What is a Trust

EQUITY AND TRUSTS

LARGE GROUP 1

Student Guide

What is a trust?

Context

In this Large Group you will examine the concept of a trust, the historical development, and key features.

At its most simple, a trust is an arrangement where someone called a ‘trustee’ is given property to look after for the benefit of one or more individuals called ‘beneficiaries’, for a period of time.

The trust is a useful tool for lawyers in a wide range of circumstances. For example:

  • An individual client might want to share his wealth with his children but, due to their young ages, he would prefer not to make outright gifts to them. A trust allows the client instead to put the property under the control of a trustee to manage it for the benefit of the children.
  • As well as family trusts, businesses may instruct their lawyer to set up a trust to provide pensions or other benefits for their employees.
  • You may have to create a charitable trust for your client. For example, the Microsoft billionaire, Bill Gates, has created a trust that allows the trustees to use the extensive trust property to promote world health and reduce extreme poverty.
  • Trusts also feature in many investment schemes and finance arrangements.

In each of these cases, the basic arrangement will involve property (which could be land, company shares or other investments) being managed by trustees for those who are intended to benefit from the arrangement.

As a lawyer, you may be involved in the following examples of trust work:

  • advising on the steps needed to create a trust;
  • advising on the duties which trustees owe when they run the trust; and
  • advising beneficiaries on their remedies if trustees breach their duties.

During the course, you will study each of these areas.

When we look at the concept of a trust, it is also important to be aware that trusts give rise to a special form of property ownership which is split between the trustees and the beneficiaries.

Outcomes

By the end of this Large Group you should be able to:

  1. Explain what a trust is.
  2. Recognise different types of trusts.
  3. Analyse the rights and benefits which different beneficiaries enjoy.
  4. INTRODUCTION

Activity 1

Denise Barlow, a single parent, made a will as follows;

This is the last will and testament of me Denise Barlow of Flat 5, Garton Towers, Farlow, Essex which I make on 3 February 2020.

I give all my property to my partner, Paul Jackson, to hold it on trust and to look after it for the benefit of my daughter, Kylie, until she is 21 when he should transfer all my property to her.

(Assume that the will was properly signed and witnessed.)

Denise was killed in a car accident last week. Kylie is six years old.

Paul has a gambling addiction and wants to use Denise’s property to pay off his extensive debts.

1 Should the law compel Paul to use the property as Denise wished?

No

2 Justify your answer to 1.

He has to fulfil the wishes of Denise.

2. THE DEVELOPMENT OF TRUSTS

Activity 2 - Introduction to the history of equity and trusts

Watch the media clip ‘How Equity Developed’.

Fill in the blanks in the following passage selecting words or phrases from the list below. Some words or phrases may be used more than once.

Precursor of the trust

The year is 1274. Two years ago, William embarked on a crusade. Before leaving Britain, William transferred his land to Percy to look after it while William was away. On William’s return, Percy refused to give back the land.

The Common Law courts would refuse William a remedy and would recognise only Percy as the legal owner of the land. William would have to seek redress in equity by petitioning the King. Later, such petitions were presented to the Lord Chancellors or the Court of Chancery. William was regarded as owning an equitable interest in the land. Equity intervened to prevent the legal owner, Percy from enforcing his legal rights unconscionably.

Conscience played a significant role in decisions of equity because successive Lord Chancellors were churchmen.

The Court of Chancery still exists as a division of the High Court and deals with disputes concerning wills and trusts. The administration of equity and common law were fused in 1873 (Judicature Acts 1873 and 1875). Now, all courts can administer equity.

  1. WHAT IS A TRUST?
    1. Definition of a trust

‘A trust is an equitable obligation, binding a person (called a trustee) to deal with property (called trust property) owned by him as a separate fund, distinct from his own private property, for the benefit of persons (called beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.’

(Underhill and Hayton, Law of Trusts, and Trustees 18th edn (2010) Chapter 1, Article 1).

    1. Creation of a trust

To create a trust, a settlor/testator must take two main steps:

  1. make a declaration of trust AND
  2. Settlor must transfer the trust property to the trustee.

Settlor/Testator Trustee(s)

transfers property to

holds property on trust for Bs.

Beneficiaries

    1. Key roles
  • Settlor
    • Testator/testatrix
    • Can make themselves a trustee.
  • Trustees
    • Trustee duties
    • Follow terms of trust laid out by S.
    • Has to be some type of enforcement.
  • Trust property.
    • Must be put into the hand of the trustees.
  • Beneficiary
    • Can enforce the trustees duties.

Activity 3

In our earlier example Denise left property by will to her partner Paul for him to look after it until Denise’s daughter, Kylie, reaches age 21.

In the example above,

Who created the trust?

Denise

Who is the Trustee?

Paul

What is the trust property?

The housed and money.

Who is the beneficiary?

Kylie.

When does the trust come into effect?

When Denise dies.

  1. WHY CREATE A TRUST?

An alternative to an outright gift.

A trust separates management of property from the benefits or enjoyment.

Activity 4

Your client Julia wants to give away money to the following individuals. Advise Julia whether a gift or a trust is the better option.

Julia’s son, who is 32 years old, has cerebral palsy and is not able to look after himself.

Trust.

The daughter of a deceased friend, who is 12 years old.

Trust.

Her twin sister Tara, who is a teacher.

Gift.

  1. KEY FEATURE OF A TRUST

5.1 Separation of legal and equitable interests in trust property

  • the trustee holds the legal title (or legal interest) in the property.
  • the beneficiary owns the equitable interest.

5.2.The trustee is the nominal owner

To the outside world, the trustee owns the trust property.

However, the trustee is just a nominal owner. The benefits will be saved up for, or passed to the beneficiaries who own the equitable or ‘beneficial’ interest.

    1. Beneficiaries have proprietary rights.

Equity regards the beneficiaries as the real owners of the property.

As equitable owners of the trust property, they have ‘proprietary rights’ in the property.

  1. TYPES OF TRUSTS

Activity 5

In this activity, you will watch clips of three clients (‘Family trusts’). When there is a pause for review, you need to answer the following questions, for each client:

1. What is the client’s objective?

2. Why an outright gift is not a good idea?

3. What type of trust the practitioner recommended?

Write the answers to the questions above in the table below.

Client’s objective

Disadvantages of an outright gift

What type of trust would be suitable? (Summarise the practitioner’s advice)

Mrs Arnold’s objective

Want to gift money to her grandchildren

The children are all infants and don’t know how to handle money.

Express Trusts.

The trustees will look after the property until the grandchildren become of age. Can put some money aside for her grandchildren to claim at 21.

Mrs Jones’s objective

Wants to leave the property in her husband’s name to then pass down to her children, not his.

If Robert was gifted the property, then he doesn’t have any obligations to fulfil and can do what he wants with the property.

A trust with successive interests. Can leave the property to Robert and can keep the income it makes. Once Robert dies, the property would be passed onto the children.

Salid Khan’s objective

Wants to provide a safety net for wife, money towards children’s education, and leave money for potential grandchildren.

Discretionary trust.

Have a class instead of beneficiary’s.

6.1 EXPRESS TRUSTS: trusts intentionally created by the settlor or testator.

Can be created for the benefit of individuals, or for a purpose.

Express trusts that benefit individuals can be either:

  • Fixed interest trusts; or
  • Discretionary trusts

It’s important to distinguish the two types of trusts, as sometimes different rules apply to one or the other type.

      1. Fixed interest trusts
  • Contingent trusts.
  • Successive interest trusts
  • Bare trusts.
      1. Discretionary trusts

Activity 6

Read the following scenarios and identify what type of trust is best in the circumstances.

Aya wants to leave property by will to her husband and also to her young niece (Aya does not have children).

Successive interest trust.

Xavier is making a will and knows he wants to benefit his children, but he hopes to live for another 50 years at least and does not know which child will be most in need of money when the will has effect on his death.

Discretionary trust.

Paul wants to gift valuable company shares to his son Marcus, who is 16. Paul wants Marcus to get the shares at age 21.

Contingent trust.

  1. EQUITABLE OR BENEFICIAL INTERESTS
    1. Vested/Contingent

Activity 7

‘On trust for Aruna when she qualifies as a solicitor’.

Is Aruna’s interest vested or contingent?

Contingent.

‘On trust for Malik’. Malik is 8 years old.

Is Malik’s interest vested or contingent?

Vested.

    1. Limited/Absolute

Activity 8

Trust ‘for Farhad if he attains the age of 21’.

Is Farhad’s interest limited or absolute?

Absolute.

Trust ‘for Anja for life, remainder to Betty’.

Is Anja’s interest limited or absolute? And Betty’s?

A = limited, B = absolute.

    1. In possession/In remainder
    2. The nature of an equitable interest may change during the lifetime of the trust.

Activity 9

Identify the beneficiaries’ interests in the trusts below:

‘On trust for Mariya when she attains 21’.

Mariya is 18.

What interest does Mariya have?

Contingent.

Mariya is now 21.

What interest will Mariya have once she reaches age 21?

Vested and Absolute.

‘On trust for Ramiro for life, then for Carmela’.

Ramiro is alive and Carmela is 25. What are their beneficial interests?

R = vested and limited possession, C = absolute and contingent in remainder.

Ramiro died recently and Carmela is now 32. What is Carmela’s interest?

  1. BARE TRUSTS

When a sole adult beneficiary (with mental capacity) has an interest that is vested, absolute and in possession, the beneficiary is said to be absolutely entitled. A trust for such a beneficiary is called a bare trust.

A beneficiary under a bare trust can demand that the trustees end the trust and transfer the trust fund to them at any time if they so wish.

When does a bare trust arise?

  • When a beneficiary under e.g. a contingent or successive interest trust becomes solely and absolutely entitled to the trust property.
  • When created expressly, for example when using a stockbroker or financial advisor.