Beneficiary (trust)
Encyclopedia
In trust law
, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person
, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures. With the exception of charitable trust
s, and some specific anomalous non-charitable purpose trust
s, all trusts are required to have ascertainable beneficiaries.
Generally speaking, there are no strictures as to who may be a beneficiary of a trust; a beneficiary can be a minor, or under a mental disability (in fact many trusts are created specifically for persons with those legal disadvantages). It is also possible to have trusts for unborn children, although the trusts must vest within the applicable perpetuity period.
From the perspective of the trustees' duties, it is most common to differentiate between:
Where a trust gives rise to sequential interests, from a tax perspective (and also from the point of view of trustee's duties), it is often necessary to differentiate beneficiaries sequentially, between:
For the purposes of various exercise of beneficiaries' rights, it is often necessary to distinguish between:
In the case of a fixed trust, the beneficiaries' interest is proprietary; they are the owners of an equitable interest in the property held under the trust.
The position is slightly different in the case of a discretionary trust
; in such cases the beneficiaries are dependent upon the exercise by the trustees of their powers under the trust instrument
in their favour.
Similarly, where a trust gives rise to successive interest, the title of a remainderman is a prospective, or contingent, interest; although unlike a discretionary beneficiary, this is still a species of property that can be dealt with, much in the same was as a contingent or prospective debt.
Historically, whilst the courts have been fairly amenable to the use of trusts in tax planning, as tax planning schemes have become more aggressive, so the courts have increasingly taken a restrictive view of the tax treatment of trusts.
Although individual countries tend to have very detailed rules about the taxation of trusts, the three mechanisms whereby taxation is usually assessed is by either treating (i) the trust as a separately taxable entity in its own right, (ii) treating the trust property as still the property of the settlor
, and (iii) treating the trust property as belonging absolutely to the beneficiaries. Some jurisdictions apply different combinations of the rules in income tax
, capital gains tax
and inheritance tax
.
it, exchange it, release it, mortgage it, and do most other things that they could do with a chose in action.
If all of the beneficiaries of the trust are adults and of sound mind, then they can terminate the trust under the rule in Saunders v Vautier, and require the trustees to transfer absolute legal title to the trust assets to the beneficiaries.
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures. With the exception of charitable trust
Charitable trust
A charitable trust is an irrevocable trust established for charitable purposes, and is a more specific term than "charitable organization".-United States:...
s, and some specific anomalous non-charitable purpose trust
Purpose Trust
A purpose trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind. In most jurisdictions, such trusts are not enforceable outside of certain limited and anomalous exceptions, but some countries have enacted legislation...
s, all trusts are required to have ascertainable beneficiaries.
Generally speaking, there are no strictures as to who may be a beneficiary of a trust; a beneficiary can be a minor, or under a mental disability (in fact many trusts are created specifically for persons with those legal disadvantages). It is also possible to have trusts for unborn children, although the trusts must vest within the applicable perpetuity period.
Categorisation
There are various ways in which beneficiaries of trusts can be categorised, depending upon the nature and need of the categorisation.From the perspective of the trustees' duties, it is most common to differentiate between:
- fixed beneficiaries, who have a simple fixed entitlement to income and capital; and
- discretionary beneficiaries, whom the trustees must make decisions as to the respective entitlements.
Where a trust gives rise to sequential interests, from a tax perspective (and also from the point of view of trustee's duties), it is often necessary to differentiate beneficiaries sequentially, between:
- those with a vested interest, such as tenants for life; and
- those with a contingent interest, such as remaindermenRemaindermanA remainderman is a person who inherits or is entitled to inherit property upon the termination of the estate of the former owner. Usually this occurs due to the death or termination of the former owner's life estate, but this can also occur due to a specific notation in a trust passing ownership...
For the purposes of various exercise of beneficiaries' rights, it is often necessary to distinguish between:
- beneficiaries under a bare trustBare trustA bare trust is a trust in which the beneficiary has a right to both income and capital and may call for both to be remitted into his own name. He is also entitled to take actual ownership and control of the trust property...
(including a constructiveConstructive trustA constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
or resulting trustResulting trustA resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...
), to whom the trustee owes basic duties arising by law; and - beneficiaries under an express trust (either an inter vivos trust or a testamentary trustTestamentary trustA testamentary trust is a trust which arises upon the death of the testator, and which is specified in his or her will...
), where the trustee owes additional duties and has additional powers specified by the trust instrumentTrust instrumentA trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
.
Rights and interest
The nature of a beneficiaries' interest in the trust fund varies according to the type of trust.In the case of a fixed trust, the beneficiaries' interest is proprietary; they are the owners of an equitable interest in the property held under the trust.
The position is slightly different in the case of a discretionary trust
Discretionary trust
In British and Canadian law, a discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia...
; in such cases the beneficiaries are dependent upon the exercise by the trustees of their powers under the trust instrument
Trust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
in their favour.
Similarly, where a trust gives rise to successive interest, the title of a remainderman is a prospective, or contingent, interest; although unlike a discretionary beneficiary, this is still a species of property that can be dealt with, much in the same was as a contingent or prospective debt.
Taxation
Tax planning usually plays a considerable role in relating to the use of trusts.Historically, whilst the courts have been fairly amenable to the use of trusts in tax planning, as tax planning schemes have become more aggressive, so the courts have increasingly taken a restrictive view of the tax treatment of trusts.
Although individual countries tend to have very detailed rules about the taxation of trusts, the three mechanisms whereby taxation is usually assessed is by either treating (i) the trust as a separately taxable entity in its own right, (ii) treating the trust property as still the property of the settlor
Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
, and (iii) treating the trust property as belonging absolutely to the beneficiaries. Some jurisdictions apply different combinations of the rules in income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
, capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
and inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
.
Beneficiaries' powers
Because an interest under a trust is a species of property, adult beneficiaries of sound mind are able to deal with their rights under the trust fund as they could with any other species of property. They can sell it, assignAssignment (law)
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
it, exchange it, release it, mortgage it, and do most other things that they could do with a chose in action.
If all of the beneficiaries of the trust are adults and of sound mind, then they can terminate the trust under the rule in Saunders v Vautier, and require the trustees to transfer absolute legal title to the trust assets to the beneficiaries.
See also
- Beneficiary (general)BeneficiaryA beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
- Trust lawTrust lawIn common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
- TrusteeTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
- SettlorSettlorIn law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
- Cestui que
- Birth certificateBirth certificateA birth certificate is a vital record that documents the birth of a child. The term "birth certificate" can refer to either the original document certifying the circumstances of the birth or to a certified copy of or representation of the ensuing registration of that birth...
- Legal fictionLegal fictionA legal fiction is a fact assumed or created by courts which is then used in order to apply a legal rule which was not necessarily designed to be used in that way...