry). In establishing the trust, the controllers should stipulate the way in which the entity runs as well as the assets being committed to the trust. These assets are passed on to the trust.

Analysis of the Situation

The business will hold the necessary assets and income, which are held by the trustees for the benefit their beneficiaries. The money held is usually called the corpusor in other instances, the principle of the trust.This principal usually changes because the trustee use some of it, while some is injected into investment to earn interest and dividends. A part of the corpus can appreciate or depreciate in its value. The Smith’s business will thus holds the property and the money as the «trust fund (Blois 1998, p. 302).

Merits of the Family Trust

The benefits of the trust are usually passing to the children or grandchildren tax-free assets. The family trust largely reduces the risks which beneficiary would incur in assets in the event of a divorce settlement or in case of bankruptcy. The trust looks after the assets on behalf of the beneficiaries who would be incapable of doing the same for themselves. For instance, mentally incapacitated or dependent children or in situations where the controllers feel that the trustees would manage the assets in a sensible way. The family trust also assists in ensuring that the control of the business remains within this particular family (Blois 1998, p. 302).

Liabilities of the Beneficiaries and the Controllers in the Operational Trust

The liability of the beneficiaries in a family trust is generally limited. Thus, the beneficiaries may not be compelled to contribute their personal funds in a bid to prevent the trust from foreclosure. Furthermore, in this trust, it would not be able to charge the interests of the beneficiaries in order to secure the beneficiaries’ liability to the trustee. This is usually not connected in administering the trust, unless the beneficiary contracts the charge.

The beneficiary is not entitled to the underlying title of the trust property. This is however contrary to scenarios where the trustee is controlled by the beneficiary. The beneficiaries are l not liable like the owner of the trust property. This implies that in matters, which involve the trust property, the beneficiary is not liable in the contract or to the trust property or trust principle. Furthermore, the beneficiaries are not liable to unlawful or discriminatory acts by the trustees as a stakeholder. The beneficiaries equitable interest ownership does not carry with it liabilities. The beneficiary does not incur liabilities, which inherently arise out the ownership of the beneficial or equitable interests, except in issues to do with taxation (Blois 1999, p. 203).

The controllers of the trust i.e. the trustees are fully liable to the trust. The controllers have a legal obligation to administer the trust for the good of the beneficiaries skilfully, and with extreme care and caution. The trustees are usually submitted against by a number of issues including, mishandling of assets, improper accounting, and deliberately inflicting financial harm to their beneficiaries, failure to acquire advantageous tax savings and in conflicts of interest with the trust.

The trustee, being a beneficiary in the trust is especially vulnerable in this entity. This does not only base on the family animosities, but more significantly from a legal perspective. In the event of death, the remaining partner as a trustee possesses divided conflicts of interests and loyalties that are inbuilt. The trustee is fully liable for allocating different assets amongst the various beneficiaries and sub trusts, who possess unequal shares. Some beneficiaries can easily object to their shares by finding them unfavorable. Thus, pleasing all the beneficiaries is hard. Chances of the surviving spouse being sued by his or her beneficiaries are common (Blois 1999, p. 305).

The trustee or controllers are fully liable in the aspects of administering the family trust in a proper way. They have to submit financial statements and tax returns on an annual basis. Additionally, the approval of the distribution of the beneficiaries’ financial statements as well as other major transactions has to be minuted. The recommendation here is employment of an accountant to assist in administration of these tasks.

Conclusion

In summary, the family trust would be the most suitable trust to cushion the business of the Smiths from unlimited liabilities. This trust maintains the assets of the business on behalf of the beneficiaries who would not be able to administer the same for themselves because of dependency on their parents. The beneficiaries have no liability to the trust or to the business in terms of expenses or in times of loses. The trustees are fully liable to the family trust.

Reference

Blois, KJ 1999, ‘Trust in business to business relationships: an evaluation of its status’, Journal of Management Studies, vol. 36, no. 2, pp. 197-215.

Blois, KJ 1998, ‘A trust interpretation of business to business relationships: a case-based discussion’, Management Decision, vol. 36, no. 5, pp. 302-308.