Trust law
From Wikipedia, the free encyclopedia
In common law legal systems, a trust is an arrangement whereby money or property is owned and managed by one person (or persons, or organisations) for the benefit of another. A trust is created by a settlor, who entrusts some or all of his property to people of his choice (the trustees). The trustees are the legal owners of the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organisations (the beneficiary), usually specified by the settlor. The trustees owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property.
The trust is governed by the terms of the trust document, which is usually written and in deed form. It is also governed by local law.
In the United States, the settlor is also called the trustor, grantor, donor, or creator.
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[edit] History
Trusts developed in England at the time of the Crusades, during the 12th and 13th Centuries.
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; to pay and receive feudal dues, for example. To achieve this, he would convey his lands to a friend, on the understanding that the land would be conveyed back on his return. However, crusaders would often return to find the legal owners less than willing to hand over the property.
Unfortunately for the crusader, English law did not recognise his claim. As far as the courts were concerned, the land belonged to the friend (or, more likely, former friend), and he was under no obligation to return it. The crusader had no legal claim.
The disgruntled crusader would 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 recognise 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.
Roman law recognised a similar concept which it referred to as the fidei-commissa.[1]
[edit] Significance
The trust is widely considered to be the most innovative contribution to the English legal system. [2] 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.
[edit] 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.
[edit] Creation
Trusts can be created by written document (express trusts) or they can be created by implication (implied 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;
- an oral declaration;[3]
- the Will of the settlor; 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.[4]
[edit] Formalities
Generally, a trust requires three certainties:
- 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 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.
[edit] Trustees
The trustee can be either a person or a legal entity such as a company. There can be multiple trustees, in which case the trust should provide a mechanism for the trustees to make decisions. A trust generally will not fail solely for want of a trustee; if there is no trustee, whoever has title to the trust property will be considered the trustee. A court may appoint a trustee if necessary.
The trustees will be the legal owners of the trust property. They can, for example, sign bank transactions, make investments or rent out a house (if part of the trust property). By default, being a trustee is an unpaid job. However, 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.
A trust can be created without the trustees having any knowledge of its existence. However, it is usual for the settlor to make arrangements with potential trustees (for example, friends or a professional) before creating the trust.
[edit] Beneficiaries
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, they will receive income from the trust property or they will receive the property itself. The extent of an individual 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 turns 25. The settlor has much discretion when creating the trust, subject to limitations imposed by law.
[edit] Types of trusts
In the United Kingdom, five main types of trust have developed:
- Interest in possession trust. Interest in possession trusts (sometimes called "life interest trusts") are often created as part of wills and are structured in such a way that the surviving spouse, or "life tenant", will have a right to receive an income for the rest of his or her life, or for a fixed period at least.
- Accumulation and Maintenance trust. "A&M" trusts arose in the 1970s because of changes to UK tax law. They exist for young beneficiaries and give the trustees discretion to pay money for their benefit. Until recently they have enjoyed special tax treatment, but the Finance Act 2006 changed this.
- Discretionary trust. Trustees of a discretionary trust can often choose the beneficiaries, based on a "class" specified by the settlor. Alternatively, they may have a fixed group of beneficiaries to choose from, but they can decide which beneficiaries (if any) are to benefit and to what extent, so long as the decision is based on the beneficiaries' best interests.
- Bare trust. Where there is a bare trust, the trustees can deal with the property as usual but the beneficiaries have an absolute right to demand any or all of the property at any time. The trustees are therefore mere agents of the beneficiaries. In the USA the term simple trust is used (see below).
- Charitable trust. Charitable trusts have a unique position in English law. They have special tax advantages, they do not have to end after a certain period of time (unlike other types of trusts), they will not be void if their objects are uncertain. They encourage charitable giving.
[edit] Purposes
The most common purposes for trusts are as follows:
- 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 one's self against one's 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.
- 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 the UK, 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.
- 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.
[edit] Society of Trust and Estate Practitioners
The international professional association for the trust industry is STEP, the Society of Trust and Estate Practitioners. Its members place the letters TEP after their names.
[edit] Jurisdictions
Specific provisions of trust law relating to particular jurisdictions may be found on the following sub-pages:
[edit] Terminology
- 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.
- 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 organisation.
- Express trust. An express trust arises where a settlor deliberately and consciously decides to create a trust, over his or her 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.
- Inter vivos 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 which will not come to an end until the terms of the trust have been fulfilled.
- 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 comparativeley 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.
- 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.
- 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 the form of implied trust which occurs where a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets.
- Revocable trust. A trust of this kind can be "revoked" (cancelled) by its settlor at any time. Revocable trusts are common outside the USA, but (for tax reasons) they are usually only used in situations where the settlor or a major beneficiary has a USA connection.
- 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.
- 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.
- Trustee. One who is responsible for a trust.
- Unit trust. A unit trust is a trust where the beneficiaries (called unitholders) 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. [5]
[edit] References
- ^ 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.
- ^ Roy Goode, Commercial Law (2nd ed.)
- ^ See for example T Choithram International SA and others v Pagarani and others [2001] 2 All ER 492
- ^ For example, in England, trusts over land must be evidenced in writing under s.56 of the Law of Property Act 1925
- ^ Kam Fan Sin, The Legal Nature of the Unit Trust, Clarendon Press, 1998.
[edit] See also
- Blind trust
- Charitable trust
- Foundation (charity)
- Inter vivos trust
- Rabbi trust
- Settlor
- Testamentary trust
- Trusts and estates
- Barnes Foundation case
