A trust is a legal entity that exists separately in and of itself. A trust results from an act whereby a person, the settlor, transfers property from his patrimony to another patrimony constituted by him which he definitively appropriates to a particular purpose. The trust comes into existence when a trustee agrees to hold the property and undertakes to administer the trust for the benefit of the beneficiaries based on the instructions left by the settlor. A trust is therefore a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary and in which none of them has any real right.
The settlor is the person who created the trust by contributing property thereto from his own patrimony. He appoints the trustee or trustees, provides for their replacement, and determines how the property of the trust is to be administered. He identifies the beneficiaries and their respective rights to the revenue and/or capital of the trust, and establishes how that revenue and capital are to be apportioned (to whom, when and how).
When property (including the original property) is transferred by the settlor to the trust, a tax will generally be imposed if that property has generated capital gains (for example, shares in the share capital of a corporation). However, the transfer of money or property that has not accrued added value will not be taxable.
The trustee is the person who administers the trust without any intervention on the part of the settlor or the beneficiaries. He has control and exclusive administration of the trust patrimony, and the titles relating to the property of which it is composed are drawn up in his name; he has the exercise of all the rights pertaining to the patrimony and may take any proper measure to secure its appropriation.
The settlor or a beneficiary may be a trustee, but he must act jointly with a trustee who is neither the settlor nor a beneficiary. The initial trustee or trustees are appointed by the settlor, who can also provide for the mode of their appointment or replacement in the act creating the trust.
The beneficiaries are those who receive the benefit derived from the trust. There are two ranks of beneficiaries: those who receive the fruits and revenues and those who receive the capital. A single person can belong to both these ranks. Beneficiaries of the fruits and revenues are entitled to share in the distribution of revenues derived from the property of the trust. Beneficiaries of the capital are entitled to share in the distribution of the capital of the trust throughout its existence or upon its liquidation.
The settlor may reserve the right to receive all or part of the revenues or even, where such is the case, the capital of the trust. He may also reserve for himself the power to appoint the beneficiaries or determine their respective shares, or confer that power on the trustees or a third person. In such a case, the trust is discretionary. The trustee then has full discretion to pay the revenues or capital to one, several or all of the beneficiaries. This discretion that is granted to the trustee may be restricted or unfettered.
A trust may be created during the settlor's lifetime or upon his death, if created in his testament. To avoid the taxation that occurs upon death, all property owned by the settlor should be transferred to a trust created by testament to the exclusive benefit of his spouse while he is still alive. Capital gains taxes will then only be payable upon the death of the surviving spouse, while the capital will be distributed to the children. If there are no children, the capital could be distributed to charitable organizations. Receipts issued by charitable organizations could then diminish or eliminate taxation, leaving more capital for the charitable organization in question.