Trusts Notes - Jonathan Garton PDF

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1 An Introduction to the Trust  two or more people can share ownership in any assets, whenever this happens, the relationship between the owners is governed by the law of trust  different kinds of rights associated with property, they don’t have to be shared equally by all the owners  property ri...

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1 1.1 An Introduction to the Trust  two or more people can share ownership in any assets, whenever this happens, the relationship between the owners is governed by the law of trust  different kinds of rights associated with property, they don’t have to be shared equally by all the owners  property rights are like a bundle of sticks, which can divided and distributed in different ways  key characteristic of the trust the ability to control the asset / the ability to enjoy the asset  the trust is a device where one person controls an asset for the benefit of another  the trustee – the person who controls the asset and has legal ownership  take all decisions to manage the asset  he is under the strict duty to do this for the benefit of someone else  the beneficiary – the person who enjoys the asset and has equitable ownership, they enjoy the value of the asset  any profit generated goes to the beneficiary 1.2 History of the Court of Chancery 1.3 History of the Trust 1.4 Key Characteristics of the Trust 

The creation of Trust Express Trust Created by conscious act or declaration by settlor The individual who creates the trust is also called the donor in charitable trust Imputed/Implied Trust Where unconscionable for the legal owner to use the asset for himself Generally arise in situations where we think it would be unconscionable for the legal owner of an asset to be able to use it for his own benefit Sometimes the law imposes trust, even when there isn’t a conscious act or a declaration intended to create it, though in certain defined situations the courts and statute imposed trusts on certain individuals so that they become trustees in respective property owned by them or otherwise under their control. 2 key types of implied trust – the resulting trust, and the constructive trust

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Trustee Our trust can have any number of beneficiaries or set laws, and the same applies to the number of trustees, subject to practical considerations, and to legal rules which consisted in some cases, ie property law where the number of Trustees holding the legal title must not exceed 4 (The Trustee Act 1925 Section 34) T can be a beneficiary of the same trust, and so too can the settlor/trustee/beneficiary the only exception – when one person is the sole owner of the asset equity aboards the nonsense of a person holding an asset on trust for himself – that does not make any sense, trustee does not come into pla Property can be any estate or interest recognized in property law – tangible or intangible T normally has legal title, but if trust property is itself an equitable property interest, T’s title must be equitable T must keep trust property separate from his other assets If T goes bankrupt because he doesn’t get the enjoyment/lacks the equitable interest, the trust property isn’t available to his creditors. Beneficiaries’ rights Extremely flexible – the enjoyment can be occupation of land, or income generated from the property, like dividends There is no rule that the entitlements of individual beneficiaries should be fixed in advance or the same as each other Allocation of benefit may be uneven Can give somebody a life interest in a company, and another beneficiary capital entitlement which they get after the first beneficiary’s death Don’t need to allocate in advance when set up a trust, he could leave this task to the trustee or third parties, they can decide how the asset will be divided in the future We can also give third parties or trustees the power to exclude certain beneficiaries entirely, as long as we put it in the trust instrument We could also stipulate that a beneficiary’s interest only arises if a specific contingency is satisfied We can also give the trustee the power, to accumulate any income that arises so they can effectively temporarily withhold the distribution of the benefit within a specific period The settlor to decide the shape of an individual trust and the individual beneficiaries rights within it should look Beneficiary right may not always arise from equity For the purpose of trust, they are the same substance Enforcement It is the beneficiary who have standing to go to court and enforce the trustees duties to look after the property for their benefit If things go wrong, and the property ends up in the hands of a third party, the beneficiaries can also enforce their equitable ownership against that third party and recover the property Property interest to bind third parties

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One very important exception to equity’s ability to bind third parties – the common law rights bind the world at large, equitable ownership rights bind the world for large except for ‘equity’s darling’ (1) bona fide purchaser (2) of the legal estate (3) without notice of the trust (4) for value If your trustee transfers the trust assets gratuitously to his cousin, you could enforce beneficiaries rights against the cousin. But if, the trust property was sold to a third party who gave money, purchased the legal title, had no knowledge of the trust and was acting bona fide, then your equitable interest of the property would come to an end. Trust must either have at least one beneficiary, you can’t hold trust on a abstract purpose. There has to be someone who can come to court and enforce it If the abstract purpose in question meets the legal definition of a charitable purpose, in which case the trust will be valid. As there are no beneficiaries who have equitable ownership in the case of a charitable trust, this is something, which is enforced by a public authority. Traditionally this will be enforced by the attorney general, who was the protector of charity on behalf of the Crown. The Charity Commission  extensive powers to enforce and supervise trust

1.5 Trusts as Human Relations Is a trust a human relationship with subboard legal relationship or reverse? Trusts are not contract, they are not legal relationships, they are human relationship 1.6 The Maxims of Equity Equity focuses less with the formalities than the common law, it focuses instead upon the substance. A number of formalities to comply with to set up a trust The Maxim of equity follows the law / equity prevails – there is no conflict! Equity does not deny common law, it shows more of the picture Equity also follows the law in the sense that it recognizes the same kinds of property interests as the common law, rather than creating its own Ownerships comes in a legal and equitable version Legal/equitable charges, legal/equitable easements Equity will not assist to volunteer These maxims are guidelines, not hard rules

2.1.

Definition of Trust

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Hague Trusts Convention (1992) - international treaty to provide a harmonized definition of the trust - aimed at resolving conflicts of law - Impetus from civil law jurisdictions, where trust is an alien concept - In some cases, it is possible for civil law countries to give some practical effect to foreign trust by drawing an analogy with legal concepts that were recognized by their own legal systems and applying their own conflict of law rules - Not consistent – lack of predictability of outcome of litigation cases Trust refers to the legal relationship created inter vivios or on death by a person the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. A trust has the following characteristics a) The asset constitutes a separate fund and are not part of the trustees estate. b) Title to the trust assets stands in T’s name or in the name of the person on behalf of the T c) T has the power of duty in respect to which she is accountable to manage, employ or dispose the assets according to the terms of the trust and the special duties imposed him by law d) The reservation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as a beneficiary and not necessarily inconsistent with the existence of a trust Trusts are available to pay the creditors of a beneficiary if beneficiary goes bankrupt  beneficiary is the owner of the value of the equity in those assets The title of the trust assets stand in the name of trustee/another person on behalf of the trustee Trustee holds the legal title to the trust assets personally.  Trust does not have a legal personality: T can sue / be sued personally When special skills are required Although the trustee is charged with managing the assets, sometimes it is expedient to hand that task over to someone else to act on behalf of the T e.g. in the case of a trust where the assets are a fluctuating portfolio of investments, it does not matter much the individual assets, but rather the value of the portfolio overall. In that situation, the trustee might choose to hand over day-to-day control of the portfolio to an investment manager. Who will be better qualified than the T to make investment decisions? Rules of delegation T has the power and duty in respective of which he is accountable to manager, employ or dispose the assets in accordance with the terms of the trust and any special duties imposed upon him by law

5 T has the power and the duty to manage the trust assets – he must manager them but there is often an element of discretion power in terms of how the assets are managed. 1) What the T must do in the extend of any discretion, is to turn to the trust instrument if the settlor provided one 2) Look at any general principles imposed by the law – it is for the trustee and the trustee alone to ensure that these powers and duties are complied with 3) Once the trust is up and running, the settlor even though he was the original owner of the asset and the creator of the trust  can’t tell him how to exercise any of his managerial discretions, nor in fact can the beneficiaries 4) The reversation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as the beneficiary and not necessarily inconsistent with the existence of a trust Trustee powers and duties Must comply with trust instrument + general principles imposed by law Neither S nor B can tell T how to act Reservation of powers Traditional view is S drops out the picture once trust is created - In many cases, the trust is in fact of outright gift But S may reserve certain powers over the trust – managerial or substantive Managerial – replaces the T, appoint additional new T or substantive – reserve himself the right to overwrite the Trust and give it to somebody e.g. settlor to reserve for himself the power to override the trust amd give the asset to someone other than the beneficiaries, i.e. give your wife property to hold on trust for our children, but reserve for myself the right to appoint the property to my siblings instead  flexibility Limitations No reference to Equity/equitable interest – because civilian system do not recognize this No division of legal and equitable title No attempt to define B’s interest Ignores formalities Ignores formalities Ignores trusts imputed by law

6 2.2 Functions of Trusts Trusts come in all sizes and shape – private family trust, pension trust, charitable trust…. All trust are private trust except chariable trust Charitable trust does not have any beneficiaries – carried out for the benefit of an abstract, publicly beneficial purpose - benevolent nature Pension fund trust - Beneficiaries are not volunteers, they have contractual rights - Some rules of trust law have been tweaked in order to give these beneficiaries additional protections over and above those accorded to standard beneficiaries - Supplemented by statutory provisions Family trust - beneficiaries are mere volunteers 1) Property can be held for persons with legal disability Separate managerial aspect and ownership Get around the situation where somebody otherwise own property in their own name is unable to manager it Any who lacks the legal capacity to own the assets 2) Property can be held for persons in succession e.g. to A for life, then to A’s children in remainder divide the equitable ownership of the assets so that the beneficiaries enjoyed consecutively rather than concurrently common: the same home stay in the family for generations the life tenant is entitled to the income generated, not the capital itself. If the assets are a portfolio of investment – trustees are under a duty to act impartially between all the beneficiaries and so they would have to ensure that the portfolio contain a balance of investment that, on the one hand would produce an appropriate income for A, but on the other would grow the value of the capital for the children You can give a future benefit to an unborn beneficiary 3) Property can be held by several owners concurrently e.g. cohabitating couples co-owning the family home / alternative to split the beneficiary interest consecutively, we can share it concurrently so all the beneficiaries enjoy the assets at the same time 4) Property can be protected from B’s bankruptcy or extravagance If a trust gives a beneficiary of fixed interest in the trust property, like a 50% share, then that share is accessible by the beneficiary’s creditors in the event of bankruptcy What matters in the point of view in insolvency is beneficial ownership

7 That’s why when trustee goes bankrupt, his creditors cant go after his assets because he is not the beneficial owner Discretionary trust - to A to hold for B, C and D in such shares as A thinks fit - under this model, all the beneficiaries collectively have the ownership, but no individual beneficiary has any particular share that he can call his own - so the trustee could choose to give it all to one beneficiary, or split in whatever unequal way he thinks fit - as a result, if one of the beneficiaries were to go bankrupt, his creditors wouldn’t be able to get to the trust assets unless the trustee chose to appoint some of the trust property to him - extravagance – beneficiaries can’t simply spend it all and instead have to persuade the trustee that they deserve to receive payments - or some restricted / limited right – e.g. life interest which means they enjoy the income of assets but not to sell it Can take account of changing future circumstances - delay decision making – trustees will decide at relevant time how much to give each child based on their circumstances Can apply property for charitable purposes - purpose must be charitable to be hold by the law - takes a lot of policing - private trust is self-regulating, clear incentive to exercise them because they are the one who lose out when they don’t manage the assets correctly - but if you have a trust for an abstract purpose, it doesn’t have anybody with obvious incentive or any legal standing to enforce thr trustees duties - therefore, without external means of enforcement, there will be nothing in practice to stop the trustees from treating the property as though they were the absolute owner - an enforcement mechanism is therefore put in place for charitable trust, precisely because they provide benefits for the wider community - enforced by the attorney general and charity commission, but the state does not have any incentive to put resources into upholding other non-charitable trusts - however – there are a handful of obscure testamentary exceptions to this rule which are called trust of imperfect obligation - a very limited range of non-charitable trst that you can set up in a will e.g. look after your pet after your death, but these are an anomaly. Use trust to make collective investments - pool resources together into a larger fund in order to invest it - it is a good idea to spread risk by having a larger porfolio

8 Trust can enable unincorporated associations to hold property - clubs - they don’t have legal personality to their own separate to their members - they can’t hold property in their own rights - the executive committee can act as trustee and hold assets on trust for their club members - members who in turn authorised them to apply the assets for whatever endeavours the club was for Trust can be used to minimise tax liability - trust enable property transfers to be made in a way other than simply by an outright right, settlements can be structured so as to restrict tax liability - one classic example of this – a former tax called Protect assets from creditors - set up a trust for someone else in the event of bankrcupt - you can transfer your assets to someone else to hold your assets on trust - if you have a fixed equitable interest, then your creditors can get it - but there is nothing in trust law itself to stop a wife giving her assets to her husband to hold on a discretionary trust for the two of them - statutory provisions to prevent settlor t do this - it is possible to set up a trust for someone else in the way that protects in a limited way their interest in the event of bankruptcy Concentrate managerial power - bigger portfolio = management more effecicent if concentrated on the hands of one set of trustees Achieve privacy in property dealings - hide the true beneficial ownership behind the legal ownership because there is no register of equitable title, it is possible to use the trust to achieve privacy in our property deadlings

9 2.3 Trust vs other legal devices 1) Trust v Contract A contract is a private relationship between the parties under which their rights and obligations are generally enforceable only against each other. Beswick v Beswick - the old coal merchant promised to transfer his business to his nephew in return for his nephew, giving him a job for life, and then after his death, are weekly payment to his widow - House of Lord did not allow the widow to enforce the contract after his husband’s death because she was not party to it By comparison, it is of the very essence of a trust that the settlor can give property to a trustee to hold on trust for a third party and thereby grant the third party the beneficiary rights against the trustee to see that the trust is property discharged Similarities between contract and trust - The origin of both is commonly a transaction between two people - In the trust context, the settlor and the trustee Maitlannd: it is impossible ‘so to define a contract that the definition shall not cover at least ¾ of all the trusts that are created’ Contracts (Rights of Third Parties) Act 1999 - Limited right for a third party to enforce a benefit given to them under a contract to which they weren’t privy Langbein’s contractarian analysis - The trust ought to be analyzed as a type of contract - But most scholars say this is problematic because there is one fundamental difference

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Trust can bind third parties because they give beneficiary proprietary rights Contracts whatever benefits might be enforceable by Third Parties, even to the 1999 Act, can never bind those who are not privy to them Contracts cant do that, trust can If trust property ends up in the hands of the third party, then the beneficiaries can enforce their rights against that third party unless he is equity’s darling (bona fide purchaser) A contract alone would not achieve this A contract requires consideration, but there is a traditional rule that T must act gratuitously and so receives nothing in return for carrying out his duties for the benefit of the beneficiaries

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This stems from the fact that the T owes what we call a fiduciary duty of loyalty to the beneficiaries, and so mustn’t be seen to benefit from his position

However, things have moved on – trustees can be paid as long as it is provided in the trust instrument or under a specific statutory provision The court can vary it – refer to the case of Re Duke of Norfolk’s ST “The court has an inherent jurisdiction to authorise the payment of remuneration of trustees and that the jurisdiction extends to increasing the remuneration authorised by the trust instrument. In exercising that jurisdiction the court has to balance two influences which are to some extend in conflict. The first is that the office of trustee is, as such, gratuitous;...