TRUSTS CONCEPT

Question 1

What is a trust?

Answer 1

Judicial descriptions:

• equitable obligations to deal with property in a particular way
• ‘a person who accepts property expressly (or impliedly) on the basis that he is to hold it for the benefit of another.’

Question 2

What are the two key components of a trust?

Answer 2

Property Component and Obligation Component

Question 3

What is the property component of a trust?

Answer 3

• ownership of the property is split
• The trustee has the formal, legal interest in the property and is responsible for managing that property.
• The beneficiary has the equitable and beneficial interest in that property. They are, in effect the true owner.

Question 4

What is the obligation component of the trust?

Answer 4

• trustee owes equitable obligations to the beneficiary
• the trustee is required to exercise their legal rights of ownership for the benefit of the beneficiary. If the trustee does not act in accordance with those obligations, the beneficiary has personal rights against the trustee - the beneficiary can sue the trustee for breach of trust.

Question 5

What are the benefits to using trusts?

Answer 5

• separation of ownership and management of property
• expertise
• protection
• offers flexibility (asset partitioning)
• control
• ringfencing on insolvency
• tax benefits

Question 6

What are the three main categories of trusts?

Answer 6

express (person intends to create trust), resulting & constructive (imposed by the courts)

Question 7

What is the difference between a testamentary and inter vivos trust?

Answer 7

testamentary = created via a will

inter vivos trust = created in the lifetime of an individual

Question 8

What is the difference between a fixed and a discretionary trust?

Answer 8

• Fixed trusts involve the trustee knowing exactly what they need to give to each beneficiary. The interests of the beneficiary are fixed.
• Under a discretionary trust, the trustee knows who the potential beneficiaries are but has the power to determine who benefits and in what shares. This makes them very flexible.

Question 9

What is the difference between a bare trusts and a trust where the trustees have active management functions?

Answer 9

• A bare trust involves the trustee simply holding legal title on trust for the sole benefit of a beneficiary. The trustee has no discretion and no active management duties. They are merely required to follow the instructions of the beneficiary.

Question 10

What two rules are essential to the temporary nature of trusts?

Answer 10

• perpetuity rules

- the rule in Saunders v Vautier

Question 11

What can be held on trust (what can be “trust property”)?

Answer 11

• Almost every asset or right can be held on trust.
• ‘The scope of the trusts recognised in equity is unlimited. There can be a trust of a chattel or of a chose in action, or of a right or obligation under an ordinary legal contract, just as much as a trust of land.’ (Lord Strathcona Steamship Co Ltd v Dominion Coal Company Ltd)
• A chose in action is a right: it is intangible. For example, £100 credited to a bank account is a chose in action. A company share is another example of a chose in action.
• A chattel is a tangible item (other than land). Cars, computers, books, jewellery and clothes etc

Question 12

What happens if there are changes made to the trust property?

Answer 12

• A trust ceases to exist if,without any fault on the part of the trustee, the trust property is destroyed or consumed.
• In contrast, if thetrustee is at fault, they will be personally liable to restore the trust property
  ○ If the trustee cannot replace the trust property, they will need to pay compensation instead, and this compensation will be subject to the trust.
• It is common for the trust property to change without any breach occurring. In many trusts, the trust property fluctuates (in cases where the trustee wishes to maximise the financial return from the trust property)
• This involves the trustee periodically reviewing the trust property and deciding whether to retain it or to sell and invest the proceeds in other property. Selling the property does not destroy the trust. It simply changes the trust assets.

Question 13

What is the basic duty of a trustee?

Answer 13

To hold or apply trust property for the benefit of the beneficiary

Question 14

If you can use the trust money freely for your own purpose, is that compatible with a trust?

Answer 14

• Usually no (Customs and Excise Commissioners v Richmond Theatre Management Ltd)
• where a trustee has the right to mix tangible assets or money with his own other assets, this is incompatible with a trust (South Australian Insurance C)
• the only exceptions for brokers who sell securities on their own account (Re Lehman Brothers International)

Question 15

What are the trust objects?

Answer 15

A trust must have a beneficiary or be for a permitted purpose
- the beneficiaries or purposes are the trust object

Question 16

Do beneficiaries have rights in rem?

Answer 16

Yes, they can assert their interest against third parties (except Equities Darlings - purchasers of a legal interest who do not have notice of the trust)

Question 17

What is the difference between trusts and contracts?

Answer 17

Contracts = creation of common law, needs to have an agreement between parties
Trusts = creation of equity, no requirement for an agreement between any of the parties, more complicated than contracts

Question 18

What is the difference between trusts and debts?

Answer 18

debts = does not relate to a specific asset or fund (unlike trusts), a creditor cannot compel the debtor to apply any specific asset (unlike a beneficiary can), creditor is affected by the debtors bankruptcy or insolvency
trusts= beneficiary has an equitable proprietary interest whereas a creditor has a personal right to payment

Question 19

What is a Quistclose trust?

Answer 19

A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular purpose. (if the purpose is not certain, it will be a normal trust)
○ When the lender advances the money to the borrower, the borrower holds the money on trust for the lender, with a power to use it for a specified purpose.
○ To the extent that the borrower uses the money for the purpose, the lender’s equitable interest is extinguished. The relationship changes from trustee-beneficiary to debtor-creditor.
○ To the extent that the borrower applies the money for any other purpose, the borrower commits a breach of trust. The lender can assert their equitable proprietary interest in the misapplied money (or its traceable proceeds).
○ If it becomes impossible to apply the money for the purpose, the borrower must return the money to the lender.
(Twinsectra, Barclays Bank Ltd v Quistclose Investments Ltd)

Question 20

When do Quistclose trusts arise?

Answer 20

They arise in any situation where property is transferred to a person whose use of the property is restricted to a specified purpose: to any case where the property is not at the free disposal of the transferee (Ali v Dinc)

Question 21

What is the difference between trusts and charges?

Answer 21

• Both the chargee and beneficiary have a proprietary interest in the trust property & charged property.
• the beneficiary solely has an equitable interest whereas a chargee can have a legal interest
• a chargor can apply charged property for their own benefit (trustee cannot)
• chargor has a right of redemption (not avail in trusts)
• trust beneficiaries are entitled to the beneficial enjoyment of the entire trust property, but a chargee’s interest in charged property is co-extensive with the debt secured.

Question 22

What is a charge?

Answer 22

A charge is the most common security interest. The chargor (debtor) creates a charge over their property in favour of the chargee (creditor). If the chargor is unable to pay the debt, the chargee can compel a sale of the charged property and apply the proceeds of sale to discharge (or reduce) the debt.

Question 23

What is the difference between trusts and agency?

Answer 23

• both agents & trustees are subject to fiduciary duties
• trustee cannot commit a beneficiary to contract with a third party (agent can). The trustee acts as a principal in their transactions with third parties

Question 24

What is the difference between trusts and bailment?

Answer 24

• only tangible property can form the subject matter of a bailment (anything can be trust property in trusts)
• the transform of possessions of chattels to a bailee does not transfer the bailor’s title to the chattels
• bailment is regulated exclusively by common law, bailor therefore has legal interest in the chattels whereas beneficiaries have equitable interests (bailor’s interest will survive a purchase by an “equities darling” but a beneficiaries will not)

Question 25

What is the difference between trusts and companies?

Answer 25

• a trust does not have legal personality whereas companies do
• limited liability does not apply to the role of trustee (like it does with directors)
• a company can act as a trustee
• Unlike trust beneficiaries, shareholders of a company do not have a proprietary interest in the company’s assets. Their interest is in the company itself. Similarly, the obligations of the company directors are owed not to the shareholders but to the company.

Question 26

What is the difference between trusts and estates?

Answer 26

• Unlike personal representatives, trustees frequently hold office for many years and have enduring asset management/investment functions. The function of a personal representative is to administer and distribute the deceased’s estate as quickly as is practicable (ideally within a year). By contrast, express trusts are commonly created to endure for many years (The maximum duration is 125 years).
• Unlike the beneficiary of a trust, a person interested in a deceased person’s estate does not have an equitable proprietary interest in any of the estate assets. Instead, they have a personal right against the executor relating to the proper administration of the estate.

Question 27

What is the difference between trusts and estates?

Answer 27

• Unlike personal representatives, trustees frequently hold office for many years and have enduring asset management/investment functions. The function of a personal representative is to administer and distribute the deceased’s estate as quickly as is practicable (ideally within a year). By contrast, express trusts are commonly created to endure for many years (The maximum duration is 125 years).
• Unlike the beneficiary of a trust, a person interested in a deceased person’s estate does not have an equitable proprietary interest in any of the estate assets. Instead, they have a personal right against the executor relating to the proper administration of the estate.

Question 28

Is a full legal owner have a legal and equitable interest in the asset?

Answer 28

NO (Livingston)

• The full legal owner of an asset (i.e. the owner of an asset which is not subject to a trust) does not have a legalandequitable interest in that asset.
• There is just one interest, the legal interest, which subsumes all rights to the asset.
• Full legal ownership isnotequal to the sum of legal ownership + equitable ownership.

Question 29

What is the difference between trusts and gifts?

Answer 29

• gift involves the absolute transfer of full legal ownership
• there is no separate equitable interest in the property at any stage for gifts