Types of Trusts

TYPES of Trusts

People can set up different kinds of trusts to take care of and protect their possessions. One popular type is a revocable living trust, which lets the person who sets it up keep control of their assets while they are alive and choose who will get them after they die. Inter vivos – This is a trust created by the settlor when he is alive. Other types of trusts include:

A.     Public Trust – Trusts created for the benefit of the public are public trusts. These include:

Purpose Trust

A purpose trust is a type of trust that has not beneficiaries, but instead exists for advancing non-charitable purpose of some kind. Trusts for charitable purposes are also technically purpose trusts, but they are usually referred to simply as charitable trusts.

Charitable trust

A charitable trust is a type of public trust, created exclusively for charitable purposes. The trust is established for the benefit of the public. The trust must benefit the society or a large part of the community.

B.     Private Express Trust – Those trusts created for the benefit of people are private trusts. It is a Trust expressly created by the parties, not inferred by the law from the conduct of the parties. Under this category there are two possible types of Trust: Fixed Trust and Discretionary Trust.

Fixed Trust

A fixed trust is one where the terms of the trust are determined and stipulated exhaustively at the outset by the settlor. These include who is a beneficiary, what is he or she to get, when they are to get it and on what conditions if anything. If the trust instrument stipulates all of these matters then the trustee’s dispositive function becomes mechanical, in that he does not have to exercise judgment just follow what is set out in the instrument. This is the traditional type of trust. A trustee holds a property for multiple beneficiary or a single one. The important aspect of a fixed trust is that the trust fund itself dictates what the beneficiaries are going to get. It is the trust that states what each beneficiary will receive. It is not compulsory to attribute equal share to the parties. A settlor may decide to give 1 per cent to one beneficiary and 99 per cent to the second beneficiary. The trust itself stipulates what each beneficiary will receive.

• Two are the main problems that arise with fixed trust. First, trusts were often created as a way to be fiscally efficient in order to reduce tax liability. Whether the beneficiary’s share is fixed, the interest will be easily taxable. Second, fixed trusts may be seen a bit too inflexible since they cannot be changed in the light of possible future needs of the beneficiaries. For these reasons, fixed trusts have become obsolete to a certain extent.

Discretionary Trust

The settlor does not determine on the trust document how much property each beneficiary will get. It will be discretion of the trustee to decide. Since tax cannot be applied until the property has been received, discretionary trusts play a better role in the fiscal life of a person. How does the trustee exercise discretion? The trustee acts in the best interest of the beneficiary as a whole. He will look at all beneficiaries and at all their needs in deciding who is going to get what. However, if the trust is a discretionary one, this refers to a dispositive discretion, where the trustee will have to exercise a discretion in determining what property to pay to a beneficiary. For example, Y leaves all my money to friend X to be divided at his discretion amongst my children in such proportions that he may think appropriate.

Advantages of a discretionary trust

A discretionary trust may be used in avoiding loss in Bankruptcy. For example, if X leaves all his money to his sons, A and B. If B becomes bankrupt the trustee will have to pay B his share of the property, even though this will become payable to creditors. If the trustee is given some discretion as to how to distribute the share of property between A and B, the trustee could simply not pay any money to B if the money was used to go to creditors. He would simply withhold payment until such time as bankruptcy proceeding had been concluded and free of debt.

The dispositive discretion

Where there is a discretionary trust, the trustees are subject to certain duties in relation to the exercise of discretion. First, clearly they have to stay within the terms of the discretion. If the trust instrument says “the trustee must divide the money at their discretion amongst A, B and C”, there is no discretion to give money to D. Secondly, the discretion must be exercised by the person who is given the discretion, you can’t delegate discretion, the trustee must decide the appropriate course.

General Principle: Trustees who exercise a power of appointment, under a discretionary trust, without exercising their discretion because they did not realise that it existed, are in breach of their duty to consider the appropriateness of the appointment, and the appointment will be invalid.

Turner v Turner [1984] Ch 100  

Facts: The settlor created a trust for the benefit of his wife and children. The trust contained a discretionary power to distribute capital or income out of the trust fund to all or any of the beneficiaries. The settlor appointed as trustees his father, sister-in-law and her husband. None of them had understanding of trust matters. In exercising the power of appointment the trustees divided the trust in favour of the four children. By a deed, the trustees revoked the appointment of the settlor’s eldest son and appointed the remaining three children as the sole beneficiaries of the trust fund. Ratio: it was held what might first appear to have been a decision of trustees may prove on questioning not to have been a decision. Where a power is exercised in form but not in substance then the appointment will be declared void. Application: The purported appointments must be set aside. The trustees had not exercised their discretion in making the appointments and were in breach of that duty.

General Principle: Sometimes the trust instrument will stipulate steps to be followed by the trustee when exercising discretion. It might just state as the trustee thinks fit, in this event the trustees have to consider what appropriate criteria they must use, these criteria must be rationally exercised.

R v District Auditor ex p West Yorkshire MCC (1986) 26 RVR 24

Facts: Application by local authority for a declaration that payment to the West Yorkshire Trust was ultra vires and was not rendered unlawful by applicant's motives and did not require consent by the secretary of state. Ratio: A settlor stated in the trust instrument the criteria that had to be taken account off when exercising discretion. Application: It was doubtful whether review was appropriate as the auditor had not yet determined the matter. Without creating a procedural precedent however, it was clear the trust neither could neither take effect as a valid charitable trust nor as private trust as there was no certainty as to beneficiaries.

The trustees will have to ensure they are properly acquainted with every factual fact and information which is necessary, in order to exercise discretion. First for example if there is a small family and they have to pay money amongst the three children, then the trustee’s must find out about the three children. What are their circumstances? Does one have a disability, which may justify a larger proportion of the pay out? They cannot exercise discretion without facts. There is no use of criteria when there is no fact to which applies the criteria.

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