This is part 1 of a series of papers on the law and practical application of trusts in everyday life.
As trust lawyers, we have pitched this trust series of articles for people who want a general understanding of trusts. Each part will delve into a specific aspect of trusts from commencement, operation and ending of a trust.
The modern day trust can be traced to the 15th century when the law came to recognize rights other than ownership rights to land, where ownership was synonymous with legal rights.
The trust (or its namesake the “use upon use”) became the vehicle used by owners of land to separate legal rights of ownership from other rights attaching to property, called equitable rights or equitable title. This resulted in 2 species of interest in land.
Legal title can be best described as that bundle of rights you enjoy as legal owner against the whole of the world except for that person or persons who hold those bundle of equitable rights over the same property over which you hold legal title.
Equitable title is that bundle of equitable rights that encumbers the legal title. Those equitable rights are rights the law recognises according to equitable principles.
It may seem incongruous that there can be 2 apparently competing interests in land – the person who holds legal title and the person who holds equitable title.
However, as shall be seen from the definition of trust below, legal title bestows on the legal holder duties and obligations that require the legal holder to act in the interests of the equitable holder. Otherwise, the legal holder has the enjoyment of the property as if it was the true owner.
A trust has been defined as:
an equitable obligation, binding a person (the trustee) to deal with property (trust property) owned by him/her/it as a separate fund, distinct from his/her/its own private property, for the benefit of other persons (beneficiaries)…. (Underhill, A and Heyton, Law Relating to Trustees, 17th Edition, Lexis Nexis Butterworths, London, 2006, page 2)
For the law to recognize and give effect to a trust, the trust must satisfy 3 certainties:
(1) Certainty of creation or intention (to create the trust) – this is usually satisfied by the execution of a trust deed or declaration of trust. However, an oral declaration is sufficient for the creation of a trust;
(2) Certainty of subject matter – there must be trust property capable of identification at the time of the creation of the trust that is declared to be trust property. In the modern trust instrument this may comprise a settlement sum of $10.00 that the person who settled the trusts (settlor) declares as trust property to be held by the trustee. If there is no trust property, the trust fails for there is nothing for the trustee to do.
(3) Certainty of object – there must be objects who are capable of identification as the person or persons benefiting from the trust (ie the beneficiaries). The trust documents will name the beneficiary or list of beneficiaries of the trust.
The modern trust has many different forms. These include:
Discretionary trust (also called the family trust) – arguably the most widely used trust today. The hallmark of this trust is the discretion of the trustee to allocate income and capital of the trust between the beneficiaries of the trust who may be numerous, including natural persons, companies and other trusts including charitable trusts. See Part 2 for more information about this trust.
Unit Trust (fixed or non fixed) – unlike the discretionary trust, the beneficiaries of the unit trust are allocated units (like shareholders in a company are allotted shares) which entitle the beneficiaries to a share of the income and/or capital of the trust.
In a fixed unit trust, the units held by beneficiaries entitled them to a fixed portion of the income and capital of the trust. Fixed trusts are largely used for tax reasons – eg holding land in a fixed trust absolves the trustee from liability for land tax as each unit holder is assessed as a land holder with respect to their proportional unit holding in the fixed trust.
See Part 2 for more information about both trusts.
Hybrid Trust – combines the elements of the discretionary trust and unit (non fixed) trust, so that a beneficiary of the trust may be allocated units entitling them to income distributions and units entitling them to capital distributions. See Part 2 for more information on this trust.
Charitable trusts – as the name suggests, such trusts are set up for a charitable purpose which according to the law are limited to those trusts set up for: relief of the poor; education; religion; and other charitable trusts for the benefit of the community. To qualify as a charitable trust, the trust provide a public benefit to the broader community
Testamentary trusts – as the name suggests, such trusts form part of a persons will and come into effect on completion of the administration of the estate of the deceased. A testamentary trust will in substance take the form of a discretionary trust, fixed trust, unit trust or hybrid trust.
Bare trust – a bare trust is one in which the trustee holds legal title to trust property and performs perfunctory duties in relation to the trust property (eg insure the property held in the name of the trustee, maintain the trust property). The beneficiary for whom the trustee holds legal title may direct the trustee at any time to transfer the trust property to the beneficiary who then becomes the legal and beneficial owner of the trust property.
Constructive trust – is imposed where the court finds that the holder of legal title holds that title for the benefit of another, in circumstances where it would be unjust for the holder of the legal title to assert their legal rights to the property. Eg in a dispute between a couple as to ownership of property, the court may find that despite each person being legally registered as equal owners of the property, the contributions made by each are unequal, and so each legal holder holds their legal title on trust to account to the other the contributions made by the other.
Resulting Trust – a resulting trust is found where a person (the giver) has conveyed title to property to another (the taker) without any payment being made by the taker, or alternatively where the giver has provided the means for the taker to acquire title. The court finds that there is a presumed intention on behalf of the giver that they did not intend the taker to hold the property conveyed or acquired by them as a gift from the giver. The taker holds the property on trust for the giver. That presumption can, however, be rebutted in familial dealings (eg parent as giver and child as taker).
Despite the references to the trust, it is the trustee who as the legal representative of the trust carries responsibilities for all dealings made by the trust, and is the person who is liable to discharge the debts of the trust.
It is for this reason that the trustee is likely a company, with the benefit of limited liability. See Part 3 for more details regarding the trustee and their relationship with the beneficiaries of the trust.
At A. W. Pitman & Co, lawyers Sydney, we can assist you with setting up you trust including the choice of trust that best suits your circumstances and those who you wish to benefit from the trust.
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