Introduction and Creation

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This article is a topic within the subject Equity and Trusts.

Contents

Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Chapter 13 (13.1 – 13.12) and Chapter 15 (15.2-15.21).

Corin v Patton (1990) 169 CLR 540 (Mason CJ and McHugh J)

Introduction

[1] A trust is when one person assumes legal ownership of a property but only for the benefit of another. This is achieved by the original owner of a property (the settlor) giving the legal title of the property to a person (the trustee) and giving the equitable title to another (the beneficiary/object).

  • Trusts were historically limited to land, but now any form of property can be held on trust.
  • Trusts are used for a wide variety of wealth management purposes (both private and commercial), where it is necessary or desirable to split the management from the benefit of property.
    • For example, managing family wealth under a family trust, managing property for children and the disabled, group investments, trading trusts, superannuation trusts and trusts used as security for borrowings.
  • Many kinds of trusts are now regulated by statute, but all are still based on equitable principles for controlling trusts. For example, superannuation trusts are subject to the Superannuation Industry (Supervision) Act 1993 (Cth).

Definition

[2] The lack of definition for the concept of an express trust has partly been responsible for its evolution as a flexible and effective method for managing wealth. Ford & Lee describe the principal features of a trust as follows:

  • “...an obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of another person (the beneficiary) or for the advancement of certain purposes.”[3]

The important elements in this definition are:

  1. A trust imposes an obligation or duty on a title-holder of property to apply the property for the purposes specified by the creator of the trust.
  2. A trust is enforceable in equity, meaning that the courts enforce them according to equity.
  3. The trustee holds legal or equitable title to the trust property and acts as a manager of it.
  4. There must be trust property (often referred to as the subject-matter).
  5. The trustee is not simply the owner of property, they deal with the property and manage it.
  6. The trustee manages the trust for the benefit of another person – the beneficiary (often referred to as the object of the trust).
  7. Not all trusts are established for the benefit of human beneficiaries. Some are created for the advancement of purposes. Examples may include a charitable trust or trusts to maintain a testator’s pet or gravestone.

Some essential characteristics of the express trust

[4] Some basic propositions apply to all express trusts:

  • A trust is distinguishable from a gift to beneficiaries, as beneficiaries are not immediately entitled to property. They must wait until the subject-matter of the trust is transferred to them by the trustee or it may be otherwise disposed of on termination of the trust.
  • A trust, as of itself, has no legal personality, therefore actions in tort or contract can only be brought against the trustee and not the trust.
  • A trustee owes fiduciary obligations to the beneficiaries. The trustee is subject to ‘no conflict,’ ‘no profit’ prohibitions but whereas other fiduciaries owe their obligations to an identified principal, a trustee may owe fiduciary obligations to unascertained beneficiaries such as unborn children.
  • The rule in Saunders v Vautier[5] provides that where all the beneficiaries are of full age and capacity, they may terminate the trust by requiring the trustees to transfer the assets to them or at their discretion. This rule overrides any terms contained in the trust instrument and operates regardless of whether the trustees are opposed to the termination.
    • The rule does not apply to a discretionary trust consisting of a fluctuating body of beneficiaries, and only applies where the beneficiaries are entitled to the whole beneficial interest in the trust property.

The parties to a trust

[6] In every trust, there are always the following parties:

  1. The settlor - the person who creates the trust by transferring his property to the trust.
    • A common example is a testator of a will.
    • Once the settlor has created the trust, he typically has no rights in respect of the trust property.
  2. The trustee - the person who holds legal title to the trust property and must perform the trust obligations. They may be an individual or a corporation.
    • A trustee does not have to consent to his appointment but if he does not want to act as a trustee he must disclaim the trusteeship (Mallot v Wilson[7]).
    • NSW, ACT, Qld, Vic and WA have provisions limiting the number of trustees to four.
    • It is inadvisable to have fewer than two individuals as trustees as it increases the chance of fraud and the administration of a trust can be seriously impaired by the death of the sole trustee.
      • At the same time, numerous trustees can obstruct administration as they must act unanimously and not by majority decision (except in the case of charity trusts).
    • It is possible for a trust to subsist without a trustee, where the court will supervise the administration of the trust until they are appointed.
    • In ACT and NSW, legislation provides that a person under the age of eighteen may not be a trustee. A person under age will not be able to enter into contracts which bind the trust. Similar considerations apply to persons of unsound mind, but not to the bankrupt (although bankruptcy is a ground for removing a trustee).
  3. The beneficiary.
    • The beneficiary can be an individual or a corporation.
    • The beneficiary may also be a charitable 'object' (or 'purpose') or, in exceptional circumstances, non-charitable objects.
    • There are no limits on the number of beneficiaries, although if the beneficiary of a discretionary trust are too numerous the trust may be held void for being administratively unworkable.

Combining roles

The roles of settlor, trustee and beneficiary can be combined.

  • A settlor can become a beneficiary, although this may attract adverse tax consequences.
  • A settlor can become a trustee by declaring themself trustee of their own property for another.
  • A trustee can be a beneficiary, however, a trust will terminate where one person is the sole trustee and beneficiary.

Different types of trust

[8] Trusts can be classified according to the degree of discretion (or 'power') given to the trustee. They can be:

  1. Fixed trusts - where the trust instrument specifies the share of the property which each person is to receive.
    • The trustee has no discretion as to whom he will distribute or the amount which he will distribute to each.
  2. Discretionary trusts and powers - where the trust instrument does not entirely determine the share (if any) which each beneficiary is to receive.
    • The trustee has some discretion regarding the distribution of the trusts.

The common types of discretion usually relate to as to:

  • Who to distribute the trust property to - this usually confined to choosing within a designated group (potential beneficiaries or 'designated range of objects').
    • Sometimes, there is a power of appointment - a power to add persons to this designated range of objects.
  • The proportion of the amount distributed between the beneficiaries (ie, how much to give to each beneficiary).
  • Both discretions may be given.

Comparison of fixed and discretionary trusts

The difference between fixed and discretionary trusts can be illustrated by a charitable trust, which can take the form of either.

  • For example, if money was settled on trust for the RSPCA it would be a fixed trust, however, if it was settled on trust ‘for such animal protection societies as my trustees shall select’ it would be a discretionary trust.
  • From the beneficiary’s point of view, there are great differences between a fixed trust and a discretionary one. The beneficiary will only have a proprietary interest in property where a fixed trust has been created.
  • All objects of fixed and discretionary trusts have the right to due administration of the trust.
  • They can compel the trustee to perform the trust and to compensate the trust for losses caused by a breach.
    • However, even though the object of a discretionary trust can compel the trustees to distribute the income from the trust, they cannot insist that they themselves receive it.
  • Beneficiaries can have a non-performing trustee removed and a new trustee appointed.

Methods of creating an express trust

[9] Express trusts are often further classified into two more categories:

  1. Testamentary trusts are created by will and only come into effect on the death of the testator.
  2. Inter vivos trusts are trusts that come into effect during the settlor’s life.

Inter vivos trusts can be created by two methods: declaration (where the settlor becomes a trustee and holds his own property on trust for the benefit of another) and transfer (where the property is transferred to a trustee).

Self-declaration of a trust

[10] A settlor can declare themself trustee of their own property. The settlor already holds title so all that is necessary is to make a valid declaration of trust. This will satisfy the requirement of certainty of intention to create a trust (see textbook 14.5).

  • In trusts created by declaration, the settlor must intend to impose trustee obligations upon themself.
  • A court will not construe a declaration of a trust out of an invalid gift.

This was discussed in Richards v Delbridge:[11]

  • Facts: A grandfather who was the lease of a business premises wrote on the back of the deed of lease “This deed and all thereto belonging I give to [my grandson] from this time forth, with all the stock-in-trade.” The lease was delivered the grandson’s mother but the grandfather died, making no mention of the property in his will.
  • Held: The writing did not constitute a valid gift of the lease to the grandson.
    • A gift would have required execution of a separate deed under seal.
    • The words were also inappropriate for the declaration of trust: “for a man to make himself a trustee there must be an expression of intention to become a trustee, whereas words of present gift shew an intention to give over property to another, and not to retain it in the donor’s own hands for any purpose, fiduciary or otherwise.”

Formalities for inter vivos trusts by declaration

[12] For inter vivos trusts involving merely personal property, there are no necessary formalities. However, a trust involving land must comply with statutory requirements based on the original Statute of Frauds 1677 (England), which currently exist in NSW in the form of the Conveyancing Act 1919 (NSW) (s 23C).

  • In most Australian jurisdictions, this requires the declaration of trust to be manifested and proved by writing signed by the person able to declare the trust (the settlor).
    • It has also been held that writing signed by the trustee is sufficient to enforce the trust against the trustee (Hagan v Waterhouse).[13]
  • Writing is required as evidence of a declaration, therefore trusts can be created orally and later reduced to writing. The trust is treated as coming into effect at the date of declaration, not the date of writing. Failure to comply renders the trust unenforceable, but does not render it void.
    • Constructive, implied and resulting trusts are not required to satisfy writing requirements.

Trust created by transfer

[14] A settlor can create an express trust by transferring property to a trustee to hold on trust. The following two requirements must be satisfied:

  1. A declaration of trust - the declaration must establish that the recipient of the property was intended to take the property in the capacity of a trustee and not beneficially. The words used by the settlor in transferring the property will be construed in the context of the transfer.
    • This was discussed in Choithram International SA v Pagarini:[15]
      • Facts: The settlor executed a trust deed establishing a charitable foundation. He then made statements which appeared to indicate an intention to make outright gifts of property to the intended trustees.
      • Held: The Privy Council held that in the context of the creation of a charitable foundation, the words used should be taken to establish an intention to transfer property on the terms of a trust and not to make absolute gifts.
  2. A valid transfer of the intended property to the intended trustee - the transfer will be valid if it complies with the common law or statutory formalities required to transfer legal or statutory title (see textbook, chapter 9). A transfer may be invalid at law but valid under the principle of equity under the principle in Corin v Patton (see below).[16]

The application of the Corin v Patton principle in these situations is as follows:

  • The transfer will be valid if the settlor has done all those things, prescribed by statute or by common law for the transfer of the legal or statutory title, that have to be done by the settlor and cannot be done by anyone else.
  • For example, if S transfers 1000 shares to T to be held on trust for B, but dies before the transfer is registered, the transfer will be valid in equity.

Formalities for inter vivos trusts by transfer (The cloak of fraud doctrine)

[17] As discussed above, trusts of land created by transfer must be evidenced in writing, otherwise they will be unenforceable. The exception is the ‘cloak of fraud’ doctrine which applies the maxim that equity will not allow 'a statute to be used as an instrument of fraud'.

This was discussed in Last v Rosenfield:[18]

  • Facts: The plaintiffs and the defendants owned a house as joint tenants. The plaintiffs transferred their share to the defendants at cost price as part of an oral agreement that if the defendants did not personally occupy the house within twelve months they would re-transfer the plaintiffs’ former share of the property to the plaintiffs at the same price. Instead, the defendants sold the property to a third party with a mortgage back to the defendants.
  • Held: Even though the agreement was unenforceable under the Statute of Frauds, the maxim that equity will not allow a statute to become an instrument of fraud was applied. The defendants were ordered to pay the plaintiffs half of the proceeds of sale and the plaintiffs were awarded a half interest in the mortgage, subject to the defendants repaying the defendants the price they had received on sale of their half-interest in the property.

The ‘cloak of fraud’ doctrine operates within carefully defined limits. It will only apply to oral trusts over land if the plaintiff (settlor) has relied to their detriment on its assumed enforceability, for example, by transferring land to another who declared themselves as a trustee. It will not apply where the settlor declares themselves as the trustee for another.

This was discussed in Wratten v Hunter:[19]

  • Facts: A father transferred land to one of his sons shortly before his death. On the day of the funeral, the son said to his sisters and brothers “I promise to live in the house and care for the home and the property for all of us.”
  • Held: The oral declaration of trust was not enforceable. It did not attract the ‘cloak of fraud’ doctrine because the siblings had not relied on their brother’s promise to their detriment.

The ‘cloak of fraud’ doctrine overlaps with the law of constructive trusts (particularly the common intention constructive trust) and with estoppel. As most cases will fall under these categories, the doctrine is only relevant where the facts of the case cannot be accommodated within one of the recognised categories of a constructive trust or where the requirements for a valid estoppel have not been met.

Testamentary trusts

[20] Special rules apply to a trust which is intended to take effect on the death of the settlor, these trusts are known as testamentary trusts. The will creating the trust must comply with the formalities for creating a will; specified in State and Territory legislation rather than the Statute of Frauds formalities. The testator must have legal capacity to make a will and have unimpaired intention to execute a will (for example, not being under undue influence).

Formalities that must be complied with generally require:

  1. The will to be in writing
  2. Signature of the will by the testator or some person in the testator’s presence and by the testator’s direction
  3. Location of the signature in a special position on the material bearing the writing
  4. Making of the signature in the presence of two or more witnesses
  5. The presence of the witnesses together at the same time when the signature is made
  6. Signature by the witnesses.

All States and Territories have amended their wills legislation to permit a court to admit to probate a document which the court is satisfied was intended by its maker to constitute a will, even if it has not been executed in complete conformity with the statutory requirements.

The doctrine of incorporation by reference

[21] A will may refer to another document so as to incorporate that document into the will. A document can be validly incorporated into a will if:

  1. The document to be incorporated is in the existence at the time of execution of the will; and
  2. The will refers to the document as an existing document.

This was discussed in Abbs v Abbs:[22]

  • Facts: The testator made gifts by will to several trusts which were not in existence when he died. He should have made a gift to his personal representatives with a direction that they set up a fund to be held on particular trusts.
  • Held: As the testator’s intentions were clear and the identity of the beneficiaries was not in dispute, the court construed the will as giving effect to the testator’s personal representatives’ directions to establish the trusts. The court treated the way in which the will was expressed as providing defective machinery to give effect to the testator’s intention.

Incompletely constituted trusts

[23]A valid trust is not created if the steps necessary to create it have not been followed. Consequences of non-compliance will depend on the nature of the intended trust in question and the precise steps which have not been taken.

  • An obstacle that beneficiary seeking to enforce an incomplete trust must overcome is the maxim that equity will not assist a volunteer.
  • The principle does not apply to a fully constituted trust but it will defeat most attempts by the beneficiary to enforce an incomplete trust if the beneficiary has not provided consideration.

General principles applicable to incomplete trusts:

  • If an attempt to create a trust by declaration fails for lack of certainty of subject, object or intention, or failure to comply with statutory formality, the would-be settlor simply continues to hold the property on their own behalf.
  • If an attempt to create a trust by transfer fails for lack of certainty of subject, object or intention, or failure to comply with statutory formality, but the property has been successfully transferred to the would-be trustee, the trustee will hold the property on resulting trust and must re-transfer it to the settlor.
  • If an attempt to create a testamentary trust fails the property will revert to the testator’s estate, to be disposed of according to his will, or on a partial intestacy.

Non-simultaneous declaration and vesting

[24] A declaration of trust made subsequently to a transfer of property will be ineffective – the transferee will already have obtained the full beneficial title to the property and the declaration will be ineffective to create a trust.

THis was discussed in Re Bowden:[25]

  • Facts: A settlor promised to settle property she might receive upon the death of her favour on trust for the religious order she was about to join. She also sought to recover money that she had transferred under his will.
  • Held: The promise to set up a trust for the property was not enforceable because the religious order were volunteers, however, the money was not recoverable because once it had been paid to the order a trust could not be applied.

End

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References

Textbook refers to M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012).

  1. Textbook, pp 209.
  2. Textbook, pp 209-11.
  3. F&L [1000].
  4. Textbook, pp 211-12.
  5. (1841) 4 Beav 115.
  6. Textbook, pp 212-14.
  7. [1903] 2 Ch 494
  8. Textbook, pp 214-15.
  9. Textbook, pp 247.
  10. Textbook, pp 247-8.
  11. (1874) LR 18 Eq 11.
  12. Textbook, pp 248-9.
  13. (1991) 34 NSWLR 308
  14. Textbook, pp 249.
  15. [2001] 1 WLR 1 (PC).
  16. (1990) 169 CLR 540, discussed at textbook [9.10].
  17. Textbook, pp 250-1.
  18. [1972] 2 NSWLR 923.
  19. (1978) 2 NSWLR 367.
  20. Textbook, pp 251.
  21. Textbook, pp 252.
  22. [2003] NSWSC 1202.
  23. Textbook, pp 252-3.
  24. Textbook, pp 253.
  25. [1936] Ch 71.
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