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Equity and Trusts/Introduction to Trusts

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INTRODUCTION TO TRUSTS

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Trusts originated in the Middle Ages as a solution to the problem of land when landowners were away on the Crusades or pilgrimages. Legal ownership was transferred but the Chancery enforced the obligation placed on the legal owner. Trusts were also used for tax avoidance – ensuring that as long as there was a living heir there would be no to tax to pay on the transfer of land to the new owner.

How a trust works

The settlor transfers property to one or more trustees, subject to them carrying out obligations with regard to one or more "named" beneficiaries.The ownership of the property is divided into a legal interest and a beneficial interest. The trustee(s) become the legal owner(s) of the property, while the beneficiaries become the beneficial owners and have has enforceable rights against the trustees and some (but not all) others dealing with the trustees.

Trusts are useful because there is:

  • separation of nominal ownership from the benefit and right of control over the property;
  • the possibility of splitting the benefit between two or more beneficiaries;
  • allocation of benefit put in suspense;
  • separation of control and management from the benefit;
  • the ability to share the property between a large number of people.

Types of trust

  • An express trust is one that is consciously set up by the settlor.
  • A resulting trust arises "by operation of law" i.e. without a settlor being involved.
    • Example: a settlor transfers £1 million to a trustee, with the intention that a named beneficiary child is assisted with living costs until the beneficiary reaches the age of 25, when the entire fund will transfer to the beneficiary. If the beneficiary dies before 25, the trust property reverts back to the settlor on a resulting trust. The trustee will now hold the funds as a trustee for the settlor rather than as a trustee for the beneficiary.
  • A constructive trust is one that is imposed by the courts because it is in the interests of justice to place the obligations of a trustee upon the legal owner.
    • Example: WikiVoucher Ltd runs a holiday voucher scheme in which customers pay £5 a week over a year and in return receive a voucher in December for a Christmas hamper. WikiVoucher are having trouble paying their overdraft but they inform the bank that the funds in the “hamper account” are customer payments. However, the bank uses the hamper account to reduce the overdraft. The court would hold that the bank is a constructive trustee of the money in the hamper account, and is therefore not allowed to treat it as its own money.