UNIT 1: INTRODUCTION TO EQUITY AND TRUSTS
2. INTRODUCTION TO TRUSTS
2.1 What is a trust?
A trust is a relationship which arises wherever a person (a trustee) is compelled in equity to hold
property for the benefit of some persons (beneficiaries, of whom he may be one) or for some
object permitted by law, in such a way that the real benefit of the property accrues, not to the
trustee, but to the beneficiaries or other objects of the trust. Therefore:
● There is a binding obligation placed on a person, ‘trustee’.
● To look after a property for the benefit of another, a ‘beneficiary’ - or for a purpose
permitted by law.
● This obligation can be enforced by the beneficiary.
A trust allows the separation of control and enjoyment of property. The trustee has
management and control of the property subject to the trust (‘trust property’).
An ‘express trust’ is one which is set up intentionally by the settlor. Many are created in written
‘trust instruments’.
2.2 Features of a Trust
Equity recognises that when a trust is created, the trustees hold the legal title or interest in the
trust property and the beneficiaries have an equitable interest.
2.2.1 Legal Interest Held by the Trustee
● The fact that trustee hold the legal title means they can manage the trust
property.
● The trustee can invest/manage the trust property as he sees fit.
● BUT a trustee is obliged to hold the property for the benefit of his beneficiary -
beneficiaries get the benefit of the trust property. However they do not get the benefits
directly, but indirectly through enforcing the trust obligation against the trustee.
● To guard against misuse, the law imposes rigorous duties upon trustees, which
derive from statute and case law.
○ Trustees must dispose of the trust property in accordance with the
terms of the trust.
○ Trustees must do their best for the trust.
○ Trustees have a duty to invest the property to bring a reasonable
return, and must avoid speculative investments.
○ If a duty is breached, the beneficiary can sue to make good any
loss from the trustees' own money.
1
, 2.2.2 Equitable Interests Held by the Beneficiary
Personal: Beneficiaries have a personal right to enforce the trustees’ duties and to seek
compensation for any breaches.
Proprietary: ie. An ownership interests in the trust itself. Its significance is twofold:
1) The proprietary right can be enforced not only against the trustee but also
against successors in title (ie. people who subsequently get the legal title to the trust
property, eg. personal representatives after death, creditors after bankruptcy etc.)
2) The proprietary nature of the beneficiary’s interest means that it is itself an item
of property (just like shares in a company or money in a bank) which can be sold or
given away.
2.3 Different Types of Trust
2.3.1 Fixed Trusts
The terms of the trust define the share of the trust property which the beneficiary will receive.
They will include the following:
‘On trust for X for life, remainder to Y’
● Thus creates ‘successive interests’, beneficial interests which have effect one
after another.
● X (‘life tenant’) has a so-called ‘life interest’.
● Y (‘remainderman’) has an ‘interest in remainder’.
● Trustees will pay the ‘trust income’ to X, which consists of recurring receipts from
the trust property, eg. interests, dividends, rents.
● When X dies, the trustees will transfer the property itself to Y, where the trust will
come to an end.
● The trust property is called ‘trust capital’.
‘On trust for A until he attains the age of 21, but if he dies before than, for B’
● A’s interest is contingent on him reaching 21. In the meantime, the trustees will
have the legal interest in the property.
● If he dies before 21, the property will pass to B.
‘On trust for Z’, where Z is an infant or cannot manage his affairs for some other reason.
● A trust is used here to ensure that the property is managed by trustees for the
benefit of Z until he can manage his own affairs.
‘On trust for C’, where C is an adult with full mental capacity.
2
2. INTRODUCTION TO TRUSTS
2.1 What is a trust?
A trust is a relationship which arises wherever a person (a trustee) is compelled in equity to hold
property for the benefit of some persons (beneficiaries, of whom he may be one) or for some
object permitted by law, in such a way that the real benefit of the property accrues, not to the
trustee, but to the beneficiaries or other objects of the trust. Therefore:
● There is a binding obligation placed on a person, ‘trustee’.
● To look after a property for the benefit of another, a ‘beneficiary’ - or for a purpose
permitted by law.
● This obligation can be enforced by the beneficiary.
A trust allows the separation of control and enjoyment of property. The trustee has
management and control of the property subject to the trust (‘trust property’).
An ‘express trust’ is one which is set up intentionally by the settlor. Many are created in written
‘trust instruments’.
2.2 Features of a Trust
Equity recognises that when a trust is created, the trustees hold the legal title or interest in the
trust property and the beneficiaries have an equitable interest.
2.2.1 Legal Interest Held by the Trustee
● The fact that trustee hold the legal title means they can manage the trust
property.
● The trustee can invest/manage the trust property as he sees fit.
● BUT a trustee is obliged to hold the property for the benefit of his beneficiary -
beneficiaries get the benefit of the trust property. However they do not get the benefits
directly, but indirectly through enforcing the trust obligation against the trustee.
● To guard against misuse, the law imposes rigorous duties upon trustees, which
derive from statute and case law.
○ Trustees must dispose of the trust property in accordance with the
terms of the trust.
○ Trustees must do their best for the trust.
○ Trustees have a duty to invest the property to bring a reasonable
return, and must avoid speculative investments.
○ If a duty is breached, the beneficiary can sue to make good any
loss from the trustees' own money.
1
, 2.2.2 Equitable Interests Held by the Beneficiary
Personal: Beneficiaries have a personal right to enforce the trustees’ duties and to seek
compensation for any breaches.
Proprietary: ie. An ownership interests in the trust itself. Its significance is twofold:
1) The proprietary right can be enforced not only against the trustee but also
against successors in title (ie. people who subsequently get the legal title to the trust
property, eg. personal representatives after death, creditors after bankruptcy etc.)
2) The proprietary nature of the beneficiary’s interest means that it is itself an item
of property (just like shares in a company or money in a bank) which can be sold or
given away.
2.3 Different Types of Trust
2.3.1 Fixed Trusts
The terms of the trust define the share of the trust property which the beneficiary will receive.
They will include the following:
‘On trust for X for life, remainder to Y’
● Thus creates ‘successive interests’, beneficial interests which have effect one
after another.
● X (‘life tenant’) has a so-called ‘life interest’.
● Y (‘remainderman’) has an ‘interest in remainder’.
● Trustees will pay the ‘trust income’ to X, which consists of recurring receipts from
the trust property, eg. interests, dividends, rents.
● When X dies, the trustees will transfer the property itself to Y, where the trust will
come to an end.
● The trust property is called ‘trust capital’.
‘On trust for A until he attains the age of 21, but if he dies before than, for B’
● A’s interest is contingent on him reaching 21. In the meantime, the trustees will
have the legal interest in the property.
● If he dies before 21, the property will pass to B.
‘On trust for Z’, where Z is an infant or cannot manage his affairs for some other reason.
● A trust is used here to ensure that the property is managed by trustees for the
benefit of Z until he can manage his own affairs.
‘On trust for C’, where C is an adult with full mental capacity.
2
