TRUSTS CONCEPT Flashcards
What is a trust?
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.’
What are the two key components of a trust?
Property Component and Obligation Component
What is the property component of a trust?
- 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.
What is the obligation component of the trust?
- 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.
What are the benefits to using trusts?
- separation of ownership and management of property
- expertise
- protection
- offers flexibility (asset partitioning)
- control
- ringfencing on insolvency
- tax benefits
What are the three main categories of trusts?
express (person intends to create trust), resulting & constructive (imposed by the courts)
What is the difference between a testamentary and inter vivos trust?
testamentary = created via a will
inter vivos trust = created in the lifetime of an individual
What is the difference between a fixed and a discretionary trust?
- 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.
What is the difference between a bare trusts and a trust where the trustees have active management functions?
- 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.
What two rules are essential to the temporary nature of trusts?
- perpetuity rules
- the rule in Saunders v Vautier
What can be held on trust (what can be “trust property”)?
- 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
What happens if there are changes made to the trust property?
- 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.
What is the basic duty of a trustee?
To hold or apply trust property for the benefit of the beneficiary
If you can use the trust money freely for your own purpose, is that compatible with a trust?
- 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)
What are the trust objects?
A trust must have a beneficiary or be for a permitted purpose
- the beneficiaries or purposes are the trust object