When is a Trust Public or Private?

There are a number of categories into which different types of trust fall. One of the most important distinctions is between express and implied trusts, as explained in another article elsewhere on this site. The majority of trusts are implied. Within this category, however, can be found two sub-divisions; implied trusts can be either public or private.

Public and private trusts can be distinguished in a number of ways. Public trusts, broadly speaking, are those that are established for the benefit of either the public at large or a section thereof. This type of trust is often otherwise known as a charitable trust. Charitable trusts have a number of defining characteristics. In the first instance, they must be said to be charitable in character.

This has several implications. Primarily, the aims of the trust must be deemed to be charitable; the Charities Act 2006 sets out a broad array of such aims. Trusts which, for example, promote the advancement of education or human rights, or which aim to relieve or reduce poverty, can all be said to have charitable aims.

Public trusts must also be said to act in the public benefit. As such, the potential beneficiaries of the trust must not be defined arbitrarily; it is unacceptable, for example, for individuals to be unable to benefit because of their hair colour.

Beneficiaries

Indeed, the public benefit requirement is one of the most important distinctions between public and private trusts. In the case of private trusts, the beneficiaries must be clearly identifiable. Furthermore, private trusts can list individuals or small groups (for example certain children or an individual family) as the beneficiaries; there is no necessity for the trust to be managed in the public interest.

This concept extends into the process by which trusts are treated if the beneficiaries cannot be identified. Under what is known as the cy-pres doctrine, a charitable trust that is unable to act for the benefit of its intended beneficiaries will be able to redirect its attentions to a similar 'class' of beneficiaries. No such provision exists for private trusts; if the beneficiaries cannot be identified, the trust will likely fail.

Tax Treatment

There are also significant differences regarding the tax treatment of public and private trusts. Public trusts enjoy favourable tax treatment, particularly with regard to donations. They also receive exemptions and reductions on business rates if they operate from their own premises. The tax treatment of private trusts varies hugely depending on the terms of the individual trust.

Different types of private trust are used for different purposes; some, for example, can be used to mitigate an inheritance tax liability while others will be inefficient for this purpose. Again, further details on individual types of private trust are available in articles elsewhere on this site.

Broadly, therefore, public trusts (more frequently known as charitable trusts) are defined by their charitable character and the fact that they act for the public benefit. Private trusts, on the other hand, are those which are established with specific, individual beneficiaries in mind.