FORTHCOMING CHANGE: The Trusts and Succession (Scotland) Act 2024 received Royal Assent on 30 January 2024, marking the first review of trusts law in Scotland in over 100 years since the principal legislation, the Trusts (Scotland) Act 1921, was passed. The trusts provisions will require secondary legislation from Scottish Ministers to be brought into force whereas the provisions relating to succession law came into effect on 30 April 2024. The main changes to modernise the law are summarised in News Analysis: Trusts and Succession (Scotland) Bill passed. Express creation of trusts A trust is constituted expressly where the owner of property (the truster) transfers property to trustees to hold for defined purposes on behalf of the beneficiaries. Constitution of the trust is completed by delivery of the trust property or trust deed to the trustee. Trust deed ‘Trust deed’ is defined by the Trusts (Scotland) Act 1921 (T(S)A 1921) as meaning: • any deed or other writing, private or local Act of Parliament, royal charter, or resolution of any corporation

Gathering information from the client When taking instructions it is preferable to ensure that the client completes an asset and liability statement. Consideration can then be given as to how much to gift into trust, what to gift into trust or whether to create a trust at all, instead of making an outright gift or retaining the assets. For example, the information obtained may indicate that the settlor (and their spouse or civil partner, if applicable)

An asset protection trust is one that is established to safeguard assets from potential threats. The threats may be from third parties such as potential creditors or a spouse in a divorce. Alternatively, they may originate from the character of the beneficiary who the trust is designed to benefit. That beneficiary may be financially irresponsible or subject to unhealthy influences or habits such as a drugs. An asset protection trust will often be discretionary in form but it need not be. The trust may confer an interest in possession on the designated beneficiaries. However, in such a case, it should be made subject to overriding powers of appointment so that the interest in possession can be terminated in the event of a beneficiary becoming bankrupt or subject to some adverse claim from a creditor or a spouse. The trust may be protective in form, that is one that follows the pattern in section 33 of the Trustee Act 1925 so that the beneficiary has an interest in possession that is terminable in

Who may be beneficiaries Every person who would be capable of owning property if of full age and sound mind may be a beneficiary under a trust, even if they are not of full age and sound mind. Identifying the beneficiaries The three certainties For a trust to exist the three certainties must be present: • certainty of intention • certainty of subject-matter • certainty of objects Charitable trusts do not need to satisfy certainty of objects so long as there is a general charitable intention. Certainty of objects—named beneficiaries Every trust deed must identify the beneficiaries. In the case of a simple life interest trust, there will be only a small number of beneficiaries and they may be named in the clause setting out the beneficial interests. For example: 'The Trustees shall pay the income of the Trust Fund to [X] during their life and after their death shall pay the capital to [Y].' The beneficiaries may be defined in the definitions clause and then referred to by reference to that definition. For example: 'The

What is a blind trust? A blind trust is a trust that is aimed at preventing conflicts of interest arising. Usually, the settlor and beneficiary of the trust is a politician or someone holding a similar public position. The settlor/beneficiary (SB) transfers assets to trustees to hold absolutely, who then manage those assets and invest them in such way as they think fit without the trustees taking any direction from SB as to how the assets are bought, sold, managed or invested and without the trustees telling SB how the assets are bought, sold, managed or invested. This is intended to prevent SB from being criticised on the grounds of there being a conflict of interest if SB, in their official role, makes a governmental decision which has an impact on the value of the investment held in the trust. The idea is that SB should take decisions without being influenced by the potential effect of the decision on their own asset portfolio. A blind trust, therefore, requires that the trustees should have

Trust drafting Testators frequently wish to include a trust or trusts in their Wills. Even if this is not the case, a trust may arise: • where a beneficiary is under 18 years at the death of the testator and the testator does not want the minor's parent or guardian to give a receipt on their behalf, there will need to be a trust of the minor's entitlement until they reach 18 and can give good receipt. In such circumstances it would be preferable to declare a trust expressly in the Will and so control the terms and trustees • where contingent gifts are made and including a trust would enable the property to be dealt with until the contingency is satisfied Once the decision has been made to include a testamentary trust, the form that trust will take must be decided. For example, if there is a wish to benefit the children, consider the requirements of a bereaved minor trust or an 18–25 trust. When drafting a Will trust, a number of matters must be

Express lifetime declarations Where a trust is created by an express lifetime declaration, the settlor simply declares that they hold the trust property on trust for the specified person or object absolutely. The settlor must be unequivocal in their declaration and should communicate the terms of the trust to the beneficiaries. The following must be present: • there must be property capable of being subjected to a trust • the trust must meet the requirements for formal validity • the terms of the trust must be sufficiently certain (essential validity) • the purpose of the trust must not be unlawful Evidential requirements—personalty Provided the conditions for the essential validity of the trust are fulfilled, a declaration of trust in respect of personalty (other than an equitable interest) may be declared: • in writing • orally or • (in exceptional cases) by conduct There are no legal requirements as to the form of a declaration of trust of personalty. However, it is good practice to ensure that all the terms of such a trust are

Creation of new trusts in the exercise of powers under existing trusts For capital gains tax purposes, if property passes into a new settlement, there is a deemed disposal under section 71 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and a charge to tax. It is important for settlements to contain powers enabling the existing trusts to be modified as well as powers enabling property to be resettled. In some cases a resettlement will be intended. In others, the intention will be for property to remain comprised in the original settlement. It has been held that the words 'absolutely entitled to any settled property' in TCGA 1992, s 71 apply where trustees of one settlement, in pursuance of a power or advancement or appointment, exercise that power in favour of trustees of another settlement. Often, however, it may be difficult to determine whether property held in trust constitutes a single settlement or more than one settlement for capital gains tax purposes. Further, trustees of a settlement may become absolutely entitled

Creation by transfer of property to trustees In practice trusts will frequently be created by a settlor transferring assets to independent trustees on the basis that the trustees will then hold the property on trust for specific individuals. The formal requirements to constitute a valid voluntary trust (ie for no valuable consideration) must be complied with. A voluntary trust is fully constituted when: • the instrument declaring the trusts has been executed • everything that is necessary has been done by the settlor, according to the nature of the property, to transfer the property to be comprised in the trust to the trustees In practice the types of property assigned in a trust are: • interests in other trusts • insurance policies • debts • chattels • company shares • land Solvency before and after making an undervalue transaction is important in preventing the setting aside of that trust. Although uncommon in practice, the settlor may wish to make a declaration of solvency before the creation of a trust. Formal requirements

Table of contents Trust deeds are often long and complex documents. Consequently, modern precedents may start by setting out in a table of contents the constituent parts of the deed, showing the operative parts separately from the administrative provisions. A table simplifies the use of the trust. However, it is important that the table does not affect the meaning of the trust. Clause headings Some solicitors drafting trust deeds prefer to give each clause a heading. Clause headings enable a person reading the trust deed to see quickly and clearly what each clause concerns and can be useful once the trust is in use. For example, a trustee may want to know what powers of investment the trustees have rather than having to read every clause until finding the investment clause. The trustee then need only look at the clause headings to identify the one required. Personal preference dictates whether or not clause headings are used. For consistency of style, either use clause headings for every clause or not at all. If clause headings are used,

The nature of a discretionary trust The following extract from Underhill and Hayton: Law of Trusts and Trustees aptly describes a discretionary trust: “A trust is a discretionary trust where beneficiaries have distributive entitlements that depend on the exercise of discretionary dispositive powers vested in the trustees or other power-holders, a simple example being where property is given to trustees to distribute the income therefrom amongst such of A's children and grandchildren as the trustees see fit. Perhaps less obviously, a trust is also a discretionary trust where beneficiaries have fixed distributive entitlements that are defeasible by the exercise of a power to appoint the property to someone else, (Underhill and Hayton—Fixed and discretionary trusts [5.5])”. Under a discretionary trust, trustees are given a discretion to pay or apply income or capital or both, to or for the benefit of all or any one or more exclusively of the others, of a specified class or group of persons. When to consider using a discretionary trust Where it is desired to benefit a large class of

Constituents of a trust When drafting, keep in mind that the essentials of creating a validly constituted trust are: • there must be property or rights capable of being subjected to a trust • the trust must meet the requirements for formal validity • the trust terms must be sufficiently certain so that the trust is administratively workable (ie essential validity) • the purpose of the trust must be lawful A trust is void if it is created for an illegal purpose or is otherwise contrary to public policy. Property capable of being subjected to a trust Any property may be made subject to a trust provided there is no reason in law why the owner is prevented from parting with the beneficial interest in the property: • under the general law • due to the specific circumstances of the relationship between the parties or • where the property is of a particular nature that limits the circumstances in which it may be settled The trust property must be properly identified. The trust