A trust is created when a settlor puts assets into the control of a trustee, who then holds those assets on trust for a beneficiary. A trust can be created in lifetime or upon death and will generally be irrevocable unless the trust deed contains an express provision to the contrary.
Key elements of a trust
- The creation of a trust means that the legal ownership of an asset is separated from the beneficial interest.
- The trustees become the legal owners of the trust property from the point of view of third parties. However, the beneficiaries can expect the trust to be managed for their benefit.
- Trust assets remain as a separate fund and do not form part of a trustee’s personal property.
- The trustees have power to deal with trust assets in accordance with the terms of the trust deed, alongside the obligations and duties which arise as a result of their trusted position.
- A trust will not exist if the reality is that the legal and beneficial interest of trust property are solely owned by the same person.
- Unlike a company a trust does not have a separate legal personality from its trustees. Trustees are personally liable when they enter into contracts with third parties on behalf of the trust. Additionally they owe personal obligations to the beneficiaries not to act in breach of trust.
It is crucial for trustees to act in accordance with their powers if they are to be reimbursed from the trust fund for any liability that they incur. Further, unlike a company, a trust cannot be a party to proceedings and instead the trustees must be referred to in their individual capacities.
The three certainties
For a trust to be valid the three certainties must apply:
- Certainty that the settlor intended to create a trust e.g. as opposed to making an outright gift.
- Certainty as to the beneficiaries, who must be identifiable individuals, with the exception of a charitable trust that can be created for a purpose.
- Certainty as to the trust assets.
Types of trust
- Express trusts – these are intentionally created and normally the terms of the trust will be set out in a trust document. Broadly there are four main types of express trust:
- Bare trusts – the beneficiaries’ beneficial ownership of the trust property is absolute and the trustees are obliged to act upon their instructions. g. where the legal ownership in land is held by a trustee, until the beneficiary reaches maturity at which point the land must be transferred to the beneficiary outright.
- Interest in possession trusts – these are often referred to as life interest trusts. These types of trusts allow for one or more beneficiaries to receive trust income as it arises or to occupy trust property.
- Discretionary trusts – beneficiaries have no absolute rights to trust capital or income. Instead they have the right to be considered by the trustees who are required to exercise their discretion when distributing capital or income as they see fit.
- Contingent trusts – E.g. for children when their interest is contingent on reaching a specific age for example 18 or 21. The trustees are usually able to use the income and capital to benefit the children prior to their reaching the specified age.
- Statutory trusts – these are trusts imposed by the law in particular circumstances. For example:
- Trusts created by the laws of intestacy where the deceased did not leave a will.
- Trusts created where land is jointly owned.
These kinds of trusts arise automatically in accordance with legislation.
- Trusts imposed by operation of law - there are two types of trust which will arise in this way:
- Resulting trusts - this type of trust can either be presumed or rise automatically. A presumed trust will arise in circumstances where it is presumed that a person intended to create a trust over property that they are holding. For example when someone provides the purchase price for a property, which is to be held legally by another person. Consideration will be given to the nature of the relationship between the donor and donee and all of the relevant circumstances.
Resulting trust may rise automatically e.g. where a settler fails to properly dispose of the entire beneficial interest in a property, which then “results“ back to the settlor. This is why trusts usually contain provisions which take effect if any prior trust fails in order to prevent assets from passing back to the original settlor.
- Constructive trusts - trusts of this nature arise by operation of law regardless of the party’s intentions. A constructive trust may be found to arise in order to prevent an unjust enrichment or in circumstances where it would be unconscionable to allow the legal owner to retain beneficial ownership of trust property.
Duties of trustees
Trustees are subject to fiduciary duties as they are in the trusted position of holding property for the benefit of others. Additionally they owe duties of skill and care when administering the trust both at common-law and in certain circumstances under the Trustee act 2000.
The main duties of a trustee are to:
- Act prudently – they must act according to the standards of the ordinary, prudent business person and consider what such a person would do if they were under a moral duty to provide for others. They may also be subject to a statutory duty to exercise reasonable care and skill.
- Avoid conflicts of interest – they must not place themselves in a position of actual or potential conflict which would prevent them from carrying out their duties and they must not make a profit from their position as trustee.
- Act collectively - unless the trustees make alternative provision.
- Act impartially between beneficiaries. This may involve consideration as to how to fairly balance the generation of income against capital growth, when investing trust assets, and require the trustees to seek appropriate professional advice when making decisions of this nature.
- Act in accordance with the terms of the trust deed and any legal requirements.
Trustees are in the trusted and responsible position of managing assets for persons other than themselves. It is therefore understandable that they must act within strict parameters and at all times in the best interests of the beneficiaries in order to avoid personal liability and to preserve the public’s confidence in the respected role of the trustee.
If you are party to a trust and have concerns that it is not being properly managed, or a trustee being criticised by a beneficiary and would like to discuss your concerns then please contact us for legal advice on trust disputes.