Chapter 2 Business Trusts Flashcards
What is the essence of a trust?
Parker case-
Court stated that:
- Trusts were designed essentially, to protect the weak (Beneficiaries); &
- To safeguard the interests of those who are absent or dead (Founder).
Thus the essence of a trust is:
- Trustee(s) appointed;
- Trustee accepts office, which is:
- –> To exercise fiduciary responsibility over certain property (held in trust) on behalf of and in the interest of Beneficiaries.
What is a trust?
A trust is:
- A legal relationship;
- That has been created in a trust deed (aka trust instrument).
A trust has the following 4 key characteristics:
- 1) Relationship created by person, who’s known as Founder;
- -2) Founder places assets under control of another person(s), known as Trustee;
- –3) This can be done either during Founder’s lifetime (inter vivos trust) or on Founder’s death (testamentary/will trust);
- —4) Purpose= to benefit 3rd persons (Beneficiaries)
What is the difference between an Ordinary Trust and a Bewind Trust?
1) Ordinary Trust:
- Where ownership and control of trust assets lies with the trustees.
2) Bewind Trust
- Where Beneficiaries have ownership of trust assets, but these are under the control of the trustees.
What is a Business Trust?
A Business Trust is quite simply an Ordinary Trust in which the trustees have been given the power to carry on business and to trade.
- The trust deed of a business trust specifically gives trustees the power to trade or carry on a business.
There is no fundamental difference between a business trust and a family trust, except that in a business trust:
- Trustees have the power to take business risks and to trade with the assets that are in the trust; and
- Beneficiaries usually have the right to sell their interest in the trust when they choose to do so.
What is the legal nature of a trust?
A trust is created by a document (reduced to writing), either:
- A written contract (inter vivos trust); or
- A will (testamentary trust).
What are the requirements for forming a valid trust?
1) Intention to form a trust
- Separation of control (trustees) and enjoyment (beneficiaries) [Parker case];
2) Legally binding trust obligation created;
3) Trust assets must be ascertained and sufficiently described;
4) Trust purpose must be certain:
- Beneficiaries; or
- Impersonal object.
Who are the parties to a trust?
Three main parties to any type of trust, are:
1) Founder
- May be trustee
- May be beneficiary
- May retain right to vary/revoke trust
2) Trustee
- Master’s consent required
- Trustees and beneficiaries can’t be indentical
3) Beneficiaries
- Nominated by founder, can delegate right to trustee.
What are the duties of trustees?
1) Good faith, impartiality
2) Care and skill (s9(1))
3) Take control of assets and keep separately
4) Preserve assets and use to benefit beneficiaries
5) Account for trust assets and business
6) Address to Maste
What are the powers of the trustee?
Traditionally- preserve assets risk-free
A trust deed gives the trustees extensive powers (business trust), such as the power to:
1) Dispose of assets;
2) Loan agreements, mortgage/encumber assets;
3) Conduct business;
4) Appointment of beneficiaries, determination of beneficiaries
- Discretionary trust
What are the rights of beneficiaries?
- Rights are created upon acceptance of a right to benefit.
- Rights can be vested, conditional or discretionary;
- Usually only a personal right against trustee.
Who handles external relation of a trust?
Contracts- by trustee as agent.
- Co-trustees must act jointly unless trust document provides otherwise.
- If vacancy, no right to act for trust
Legal Proceedings
- Trustee- actions by or against trust
- Execution- only trust assets
- Beneficiaries- derivative action against trustee.
What are the advantages of a Business trust?
1) Limited Liability (trust assets);
2) Continuation/succession (change in trustees/beneficiaries);
3) Little regulation (eg disclosure and reporting)
4) Juristic persons may participate (any capacity)
5) Flexibility (especially discretion of trustee)
6) Tax friendly
What types of business trust are there?
1) Private Business trust
- Closed circle of participants, close relationship
- Can look like partnerships, private company, CC
2) Public Business trust
- Investments from public (becomes beneficiary in exchange)
- Beneficiaries not involved in management
- Certificates in respect of interest are common (Collective Investment Schemes).
What are the risks of a business trust?
1) Control over management powers (loses say assets)
- Importance of careful formulation in trust document
- Balance between control and benefits
- Risk of invalidity if beneficiaries in complete control of assets.
2) Third Parties- lack of regulation, liability.
