Chapter 1: Trust Law - Basic Principles
The trust concept basically enables more than one person to have rights in the same piece of property simultaneously. Trust can be divided into two classes:
- Trusts created deliberately (express trust), and
- Trusts created by the court (Implied trust).
Trusts can be created deliberately by a settler, or they can be imposed by a court after an analysis of the facts of the case before it.
Express trusts are trusts declared by the settler of his/her intention to settle specific property on trust for clear identifiable beneficiaries according to the terms set out in the trusts. It is necessary that the trust property is sufficiently identifiable and that there is no uncertainty as to the identity of the beneficiaries. Legal title in the trust property must also be transferred to the trustees before the trust can be effective.
Implied trusts are those created by the court to prevent unconscionable behavior. They can be classified as resulting trusts or constructive trusts.
Resulting trusts are implied by the courts (Westdeutsche Landesbank Girozentrale v Islington LBC, 1996) arising from two situations:
Express trusts are trusts declared by the settler of his/her intention to settle specific property on trust for clear identifiable beneficiaries according to the terms set out in the trusts. It is necessary that the trust property is sufficiently identifiable and that there is no uncertainty as to the identity of the beneficiaries. Legal title in the trust property must also be transferred to the trustees before the trust can be effective.
Implied trusts are those created by the court to prevent unconscionable behavior. They can be classified as resulting trusts or constructive trusts.
Resulting trusts are implied by the courts (Westdeutsche Landesbank Girozentrale v Islington LBC, 1996) arising from two situations:
- First, where the settler has transferred the legal title in property to a trustee but has failed to identify the person (s) who will take the equitable title, that part of unsettled equitable title will be held by the trustee on resulting trust for the settler (Vandervell v IRC, 1967). The underpinning principle is that the equitable title will ‘jump back’ to the settler. This is an extension of the equitable principle that there cannot be a vacuum in the equitable title to property.
- Secondly, where a person contributes to the purchase price of the property, that person acquires an equitable interest in the property (Dyer v Dyer, 1788). The size of the equitable interest is pro-rated to the total purchase price on resulting trust principles.
A constructive trust arises by operation of the law in circumstances where a defendant had acted unconscionably. The defendant will be considered to have held the property on constructive trust for the person properly entitled in equity. The English court will typically impose a constructive trust on those parties to give effect to their common intention (Lloyds Bank v Rosset, 1990).
Provided that a trust has been validly declared, the legal title must be transferred to the trustee. The beneficiary will acquire the equitable title in the trust fund at that time. Once a trust has been validly declared, the settler ceases to have any active role in the trust (Paul v Paul, 1882). The settler would then not be allowed to unwind the trust and recover the property. It means that, once a trust has been created, it remains inviolate. The only exception would be if the settler were to reserve to herself some specific authority under the terms of the trust to unwind the trust. The precise term of the trust will be decisive, unless those terms transgress any rule of public policy. In any event, it is likely that in such a situation, the settler would then reserve rights as a form of trustee rather than as settler.
On creation of a trust, the legal title would then be vested in the trustee and held by the trustee on trust for the beneficiary. Any litigation between the trust and third party will be conducted by the trustee as legal titleholder in the trust property. We can refer the trustee as the ‘legal owner’ of the property which literally means that the trustee is vested with the common law rights in the property. However, the trustee is not entitled to assert personal, beneficial ownership in the trust property. Rather, it is the beneficiary who has all of the beneficial title in the property.
It is always important to consider the precise terms of the trust. The courts tend to look very closely at the precise written terms of a trust or at the verbal expression of the settlor’s intentions (Fuller v Evans, 2000).
The trustee is also required to hold the original trust property or substituted property on trust for the beneficiary. Unless there is something expressly to the contrary on the terms of the trust, a trust does not simply attach to specific property and that property only. Rather, the trust attaches to bundles of property rights which may be transferred from one piece of property to another. What is important to bear in mind is that the particular property which makes up the trust fund from time to time may change; it is the trust fund at the particular time which the trustees are required to hold on trust. The precise obligations on the trustee are therefore to be found in the trust document itself. However, there are more general obligations on the trustee imposed by the general law of trusts. Among the issues are the amount of information which trustees are required to give to beneficiaries, the manner in which the trust fund should be invested while it is held on trust, the appointment or retirement of trustees, and the termination of the trust. Much will depend upon the nature and terms of the trust.
Some examples of trusts are:
Bare Trust – a bare trust arises where the trustee hold property on trust for a single, absolutely-entitled beneficiary. The beneficiary holds the entire equitable interest in the trust fund. The trustee has neither discretion nor any obligation other than stewardship of that trust property on behalf of that beneficiary. The beneficiary will hold 100% of the equitable interest in the property. The rights of the beneficiary are vested in the trust fund itself. The trustee in this situation is often referred to as being a ‘nominee’.
Saunders v Vautier (1841) sets the principle in defining the nature of the beneficiary’s entitlement. A beneficiary who is absolutely entitled and sui juris (over 18) will be able to direct the trustees to deliver up the trust property to that beneficiary so that he/she becomes absolutely entitled to it. Therefore the beneficiary is able to take control of his/her trust fund and to direct the manner in which the trustee is able to deal with it.
Fixed Trust – A fixed trust refers to the situation in which the trustees hold property on trust for a certain, defined list of beneficiaries. The ‘fixed’ nature of the trust refers then to the fixed list of people who can benefit from the trust. The trustee is only required simply to perform the terms of the trust slavishly.
Discretionary Trust – Discretionary trust gives some discretion to the trustee as to the manner in which property is to be distributed and/or the people to whom the property is to be distributed.
In this case, the trustee is required to exercise discretion and ensuring that such exercise remains within the terms of the settlement. Alternatively, a settler may decide that a trustee is to have a power of appointment between a number of potential beneficiaries. That means that the trustee is empowered to decide which people from among an identified class of beneficiaries are entitled to take absolute title in property which is apportioned to them by the trustee. In a discretionary trust, the discretionary class of beneficiaries may have equitable interest in the property to the extent that each of them can compel the trustees to perform their negotiations and to exercise their discretion properly. However, no individual beneficiary acquires any specific beneficial rights in any identifiable property until the trustees’ discretion has been exercised formally.
A settler may seek to create as endowment trust from which the needs and living expenses of the settlor’s children are to be provided. The principle responsibility of the trustee is to invest the trust property and then to apply it according to the needs identified in the terms of the trust. The beneficiaries have right against the trustees to have the trust performed in accordance with the terms of the trust and to have the property advanced for the benefit at the time identified in the trust (subject to the discretion in the trustees).
Trustees possessed both power and obligations. Power is the ability and capabilities set out in the terms of the trust to hold or invest, or to exercise their discretion and so forth. By obligations, it means duties contained in the terms of the trust which the trustee is compelled to carry out.
Trustees basically have fiduciary duties which mean that trustees owe legal duties of loyalty and utmost good faith in relation to the beneficiary. Those duties extend from the management of the trust to duties not to permit any conflict of loyalties between the fiduciary’s personal interests and obligations to the beneficiaries.
Once a trust is properly constituted, there will necessarily be a fiduciary relationship between trustee and beneficiary. The effects of these being a fiduciary relationship will not that the fiduciary will owe the beneficiary a range of obligations, good faith and potential obligations to make good any loss suffered by the beneficiaries.
The rights of the beneficiary will depend on the specific terms and nature of the trust. The beneficiary retains the rights to compel the trustee to carry out the terms of the trust. The rights of the beneficiary will vary in quality. The most important distinction will be between ‘vested rights’ and ‘rights which remains contingent’ on some eventuality provided for. Under the ‘mere power’ of appointment, the beneficiary will have no vested rights in any property until the trustee exercises her power of appointment in favour of that beneficiary. A power of appointment does not give the beneficiary any right in the money, all that the beneficiary has is an ‘unenforceable hope’ (spes) that the holder of the power will choose to benefit the benefactor.
Under ‘discretionary trust’, the beneficiary will not acquire a vested right in any particular property under the trust until the trustees’ discretion is exercised in her favour. However, the beneficiary does acquire a personal right in common with the other beneficiaries to ensure the trustees observe the terms of the trust. Beyond the personal claim against the trustee, the beneficiary will not have rights to any specific property under a discretionary trust before the trustee exercised her discretion.
An express trust arises from the unilateral act of the settler in declaring a trust. There is no contract between the settler and trustee necessarily. However, if a professional trustee is appointed, the trustee may require payment from the settler to act as trustee. In such circumstances, there will be a trust and also a contract between settler and trustee. However, the contract does not form a part of the trust, rather, it is collateral to it.
A contract creates personal obligations between the contracting parties. The rights to damages in the event of breach of contract would arise in common law from the existence of the contract.
In relation to trust, there are personal obligations between trustee and beneficiary in relation to the treatment of the trust fund and the performance of the trust’s obligations under the trust. The trustee will be liable to the beneficiary both to reinstate the trust fund and for compensation if there is a breach of trust. The beneficiary is also entitled to require the trustee to carry out the obligations (Saunder v Vautier, 1841).
A trust is different from a bailment. In bailment, a person delivers property into the control of another on the understanding that the property is to be returned to the owner. There is no transfer of property law rights. Whereas in trust, a trustee acquire common law property rights in the trust fund. A bailee of property does not acquire any property rights in the object put into her control.
Where an agency relationship exists, a principal instructs an agent to act on behalf of the principal. The agency can take the legal form of a contract agreement. In an agency agreement, a principal would not ordinarily acquire equitable interests in property acquired by the agent in the way that a beneficiary under a trust acquires equitable interests once the declaration of trust takes effect. The similarity between trustee and agent is in relation to the fiduciary obligations created by each office. Trustees and agents owe fiduciary duties to the beneficiaries and principals respectively, precluding them from making unauthorised profits from their arrangements, or becoming otherwise unjustly enriched.
A gift involves the outright transfer of property rights in an item of property from an absolute owner of those rights to a volunteer. The recipient becomes absolute owner of that property as a result of the transfer. The beneficiary is not required to have given considerations for that transfer. One of the core equitable principles is that equity will not assist a volunteer.
The genius of the trust is that it enables one person, the trustee, to control property while vesting all of the ultimate entitlement to that property in another person, the beneficiary. In literal sense, it enables a person who cannot deal with their own property once he is dead to appoint another person to do it on his behalf. The beneficiary from this property is also able to exercise control over the trustee to ensure that the settlor’s intention are carried out effectively.
The other primary use for the trust is to facilitate commercial transactions. In commercial terms, a trust becomes a core technique in taking security in a transaction when one party is concerned about the ability of the other party to perform its obligations. Any property (including money) which is to be passed as part of the transaction can be held in trust until such time as both parties contractual obligations have been performed. Briefly put, a third party trustee will hold the property rights in both the money or property until both contractual parties are satisfied that the contractual obligations are performed as required. A straightforward example is the case of Re: Rayford (1975) which involves a mailing order business. Where a trust had been created over those advanced payments in favour of the customers who had made pre-payments without receiving the goods.
One of the most common uses of the trust is as a means of tax avoidance. Suppose that the property involved a bundle of valuable shares which are expected to generate large dividend annually, the shareholders will be liable to tax on those dividends. However, if those shares were transferred to a trustee to be held in trust for herself, the shareholder would then not be liable to tax payable on any dividends paid. The general principle is that it is the trustee who must account for any taxable income derived from the trust property (Williams v Singer, 1921). In a bare trust, the beneficiary is liable for the tax. In the Finance Act 1995, a broad range of tax avoidance rules were introduced in relation to settlements. The underlying intention of the Act is to prevent tax avoidance.
The core principles of trust law was made by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC (1996) when his Lordship set out the framework up the framework upon which the trust operates: -
Provided that a trust has been validly declared, the legal title must be transferred to the trustee. The beneficiary will acquire the equitable title in the trust fund at that time. Once a trust has been validly declared, the settler ceases to have any active role in the trust (Paul v Paul, 1882). The settler would then not be allowed to unwind the trust and recover the property. It means that, once a trust has been created, it remains inviolate. The only exception would be if the settler were to reserve to herself some specific authority under the terms of the trust to unwind the trust. The precise term of the trust will be decisive, unless those terms transgress any rule of public policy. In any event, it is likely that in such a situation, the settler would then reserve rights as a form of trustee rather than as settler.
On creation of a trust, the legal title would then be vested in the trustee and held by the trustee on trust for the beneficiary. Any litigation between the trust and third party will be conducted by the trustee as legal titleholder in the trust property. We can refer the trustee as the ‘legal owner’ of the property which literally means that the trustee is vested with the common law rights in the property. However, the trustee is not entitled to assert personal, beneficial ownership in the trust property. Rather, it is the beneficiary who has all of the beneficial title in the property.
It is always important to consider the precise terms of the trust. The courts tend to look very closely at the precise written terms of a trust or at the verbal expression of the settlor’s intentions (Fuller v Evans, 2000).
The trustee is also required to hold the original trust property or substituted property on trust for the beneficiary. Unless there is something expressly to the contrary on the terms of the trust, a trust does not simply attach to specific property and that property only. Rather, the trust attaches to bundles of property rights which may be transferred from one piece of property to another. What is important to bear in mind is that the particular property which makes up the trust fund from time to time may change; it is the trust fund at the particular time which the trustees are required to hold on trust. The precise obligations on the trustee are therefore to be found in the trust document itself. However, there are more general obligations on the trustee imposed by the general law of trusts. Among the issues are the amount of information which trustees are required to give to beneficiaries, the manner in which the trust fund should be invested while it is held on trust, the appointment or retirement of trustees, and the termination of the trust. Much will depend upon the nature and terms of the trust.
Some examples of trusts are:
Bare Trust – a bare trust arises where the trustee hold property on trust for a single, absolutely-entitled beneficiary. The beneficiary holds the entire equitable interest in the trust fund. The trustee has neither discretion nor any obligation other than stewardship of that trust property on behalf of that beneficiary. The beneficiary will hold 100% of the equitable interest in the property. The rights of the beneficiary are vested in the trust fund itself. The trustee in this situation is often referred to as being a ‘nominee’.
Saunders v Vautier (1841) sets the principle in defining the nature of the beneficiary’s entitlement. A beneficiary who is absolutely entitled and sui juris (over 18) will be able to direct the trustees to deliver up the trust property to that beneficiary so that he/she becomes absolutely entitled to it. Therefore the beneficiary is able to take control of his/her trust fund and to direct the manner in which the trustee is able to deal with it.
Fixed Trust – A fixed trust refers to the situation in which the trustees hold property on trust for a certain, defined list of beneficiaries. The ‘fixed’ nature of the trust refers then to the fixed list of people who can benefit from the trust. The trustee is only required simply to perform the terms of the trust slavishly.
Discretionary Trust – Discretionary trust gives some discretion to the trustee as to the manner in which property is to be distributed and/or the people to whom the property is to be distributed.
In this case, the trustee is required to exercise discretion and ensuring that such exercise remains within the terms of the settlement. Alternatively, a settler may decide that a trustee is to have a power of appointment between a number of potential beneficiaries. That means that the trustee is empowered to decide which people from among an identified class of beneficiaries are entitled to take absolute title in property which is apportioned to them by the trustee. In a discretionary trust, the discretionary class of beneficiaries may have equitable interest in the property to the extent that each of them can compel the trustees to perform their negotiations and to exercise their discretion properly. However, no individual beneficiary acquires any specific beneficial rights in any identifiable property until the trustees’ discretion has been exercised formally.
A settler may seek to create as endowment trust from which the needs and living expenses of the settlor’s children are to be provided. The principle responsibility of the trustee is to invest the trust property and then to apply it according to the needs identified in the terms of the trust. The beneficiaries have right against the trustees to have the trust performed in accordance with the terms of the trust and to have the property advanced for the benefit at the time identified in the trust (subject to the discretion in the trustees).
Trustees possessed both power and obligations. Power is the ability and capabilities set out in the terms of the trust to hold or invest, or to exercise their discretion and so forth. By obligations, it means duties contained in the terms of the trust which the trustee is compelled to carry out.
Trustees basically have fiduciary duties which mean that trustees owe legal duties of loyalty and utmost good faith in relation to the beneficiary. Those duties extend from the management of the trust to duties not to permit any conflict of loyalties between the fiduciary’s personal interests and obligations to the beneficiaries.
Once a trust is properly constituted, there will necessarily be a fiduciary relationship between trustee and beneficiary. The effects of these being a fiduciary relationship will not that the fiduciary will owe the beneficiary a range of obligations, good faith and potential obligations to make good any loss suffered by the beneficiaries.
The rights of the beneficiary will depend on the specific terms and nature of the trust. The beneficiary retains the rights to compel the trustee to carry out the terms of the trust. The rights of the beneficiary will vary in quality. The most important distinction will be between ‘vested rights’ and ‘rights which remains contingent’ on some eventuality provided for. Under the ‘mere power’ of appointment, the beneficiary will have no vested rights in any property until the trustee exercises her power of appointment in favour of that beneficiary. A power of appointment does not give the beneficiary any right in the money, all that the beneficiary has is an ‘unenforceable hope’ (spes) that the holder of the power will choose to benefit the benefactor.
Under ‘discretionary trust’, the beneficiary will not acquire a vested right in any particular property under the trust until the trustees’ discretion is exercised in her favour. However, the beneficiary does acquire a personal right in common with the other beneficiaries to ensure the trustees observe the terms of the trust. Beyond the personal claim against the trustee, the beneficiary will not have rights to any specific property under a discretionary trust before the trustee exercised her discretion.
An express trust arises from the unilateral act of the settler in declaring a trust. There is no contract between the settler and trustee necessarily. However, if a professional trustee is appointed, the trustee may require payment from the settler to act as trustee. In such circumstances, there will be a trust and also a contract between settler and trustee. However, the contract does not form a part of the trust, rather, it is collateral to it.
A contract creates personal obligations between the contracting parties. The rights to damages in the event of breach of contract would arise in common law from the existence of the contract.
In relation to trust, there are personal obligations between trustee and beneficiary in relation to the treatment of the trust fund and the performance of the trust’s obligations under the trust. The trustee will be liable to the beneficiary both to reinstate the trust fund and for compensation if there is a breach of trust. The beneficiary is also entitled to require the trustee to carry out the obligations (Saunder v Vautier, 1841).
A trust is different from a bailment. In bailment, a person delivers property into the control of another on the understanding that the property is to be returned to the owner. There is no transfer of property law rights. Whereas in trust, a trustee acquire common law property rights in the trust fund. A bailee of property does not acquire any property rights in the object put into her control.
Where an agency relationship exists, a principal instructs an agent to act on behalf of the principal. The agency can take the legal form of a contract agreement. In an agency agreement, a principal would not ordinarily acquire equitable interests in property acquired by the agent in the way that a beneficiary under a trust acquires equitable interests once the declaration of trust takes effect. The similarity between trustee and agent is in relation to the fiduciary obligations created by each office. Trustees and agents owe fiduciary duties to the beneficiaries and principals respectively, precluding them from making unauthorised profits from their arrangements, or becoming otherwise unjustly enriched.
A gift involves the outright transfer of property rights in an item of property from an absolute owner of those rights to a volunteer. The recipient becomes absolute owner of that property as a result of the transfer. The beneficiary is not required to have given considerations for that transfer. One of the core equitable principles is that equity will not assist a volunteer.
The genius of the trust is that it enables one person, the trustee, to control property while vesting all of the ultimate entitlement to that property in another person, the beneficiary. In literal sense, it enables a person who cannot deal with their own property once he is dead to appoint another person to do it on his behalf. The beneficiary from this property is also able to exercise control over the trustee to ensure that the settlor’s intention are carried out effectively.
The other primary use for the trust is to facilitate commercial transactions. In commercial terms, a trust becomes a core technique in taking security in a transaction when one party is concerned about the ability of the other party to perform its obligations. Any property (including money) which is to be passed as part of the transaction can be held in trust until such time as both parties contractual obligations have been performed. Briefly put, a third party trustee will hold the property rights in both the money or property until both contractual parties are satisfied that the contractual obligations are performed as required. A straightforward example is the case of Re: Rayford (1975) which involves a mailing order business. Where a trust had been created over those advanced payments in favour of the customers who had made pre-payments without receiving the goods.
One of the most common uses of the trust is as a means of tax avoidance. Suppose that the property involved a bundle of valuable shares which are expected to generate large dividend annually, the shareholders will be liable to tax on those dividends. However, if those shares were transferred to a trustee to be held in trust for herself, the shareholder would then not be liable to tax payable on any dividends paid. The general principle is that it is the trustee who must account for any taxable income derived from the trust property (Williams v Singer, 1921). In a bare trust, the beneficiary is liable for the tax. In the Finance Act 1995, a broad range of tax avoidance rules were introduced in relation to settlements. The underlying intention of the Act is to prevent tax avoidance.
The core principles of trust law was made by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC (1996) when his Lordship set out the framework up the framework upon which the trust operates: -
- Equity operates on the conscience of the owner of the legal interest. The conscience of the legal owner requires him to carry out the purposes in which the property was vested in him or of which the law imposes on him by reasons of his unconscionable conduct (Constructive Trust).
- The holder of the legal interest cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience.
- In order to establish a trust, there must be identifiable trust property.
- Once a trust is established, the beneficiary has, in equity, a proprietary interest in the trust property.
A constructive trust will be imposed on a person whose conscience is affected by knowledge of an unjust factor.
A resulting trust operates to fill in a gap in the equitable title to property (Vandervell v IRC, 1967), or to explain the rights of a person who has contributed to the purchase price of the property (Dyer v Dyer, 1788).
A resulting trust operates to fill in a gap in the equitable title to property (Vandervell v IRC, 1967), or to explain the rights of a person who has contributed to the purchase price of the property (Dyer v Dyer, 1788).
posted by Maverick SM @ 9/20/2005 10:56:00 PM
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