Trust Law notes from weeks 1 to 10 of the module for a legal apprentice. Covers subjects such as:
- trust relationship
- beneficiaries
- trustees powers, duties and liability
- fiduciary duties and accessory liability
- proprietary and receipt based claims
- creation of private express trusts...
Trusts
What is a trust?
2 key components:
1. Property: trustee holds property for beneficiary.
2. Obligation: Trustee must exercise rights on behalf of beneficiary
Both the trustee and beneficiary have proprietary rights. The trustee has the legal right, and
the beneficiary has equitable rights.
The trustees’ duties are equitable. The beneficiary has personal rights to enforce the trust
against the trustee.
Benefits of trust
1. Separation of ownership and management of property
2. Expertise
3. Flexibility
4. Protection of minors
5. Ringfencing on insolvency
6. Tax benefits
Key uses of trusts
1. Commercial arrangements
• Share ownership
• Investments funds
• Pension funds
• Other forms of tax efficient employee remuneration
• Corporate tax avoidance!
2. Private arrangements
• Testamentary planning
• Land ownership
• Tax planning
3. Charitable purposes
Categories of Trust
Express:
• Trust arising by operation of law
• Resulting, constructive and statutory trusts
Testamentary trusts
• Trusts involving active management duties
Temporary nature of trusts
Trusts are a temporary way of dealing with property. This gives rise to two essential rules:
1. Perpetuity rules – trusts cannot last indefinitely
The rule in Saunders v Vautier: the beneficiary or beneficiaries can “collapse” the trust.
The Trust concept
What is a trust?
• A trust is an equitable duty relating to property. The person subject to the duty is
called a trustee and the person to whom the duty is owed is called a beneficiary.
• The property to which the duty relates is called the trust property
• The trustee is usually the legal owner of the trust property
• The beneficiary has an equitable proprietary interest in the property
• The duty is equitable because it was created and developed by the Court of
Chancery.
• The basic concept of the duty is that the trustee must hold or apply the trust property
for the benefit of the beneficiary
• There is no single definition of a trust
• EXAMPLE OF JUDICIAL DESCRIPTION OF TRUSTS: “equitable obligations to deal
with property in a particular way”
Principal characteristics of trusts
• Trust property=
It is a fundamental proposition of trusts law that there must be identifiable
trust property (Westdeutsche Landesbank Girozentrale v Islington London
Borough Council). The proposition is fundamental because a trust is an
equitable duty relating to property.
The trust property is known as the subject matter of the trust.
If there is no trust property there is no trust (Mac-Jordan Construction Ltd v
Brookmount Erostin Ltd).
A trust ceases to exist if, without any fault on the part of the trustee, the trust
property is destroyed or consumed. In the absence of any trust property,
there is nothing to which a trust can attach.
If the trustee is at fault they will be personally liable to restore the trust
property. If they cannot restore they will need to pay compensation instead
and this compensation will be subject to the trust.
Selling the property does not destroy the trust. It simply changes the trusts
assets.
• A trustee
, A trustee owns the trust property and has all the rights and powers of legal
ownership. But a trustee must exercise those rights and powers consistently
with the basic trust duty.
The functions and duties of trustees are not unitary. They can and do vary.
The function and any duty of any specific trustee is determined by the nature
of the trust they are administering.
• A duty
The basic duty of a trustee is to hold or apply trust property for the benefit of
the beneficiary.
An indelible incident of trust property is that a trustee can never make use of
it for his own benefit” (South Australian Insurance Co v Randell)
A person is not a trustee of property which they have the absolute right to
use for their own benefit.
A trustee can be one of the beneficiaries of a trust. They will still ow duties to
other beneficiaries so cannot simply use the trust fund for their own benefit.
This would be a breach of trust.
Customs and Excise Commissioners v Richmond Theatre Management Ltd –
held that the company was not a trustee. Its ability to freely use the money
for its own purposes was incompatible with a trust.
Re Bond Worth – the ability of the company to use fibres in its manufacturing
process was inconsistent with the company holding fibres on trust for the
unpaid seller of them
Limited exception to this principle – Re Lehman Brothers International – the
ability of a broker to sell trust securities on its own account and for its own
profit was not inconsistent with a trust because the broker was under a duty
to replace any securities it sold with identical securities.
• Objects: usually a beneficiary but sometimes a trust purpose
The beneficiaries of purposes of trust are known as the trusts objects
A purpose trust is a trust for the promotion or realisation of a purpose. It is not
possible to create a trust for any purpose. It is only possible to create a trust
for a permitted purpose. Charitable purposes are the principal category of
permitted purpose trusts. There is also a small category of non-charitable
purpose trusts.
Most trusts will have a beneficiary or beneficiaries. A beneficiary has rights
correlative to the trustees’ duties and can enforce those duties. A beneficiary
also has an equitable proprietary interest in the trust property. This is
important because (A) the beneficiaries’ rights are enforceable against third
parties (B) the beneficiaries rights are protected against the insolvency of the
trustee.
Akers v Samba Financial Group – the beneficiary’s interests in the trust
property “posses the essential hallmark of any given right in rem, namely that
it is good against third parties into whose hands the property or its traceable
proceeds may have come”.
A trust property does not form part of the trustees estate for the purposes of
bankruptcy and insolvency regimes. It therefore cannot be distributed to the
trustees creditors. Thus a beneficiary enjoys priority over the unsecured
creditors of the trustee in the event of the latter’s bankruptcy or insolvency.
• An equitable proprietary interest
CREST STRUCTURE – SECURITIES MARKET
, CREST MEMBER -------- BROKER ------ PRIVATE INVESTOR
Crest member is the legal owner of the shares but has no beneficial interest. Legal title is
held on trust of the broker.
The broker has an equitable interest in the shares. It has no beneficial interest in the shares.
The equitable interest is held on trust for the private investor
The private investor has an equitable and beneficial interest in the shares.
There is a waterfall or chain of equitable relationships (SL Claimants v Tesco PLC).
Categorisation of Trusts
An express trust is one which is deliberately created. It is a trust which arises in response to
a person’s intention to create it. The person who creates the trust is known as the settlor.
They are intentionally created and can be private or public.
Resulting and constructive trusts arise by operation of law. They are imposed by the courts.
These are also described as implied trusts.
Creating a trust:
Self-declaration of trust:
Settlor becomes trustee:
• Retains legal title
• Legal title now held in new capacity
• New equitable title created
• Beneficial ownership transferred to beneficiary
LAW (LEGAL TITLE)
Legal Owner (legal title only now equitable title) ------------------- Trustee (Still Legal Owner)
--------------------------------------------------------------------------------------------------------------
Beneficiary (Equitable and beneficial owner)
EQUITY (EQUITABLE TITLE)
Transfer on trust:
Third party becomes trustee:
• Settlor transfers legal title to third party
• Settlor ceases to have any interest
• New equitable title created
• Beneficial ownership transferred to beneficiary
A settlor can become the beneficiary of a trust over property which they previously held as
full legal owner. One way of doing this is to transfer property on trust to a third-party trustee
to hold on trust for the settlor.
Requirements for creation of express trusts:
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