Trusts Lecture 1
1. What is a trust?
2. Classification of Trusts
3. Parties to a Trust
4. Creation of a Trust
5. Trust Purposes
Trusts: Introduction
Trusts have a long history in Scots law. The law of trusts is very complex and poses many theoretical
and conceptual problems.
At its most basic, a trust describes the legal situation where one person (“the trustee”) owns and holds
property for the benefit of another person (“the beneficiary”).
The trustee is owner of the trust property and has full title over it, but he is bound by a fiduciary duty
(a legal financial duty) to administer the trust property solely for the advantage of the beneficiary.
You own the property, but you must use it - you're legally obligated to use it - for the benefit of
someone else.
Although the trust property is owned by the trustee, it remains separate from the trustee’s own
personal patrimony and it cannot be attached or seized to pay the trustee’s debts.
Legislation
The law relating to trusts is mainly common law but certain matters, especially trust administration,
are governed by statutory law.
The main pieces of legislation currently applying to trusts are:
• the Trusts (Scotland) Act 1921;
• the Trusts (Scotland) Act 1961; and
• the Charities and Trustee Investment (Scotland) Act 2005.
The Scottish Law Commission has also issued a number of Discussion Papers on the subject of trusts
(DPs 123, 124, 126, 129, 133, 138, 142, 148, 206 and 239).
These are all available on: http://www.scotlawcom.gov.uk
They are all useful for providing background on the current state of the law.
1. WHAT IS A TRUST?
A trust is not a juristic person (a company is also a juristic person, it has legal personality. It can own
property, it can act in its own name).
It is a legal concept describing a three-party legal relationship where a truster gives property to
trustees who hold it for the benefit of beneficiaries.
,In practice, an operational trust is generally a two-party affair (trustees-beneficiaries).
No statutory definition exists, but Wilson & Duncan, Trusts, Trustees and Executors (1995) para. 1.64
describe it thus:
“A trust then is a legal relationship in which property is vested in one person, the trustee, who is under
a fiduciary obligation to apply the property to some extent for another person’s benefit, the obligation
being a qualification of the trustee’s proprietary right and preferable to all claims of the trustee or his
creditors.”
In other words, fiduciary ownership for the benefit of another. You own the property, but you must
use it to help someone else, to benefit them.
The parties 1
A trust always involves three parties, the truster, the trustee and the beneficiary.
• The truster creates the trust and gives the property to the trustee.
• The trustee is the person appointed to administer the property for the
beneficiary’s benefit, subject to the power given to him in the trust deed or
by operation of law. The trustee is the legal owner of the property and not
the beneficial owner of it.
• The beneficiary is the person entitled to receive the benefits of the trust. He
is said to have a beneficial interest and may do whatever he wishes with
anything he receives from the trust.
If you're the beneficiary of a trust, anything that you receive under the trust, you can do what you
want with it. Because as the beneficiary, it is your money. It is your property you receive. You can do
anything you like with it because you are the owner and there is no restriction on your ownership. But
the trustee has legal restrictions on what he or she can do with the property.
The parties 2
It is very common for there to be more than one trustee and more than one beneficiary.
For example, you might make a trust for the benefit of your children. And you appoint three or four
people to oversee the trust, that would be one example. And in that case, you might have three or
four trustees and three or four beneficiaries, maybe even more.
It is also the case that the truster actually may be a trustee or a beneficiary, or even the sole trustee
or sole beneficiary; beneficiaries may also serve as trustees.
The following combinations are allowed by law:
• sole truster and sole trustee (called a truster-as-trustee trust);
A lot of people will set up a trust. They will put property into that trust and they will
use the property for the benefit of some other party, maybe for their children. That's
a very common one. To be truthful, most trusts that you will see in practice are about
, people trying to take care of their children or set up funding for their child's future
education and the truster-as-trustee trust is a very common example of that.
• sole truster and sole beneficiary (called a trust for administration);
Often you get someone who's getting on in years, they're getting a bit old and they're
worried they might not be able to look after their affairs. So they put their property
into a trust and they appoint a trustee or more than one trustee.
And they have themselves as beneficiaries. So you're effectively saying that someone
else should take over control of your property and use it for your benefit. The sole
truster and the sole beneficiary are the same person.
• sole truster, one of the trustees and sole beneficiary.
But a sole trustee may not be a sole beneficiary – the trust in this case will be extinguished by
confusion (i.e. creditor and debtor becoming the same person). How can you have legal ownership of
the property which you then use for the benefit of the beneficiary, when you ARE the beneficiary.
The function of a trust
Trusts are ubiquitous. They can be found in almost every legal jurisdiction and serve many different
purposes, some personal, some charitable and some commercial.
Common examples of trusts include:
• trusts to protect incapax or vulnerable people;
Trusts to protect incapax or vulnerable people. So someone who is no longer able to
look after their affairs. A trust might be set up for them. Parents of disabled children
often like to set up trusts to care for their children once the parent is dead.
• trusts for the creation of charities and funds to benefit the public;
• trusts for collective investment purpose (e.g., investment trusts);
Where you give money to a trustee and the trustee invests that money and the profits,
the revenues, that accrue from the investments are distributed to you as a
beneficiary.
• trusts for the anonymous acquisition of shares; (commercial)
• trusts to minimise tax liability;
• in previous centuries, marriage trusts allowed for the preservation of the estate of
unmarried persons intending to become married;
Women were not always in control of their own property, it was often the case a
parent of a daughter would set up a marriage trust. And it meant that when their
daughter married, the daughter's property, did not go to her husband, did not come
under the control of the husband. It remained in trust.
• trusts are how executors fulfil their duties and how trustees on bankruptcy to
administer a sequestration.
