Head 16: What Trusts are Used For Flashcards
What are trusts used for?
Trusts are used for all kinds of things, for example:
⁃ (a) Protection of assets from insolvency, eg funds given to stockbroker or lawyer, tenants’ deposits.
⁃ (b) To hold property for persons who lack active capacity, eg the mentally disabled, bankrupts, deceased individuals.
⁃ (c) Providing long-term or continuing benefits for the public, e.g. John Muir Trust
⁃ (d) Protecting future interests eg gift to A and on A’s death then to B.
⁃ (e) Where speed or secrecy is wanted.
⁃ (f) Do things that are difficult or impossible otherwise, eg sports club property, unit trusts, assigning business debts, transferring non- assignable property, dividing the indivisible.[ See below for more detailed discussion.]
⁃ ⁃ (g) Provide a more flexible regime for achieving something, eg trust liferent/ proper liferent (Gretton and Steven, chap 21 and p 342[ Look this up- lots of grey areas.]).
⁃ In a trust (improper) liferent the trustees are the only people with real rights in the property. The beneficiaries only have personal rights against the trustees. One will have a personal right to occupy the property for life and the other will have a personal right to have the property made over to them when the other dies. This can be used for any type of asset. [The advantage of improper liferent is that you can alter the terms, e.g. allow a person to stay in the property for 10 years rather than for life.]
⁃ (H) Truster-as-trustee debt (where there are a number of book debts that a business wishes to assign to e.g. a bank then normally they would be required to intimate to every debtor. Instead what the business can do is create a truster-as-trustee trust so that they are the trustee of all the debts and the bank is the beneficiary - thus there is no requirement for intimation. NB in this situation only existing debts could be put in, future debts cannot (Rangers case)). This is nearly as good as a security. It can be trumped by a real security. The arrangement where there is a stream of income on one side and a trusters/trustees-trust selling it to a lender etc. Underlies commerce.
What can’t you do without a trust?
1) Transfer non-assignable rights.
2) Divide a lease
How can you transfer non-assignable rights under a trust?
Some contracts say that you cannot assign the rights under the contract, but you can using a trust. This only applies to rights to receive payment. (NB this can be excluded by stating in the contract that the rights can’t be put into trust either).
⁃ The classic example is a boxing promoter with a stable of boxers who receives a stream of income from the boxers when they win or lose. He wishes to transfer his future income stream into capital but the boxing promotion contracts are always made unassignable. What he does is to declare himself to be a trustee of the rights under the contracts (using a truster-as-trustee trust) with the lender as the beneficiary. So as the money comes in it is held in trust and then paid over to the lender.
How can you divide a lease under a trust?
⁃ Suppose you are the tenant of a farm and a farm house. You wish to let one branch of your family (A) have the farmhouse and the other (B) manage the farm land. Unless the landlord is willing to have the lease renounced and then grant two separate leases to A and B then this is not possible. But you can if you set up a trust with yourself as the trustee of the tenancy because then the beneficiaries can be A and B - effectively they are sub-tenants but in legal theory the lease is still undivided.
- This is impossible. e.g. Where the tenant wants to divide the lease so one person is in farm and one is in house. Unless the landlord is prepared to take a renunciation of the lease then ti cannot be done. BUT it can be done with a trust. Since X declares himself a trustee of the farm. Then you can give beneficial rights to A and B. You can give A occupation of the farm and B occupation of the farm house.
*Don King
Don K was a boxing promoter with a stable of boxers that provided him with a stream of income. He wanted to raise capital from this. The difficulty of going down the sale of book debts was that the contracts were non-assignable. You can do this by a trust. Don King sets up trust in which he is a trustee (truster-trusee-truse) the boxers continue to pay him and he gets money from the bank and he continues to pay the boxers. This was the test case to establish that this sort of thing was not a breach of the non-assignation principle. This was not a breach because the same legal person still held the rights.
Providing more flexible solutions: another purpose of trust
You can dispone property to someone else and on registration — they will have real rights of life rent and ownership in the property - these have incidents that are regulated by the law. So e.g. P has a liferenter but the assignee only gets rights during P’s lifetime not the assignee’s lifetime.
O has the ownership but is burdened with a life rent. She can only enjoy the property fully when P dies.
It is not easy for O as the fiar to deal with situations when P fails to protect the property as a liferenter.
There are neutral people (trustees) to hold the balance between fiar etc.
The disadvantages are that the trustees usually have to be paid (usually professional trustees). They usually take a fee for being trustees and charge everything they do.
The other disadvantage is that P and O only have personal rights now. The trustees are the only people with a real right in ownership. These are less secure than real rights. Trusts only work because the vast majority of trustees are honest and competent.
NB although the end result is much the same as the two the underlying legal structure is quite different.
