The Trust

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The Modern Trust

Trusts are one of the most important concepts in the English legal system

The modern trust is based on the idea of dual ownership: that is, both a legal and an equitable ownership

In a trust, the legal ownership is vested in one person or group of persons (the Trustees) while the beneficial, or equitable, ownership is vested in another person or persons (the beneficiaries or cestuis que trust).

The legal owners are obliged to use the property in accordance with the terms of the trust, for the benefit of the beneficiaries

The legal owners’, or trustees’, obligations are more extensive than ordinary contractual obligations.

  • The trustee is under a fiduciary obligation to act in the beneficiaries’ interests, in preference to their own interests. This may mean that the trustee has to act in a way that is contrary to their own interest or to their sense of morality.
  • See, for example, the case of Buttle v Saunders [1950]

The Magic Triangle

There are three parties to a trust: settlor, trustee and beneficiary

  • The relation between the three is sometimes called the 'Magic Triangle'.

The Magic Triangle

  • The settlor is the absolute owner of property
  • If the settlor wishes to create a trust the legal title is given to the trustee and the equitable title is given to the beneficiary
  • In other words, a trust is created when the absolute owner of property (the settlor) passes the legal title in that property to a person (the trustee) to hold that property on trust for the benefit of another person (the beneficiary) in accordance with the terms set out by the settlor

Trusts are, generally, irrevocable: the settlor cannot later change their mind and recover the property. See, for example, the case of Re Bowden [1936]

Traditionally, trusts have been used to control property, to keep it ‘in the family’, to provide for children and, in the days before the Married Woman’s Property Act, for married women: while married women could not own property in their own right, they could be the beneficiary of a trust.

Nowadays, trusts are used in other areas e.g. owning investments and pension funds.

  • Thus, if you pay into an occupational pension scheme your employer will also pay money into a pension fund, which will then be held on trust for present and future pensioners by a body of trustees comprising representatives of the employer and representatives of the employees

A legal person, such as a company, may be a settlor, trustee or the beneficiary of a trust.

Legal v Beneficial Ownership

Saunders v Vautier (4 Beav. 115): where the beneficiary or beneficiaries are sui juris (i.e. over 18 and of sound mind), they can require the trustees to vest the legal title of the property in them.

  • So, beneficial ownership can be transferred into legal ownership

This only applies where all possible beneficiaries agree and they must all be sui juris (including any beneficiaries who might come into being)

Types of trust

Express Trust

A trust is an express trust where the settlor has expressed his intention to form a trust. Although there is no requirement to use any particular form of words, the intention must be clear (Re Kayford 1975)

The most common example is where the settlor – the owner of the property – transfers property with a declaration, whether written or oral, that the transferee (i.e. trustee) is to hold the property on trust for the benefit of the named beneficiaries.

The owner of property may also declare that they hold property on trust for another without transferring it to a trustee. See the case of Hunter v Moss [1994]

Constructive Trust

A constructive trust is a trust implied by law, when the circumstances are such that the conscience of the legal owner should be engaged. This may be, for example, where money is paid by mistake: the person who has the money will hold it on trust for the person who paid it.

See the separate notes on constructive trusts

Resulting Trust

Resulting trusts are implied by the court – they are not created intentionally by the settlor

See the separate notes on resulting trusts

Other clasifications

Bare Trust:

  • In a bare trust, a trustee holds property for the benefit of a single adult absolutely

Fixed Trust:

  • A trust where there is a certain fixed group of beneficiaries and the property is held in specific shares
  • A trust of £30,000 held for the benefit of the settlor’s two named children, in equal shares, is a fixed trust.

Discretionary Trust:

  • Trust where the trustees have the discretion to choose which, of a defined class or group, they choose to apply the income or property of the trust to.
  • E.g. suppose a situation in which a settlor has 3 adult children and wishes to require that the trustees use as much of a fund of money as they may think appropriate to help whichever one of the children earns the least money in any given calendar year

Public Trust e.g. charitable trusts

Trusts and Contracts

Trusts and contracts are separate concepts

A trust is an equitable relationship, which may arise by express agreement or from circumstances; there is no need for consideration for an equitable obligation to arise.

  • A contract is a bilateral agreement (resulting from offer, an acceptance of that offer, and consideration)

Privity question does not arise in trusts: a beneficiary of a trust may enforce it irrespective of whether they were party to original deed: Gregory and Parker v Williams [1817]

Bailment, Agency and Stakeholders

There are other circumstances in which people hold other people's property: these may be bailment, agency and the stakeholder relationship.

Bailment:

  • Bailment is the situation where another person has possession of, but not ownership of, chattels.
  • This might arise where property is loaned or hired; or where a person is keeping or storing property on another's behalf; or where the person has possession in order to carry out some work on the chattel.
  • Bailment may be voluntary, involuntary or for reward and thereby governed by contract. The bailee has a common law duty of care, but this is not an equitable duty

Agency:

  • The relation of an agent to his principal has some features in common with that of trustee and beneficiary: in particular, the agent has a fiduciary relationship with the principal, and may hold property - both real and personal - on behalf of the principal.

Stakeholder:

  • A stakeholder is a third party who temporarily holds money or property whilst its owner is still being determined e.g. gambling or purchasing property
  • In Potters v Loppert [1973] it was held that a stakeholder is not a trustee or agent → he is a principal who owes contractual obligations to the depositors

Bank Accounts

A bank account is not a trust and the depositor (i.e. me) has no proprietary interest in the money in their account: the money belongs to the bank and they are free to use it as their own and keep any interest earned.

Relationship between bank and depositor is contractual: if the bank goes insolvent, the depositor is a creditor and must prove their debt: Foskett v McKeown [2001]

Executors

Dead persons cannot own property. On the death of a person, the legal title to all their real and personal property devolves, by operation of law, in their executors.

Although the executor owes fiduciary duties, including a duty to account and a duty not to profit from his or her role, they are not a trustee of the property: Commissioner of Stamp Duties (Queensland) v Livingston [1965]

Insolvency and bankruptcy

Principle reason to distinguish property on trust and a contractual obligation to repay is that a trust will survive the insolvency of a company or bankruptcy of an individual

If you don't have a trust you will be a creditor and have to ‘prove’ your debt

Trusts, Discretionary Trusts and Powers

Discretions must be exercised. Powers need not be exercised, but must be considered

Whether a provision in a trust instrument creates a trust, a discretionary trust or a power is a matter of the construction of the instrument: Wilson v Turner (1883)

Powers of Appointment

Powers to distribute or dispose trust property, whether by making a person a beneficiary or by giving them income/capital are ‘powers of appointment’: this does not need to be exercised.

Although the “trustee is not bound to exercise it” this “does not mean that he can simply fold his hands and ignore” it (Re Hay’s Settlement Trust [1981] (Megarry VC))

Other Powers

There will also be administrative and managerial powers given to the trustees to deal with the trust property so as to maintain its value.

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