General Characteristics of a Trust

Question 1

Definition of a Trust

Answer 1

Split of legal and equitable title

At common law, a trust is defined as a fiduciary relationship in which one person (the trustee) holds legal title to property for the benefit of another (the beneficiary). The beneficiary may enforce the trust in equity, thus giving the beneficiary an equitable interest in the trust
property. If the sole trustee becomes the sole beneficiary, the legal and equitable interests merge, and no trust exists.

Question 2

Express Trusts and Implied Trusts

Answer 2

a. A trust may be created (by a “settlor”) in express terms
by a transfer of legal title to a trustee or by a declaration
of trust (where the settlor retains legal title as trustee).

i. An inter vivos trust is one created by a settlor during his life.
ii. A testamentary trust is one created by a will.
b. Because of the Statute of Uses, if a person holds title to land for the benefit of another person, the legal title holder must have some duties to perform in order for the trust to be valid. Practically, this statute is rarely of concern.
(2) Implied trusts: A trust may be implied by law from the conduct of the parties.

Question 3

Resulting Trust

Answer 3

3) Resulting trust/Equitable trust: When legal title is conveyed with the intent that someone other than the holder of the legal title is to enjoy the beneficial interest, but an express trust is not created, the court may infer a trust.
a. When the purchase price is paid by one person and title taken in the name of another, there is a rebuttable presumption of trust
b. If the transferee is a person whom the transferor is obligated to support, such as a spouse or child, the transfer is presumed to be a gift.
c. When title is placed in the name of a son-in-law or daughter-in-law no gift should be presumed, and a resulting trust may be created.
d. When a settlor conveys property to a trustee but the trust fails, the trustee may be found to hold legal title to the property in resulting trust for the benefit of the settlor, and thus the trustee must reconvey legal title to the settlor.
e. If an inter vivos trust fails for illegality, a resulting trust may not necessarily arise. Courts often leave the parties where they find them in an illegal transaction. Other times courts will give greater weight to the policy against unjust enrichment and create a resulting trust.
f. When a trust originally takes effect but the beneficiary later goes out of existence, or the trust purposes are completed before trust properties are exhausted, the remaining trust corpus is held in a resulting trust in favor of the settlor or the settlor’s estate.

Question 4

Constructive Trust

Answer 4

(4) Constructive Trust: when legal title is obtained by some fraud or wrongdoing on the part of the recipient or when beneficial enjoyment of property by the legal title holder would be inequitable, the court may impose a trust upon the property, declaring that the legal title is held for the benefit of the person entitled to enjoyment.
a. A constructive trust may arise when a person in a fiduciary duty with another, in violation of his duty:
i. buys trust property personally from the trust
ii. sells his own property to the trust
iii. takes title in his own name to property which should have been purchased for the beneficiary
iv. buys personally an encumbrance on the property held by him as trustee
v. receives a bonus or commission and retains it in violation of his duty
vi. makes a profit on disposition of the beneficiary’s property
vii. improperly competes with his beneficiary
viii. improperly uses fiduciary information
b. Because a constructive trust is implied in law for the benefit of a party entitled to restitution, it need not be in writing.

Question 5

Constructive Trust v. Resulting Trust

Answer 5

(5) Constructive trust v. resulting trust

a. In SC when a fiduciary uses trust funds to buy property
in his own name, the property is held in resulting trust.

b. If the purchase is made entirely with trust money, the
beneficiary may elect between a resulting trust and a
debt secured by and equitable lien, which may be more
valuable if the property has declined in value

c. A resulting trust arises when circumstances raise an
inference that the settlor does not intend that the
person holding title shall have the beneficial interest. A
constructive trust is imposed, not to effectuate
intention, but to redress wrong or unjust enrichment.

Question 6

Tracing

Answer 6

(6) Tracing
a. Where funds have been obtained or retained by fraud, a constructive trust or equitable lien may be imposed on the property into which the wrongfully obtained or retained funds have been converted. Commingling does not prevent the imposition of a constructive trust. If wrongfully retained funds have merely been used to make improvements in property, only an equitable lien is available.
b. When the trustee of an express or constructive trust is insolvent, the beneficiary has a preference over general creditors of the trustee, if the trust property is in existence, or if the property into which it was converted is identifiable.
c. When an insolvent trustee has commingled trust funds with his own, the beneficiary has a preferred right to traceable funds. Where funds are not traceable, the beneficiary’s status is that of a general creditor.