There is enormous flexibility in relation to the terms on which trusts can be created. The main constraints are those of public policy. The former rules regarding the duration of trusts have been amended. It is now possible to apply to Court to vary trusts under new legislation, which commenced in 2010.
Trusts allow a person to separate the ownership and control of his assets, either during his lifetime, or indeed after his death. They may maintain a degree of control in relation to the point of time at which the assets are vested in other.
Trusts are commonly used to manage family assets. There is very wide freedom and flexibility to set the terms of the trust as is desired, subject only to a limited number of constraints. Trusts may be used to mitigate, avoid or plan the timing and incidence of tax liability.
See the separate section on trusts of land and on the deemed statutory trust of land that arises under the 2009 land law reforms. This statutory trust replaces the artificial device of trusts for the sale of land, with a power to postpone, which were employed to avoid the Settled Land Acts, where land was held within a trust, which might otherwise undermine the trust, by giving the beneficiary the right to sell.
Rights and Interests of Beneficiaries
The trust set out the obligations of the trustees and the rights of beneficiaries. As mentioned in other sections, the rights of beneficiaries in respect of the trust assets may vary from complete ownership to the right to be considered in respect of receiving a prospective share of the trust assets. They may have rights to a fixed income or income for a certain period. They may have a future right at some future date, for example, after the death of persons who enjoy the income at present, etc.
The rights of beneficiaries may be contingent. That is to say, they may be conditional upon certain conditions such as living to a certain age, surviving a certain person, etc.
The rights may be for members of a class of persons, for example, the children, grandchildren and other relatives of the settlor, the person who has created the trust. The trust may be a discretionary trust, so that the beneficiaries may receive a benefit, if but only if, and when but only when the trustees decide to exercise their discretion in favour of that particular beneficiary.
It is a fundamental principle, that if all (actual and potential) beneficiaries of a trust (all must have mental capacity and be of full age) agree collectively to terminate the trust, the trust may end and the trust assets may be vested in the beneficiaries in accordance with their entitlement or as they agree. However, it may not be possible to terminate the trust, because beneficiaries or potential beneficiaries are under age, or have not yet been born.
The rights of a beneficiary under a trust can be transferred. The Statute of Frauds requires that the transfer be in writing. In practice, an interest under a trust would only be saleable if it is of sufficient and certain duration, and is substantial. For example, a person may be the owner of a property absolutely where the trustee is a mere nominee. In this case, the interest under the trust is a valuable asset. In other cases, the interest of the beneficiary may be contingent and conditional and have little value.
Vesting of Trust Assets
It is common, particularly in trusts and wills for the benefit of children and grandchildren, to provide a power to make advances from trust assets. This power may cut across the rights of beneficiaries, by reducing the trust funds.
It is commonly the case, that a share of assets is left to children, to vest in them upon attaining the age of majority, or more commonly older ages, such as 21, 25 or 30 years of age. In such cases, the trustees are commonly given the power to make an advance of capital or income, or both, to the beneficiary.
The income or capital (depending on the wording of the trust) may be used for the education, maintenance or advancement of the beneficiary, pending and prior to the trust asset becoming vested in them. Such advances are generally taken into account when the assets vest or on the ultimate division of the assets, for example, when the person attains the requisite age.
There is statutory power to make advancements from trusts funds, for child (under 18 years) beneficiaries or prospective child beneficiaries. Many trusts are set up informally or in simple wills, by which assets are to vest to a child on attaining a specified age, without provision for advancement before that age. The statutory power relieves the trustee of the requirement to accumulate the income of the asset until the person reaches the designated age and allows access for the purpose of education, maintenance or advancement generally.
Sometimes there is an overriding power for the trustees to make advancements to a particular beneficiary, notwithstanding that it reduces the share or prospective share of other beneficiaries. This is useful if, for example, a particular child or beneficiary has special needs, that may not have been anticipated when the trust or will was made.
In this case, the power of advancement in effect treats the assets as a family fund, so that one child or beneficiary may be benefited more than others. The trustee’s right to use this power may not necessarily be limited cases where there are special needs. Usually, the power exists and it is a matter for the trustees as to whether to use it. A letter of wishes may give guidance.
Discretionary trusts afford advantages in terms of flexibility. They allow the enjoyment and ownership of assets to be split. They are commonly made in favour of younger beneficiaries, typically under the age of majority. They may be useful in dealing with the unknown needs of a family into the future. They may allow the flexibility to making benefits available to beneficiaries with special or unpredictable needs.
Generally, the Courts will not interfere with the exercise by the trustees of discretion, unless it is manifestly unfair or is being abused. Trustees must act impartially and balance the interests of the various beneficiaries. This involves acting equally and fairly, between present day and future beneficiaries. This interests of fairness may, for example, require a balancing of present needs against future possible needs, with a consequent emphasis on maintenance of capital.
Trust assets may be directed to be sold at either an early date or a later date (which may commonly be postponed indefinitely) so that the cash proceeds continue to represent the trust fund and to be subject to the terms of the trust. There is usually a power to postpone the sale and to permit the assets to be enjoyed or permitted to be enjoyed by beneficiaries in their present form.
In some situations, the duty on trustees to act fairly and proportionately requires them to convert certain assets from one form to another, so as not to jeopardise the interests of certain beneficiaries, in particular, future beneficiaries. The courts evolved certain rules in this context. They can be excluded expressly or by implication, and are usually excluded in wills which create trusts. Some of these older rules have been reformed in 2009 in the context of trust of land.
Investments Capital and Income
The rules apply where a person is to receive income for a certain period (generally the lifetime of the beneficiary) with the provision that entitlement to the capital is to pass to another after that period or upon the beneficiary’s death. The first rule requires the conversion of wasting, risky or unauthorised investments into authorised investments. It applies to lifetime trusts and wills
The default provisions for authorised investments (which would apply where no express powers of investment have been given) provide for a limited category of authorised investments. Broadly speaking, authorised investments are government-backed securities and securities (equity and debt), certain companies shares were presumed (in some cases incorrectly) to be safe and secure from capital loss) together with certain intermediary investment funds, which invest in these and similar products.
The rule does not apply to land. It also does not apply where there is an intention that the asset be enjoyed by the beneficiary in its actual state (in specie). Where the rule applies. the current owner of the income interest is to be entitled to a fair yield on authorised investments. Surplus income received must be added to capital. The date of valuation depends on the date of the document.
In the case of a will, the default position is that valuation and calculation takes place after one year. If the sale of assets does not take place until after one year, the person entitled to income is entitled to interest at a fair rate from that date, until to the date of actual conversion into authorised investments. If the income earned is less than that on authorised investments, the trustees must pay the same to the person entitled to the income interest.
The Succession Act allows for the appropriation of any part of the assets in their actual state, towards satisfaction of any benefit under the will. Certain notices are required to be given. In certain cases, the consent of trustees or persons entitled to income, is also required. Where this provision applies, no apportionment is required under the rule.
Another rule, which also applies to wills and which may be displaced, seeks to protect the holder of the income against unfair advantage, which might otherwise accrue to the owner of capital. The rule requires that the holder of the income, is to receive the income which he would have been entitled to, if the asset had been converted into an authorised investment at the date of death.
Where there non-income producing trust assets, the rule may apply to require that person entitled to income receives the equivalent income from capital. The person entitled to the income is also entitled to interest on the equivalent income from the date of death.
There is a presumption (usually excluded in wills) that the person who is entitled to income, is entitled to income on the net estate only, from the date of death. Therefore, if income has been paid or accumulated on the gross estate (part of which is used to pay debt) an adjustment is made, so that the balance on the part representing the debts is paid to or accumulated for the owner of the capital.
Income received before death is capital, so that where there is split in the entitlement to income and capital, it belongs to the owner of capital. Where a dividend is declared after death or other income is earned, in respect of a period both before and after death, the part relating to the pre-death period must be apportioned to the beneficiary entitled to capital. The part accruing after death is apportioned to the person entitled to income.
More difficult situations may arise in respect of sums received after death which include both elements of capital and income. In some cases sums described as capital must be treated as income and vice versa. In other cases, the courts may not require an apportionment, if the calculations are unduly complex and costly relative to the benefits derived.
Where property or other assets need to be maintained and repaired, the costs should be taken from income. In contrast, capital expenditure should be taken from the capital fund on the basis that it represents a permanent improvement.
Trusts of Land
For many centuries, when land comprises most wealth, it was common for families who owned large landed estates to settle and resettle land from generation to generation. These types of arrangement were very common in the 18th, 19th and early part of the 20th century.
Typically, substantial estates comprising agricultural land and tenanted lands, subject to agricultural or residential tenancies, were vested in the present owner of the estate for life and thereafter to his heirs. Often the settlements were made on marriage. Each generation typically settled and resettled the land, once a generation with the co-operation of the next generation. The result was that many complex types of rights or interest could exist in a single piece of land.
The mechanism of the trust was commonly employed in settlements, as it avoided some technical common law rules on the creating and vesting of future “legal” interests (interests or rights which would or might come into existence at some future date).
Trust provided much greater flexibility than the common law allowed. Complex successive and layered interests and right could be created for present and future family members. Trusts were themselves subject to the technical rules against perpetuities.
Statuory Powers re Land
By the mid-19th century, many landed estates became insolvent because they were unable to bear the interests, charges and mortgages with which they were encumbered. The desire to retain the land, within the family, reflected in settlements and trusts, had created structures where it was difficult to realise the economic benefit of the land by way of lease or sale. In Ireland, numerous estates were sold through the Landed Estates Court, which cleared all obligation and rights from the title.
Legislation was introduced through out in the latter half of the 19th century, designed to enhance the powers of the current principal “owner” (typically the person entitled to the income or to the enjoyment of the property in kind for life) to manage and sell the lands. Provision was made whereby the settled or trust land could be sold, leased and converted into monies so that the all present and future interests and rights were “overreached” and attached to the proceed of sale (regardless of whether this was sufficient).
This legislation provided that (typically) the life tenant was given powers, including the power of sale, the power to grant mortgages and power to lease and improve the land, notwithstanding that he was a temporary owner only. Other parties, typically existing trustees, were deemed trustees of the settlement and had a protective role and were required to consent to certain key decisions. In the case of a sale, the monies must be paid to the trustees as capital, (with the life tenant typically receiving the income).
Under the 2009 land law reforms, the ability of to create complex legal rights of ownership, was severely curtailed. All such rights must now exist as beneficial interests (i.e. subsisting under a trust). This has the benefit of facilitating dealing with and sale of the property. An outsider need only deal with the designated or deemed trustees, and need not concern themselves with the terms of the trust are being complied with. .
Where successive interests legal interests exists, or are created after the Act, they are deemed to be subject to the 2009 Act. A trusts of land is deemed to apply, even if there is no express trust. The trustees are given most of the powers of the owner. The Act specifies who the trustees shall be.
Discretionary trusts are a mechanism which may protect family members from the consequences of personal problems, such as addiction or insolvency. Beneficiaries may be protected from their own foolishness. Assets within a discretionary trust are assets of the beneficiary, and thereby subject to seizure on enforcement, to the extent only that they have been appointed to him.
A trust may grant rights and interests to a person, for so long as certain conditions are satisfied. If the interest is so created from inception, its automatic termination, will be less vulnerable to being set aside for public policy reasons So called protective trust involve fixed interests or rights for the beneficiary, which terminate, if an events such as insolvency, occur, at which point, the interest become subject to a discretionary trust.
In other jurisdictions such as the United States, England and Wales and Northern Ireland protective trusts can be created in a short format. In Ireland, it is necessary to execute a more complex document.
Protective trusts are more readily valid in the case of a transfer of an asset to a third party, on terms that protect against that third party’s insolvency. Attempts to transfer assets which are already held, in order to protect again one’s own insolvency, will often be invalidated under insolvency legislation.