The Trust Relationship PDF

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The Trust Relationship...

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T1 – Prep Video  What is a trust? A trust is an equitable duty relating to property. Useful mechanism for dividing ownership and management of property. No single definition but key features for it to exist: I. Property component o A trustee holds a proprietary interest on trust for the beneficiary. Typically has a legal interest in the property. As far as common law is concerned, trustee is the owner – all the rights of legal ownership; can do with it as they wish. However, equity recognises another proprietary interest – that of the beneficiary. ALSO, a property right. Beneficiary can give away/sell interest under trust, but cannot give away the legal interest since this is owned by the trustee. o Thus, ownership split – trustee has formal legal interest and right to manage the property. The beneficiary has the equitable and beneficiary interest; the true owner. o So how does the beneficiary stop the trustee from exercising their legal rights simply in any way they choose? II. Obligation component o Although trustee has legal right to do what he will, owes equitable obligations to the beneficiary; equity places duty on the trustee – must exercise legal rights 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. Beneficiary can sue the trustee for breach of trust. Number of trustees/beneficiaries can vary as can precise nature of relationship.  SO ALWAYS DISTRINGUISH THE LEGAL FROM THE EQUITABLE INTEREST.  BENEFITS OF TRUSTS: o A. Separation of ownership and management of property o B. Expertise; o C. Flexibility – Is possible to create interests in equity that are not recognised in law – can divide property into different ways giving different beneficiaries different interests – e.g. conditional interests; Also Control – original owner can retain degree of control even after divesting themselves of original interest in the property. Cannot do this if you are making outright gift. o D. Protection of minors – beneficial owner may be incapable of managing the property; o E. Ringfencing insolvency; Beneficiaries interest protected against the trustee’s insolvency because the trustee does not have a beneficial interest in the trust property. Also, can set trusts up to ensure property is protected against the risk of insolvency of beneficiaries. o F. Tax benefits.  KEY USES: Commercial arrangements; 1. Share ownership; 2. Investment funds; 3. Pension funds; 4. Other forms of tax-efficient employee remuneration; 4. Corporate tax avoidance. Private arrangements: 1. Testamentary planning; 2. Land ownership; 3. Tax Planning ALSO, Charitable purposes.  Best way after holding charge to demonstrate proprietary right is to show that a trust has been created.  So key benefit of trust – protection against insolvency.  CATEGORISING TRUSTS:  A. Express trusts: Deliberately created

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B. Resultant/Constructive: Arise by operation of law – imposed by the courts. ‘’Implied trusts.’’ C. Testamentary: Created by a will. D. Fixed: Trustee knowing exactly what they have to give to each beneficiary – interests of the beneficiary are fixed. E. Discretionary: Trustee knows who the potential beneficiaries are but has the power to determine who benefits and in what shares – makes them very flexible. F. Charitable v non-Charitable. G. Bare trust – Where trustee simply holds title on trust for benefit of beneficiary – no discretion, must simply follow instruction of the trustee e.g. shares – stockbroker may hold title of shares on trust for the beneficial owner. TEMPORARY NATURE: Trusts are temporary way of dealing with property. Two rules: 1. Perpetuity rules – trusts must be ended within a defined period (125 years). 2. Saunders – beneficiaries can collapse trust by directing trustee transfer legal title to them or to another person they choose. In practise complexity of the trust will determine how/whether it can be collapsed.

Notes – The Trust Concept  What is a trust? An equitable duty relating to property. The person subject to the duty is called a trustee and the person to whom the duty is owed is called a beneficiary.  The property to which the duty relates is called the trust property.  The trustee is usually the legal owner of the trust property.  The beneficiary has an equitable proprietary interest in that property.  Duty is equitable since created and developed by the Court of the Chancery.  Basic content of the duty is that the trustee must hold or apply the trust property for the benefit of the beneficiary.  This description is however, not exhaustive – it is possible in limited circumstances to create a trust for a purpose rather than a person. It is also possible to hold equitable interests on trust.  No single definition of a trust, as shown by the following examples all of which come from case law. Examples of judicial descriptions of trusts · ‘equitable obligations to deal with property in a particular way.’ ·‘A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property) for the benefit of persons….any one of whom may enforce the obligation.’ · ‘a person who accepts property expressly (or impliedly) on the basis that he is to hold it for the benefit of another.’ · ‘a person holding the legal title to property under an express or implied agreement to apply it, and the income arising from it, to the use and for the benefit of another person.’ History of the trust  A person would make a will giving property to trustees and instructing them on how it should be applied. E.g. trustees were instructed to distribute income to the deceased’s spouse and (after the spouse’s death) to the deceased’s children and (after the children’s death) to distribute capital to the deceased’s grandchildren. Where trust property was land  Ordinarily trustees would be given legal title to the land by the deceased and they would enjoy all the powers of legal ownership.

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In the exercise of those powers the trustees would create tenancies and receive rent from the tenants. The trustees would pay the rent ( income) to the deceased’s spouse and then (after the spouse’s death) the deceased’s children. After the children’s deaths the trustees would transfer the land (capital) to the deceased’s grandchildren. Then the trust would cease to exist.

Expansion of trusts to other contexts The family trust illustrates two important attributes of a trust. First, a trust allows the separation of the powers of the legal owner (held by trustees) from the benefits resulting from the exercise of those powers (enjoyed by beneficiaries). Secondly, a trust can confer different types of rights on different beneficiaries at different times. The family trust is still in common use today. But trusts have expanded beyond this paradigmatic model. Today, trusts are used in many contexts and for various reasons. To take just one commercial example, the market in listed securities is underpinned by the trust. Most listed securities are in a ‘dematerialised’ or ‘uncertificated’ form. This means that legal ownership of UK-listed securities requires registration in an electronic register called CREST. Securities are registered in the names of CREST members (usually banks or other financial institutions). The members are the legal owners of securities registered in their names. But they generally acquire and hold the securities for the benefit of their clients. In other words, they hold them on trust. The CREST member is the legal owner of the shares but has no beneficial interest. Legal title is held on trust for the broker. • The broker has an equitable interest in the shares. Like the CREST member, it has no beneficial interest in the shares. The equitable interest is held on trust for the private investor. • The private investor has an equitable and beneficial interest in the shares. Thus, there is a ‘waterfall or chain of equitable relationships. (See SL Claimants v Tesco Plc [2019] EWHC 2858 (Ch) for a more detailed analysis.) Principle characteristics of trusts Trust property  Property is an essential requirement for a trust.  In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705, Lord Browne-Wilkinson said that it is a ‘fundamental’ proposition of trusts law that ‘there must be identifiable trust property.’ The proposition is ‘fundamental’ because a trust is an equitable duty relating to property.  The trust property is known as the subject matter of the trust.  The question of whether there is trust property can be contentious, as is demonstrated by the case of Mac-Jordan Construction Ltd v Brookmount Erostin Ltd(inreceivership) [1992] BCLC 350.  FACTS: In Mac-Jordan the defendant employed the plaintiff to construct a building. They agreed that the defendant would: • pay the plaintiff as the work progressed. • retain 3% of each of payment. • establish a separate fund in respect of the retained sums. • hold the fund on trust for the plaintiff until the work was completed.

The defendant retained 3% from each payment but failed to establish a fund representing those sums. The defendant became insolvent. The issue was whether the defendant was a trustee for the plaintiff, giving the plaintiff proprietary rights over the defendant’s bank account. If not, the plaintiff would merely rank as an unsecured creditor.  HELD: The defendant was not a trustee for the plaintiff.  Scott LJ held that the plaintiff was unable to establish a trust because the defendant had not established a separate fund. He said that ‘there were, and are, no identifiable assets impressed with the trusts applicable to the retention fund.’  He rejected an argument that the defendant held the sum credited to its bank account on trust for the plaintiff on the ground that the defendant had never agreed to create a trust of its bank account. It had agreed to create a trust of a separate fund but the fund itself was never actually established. In short, there was no trust because there was no trust property. The defendant had breached its contractual obligation to create the fund. But this only gave rise to a personal right to sue the defendant for the money.  Almost every asset or right can be held on trust. As Lord Shaw noted in Lord Strathcona Steamship Co Ltd v Dominion Coal Company Ltd [1926] AC 108, 124: ‘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.’  A chose in action is a right: it is intangible. For example, £100 credited to a bank account is a chose in action (a debt). The account holder has a right to be paid £100 by the bank: the bank owes £100 to the account holder. It is worth pausing to consider two of the items mentioned by Lord Shaw. · A chattel is a tangible item (other than land). Cars, computers, books, jewellery and clothes are obvious examples. · A company share is another example of a chose in action. The nature of a shareholder’s rights depends on the nature of their shares. The most common shareholder rights are rights to attend and vote at company meetings and to be paid dividends by the company. Changes to 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 the absence of any trust property, there is nothing to which a trust can attach.  In contrast, if the trustee is at fault, they will be personally liable to restore the trust property (using their own funds). If the trustee cannot replace the trust property, they will need to pay compensation instead, and this compensation will be subject to the trust. (In such cases it is likely that a new trustee will be appointed.)  We have just seen an example of a case where the trust property may change because of a breach of trust. In fact, it is common for the trust property to change without any breach occurring. In many trusts, the trust property fluctuates.  For example, in a standard family trust, a principal function of the trustee is 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. 

Trustees  A trust must have a trustee. A trustee owns the trust property and has all the rights and powers of legal ownership. But a trustee must exercise those rights

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and powers consistently with the basic trust duty (i.e. they must hold or apply the property for the benefit of the beneficiary). As we have already seen, if the trustee does not act in accordance with that duty they will be personally liable for breach of trust. The functions and duties of trustees are not unitary. They can and do vary. The function and duty of any specific trustee is determined by the nature of the trust they are administering. In some cases (for example, a family trust) the trustee has an enduring asset management/investment function and is subject to various duties corresponding to that function. In other cases (for example, a trust of intermediated securities) the trustee’s function may be no more extensive than complying with the beneficiary’s instructions in relation to the trust property. The role of trustee is a voluntary office and is typically unpaid although professional trustees are entitled to remuneration.

Trustee duties  The basic duty of a trustee is to hold or apply trust property for the benefit of the beneficiary. As Sir Joseph Napier said in South Australian Insurance Co v Randell (1869) LR 3 PC 101, 110: ‘An indelible incident of trust property is that a trustee can never make use of it for his own benefit.’ Thus, a person is not a trustee of property which they have the absolute right to use for their own benefit.  Note that a trustee can be one of the beneficiaries of a trust. They will still owe duties to the other beneficiaries so cannot simply use the trust fund for their own benefit. This would be a breach of trust. In Customs and Excise Commissioners v Richmond Theatre Management Ltd [1995] STC 257 FACTS: A theatre company sold advance tickets for performances. The terms and conditions stated that the company would hold the purchase money ‘upon trust’ for the purchaser until the performance took place and would return the money if it was cancelled. There were no restrictions on how the company could use that money and it was not required to account to the customers. HELD: The company was not a trustee. Its ability to freely use the money for its own purposes was incompatible with a trust. Similarly, in In re Bond Worth [1980] Ch 230, the ability of a company to use fibres in its manufacturing process was inconsistent with the company holding the fibres on trust for the unpaid seller of them. Slade J stated (at 261) that South Australian Insurance Co and other cases were ‘clear authority for the proposition that, where an alleged trustee has the right to mix tangible assets or moneys with his own other assets or moneys and to deal with them as he pleases, this is incompatible with the existence of a presently subsisting [trust] in regard to such particular assets or money.’ There may be a limited exception to this principle. In In re Lehman Brothers International (Europe) (in administration) [2009] EWHC 2545 (Ch), Briggs J held (at paras 60-63) that the ability of a broker to sell trust securities on its own account and for its own profit was not inconsistent with a trust– because, by the terms of its agreement with the client beneficiary, the broker was under a duty to replace any securities it sold with identical securities. Briggs J said (at para 63) that the broker’s ability to sell the trust securities ‘was not, viewed in essence as a right to swap,’ fatal to the trust. Objects  A trust must have a beneficiary or be for a permitted purpose. The beneficiaries or purposes of trusts are known as the trust objects.

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A purpose trust is a trust for the promotion or realisation of a purpose (in other words, a trust without a beneficiary). It is not possible to create a trust for any purpose. It is only possible to create a trust for a permitted purpose. Charitable purposes are the principal category of permitted purpose trusts. There is also a small (closed) category of non-charitable purpose trusts. Purpose trusts are not considered in any detail in this element. Most trusts will have a beneficiary or beneficiaries. A beneficiary has rights correlative to the trustee’s duties and can enforce those duties. A beneficiary also has an equitable proprietary interest in the trust property. This is important for two principal reasons: The beneficiary’s rights are enforceable against third parties. The beneficiary’s rights are protected against the insolvency of the trustee. In Akers v Samba Financial Group [2017] UKSC 6, Lord Sumption noted that a beneficiary’s interest in the trust property ‘possesses the essential hallmark of any given right in rem, namely that it is good against third parties into whose hands the property or its traceable proceeds may have come.’ Thus, if a trustee misapplies trust property (for example, by giving £100 to their spouse, who is not a beneficiary) the beneficiary can assert their interest in the money against the spouse and demand that it is restored to the trust. Moreover, if the spouse uses the money to buy a painting, the beneficiary can assert an interest in the painting (the ‘traceable proceeds’ of the money) and demand that the painting is added to the trust. Thus, a beneficiary’s equitable proprietary interest is important because it can be enforced against third parties. However, unlike legal proprietary interests, it cannot be enforced against everyone. More particularly, equitable proprietary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust. So, if in breach of trust, a trustee transfers legal title to trust property to a purchaser who is unaware that they are purchasing trust property, the transfer extinguishes the beneficiary’s equitable interest. These principles are confirmed in both Westdeutsche and Akers. As a beneficiary has an equitable proprietary interest in trust property, the property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes. It therefore cannot be distributed to the trustee’s creditors. Thus a beneficiary enjoys ‘priority’ over the unsecured creditors of the trustee in the event of the latter’s bankruptcy or insolvency.

This can be illustrated by an example: X owes B, C, D and E £50,000 each. B, C, D, and E are unsecured creditors of X. £100,000 is credited to X’s bank account. X is made bankrupt. Assuming X has no other creditors or assets, the claims of B, C, D and E abate rateably. Each will receive £25,000. Vary the example: X owes B, C and D £50,000 each. B, C and D are unsecured creditors of X. X is a trustee of £50,000 for E. £100,000 is credited to X’s bank account: £50,000 of it is trust money. X is made bankrupt. The trust money (£50,000) is not part of X’s estate for the purposes of the bankruptcy and cannot be distributed to X’s creditors. It continues to be held on trust for E. Assuming X has no other creditors or assets, B, C and D’s claims abate rateably. Each will receive £16,667. Categorisation of trusts Trusts can be categorised in various ways but they are most frequently categorised as express, resulting or constructive.

An express trust is one which is deliberately created. In other words, it is a trust which arises in response to a person’s intention to create it. The person who creates the trust is known as the ‘settlor’. Unlike express trusts, resulting and constructive trusts arise by operation of law. In other words, they are imposed by the courts. You will...