Nature of Trusts

Background in Equity

The trust is very much the creation of the law of equity. Historically, equity was dispensed by the courts of equity.  The courts of equity merged with the courts of law in 1877, so that equity and law are applied in all courts. In most cases, the equitable rules take precedence over the rules of “law”. In this context, the rules of “law” refer to the rules applied by the common law courts, prior to 1877.

Historically, equity looked at circumstances and dealings from the points of view of justice and fairness. They were more flexible, both in relation to the evolution and application of principles and in relation to the types of remedy which they employed.

In contrast, the common law,  particularly in its earlier phases, was significantly more inflexible.  Certainty, even in relation to archaic and sometimes arbitrary principles, was seen as preferable to the exercise of discretion and concept of justice.

General

A trust is one of the key legal institutions.  It may apply to a  wide variety of situations.  A trust arises when one person (the trustee) holds an asset under an equitable obligation to deal with the property and hold it for the benefit of one or more others (the beneficiaries).

A characteristic of the court of equity is that they act on the respondent personally. It orders are enforced, principally by the application of personal sanctions, including imprisonment. Equity imposes personal obligations on trustees, to fulfil the terms of the trust.

The beneficiaries may enforce the terms of the trust against the trustee in his personal capacity. The trustees may be compelled to enforce the terms of the trust.T he court may sanction a trustee personally.  An order to pay compensation for breach of trust may be enforced against the trustee’s personal assets.

Protection of Trust Assets

The law of equity (which takes precedence over other law) places an obligation on the trustee to deal with the assets in accordance with the terms of the trust.  Therefore the rights and interests of the beneficiaries exist via the enforcement of the personal trust obligation on the trustees.

The trustee or trustees jointly, hold legal title to the trust assets.  For example, in the Land Registry or Registry of Deeds, he may appear to be the owner.  He may be the registered owner of shares.  As far as the outside world is concerned, the trustee may appear to be the absolute owner.  Third parties without notice of his true status, are entitled to deal with the registered nominal or legal owner as if he were the absolute owner.

The general principle found throughout various strands of law is that a person who purchases in good faith from a trustee without notice of the trust or at least without notice of a breach of the trust takes a good title.  In this event, the rights of the beneficiaries would lie only against the trustee personally

There exist various mechanisms in registers which may protect beneficiaries. The fruits of benefits taken by the trustee in breach of trust can be traced or attached by the Courts of equity.

In the Land Registry, it is possible through the mechanisms of an inhibition, to put a notice on a register so as to prevent a trustee dealing with trust assets in breach of trust.  Similarly, it is possible to put stop notices in the register of members of a company.  These options provide a measure of protection, as they provide at best a warning to the beneficiary that a transaction in breach of trust or fiduciary duty may occur.

Creation of Trust

A trust is created during lifetime by a deed of trust. A trust may be established in a will. The deceased settles the trust in the will and nominates the trustee. It takes effect on death.

A person may add assets to a lifetime trust, established by himself or another, under the terms of his will.  It would not be unusual in tax planning for a person to create a lifetime trust with minimal value assets only with the intention of leaving substantial assets on death in a Will.

The person creating the trust. He is often referred to as the settlor. He may be also be a trustee and / or one of the beneficiaries or both. He or third parties may later add to the trust assets.

Trusts may arise informally, without any document,  in other circumstances. See the article on resulting trusts and constructive trusts.

Terms of Trust

The terms of trusts vary considerably. There is a great deal of  flexibility in relation to the terms on which a trust may be established.  In some cases, the trustee is a mere nominee holding for the beneficiaries, who are entitled to call for the transfer of the legal title of assets to them at any time.  The trustees are mere nominees and their role is to transfer the trust assets in accordance with pre-defined entitlements, when called upon to do so.

In other cases, the beneficiary’s rights are more limited and conditional.   The beneficiaries may be entitled to some or all of the trust assets at a future date. They may be entitled to the income or a share of the income of the trust assets for life or another period. In these cases, the trustees have ongoing obligations and powers, the beneficiaries’ rights and entitlements are defined by the trust or a previous transfer or appointment under the trust

In the other end of the spectrum, is a discretionary trust.  Under a discretionary trust, the beneficiaries have no entitlement to all or any part of the trust assets, unless and until the trustees vest or “appoint” the assets to them. The beneficiaries cannot compel the trustees to transfer any particular assets to them.  Their right is to be considered by the trustees in the exercise of their discretion and powers in accordance with the terms of the trust.

Public / Charitible Trusts

Trusts may be for public or private purposes.  A private trust is for the benefit of particular persons or relatively small groups of persons.  They are commonly used managing the   transfer of assets between generation within families.  A public trust must generally be for “charitable” purposes. “Charity” in this context has a particular established meaning.

The rules in relation to charitable trusts are more liberal than in those for private trusts.  Designated public authorities have a role in enforcing and monitoring charitable trusts.  Charities have recently been subject to significantly increased regulation.  See the section on the registration and regulation of charities.

Trust by Operation of Law

Two principal types of trust arise automatically, without being created by deed, writing or oral declaration of trust.  In each case, the equity, formerly the courts of equity, took  the view that it would be inequitable to treat the nominal owner or trustee as the true owner of the relevant assets in particular types of circumstance.  He is instead obliged to hold the in accordance with the terms of a trust imposed by law.

The first type of trust is a “resulting trust”, which arises out of the presumed intention of the  parties in certain circumstances, which usually involve the use of another person’s funds or assets. A common instance of a resulting trust, is where  A uses B’s money to buy an asset. In  the absence of proof of a gift, or of a close familial relationship between A and B, it is presumed that A holds the asset as a bare trustee for B.

The courts of equity took  the view that it would be inequitable for A to take ownership of property, as it is contrary underlying economic position. A would hold his legal ownership as trustee for B. After the merger of the courts of law and courts of equity, the equitable position prevails and resulting trust principles apply in all courts.

The second type of automatic arising trust, is a constructive trust.  In its broadest formulation, it is applied to prevent unjust enrichment. The courts of equity impose an obligation on a person by which he is a constructive trustee for another.  Constructive trusts arise principally, in certain types of circumstances.

The Courts have gone some  distance towards using the concept of a constructive trust, as a remedy or as  means of remedying injustice. However, the courts have not yet evolved a general principle, whereby they apply constructive trusts to undo just enrichment.

A constructive trust may arise for example where a trustee wrongfully uses trust monies to benefit himself.  In this case, any assets held must themselves be held under the principal trust, for the benefit of the beneficiaries.

Non-Trust Fiduciaries I

Trustees owe fiduciary duties to the beneficiaries under the trust. The law imposes fiduciary duties on certain other persons, who are not trustees, but who stand in a position of dominance or influence in relation to certain other persons, who are typically in a weaker position, intellectually or economically. The disadvantage may arise from reasons such as youth, advanced years or a relationship of dependence.

The duties of fiduciaries, who are not trustee are similar to the duties of  trustees, but are slightly less onerous and rigorous. Many of the key trustee duties, such as avoiding conflict of interest and not benefiting from the relationship apply to non-trustee fiduciaries. In some cases, informed consent following full disclosure may permit what would otherwise constitute a breach of the duty.

Certain relationships give rise to a fiduciary duty, in order to protect the person whose interests are at risk of abuse. The directors of the company owe fiduciary duties to the company. They control the company but the company itself is owned by the shareholders.  They are in a position to exploit the company for their personal gain, and the imposition of fiduciary duties seeks to avoid this possibility.

Non-Trust Fiduciaries II

Personal representatives are deemed to be trustees for some purposes under the Succession Act. In order to protect the interests of the beneficiaries, trustee and fiduciary duties are imposed. They have duties to collect in the assets of the deceased and apply them in accordance with the will or rules on intestacy.  Where the representative are not specifically appointed as trustees or are not deemed to be trustees, fiduciary duties will usually  continue to apply.

The personal representative’s role runs from the date of death or issue of grant, to the time that assets are vested. Personal representatives may be appointed as trustees under a will, so the deceased’s assets may be vested in them for the medium to long-term, under the terms of a trust provided for in the will.

An agent is somebody who acts on behalf of another.  See the section on agencies.  Agents owe fiduciary duties to their principal.  As with directors, they do not have the full obligations of trustees.  Many of the significant fiduciary duties apply, such as the duty to avoid conflicts of interest and to the duty to act in good faith.

Employees owe a  duty of fidelity or loyalty to their employer.  This duty is significantly more diluted, than that which applies to fiduciaries or trustees.  However, the law of equity imposes obligations of confidence and good faith, where employees deal with valuable employer assets, such as trade secrets and valuable certain highly confidential information.

Where a person takes custody of goods belonging to another a bailment commonly arises.  This does not of itself create fiduciary duties, common law duties to take care of the goods arises.

Powers

A power is a right vested in a person, to exercise a particular authority on behalf of another.  It may or may not be, by it terms wholly or partly discretionary. A person may have the power to appoint assets. Powers do not need to meet the test of certainty of objects (beneficiaries) that applies to trusts.  A general power entitles a person to appoint the assets as he sees fit.  A special power is subject to limitations, as to the class of person to whom they may be appointed.

Trustees have trust powers, but a person may have trust like powers, without being appointed a trustee. A bare power may be similar to a discretionary trust.   However, the persons to whom the assets may be appointed, are not the beneficiaries of a trust, so that (for example)  they may not collectively terminate the power, in contrast to the position where the beneficiaries of a trust are fully ascertained, mentally competent  and of full age.

Under a general power, the person holding the power usually has complete discretion as to its exercise.  Certain powers are interpreted as being in the nature of trust. This may apply to special powers, where there is a limited class of potential beneficiaries.  In these cases, the courts of equity may find there to be an intention to benefit the particular objects of the power. The courts will not readily allow the gift to lapse, by reason of failure to exercise the power.

Power of Attorney

A power of attorney is a special form of agency.  It allows the person to whom it is given (the donee) on to act in the name of the person wo makes it (the donor), to the extent provided in the instrument. The Powers of Attorney Act allows for the creation of a general power of attorney by use of a very simple form of wording, specified in the Act.  The general power entitles the donee to do every legally binding thing, which the donor may do. The donee is also referred to as the attorney.

A power of attorney may be limited, in which case, it is necessary to examine and interpret the terms of the instrument in order to ascertain the extent of the authority.

A power of attorney is terminated by the donor’s death or incapacity.  Certain protections are provided for third parties dealing in good faith with the attorney, who do not have knowledge of the death or incapacity or the donor, or do not have notice of its revocation. An enduring power of attorney, is valid in the event of and notwithstanding the donor’s subsequent incapacity.