Introduction to Trusts

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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 legal title of the property to a person (the trustee) and giving the equitable title to another (the beneficiary/object).

  • The trustee, the trust property and the beneficiary are the three essential elements of a trust.
  • The trustee assumes a fiduciary obligation towards the beneficiary.
  • The trust ends when legal title is also transferred to the beneficiary.
  • Thus, the trustee cannot be the sole beneficiary, as equitable and legal title would be in the same person and the trust would come to an end.
  • A 'person' means a legal person (ie, companies etc).

Trusts are classified into 3 groups:

  1. Express trusts - trusts which the parties have created properly.
  2. Resulting trusts (implied trusts) - trusts which the court has imposed after determining that the parties intended to create a trust but failed to create properly.
  3. Constructive trusts - trusts that are imposed by the courts regardless of the parties' intention (usually based on unconscionability).

A trustee will sometime be given discretion when making distribution to the beneficiaries. Examples of discretion are:

  • Who to distribute to - this usually confined to choosing within a designated group (potential beneficiaries or 'designated range of objects').
    • Sometimes, there is even 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).
  • Where the trustee has some discretion but is nevertheless obliged to distribute, it is named a discretionary trust or a 'trust power'.
  • Where the trustee is not obliged to distribute, it is named a discretionary power, or a 'mere/bare power. This is not a real trust.

This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008, pp. 341-345 [4.74-4.79]

Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012, pp. 5-8 [1.7-1.12]; 389-397 [23.1-23.25].

Introduction

A trust is when one person assumes legal ownership of a property but only for the benefit of another. It is usually used to make someone a temporary owner of a property whilst the intended owner is not ready (eg, a father creates a trust effective until his child grows up). It is facilitated by equity:

  • The original owner of the property, the settlor, splits up the legal and equitable ownership in the transfer of property. In the case of a will, the person is called a 'testator'.
  • The legal title is transferred to the trustee.
  • The equitable title is transferred to the beneficiary/object.
    • The trustee, the trust property and the beneficiary are the three essential elements of a trust.

The trustee assumes a fiduciary obligation towards the beneficiary (ie, he holds the property for the benefit and interests of the beneficiary). The trusts comes to an end when all equitable and legal title are joined in one person (ie, when the legal title also transfers to the beneficiary). In legal terms, the a trust end when the trust ‘vests’ in the beneficiary.

  • This usually occurs on a specified future date or after a fulfillment of a condition.
  • A trusts make use of equity - in common law, the trustee would have been the complete owner of the property and there would have been nothing that the beneficiary could have done to receive it back.
  • The imposition of a fiduciary obligation ensures that the trustee acts for the benefit of the beneficiary whilst it is the owner of the property.

The Actors

There are a number of miscellaneous rules regarding the actors of a trust:

  • A ‘person’ (for the purposes of trusts) doesn't have to be a natural person – they can also be a legal person (eg, companies).
    • It has also been ruled that 'charitable purposes' can constitute a beneficiary (eg, a trust for the benefit of feeding the poor).
  • The settlor and trustee can be the same person (eg, a father creates a trust, where he holds his own house on trust for his son).
  • The settlor and the beneficiary can be the same person (eg, a child appointing his uncle to hold his house on trust for him).
  • However the trustee cannot be the sole beneficiary, as equitable and legal title would be in the same person and the trust would come to an end.[1]
    • This means that if there are multiple beneficiaries, one of them can be the trustee (therefore although it holds both legal and equitable interest, others also own some equitable interest).

Classification of Trusts

Trusts can be classified according to how they came about:

  1. Express trusts - these arise from express declaration and can be effected by (a) agreement or (b) common intention of the parties.
    • The 'classic', core trust.
    • Trusts for charitable purposes are usually express trusts.
  2. Resulting/implied trusts - these are imposed where it is presumed that a trust was intended, but for some reason, it was never properly constituted. This arises in two circumstances:
    1. The settlor fails to dispose of the entire beneficial interest in property;
    2. One person purchases property in the name of another without any intention of making a gift.
  3. Constructive trust - these are trusts imposed by the court despite the absence of intention by the parties, and even where there is intention against a trust. They are imposed in circumstances where it would be unconscionable for the legal titleholder to deny the beneficiary that title.

Resulting and Constructive trusts are often considered as being in the same broad group (trusts arising by operation of law) as opposed to express trusts (which arise by operation of the parties).

Amount of Discretion

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

  1. Fixed trusts - where 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 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 discretion may be given.

Difference Between Trust Powers and Mere/Bare Powers

[3] Discretionary trusts are further divided into subcategories depending on whether the trustee is actually obliged to distribute the trust (ie, whether the trustee can choose not to distribute some or all of the property)

  • Where the trustee is obliged to distribute, it is named a discretionary trust (very confusing) or a 'trust power'.
  • Where the trustee is not obliged to distribute, it is named a discretionary power, or a 'mere/bare power.

Where a person is given a mere/bare power, it is not really a trust at all - therefore, the person given the power is called a 'donee' rather than a trustee.

  • No one has sufficient standing, and indeed a court can’t compel a donee to distribute.
  • This is studied under trusts because whilst it does not of itself entail it, fiduciary obligations are often imposed to the effect that the donee becomes a trustee.

Beneficiaries in Discretionary Trusts/Powers

[4] A beneficiary of a discretionary trust or power has no entitlement to the trust property until the trustee decides to distribute some of the property to it.

  • This means that the (potential) beneficiary does not have a proprietary right in the trust property , but only a ‘mere expectancy’ to be considered for nomination by the trustee,[5] and to compel proper administration of the trust.[6]

It follows that potential beneficiaries generally cannot demand distribution as they want it. Their ‘interest’ extends only to administration and information of the trust.[7]

  • The trustees need not give reasons for their decisions.
  • In case of an ascertained[8] class of objects, they can call for distribution provided they are combinedly unanimous.[9]
  • Further, the conferral of discretion relating to management does not of itself create a discretionary trust. The trustee thus cannot determine the proportions of beneficial interests.[10]

Common Examples of Trusts

Unit Trusts

[11] Unit trusts are a tool of investment whereby a company purchases property and vests it in a trustee under a trust deed.

  • The beneficial interest is divided into ‘units’ for the original beneficiary to grant.
  • Investors then purchase the units. The original company makes money by charging investors a service fee for purchasing the units.
  • The units entitle the investors to shares in income of the trust and a return of a proportion of the capital investment.
  • They are favoured over shares as:
    1. They offer more flexibility – the manager can repurchase the units without reducing the capital of the company.
    2. Doctrines of company law do not apply to unit trusts.
    3. They are not covered by the Corporations Act, except in cases of offers to the public.

Trading Trusts

[12] The trustee conducts business for the beneficiaries. They are preferred over corporations for tax reasons. It can include the employment of unit trusts.

Family Trusts

[13] The trustee is a family member. Once again, it is preferred for tax reasons – income can be split among the family members.

Superannuation Trusts

[14] Trusts established for superannuation benefits. Once again, attractive as it is tax-deductible. Two principle types:

  1. Defined benefit schemes: a defined lump sum is paid on retirement.
  2. Defined contribution schemes: the contributor provides a defined amount.

The Distinction Between Trusts and Other Institutions

Trusts and Fiduciary Obligations

[15] Every trustee is a fiduciary, but not every fiduciary is a trustee. The essential difference relates to property. A trustee holds property; a fiduciary does not.[16]

  • A person can be both a trustee and a fiduciary.
  • A fiduciary improperly benefiting from ill-gotten gains will be held to have held the gains on constructive trust for the principal.

Trusts and Agency

[17] Whilst both must act in interests of another party and are often under a fiduciary obligation, the agent does not have title to the property as the trustee does.

  • An agent can be instructed on the day-to-day management of the agency, but a trustee cannot.[18]

Trust and Bailment

[19] A bailee has possession, but not title of the property.

  • The determination of whether a title is granted on trust or as a bailment is a matter of determining the intention of the parties, particularly the true owner.

Trust and Contract

[20] A settlor is not in a contractual relationship with a trustee.A trustee can seek damages for breaches of covenant.

  • It used to be that where A contracts with B to provide a benefit for C, C is not entitled to anything in law or equity, as s/he is not party to the contract.[21] B could only recover nominal damages, as A had not made any promise to him/her, unless A’s promise to B was as B directs.[22]
  • C could only claim from A through B on trust. The existence of the trust is determined by the intention of the parties, particularly that of B (the promisee).
  • Unless B will suffer actual loss from A’s failure to pay C, B can only recover damages where B holds the benefit of the promise on trust for C.[23]
  • However, these confusing limitations were ameliorated in Trident General Insurance v McNiece.[24] After that case, C would be entitled to recover under the contract as a member of the class of persons intended to benefit from the performance of the contract. Thus, the above problem can be solved in contractual terms, rather than resorting to the use of artificial trusts.

Trust and Debt

[25] A debtor is not a trustee. A beneficiary of legal age and entitlement can claim the property from the trustee at any time. A creditor can only do so upon the debtor’s default.

  • Further, a creditor can only recover (on damages) money lent, whereas a person who has paid money on trust can trace the money into any other property.
  • Again, the determination turns on the intention of the parties. The two concepts are not, however, mutually exclusive.[26]

Trust and Body Corporate

[27] A body corporate is a separate legal entity. A trust is not. A beneficiary is the title holder of property, but shareholders only holds shares – not the property itself.

Trust and Personal Representative

[28] An executor has a fiduciary duty like a trustee. However, the powers and duties of the trustee and executor differ.

  • The executor’s duties are limited to matters of administration and distribution of the estate. However, s/he has wider powers to deal with the assets of the estate than a trustee.
  • An executor can become a trustee if the property is held in the name of the beneficiaries after administration is complete. The executor could be executor in some parts, and trustee in others.

End

This is the end of this topic. Click here to go back to the main subject page for Property, Equity and Trusts 1.

References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Sometimes called the ‘sausage meat fallacy’.
  2. Equity Textbook, pp. 390-1 [23.5].
  3. Equity Textbook, pp. 391-2 [23.5-23.9].
  4. Equity Textbook, pp. 390-1 [23.5];392-3 [23.10].
  5. Pearson v IRC [1981] AC 753.
  6. Gartside v IRC [1968] AC 553.
  7. Spellson v George (1987) 11 NSWLR 300.
  8. Able to be identified and listed.
  9. Sir Moses Monefiore v Howell (No 7) [1984] 2 NSWLR 406, 411 (Kearney J).
  10. Neill v Public Trustee [1978] 2 NSWLR 65.
  11. Equity Textbook, p. 393 [23.12].
  12. Equity Textbook, p. 393 [23.13].
  13. Equity Textbook, pp. 393-4 [23.14].
  14. Equity Textbook, p. 394 [23.15].
  15. Equity Textbook, pp. 394-5 [23.15].
  16. Chan v Zacharia (1984) 154 CLR 178.
  17. Equity Textbook, p. 395 [23.17].
  18. Re Brockbank [1948] Ch 206.
  19. Equity Textbook, p. 395 [23.18].
  20. Equity Textbook, pp. 395-7 [23.19-23.22].
  21. Wilson v Darling Island (1956) 91 CLR 43.
  22. Cathels v Commissioner of Stamp Duties [1962] SR (NSW) 455.
  23. Coulls v Bagot’s Executor and Trustee (1967) 119 CLR 460, 501 (Windeyer J).
  24. (1988) 62 ALJR 508
  25. Equity Textbook, p. 397 [23.23].
  26. Barclays Bank v Quistclose Investments [1970] AC 567
  27. Equity Textbook, p. 397 [23.24].
  28. Equity Textbook, p. 397 [23.25].
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