Chapter 16 Trust Law Flashcards
16.2 The definition of a trust
A trust is a relationship recognised in equity that arises where one-person (the settlor) places property (called trust property) under the control of another (the trustee) who holds the property for the beneficiary for a purpose permitted by law. The trust relationship is between the trustee and the beneficiary. Trusts intentionally made by a settlor as known as express private trusts. Trusts can occur by the operation of law (for example statutory trusts). The trust relationship ensures the benefit of the trust accrues to the beneficiaries and not the trustees, but the trustees have control over the trust property.
Express private trusts may be created by a person in their lifetime or they can be created on their death in the will. In case of death, a statutory trust may result where a person dies intestate and a minor is the legatee of the property. The trust deed is a document setting out the powers, rights and duties of the parties and establishes the content of the equitable relationship.
There is no legal obstacle to the same person being the settlor, trustee and beneficiary, but the mixing of roles can lead to confusion and conflict of duty and interest.
16.3 Types of express private trust
There are three main categories of express private trusts – bare trusts, interest in possession trusts (fixed interest trusts) and discretionary trusts. The type of trust depends on the terms of the deed. The express terms will be decided by the settlor of the trust, although implied terms will be included in the trust relationship by Equity and other relevant statutes. The key statutes that apply in English law are the Trustee Act 1925, the Trusts of Land and Appointment of Trustees Act 1996 and the Trustees Act 2000.
Bare trusts - if a settlor creates a trust without imposing active duties upon the trustee, they are likely to have created a bare trust. The trustee’s duty is to hold the trust property and to act in accordance with the wishes of the beneficiary. The trustee has no active duty to keep a fair balance between beneficiaries with successive interests. Bare trusts are sometimes known as nominee arrangements. CGT regime has special rules for bare trusts but income tax and inheritance tax do not create them as a type of trust. The beneficiary alone is the person who is liable to income and inheritance tax.
Interest in possession trusts – created by a settlor where a beneficiary of the trust enjoys an interest in possession of some of the trust property. More than one beneficiary may enjoy interest in the same part of the property at once. It exists where the beneficiary with the interest in possession has the immediate entitlement to the net income. The beneficiary cannot be prevented by the trustees from enjoying the income.
If the trustees have a power which can be exercised over the income after it has arisen to withhold it from the beneficiary then this negates the existence of an interest in possession. Where the trustees have a power to revoke a beneficiary’s interest in possession or the power to transfer the trust property, the mere existence of that power does not prevent the interest from being an interest in possession for so long as it subsists and the trustee’s power remains unexercised.
Interest in possession may themselves be of different types:
• Where a beneficiary enjoys their interest in possession for their own life, is it known as a life interest and the beneficiary is called the life tenant
• Where a beneficiary enjoys the interest as long as someone else is alive, it is known as an interest as an interest pur autre vie
• Where a beneficiary enjoys their interest for a fixed period until a certain event, this is known as a fixed interest
16.3 Types of express private trust (2)
Where interest in possession comes to an end, the trust deed is used to see what happens to the property. Another beneficiary may become entitled to the property, they are known as the remainderman of the trust, during the existence of the previous trust they are said to have a reversionary interest. Where nobody is identified the trust is knowing as the resulting trust and reverts to the settlor.
The revisionary interest of the remainderman can be absolute or contingent. If absolute they will take the property at the end of the interest in possession, this can be inherited if they die. If the interest is contingent, they have to satisfy a condition before their interest vests in them, this will be stipulated in the trust deed. If the condition is not met, the settlor becomes the remainderman and the property reverts back to them.
Interest in possession trusts have a lower tax rate than other discretionary trusts. Trustee Act 1925 plays a role in identifying an interest in possession trust. Where a settlor purports to give a minor an interest in possession trust, this will only apply if it excludes section 32 of the act.
Discretionary trusts – many trusts in the residual category are called discretionary trusts. The beneficiaries have no immediate right to use the trust property or the net income arising. Their ability to benefit is subject to the exercise by the trustees of the discretion in the trust deed. These trusts are further categorised:
• Where the trustees are under a duty to distribute all of the net income but exercise a discretion as to which beneficiaries the income is distributed to, this is an exhaustive discretionary trust
• Where the trustees have a discretion whether to distribute the net income of the trust and a discretion to which beneficiaries to distribute to, this is a non-exhaustive discretionary trust.
16.4 Advantages of express private trusts
The advantages are:
• The owner may wish to control it while giving away capital and income derived from it
• A settlor may wish to prevent immediate control over the property from passing to the intended beneficiary
• A settlor may wish to ensure the property is dealt with in a particular way in the future
• A settlor may wish to set up the trust now but decide at some future date who should ultimately benefit
• A flexible form of trust (sometimes known as a flexible life interest trust) allows property to be settled on a beneficiary for life, with the trustees having the power to terminate the life interest and establish a discretionary or new trust in its place. Alternatively, a trust may be used to protect property for the future or to protect family wealth from marriage breakdown or bankruptcy
• A flexible life interest trust can be used if property is given to someone with a history of getting into financial difficulties. The trust gives the beneficiary a life interest in the trust which can end on the bankruptcy of the beneficiary or if they attempt to dispose of their interest
• Trusts can be set up to hold property on behalf of that incapable of holding it themselves
• A bare trust enables the owner of property to conceal the beneficial interest in it behind a nominee
• An employer may wish to establish a trust to benefit employees of a business or a company, trusts can be used to hold shares on behalf of employees or to generate a fund from which cash payments can be made
• Trusts are set up for charitable or educational purposes
16.5 The Ownership of trust property
Ownership exists both at common law and in equity. An absolute owner of property simultaneously enjoys the rights of both legal and equitable ownership. It is possible for legal and equitable ownership to be divided between persons. A trust of property arises where this happens and the legal ownership vests in the trustee. The equitable ownership vests in the beneficiaries of the trust.
In the case of an interest in possession trust, equitable ownership vests immediately in the beneficiaries. They are treated as owning the trust property and any income with it.
In the case of a discretionary trust, equitable ownership goes into abeyance as the beneficiaries have only a hope (spes) of benefiting from the property. Equitable ownership vests in the beneficiaries when the trustees exercise their discretion to use the trust property for the benefit of the beneficiaries.
Where the legal and equitable ownership of the trust property is vested in one person, the trust comes to an end and the remainderman becomes the absolute owner of the property again.
The sales of an estate in land – a contract for the sale of land results in the buyer acquiring an interest in the land sold. The vendor becomes in equity a trustee for the purchaser. The main purpose of the imposition of a trust is to impose duties on the vendor to preserve the property until completion of the contract. An uncompleted contract for the sale of land is not a declaration of trust as neither the vendor nor the buyer has unqualified beneficial ownership. Beneficial ownership is split between them both on the assumption the contract will be completed. If the contract proceeds the equitable interest may be viewed as passing to the buyer in stages.
