Introduction to the trust Flashcards
What are the two key components a trust?
No single definition of a ‘trust’
- Property - T holds proprietary interest on trust for B; will typically have legal interest and can do with as they wish
- Obligation - T must exercise rights on behalf of B (for its benefit) through its duties - B has personal rights against T if fail (B can sue for breach of trust)
Who has ownership of trust property?
Split:
- T has legal ownership/interest; responsible for managing (subject to duty)
- B has equitable proprietary interest; is the true owner (is owed duty)
Both proprietary interest
Benefits of using a trust?
- Separation of ownership and management of property
- Expertise e.g. fund manager
- Protection of minor interests or incapable individuals
- Flexibility - property can be held by several owners concurrently (create future and immediate interests)
- Minimise tax liability (but can also trigger taxes)
- Ringfence insolvency (T does not have beneficial interest in trust property)
Key uses of trusts
- Commercial arrangement (pension funds, investment funds, corporate tax avoidance etc…)
- Private arrangements (testamentary planning, land ownership (i.e joint ownership), tax planning (IHT) )
- Charitable purpose
What are the different categories of trusts?
- Express trusts (created by settlor) - deliberately created
a) Testamentary - created by will
b) Inter vivos - created in lifetime - Implied trusts - arise by operation of law (imposed by the courts)
a) Resulting
b) Constructive
What are fixed and discretionary trusts?
- Fixed = B’s interests are fixed (T knows exactly what to give)
- Discretionary = T knows who Bs are, but have the power to determine who benefits and in what shares (flexible!)
What are charitable purpose trusts and non-charitable purpose trusts?
- Charitable purpose trusts = exception to general rule that trust must have B
- Non-charitable purpose trusts = smaller class of exceptions; private trusts set up for very specific purposes
What is a bare trust and what is the alternative?
- Bare trust = T holds legal title on trust for benefit of B; has no discretion and no active management duties - just have to follow instructions of Bs (most common with stockbrokers etc.)
Contrast to trusts where Ts have active management functions
What two rules arise when considering the temporary nature of trusts?
- Perpetuity rules: trusts cannot last indefinitely and must be brought to end within a defined period (broadly prevent trust lasting longer than 125 years)
- Saunders v Vautier: Bs of trust can collapse trust by directing T transfer legal title to them or someone else = legal and equitable interest merge and trust ends
What is the trust property and what is the rule on it?
- The trust property is the subject matter of the trust
- This subject matter must be identifiable trust property
E.g. Mac-Jordan - D would pay C as construction work progressed, retain a % of payment in separate fund and hold on trust to pay once completed - no separate fund was made = no identifiable assets so no (also could not claim D held sum in own bank account on trust as D never agreed to do this)
Can trust property be both chattel (tangible item other than the land) and chose in action (intangible item e.g. the right to be paid £100)?
Yes - almost every asset or right can be held on trust
What happens if the trust ceases to exist (destroyed/consumed) at the fault or non-fault of T?
- Without fault of T = trust ceases to exist as nothing to which a trust can attach
- With fault of T = T personally liable to restore trust property using own funds (or pay compensation)
Trust property can change e.g. T sells and invests in other property to maximise value
What is the basic duty of the T?
Hold or apply property for benefit of B (or be personally liable for breach of trust)
Cannot be a T of property which they have absolute right to use for own benefit
Can a T also be one of the Bs of a trust? If so can it therefore use trust property exclusively for own benefit?
Can be a B of a trust - but will still owe duties to other Bs and cannot simply use trust fund for own benefit
If using freely = cannot be a T
Customs - cinema that stated company would hold purchase money ‘upon trust’ for purchaser until performance took place and return if it was cancelled - no restrictions on how the company could use money so company was not a T
Re Bond Worth - ability of a company to use fibres in manufacturing process was inconsistent with company holding fibres on trust for unpaid seller
What is the exception for a T using trust property freely?
Where the broker is contractually under a duty to B to replace any securities it sold with identical securities
What is meant by the ‘objects’ of a trust?
The Bs or purposes of the trust; rule that trust must have a B or permitted purpose
What is a purpose trust, and can it be for any purpose?
- Purpose trust = trust for promotion or realisation of a purpose (with no B!)
- Can only create a trust for a permitted purpose e.g. charitable purposes or small closed category of non-charitable purpose trusts
What are the 2 important reasons that the B has an equitable proprietary interest in the trust property?
- B’s rights are enforceable against TPs (e.g. T gives trust property to X, B can enforce their interest against X and demand restoration)
- B’s rights are protected against insolvency of T (B enjoys priority over unsecured creditors of T)
Insolvency example: T has £100,000 in bank account, £50,000 of which is trust money, and T is made bankrupt. T owes B, C and D £50,000 each. £50,000 trust money not part of T’s estate for bankruptcy purposes, so B, C and D only receive £16,667 (1/3 of the £50,000 that is not trust money)
When can equitable proprietary interests not be enforced?
Against a purchaser of a legal interest who does not have notice of the trust (e.g. T transfers legal title to property to purchaser unaware they are purchasing trust property)
Does not apply to someone who is gifted trust property
Are Ts entitled to remuneration?
Professional Ts entitled to remuneration; otherwise typically unpaid
What is meant by a waterfall/chain of equitable relationships?
Three parties re 10,000 shares:
1. CREST member is the trustee - legal owner but no beneficial interest; legal title held on trust for broker
2. Broker is the sub-trustee - has an equitable interest in the shares (no beneficial interest, holds equitable interest on trust for private investor)
3. Private investor is the beneficiary - has an equitable and beneficial interest in the shares
Example
What is the difference between a trust and a contract?
Both give rise to personal liability
- Contract is a result of agreement between parties each of whom owe obligations to another
- Trusts are the creation of equity; no requirement for agreement between party and only obligations that arise are from the T to the B
What is the difference between a trust and a debt?
- B of trust has an equitable proprietary interest in the trust property
- Creditor has mere personal right to payment
A debt will also not relate to specific assets or funds, like a trust will
What is the difference between a trust and a charge?
Charge = chargor creates charge over their property in favour of chargee - if chargor unable to pay debt, chargee can compel sale of property and use proceeds to reduce debt
Both have proprietary interest in trust/charged property, but…
- Chargor can use charged property for own benefit (e.g. mortgagor occupying a home), T cannot
- Bs are entitled to beneficial enjoyment of whole trust property, chargee limited to amount of debt secured