The trust is governed by the
terms of the trust document, which is usually written and occasionally set out
in deed form. It is also
governed by local law. The trustee is obliged to administer the trust in
accordance with both the terms of the trust document and the governing law.
In the United States, the settlor is also called
the trustor, grantor, donor or creator.
History
Roman law recognised a
fairly similar concept to the trust that it referred to as the fidei
commissa, although this was a bequest in a law. Roman law never
employed a concept equivalent of the inter vivos trust later seen in
common law jurisdictions. Another major difference between the fidei
commissa and the trust was "the former existing primarily to ensure
proper passage of the property and the latter being a mechanism to increase the
efficient management of property and to minimize the costs of ownership."[1]
The waqf in Islamic law, which developed in the medieval
Islamic world from the 7th to 9th centuries, bears a notable
resemblance to the English trust.[2] Every waqf
was required to have a waqif (founder), mutawillis (trustee), qadi (judge) and beneficiaries.[3] Under both a waqf
and a trust, "property is reserved, and its usufruct appropriated,
for the benefit of specific individuals, or for a general charitable
purpose; the corpus becomes inalienable; estates for life in
favor of successive beneficiaries can be created" and "without regard
to the law of inheritance or
the rights of the heirs; and continuity is secured by the successive
appointment of trustees or mutawillis."[4]
The only significant distinction
between the Islamic waqf and English trust was "the express or
implied reversion of the waqf to charitable purposes when its specific
object has ceased to exist",[5] though this
difference only applied to the waqf ahli (Islamic family trust) rather
than the waqf khairi (devoted to a charitable purpose from its
inception). Another difference was the English vesting of "legal
estate" over the trust property in the trustee, though the "trustee
was still bound to administer that property for the benefit of the
beneficiaries." In this sense, the "role of the English trustee
therefore does not differ significantly from that of the mutawalli."[6]
The trust law developed in England at the time of
the Crusades, during the
12th and 13th centuries. The trust was introduced by Crusaders who may have
been influenced by the waqf institutions they came across in the Middle East.[7][8] At the time,
land ownership in England was based on the feudal system. When a
landowner left England to fight in the Crusades, he needed someone to run his
estate in his absence, often to pay and receive feudal dues. To achieve this,
he would convey ownership of his lands to a friend, on the understanding that
the ownership would be conveyed back on his return. However, Crusaders would
often return to find the legal owners' refusal to hand over the property.
Unfortunately for the Crusader,
English law did not recognize his claim. As far as the courts were concerned,
the land belonged to the trustee, who was under no obligation to return it. The
crusader had no legal claim. The disgruntled Crusader would then petition the
king, who would refer the matter to his Lord Chancellor. The
Lord Chancellor could do what was "just" and "equitable",
and had the power to decide a case according to his conscience. At this time,
the principle of equity
was born.
The Lord Chancellor would
consider it unjust that the legal owner could deny the claims of the crusader
(the "true" owner). Therefore, he would find in favour of the
returning crusader. Over time, it became known that the Lord Chancellor's court
(the Court of Chancery) would continually recognize the claim of a returning
crusader. The legal owner would hold the land for the benefit of the original
owner, and would be compelled to convey it back to him when requested. The
crusader was the "beneficiary" and the friend the
"trustee". The term use of land was coined, and in time
developed into what we now know as a trust.
Also, the Primogeniture system
could be considered as a form of trust. In Primogeniture system, the first born
male inherited all the property and "usually assumes the responsibility of
trusteeship of the property and of adjudicating attendant disputes." [9]
Significance
The trust is widely considered to
be the most innovative contribution to the English legal system.[10] Today,
trusts play a significant role in all common law systems, and
their success has led some civil
law jurisdictions to incorporate trusts into their civil codes, like
France since 2007, amended in 2009. Trusts are recognized internationally under
the Hague Convention on the Law Applicable to Trusts and on their Recognition
which also regulates conflict
of trusts.
Basic principles
Property of any sort can be held
on trust. The uses of trusts are many and varied. Trusts can be created during
a person's life (usually by a trust instrument) or
after death in a will.
Creation
Trusts can be created by the
expressed intentions of the settlor (express trusts) or they
can be created by operation of law (resulting trusts).
Typically a trust is created by
one of the following:
- a written trust
document created by the settlor and signed
by both the settlor and the trustees (often referred to as an inter
vivos or "living trust");
- an oral declaration;[11]
- the will of a
decedent, usually called a testamentary
trust; or
- a court order (for example in family proceedings).
In some jurisdictions certain
types of assets cannot be the subject of a trust without a written document.[12]
Formalities
Generally, a trust requires three
certainties, as determined in Knight v Knight:
- Intention. There must be a clear intention to create a
trust (Re Adams and the Kensington Vestry)
- Subject Matter. The property subject to the trust must be
clearly identified (Palmer v Simmonds). One cannot, for example,
settle "the majority of my estate", as the precise extent cannot
be ascertained. Trust property can be any form of specific property, be it
real or personal,
tangible
or intangible.
It is often, for example, real estate, shares or cash.
- Objects. The beneficiaries of the trust must be
clearly identified, or at least be ascertainable (Re Hain's Settlement).
In the case of discretionary trusts, where the trustees have power to
decide who the beneficiaries will be, the settlor must have described a
clear class of beneficiaries (McPhail
v Doulton). Beneficiaries can include people not
born at the date of the trust (for example, "my future
grandchildren"). Alternatively, the object of a trust could be a
charitable purpose rather than specific beneficiaries.
Trustees
The trustee can be either a person or a legal entity such as a company. A trust may
have one or multiple trustees. A trustee has many rights and responsibilities;
these vary from trust to trust depending on the type of the trust. A trust
generally will not fail solely for want of a trustee. A court may appoint a
trustee, or in Ireland the trustee may be any administrator of a charity to
which the trust is related. Trustees are usually appointed in the document
(instrument) which creates the trust.
A trustee may be held personally
liable for certain problems which arise with the trust. For example, if a
trustee does not properly invest trust monies to expand the trust fund, he or
she may be liable for the difference. There are two main types of trustees, professional
and non-professional. Liability is different for the two types.
The trustees are the legal owners
of the trust's property. The trustees administer the affairs attendant to the
trust. The trust's affairs may include investing the assets of the trust,
ensuring trust property is preserved and productive for the beneficiaries,
accounting for and reporting periodically to the beneficiaries concerning all
transactions associated with trust property, filing any required tax returns on
behalf of the trust, and other duties. In some cases, the trustees must make
decisions as to whether beneficiaries should receive trust assets for their
benefit. The circumstances in which this discretionary authority is exercised
by trustees is usually provided for under the terms of the trust instrument.
The trustee's duty is to determine in the specific instance of a beneficiary
request whether to provide any funds and in what manner.
By default, being a trustee is an
unpaid job. In modern times trustees are often lawyers or other professionals
who cannot afford to work for free. Therefore, often a trust document will
state specifically that trustees are entitled to reasonable payment for their
work.
Beneficiaries
The beneficiaries are beneficial
(or equitable) owners of the trust property. Either immediately or
eventually, the beneficiaries will receive income from the trust property, or
they will receive the property itself. The extent of a beneficiary's interest
depends on the wording of the trust document. One beneficiary may be entitled
to income (for example, interest from a bank account), whereas another may be
entitled to the entirety of the trust property when he attains the age of
twenty-five years. The settlor has much discretion when creating the trust,
subject to some limitations imposed by law.
Purposes
Common purposes for trusts
include:
- Privacy. Trusts may be created purely for privacy.
The terms of a will are public and the terms of a trust are not. In some
families this alone makes use of trusts ideal.
- Spendthrift Protection. Trusts may be used to protect
beneficiaries (for example, one's children) against their own inability to
handle money. It is not unusual for an individual to create an inter vivos
trust with a corporate trustee who may then disburse funds only for causes
articulated in the trust document. These are especially attractive for
spendthrifts. In many cases a family member or friend has prevailed upon
the spendthrift/settlor to enter into such a relationship. However, over time,
courts were asked to determine the efficacy of spendthrift clauses as
against the trust beneficiaries seeking to engage in such assignments, and
the creditors of those beneficiaries seeking to reach trust assets. A case
law doctrine developed whereby courts may generally recognize the efficacy
of spendthrift clauses as against trust beneficiaries and their creditors,
but not against creditors of a settlor.
- Wills and Estate Planning. Trusts frequently appear in wills (indeed,
technically, the administration of every deceased's estate is a form of
trust). A fairly conventional will, even for a comparatively poor person,
often leaves assets to the deceased's spouse (if any), and then to the
children equally. If the children are under 18, or under some other age
mentioned in the will (21 and 25 are common), a trust must come into
existence until the contingency age is reached. The executor of the
will is (usually) the trustee, and the children are the beneficiaries. The
trustee will have powers to assist the beneficiaries during their
minority.
- Charities. In some common law jurisdictions all
charities must take the form of trusts. In others, corporations may
be charities also, but even there a trust is the most usual form for a
charity to take. In most jurisdictions, charities are tightly regulated
for the public benefit (in England, for example, by the Charity
Commission).
- Unit Trusts. The trust has proved to be such a flexible
concept that it has proved capable of working as an investment vehicle:
the unit trust.
- Pension Plans. Pension plans are
typically set up as a trust, with the employer as
settlor, and the employees
and their dependents as beneficiaries.
- Remuneration Trusts. Trusts for the benefit of directors and
employees or companies or their families or dependents. This form of trust
was developed by Paul Baxendale-Walker and has since gained widespread
use. [1]
- Corporate Structures. Complex business arrangements, most
often in the finance and insurance sectors, sometimes use trusts among
various other entities (e.g. corporations) in their structure.
- Asset Protection. The principle of "asset
protection" is for a person to divorce himself or
herself personally from the assets he or she would otherwise own, with the
intention that future creditors will not be able to attack that money,
even though they may be able to bankrupt him or her personally. One method
of asset protection is the creation of a discretionary trust, of which the
settlor may be the protector and a beneficiary, but not the trustee and
not the sole beneficiary. In such an arrangement the settlor may be in a
position to benefit from the trust assets, without owning them, and
therefore without them being available to his creditors. Such a trust will
usually preserve anonymity with a completely unconnected name (e.g.
"The Teddy Bear Trust"). The above is a considerable
simplification of the scope of asset protection. It is a subject which
straddles ethical boundaries. Some asset protection is legal and
(arguably) moral, while some
asset protection is illegal and/or (arguably) immoral.
- Tax Planning. The tax consequences of doing anything using
a trust are usually different from the tax consequences of achieving the
same effect by another route (if, indeed, it would be possible to do so).
In many cases the tax consequences of using the trust are better than the alternative,
and trusts are therefore frequently used for tax
avoidance.For an example see the "nil-band
discretionary trust", explained at Inheritance Tax (United Kingdom).
- Tax Evasion. In contrast to tax avoidance, tax evasion is
the illegal concealment of income from the tax authorities. Trusts have
proved a useful vehicle to the tax evader, as they tend to preserve
anonymity, and they divorce the settlor and individual beneficiaries from
ownership of the assets. This use is particularly common across borders—a
trustee in one country is not necessarily bound to report income to the
tax authorities of another. This issue has been addressed by various
initiatives of the OECD.
- Money
Laundering. The same attributes of trusts which attract legitimate asset
protectors also attract money launderers. Many of the techniques of asset
protection, particularly layering, are techniques of
money-laundering also, and innocent trustees such as bank trust companies
can become involved in money-laundering in the belief that they are
furthering a legitimate asset protection exercise, often without raising
suspicion. See also Anti
Money Laundering and Financial Action Task Force on Money
Laundering.
- Co-ownership. Ownership of property by more than
one person is facilitated by a trust. In particular, ownership of a
matrimonial home is commonly effected by a trust with both partners as
beneficiaries and one, or both, owning the legal title as trustee.
Types
- Constructive
trust. Unlike an express or implied trust, a constructive
trust is not created by an agreement between a settlor
and the trustee. A constructive trust is imposed by the law as an
"equitable remedy." This generally occurs due to some
wrongdoing, where the wrongdoer has acquired legal title to some property
and cannot in good conscience be allowed to benefit from it. A
constructive trust is, essentially, a legal fiction. For
example, a court of equity recognizing a plaintiff's request for the
equitable remedy of a constructive trust may decide that a constructive
trust has been "raised" and simply order the person holding the
assets to the person who rightfully should have them. The constructive
trustee is not necessarily the person who is guilty of the wrongdoing, and
in practice it is often a bank or similar organization.
- Express trust. An express trust arises where a
settlor deliberately and consciously decides to create a trust, over their
assets, either now, or upon his or her later death. In these cases this
will be achieved by signing a trust instrument, which will either be a will or a trust deed.
Almost all trusts dealt with in the trust industry are of this type. They
contrast with resulting and constructive trusts. The intention of the
parties to create the trust must be shown clearly by their language or
conduct. For an express trust to exist, there must be certainty to the
objects of the trust and the trust property. In the USA Statute
of Frauds provisions require express trusts to be
evidenced in writing if the trust property is above a certain value, or is
real estate.
- Fixed trust. In a fixed trust, the entitlement of
the beneficiaries is fixed by the settlor. The trustee has little or no
discretion. Common examples are:
- Hybrid trust. A hybrid trust combines elements of
both fixed and discretionary trusts. In a hybrid trust, the trustee must
pay a certain amount of the trust property to each beneficiary fixed by
the settlor. But the trustee has discretion as to how any remaining trust
property, once these fixed amounts have been paid out, is to be paid to
the beneficiaries.
- Implied trust. An implied trust, as distinct from an
express trust, is created where some of the legal requirements for an
express trust are not met, but an intention on behalf of the parties to
create a trust can be presumed to exist. A resulting trust may be deemed
to be present where a trust instrument is not properly drafted and a
portion of the equitable title has not been provided for. In such a case,
the law may raise a resulting trust for the benefit of the grantor (the
creator of the trust). In other words, the grantor may be deemed to be a
beneficiary of the portion of the equitable title that was not properly
provided for in the trust document.
- Incentive trust. A trust that uses distributions from
income or principal as an incentive to encourage or discourage certain
behaviors on the part of the beneficiary. The term "incentive
trust" is sometimes used to distinguish trusts that provide fixed
conditions for access to trust funds from discretionary trusts that leave
such decisions up to the trustee.
- Inter
vivos
trust (or living trust). A settlor who is living at the time the
trust is established creates an inter vivos trust.
- Irrevocable trust. In contrast to a revocable trust, an
irrevocable trust is one in which the terms of the trust cannot be amended
or revised until the terms or purposes of the trust have been completed.
Although in rare cases, a court may change the terms of the trust due to
unexpected changes in circumstances that make the trust uneconomical or
unwieldy to administer, under normal circumstances an irrevocable trust
cannot be changed by the trustee or the beneficiaries of the trust.
- Offshore trust. Strictly speaking, an offshore trust
is a trust which is resident
in any jurisdiction other than that in which the settlor is resident.
However, the term is more commonly used to describe a trust in one of the
jurisdictions known as offshore
financial centers or, colloquially, as tax havens.
Offshore trusts are usually conceptually similar to onshore trusts in
common law countries, but usually with legislative modifications to make
the more commercially attractive by abolishing or modifying certain common
law restrictions. By extension, "onshore trust" has come to mean
any trust resident in a high-tax jurisdiction.
- Private and public
trusts. A private trust has one or more particular individuals as its
beneficiary. By contrast, a public trust (also called a charitable
trust) has some charitable end as its beneficiary.
In order to qualify as a charitable trust, the trust must have as its
object certain purposes such as alleviating poverty, providing education,
carrying out some religious purpose, etc. The permissible objects are
generally set out in legislation, but objects not explicitly set out may
also be an object of a charitable trust, by analogy. Charitable trusts are
entitled to special treatment under the law of trusts and also the law of
taxation.
- Protective trust. Here the terminology is different between
the UK and the USA:
- In the UK, a protective trust is a life
interest which terminates on the happening of a specified event such as
the bankruptcy of the beneficiary or any attempt by him to dispose of his
interest. They have become comparatively rare.
- In the USA, a protective trust is a
type of trust that was devised for use in estate planning. (In another
jurisdiction this might be thought of as one type of asset
protection trust.) Often a person, A, wishes to
leave property to another person B. A however fears that
the property might be claimed by creditors before A dies, and that
therefore B would receive none of it. A could establish a
trust with B as the beneficiary, but then A would not be
entitled to use of the property before they died. Protective trusts were
developed as a solution to this situation. A would establish a
trust with both A and B as beneficiaries, with the trustee instructed
to allow A use of the property until they died, and thereafter to
allow its use to B. The property is then safe from being claimed
by A's creditors, at least so long as the debt was entered into
after the trust's establishment. This use of trusts is similar to life estates and remainders,
and are frequently used as alternatives to them.
- Purpose trust. Or, more accurately, non-charitable
purpose trust (all charitable trusts are purpose trusts). Generally, the
law does not permit non-charitable purpose trusts outside of certain
anomalous exceptions which arose under the eighteenth century common law
(and, arguable, Quistclose trusts). Certain
jurisdictions (principally, offshore
jurisdictions) have enacted legislation validating
non-charitable purpose trusts generally.
- Resulting trust. A resulting trust is a form of
implied trust which occurs where (1) a trust fails, wholly or in part, as
a result of which the settlor becomes entitled to the assets; or (2) a
voluntary payment is made by A to B in circumstances which do not suggest
gifting. B becomes the resulting trustee of A's payment.
- Revocable trust. A trust of this kind can be amended, altered
or revoked by its settlor at any time, provided the settlor is not
mentally incapacitated. Revocable trusts are becoming increasingly common
in the United States as a substitute for a will to minimize
administrative costs associated with probate and to provide centralized
administration of a person's final affairs after death.
- Secret trust. A post mortem trust
constituted externally from a will but imposing obligations as a trustee
on one, or more, legatees of a will.
- Simple trust. This term is only used in the USA,
but in that jurisdiction has two distinct meanings:
- In a simple trust the trustee has no
active duty beyond conveying the property to the beneficiary at some
future time determined by the trust. This is also called a bare trust.
All other trusts are special trusts where the trustee has active
duties beyond this.
- A simple trust in Federal income tax law is
one in which, under the terms of the trust document, all net income must
be distributed on an annual basis.
- Special trust. In the USA, a special trust contrasts with a
simple trust (see above).
- A Spendthrift
trust is a trust put into place for the benefit of a
person who is unable to control their spending. It gives the trustee the
power to decide how the trust funds may be spent for the benefit of the
beneficiary.
- Standby Trust or Pourover Trust. The trust is empty
at creation during life and the will transfers the property into the trust
at death. This is a statutory trust.
- Testamentary
trust or Will Trust. A trust created in an individual's will is called a
testamentary trust. Because a will can become effective only upon death, a
testamentary trust is generally created at or following the date of the
settlor's death.
- Unit trust. A unit trust is a
trust where the beneficiaries (called unit holders) each possess a
certain share (called units) and can direct the trustee to pay
money to them out of the trust property according to the number of units
they possess. A unit trust is a vehicle for collective
investment, rather than disposition, as the person who
gives the property to the trustee is also the beneficiary.[13]
While the preceding list is a
great starting point in trust education, this is an ever-expanding field of
law. New types of trusts continue to be created, as the IRS continues to expand
tax law, and individuals seek to find new ways to properly transfer their
wealth to individuals, charities, etc.
Terms
- Appointment. In trust law, "appointment" often
has its everyday meaning. It is common to talk of "the appointment of
a trustee", for example. However, "appointment" also has a
technical trust law meaning, either:
- the act of appointing (i.e. giving)
an asset from the trust to a beneficiary (usually where there is some
choice in the matter—such as in a discretionary trust); or
- the name of the document which gives effect
to the appointment.
The trustee's right to do this, where it exists, is called a power
of appointment. Sometimes, a power of appointment is given to
someone other than the trustee, such as the settlor, the protector, or a
beneficiary.
- Protector. A protector may be appointed in an
express, inter vivos trust, as a person who has some control over the
trustee—usually including a power to dismiss the trustee and appoint
another. The legal status of a protector is the subject of some debate.
No-one doubts that a trustee has fiduciary
responsibilities. If a protector also has fiduciary
responsibilities then the courts—if asked by beneficiaries—could order him
or her to act in the way the court decrees. However, a protector is
unnecessary to the nature of a trust—many trusts can and do operate
without one. Also, protectors are comparatively new, while the nature of
trusts has been established over hundreds of years. It is therefore
thought by some that protectors have fiduciary duties, and by others that
they do not. The case
law has not yet established this point.
- Trustee. A person (either an individual, a corporation or more than one of either) who administers a trust. A trustee is considered a fiduciary and owes the highest duty under the law to protect trust assets from unreasonable loss for the trust's beneficiaries.
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