Trust

Trust Meaning

A trust is an equitable device created by Equity in order to transfer a property under the control of a trustee for the benefit of a beneficiary. The most common definition of trust has been given by A Underhill and D Hayton in the Law of Trusts and Trustees (16th Edition, Butterworths, 2002):

‘A trust is an equitable obligation, binding a person (called a trustee) to deal with property over which he has control (which is called the trust property) for the benefit of persons (who are called the beneficiaries or cestuis que trust) of whom he may himself be one, and any one of whom may enforce the obligation.’

The definition refers to the most commonly used private trusts. Nevertheless, it is important to mention at an early stage that charitable and private purpose trusts also exist. According to Section 1 of the Recognition of Trusts Act 1987, ‘For the purposes of this Convention, the term trust refers to the legal relationship created inter vivos or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.’

The development of the trust

Trusts have developed out of the division of law and equity. The settlor of property wishes to transfer this property to a friend for the benefit of a third party namely his children or wife (up to a hundred years ago women were not permitted to have property). The original owner can execute a document of transfer, transferring the property to his friend the trustee, for his children. The dispute that would arise is whom the property belonged too? The document of transfer makes the friend the legal owner, but the original intentions of the settlor was that the friend nominally own and control the property for his children, the rightful owner. The common law courts would examine the transfer document and hold the friend is the legal owner for all purposes, although the original intention of the settlor was the property is given for the benefit of the third party. The Equity/Chancery courts recognised this arrangement, that the property was not owned by the trustee but by the third party. Eventually the position of the chancery courts prevailed, the equity courts would enforce the trustee to act in the benefit of the third party and not for his own purposes. The beneficiary’s right under the trust became known as the equitable and beneficial interest. The trustee is said to have legal title; this was seen through the common law courts that believed the trustee to be the legal owner of the property.

What is a Trust?

The trust involves an equitable obligation, which is imperative in nature.

“Stated in its simplest terms, a trust is a relationship which exists when one party holds property on behalf of another.” Per Lord Nicholls, Royal Brunei Airlines v. Tan [1995] 3 All ER 97, at 103.

“A trust exists whenever the legal title is in one party and the equitable title in another. The legal owner is said to hold the property in trust for the equitable owner.” Per Lord Millett, Restitution and Constructive Trusts (1998) 114 LQR 399, at 403.

“A trust is an arrangement in which one person, who is called the settlor, transfers property to another person, who is called the trustee.  In so doing, the settlor directs the trustee to hold the property either for the benefit of certain persons or for the promotion of some purpose.  If the trustee undertakes to carry out the direction, he becomes subject to a binding obligation which Equity will enforce.” Professor Everton, What is Equity About? (London, Butterworths, 1970), at pp. 22-23.

The settlor when establishing a trust of his property will transfer the property to a trustee. The transfer document will stipulate the trustee is the nominal or ostensible owner of the property, but the terms of the trust will state the trustee must hold the property for the benefit of the third party the beneficiary. The beneficiary is entitled to enforce his right under the trust against the trustee, this right is called equitable interest because it was originally the Chancery courts that recognised the third party’s right.

Advantages of Trusts

1. Separation of income and capital - The use of Trusts enables assets to be segregated from what belongs to the settlor. Trusts protect the so-called beneficiaries from the consequences of the settlor’s insolvency. Whether the settlor becomes insolvent, creditors will not be able to access the properties of the Trust. Therefore, the trust is used for asset protection. These types of trusts allow large amounts of money to be held on trust, which accumulate substantial interest payments, which are to be paid to the benefactor. For example, money can be left to my friend on trust, to hold for my wife for life and then for my children. (This means the wife will receive the interest for life and then the children will get the money, when she dies). The separation of money and capital also allows future gifts – The mechanics of a trust allows a gift to be made which will continue on in the future over time.

2. Joint and collective ownership - Trusts can be used to create concurrent or subsequent interests in land. Thanks to the use of Trusts the settlor may partition the asset for the benefit of several people. For instance, the settlor may leave a property to A for life with reminder to B. This means the property belongs to A for the duration of his life and then B will benefit from the property at the death of A.

3. Collective investment - Investment on the stock market in an efficient way requires large amounts of money far beyond what is available to most individuals. Thus a trust allows collective investment, which is managed by professional investment managers on trust. These managers are in control of the money they invest it and act in the best interests of the third parties, who in this type of situation may also be the settlor. The same works for investment and pensions, which works through the law of trusts.

4. Administrative convenience - The administration and management of a property by the trustee may be useful in those circumstances whether the beneficiaries have not a high level of financial and investment knowledge or whether the beneficiaries are young.

5. Tax avoidance - Trusts allow those using it to avoid or mitigate tax liability.

LAW BOOKS

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