Background in Equity
The trust is very much the creation of the law of equity. Historically, equity was dispensed by the courts of equity. The courts of equity merged with the courts of law in 1877 so that equity and law are applied in all courts.
In most cases, the equitable rules take precedence over the rules of “law”. In this context, the rules of “law” refer to the rules applied by the common law courts prior to 1877.
Historically, equity looked at circumstances and dealings from the points of view of justice and fairness. They were more flexible, both in relation to the evolution and application of principles and in relation to the types of remedies which they employed.
In contrast, the common law, particularly in its earlier phases, was significantly more inflexible. Certainty, even in relation to archaic and sometimes arbitrary principles, was seen as preferable to the exercise of discretion and concepts of justice.
The trust is one of the key legal institutions. It may apply to a wide variety of situations. A trust arises when one person (the trustee) holds an asset under an equitable obligation to deal with the property and hold it for the benefit of one or more others (the beneficiaries).
A characteristic of the court of equity is that they act on the respondent personally. Its orders are enforced principally by the application of personal sanctions, including imprisonment. Equity imposes personal obligations on trustees to fulfil the terms of the trust.
The beneficiaries may enforce the terms of the trust against the trustee in his personal capacity. The trustee may be compelled to comply with the terms of the trust. The court may sanction a trustee personally. An order to pay compensation for breach of trust may be enforced against the trustee’s personal assets.
Protection of Trust Assets
The law of equity (which takes precedence over common law) places an obligation on the trustee to deal with the assets in accordance with the terms of the trust. Therefore the rights and interests of the beneficiaries exist by means of the enforcement of the personal trust obligation on the trustees.
The trustee or trustees jointly hold legal title to the trust assets. For example, in the Land Registry or Registry of Deeds, he or they may appear to be the owner. He may be the registered owner of shares.
As far as the outside world is concerned, the trustee may appear to be the absolute owner. Third parties, without notice of his true status, are entitled to deal with the registered nominal or legal owner as if he were the absolute owner.
The general principle found throughout various strands of law is that a person who purchases in good faith from a trustee without notice of the trust or at least without notice of a breach of the trust, takes a good title. In this event, the rights of the beneficiaries would lie only against the trustee personally.
There exist various mechanisms in registers which may protect beneficiaries. The fruits of benefits taken by the trustee in breach of trust can be traced or attached by the courts of equity.
In the Land Registry, it is possible, through the mechanisms of an inhibition, to put a notice on a register so as to prevent a trustee from dealing with trust assets in breach of trust. Similarly, it is possible to put stop notices in the register of members of a company. These options provide a measure of protection, as they provide, at best, a warning to the beneficiary that a transaction in breach of trust or fiduciary duty may occur.
Creation of Trust
A trust may be created during lifetime by a deed of trust. A trust may be established in a will. The deceased defines the trust in the will and nominates the trustee. It takes effect on death.
A person may add assets to a lifetime trust established by himself or another under the terms of his will. In tax planning, a person may create a lifetime trust with minimal value assets only with the intention of leaving substantial assets to the trust on death in a will.
The person creating the trust is often referred to as the settlor. He may also be a trustee and/or one of the beneficiaries or both. He or third parties may later add to the trust assets.
Trusts may arise informally, without any document, in other circumstances. See the articles on resulting trusts and constructive trusts.
Terms of Trust
The terms of trusts vary considerably. There is a great deal of flexibility in relation to the terms on which a trust may be established.
In some cases, the trustee is a mere nominee holding for the beneficiaries, who are entitled to call for the transfer of the legal title of assets to them at any time. The trustees are mere nominees and their role is to transfer the trust assets in accordance with pre-defined entitlements when called upon to do so.
In other cases, the beneficiary’s rights are more limited and conditional. The beneficiaries may be entitled to some or all of the trust assets at a future date. They may be entitled to the income or a share of the income of the trust assets for life or another period. The beneficiaries’ rights and entitlements may be defined by the trust or a previous transfer or appointment under the trust.
On the other end of the spectrum is a discretionary trust. Under a discretionary trust, the beneficiaries have no entitlement to all or any part of the trust assets unless and until the trustees vest or “appoint” the assets to them.
The beneficiaries cannot compel the trustees to transfer any particular assets to them. Their right is to be considered by the trustees in the exercise of their discretion and powers in accordance with the terms of the trust.
Public / Charitible Trusts
Trusts may be for public or private purposes. A private trust is for the benefit of particular persons or relatively small groups of persons. They are commonly used in managing the transfer of assets between generations within families.
A public trust must generally be for “charitable” purposes. “Charity” in this context has a particular established meaning. The rules in relation to charitable trusts are more liberal than those for private trusts.
Designated public authorities have a role in enforcing and monitoring charitable trusts. Charities have recently been subject to significantly increased regulation. See the section on the registration and regulation of charities.
Trust by Operation of Law
Two principal types of trust arise automatically, without being created by deed, writing or oral declaration of trust. In each case, the courts, formerly the courts of equity, take the view that it would be inequitable to treat the nominal owner or trustee as the true owner of the relevant assets in particular types of circumstances. He is instead obliged to hold them in accordance with the terms of a trust imposed by law.
The first type of trust is a “resulting trust”, which arises out of the presumed intention of the parties in certain circumstances, which usually involve the use of another person’s funds or assets. A common instance of a resulting trust is where A uses B’s money to buy an asset. In the absence of proof of a gift or of a close familial relationship between A and B, it is presumed that A holds the asset as a bare trustee for B.
The courts of equity took the view that it would be inequitable for A to take ownership of property, as it is contrary to the underlying economic position. A would hold his legal ownership as trustee for B. After the merger of the courts of law and courts of equity, the equitable position prevails, and resulting trust principles apply in all courts.
The second type of automatic arising trust is a constructive trust. In its broadest formulation, it is applied to prevent unjust enrichment. The courts of equity impose an obligation on a person by which he is a constructive trustee for another. Constructive trusts arise principally in certain defined types of circumstances.
The Courts have gone some distance towards using the concept of constructive trust as a remedy or as means of remedying injustice. However, the courts have not yet evolved a general principle whereby they apply constructive trusts generally to undo just enrichment.
A constructive trust may arise, for example, where a trustee wrongfully uses trust monies to benefit himself. In this case, any assets held must themselves be held under the principal trust for the benefit of the beneficiaries.
Trustees owe fiduciary duties to the beneficiaries under the trust. The law imposes fiduciary duties on certain other persons, who are not trustees, but who stand in a position of dominance or influence in relation to certain other persons who are typically in a weaker position, intellectually or economically. The disadvantage may arise from reasons such as youth, advanced years or a relationship of dependence.
The duties of fiduciaries who are not trustees are similar to the duties of trustees, but are slightly less onerous and rigorous. Many of the key trustee duties, such as avoiding conflict of interest and not benefiting from the relationship, apply to non-trustee fiduciaries. In some cases, informed consent following full disclosure may permit what would otherwise constitute a breach of duty.
Certain relationships give rise to a fiduciary duty in order to protect the person whose interests are at risk of abuse. The directors of the company owe fiduciary duties to the company. They control the company, but the company itself is owned by the shareholders. They are in a position to exploit the company for their personal gain, and the imposition of fiduciary duties seeks to avoid this possibility.
Personal representatives are deemed to be trustees for some purposes under the Succession Act. In order to protect the interests of the beneficiaries, trustee and fiduciary duties are imposed.
Personal representatives have duties to collect in the assets of the deceased and apply them in accordance with the will or rules on intestacy. Where the representative is not specifically appointed as trustee or is not deemed to be a trustee, fiduciary duties will usually continue to apply.
The personal representative’s role runs from the date of death or issue of grant to the time that assets are vested. Personal representatives may be appointed as trustees under a will, so the deceased’s assets may be vested in them for the medium to long term, under the terms of a trust provided for in the will.
Agents and Employees
An agent is somebody who acts on behalf of another. See the section on agencies. Agents owe fiduciary duties to their principals.
As with directors, they do not have the full obligations of trustees. Many of the significant fiduciary duties apply, such as the duty to avoid conflicts of interest and the duty to act in good faith.
Employees owe a duty of fidelity or loyalty to their employer. This duty is significantly more diluted than that which applies to fiduciaries or trustees. However, the law of equity imposes obligations of confidence and good faith, where employees deal with valuable employer assets, such as trade secrets and valuable certain highly confidential information.
Where a person takes custody of goods belonging to another, a bailment commonly arises. This does not of itself create fiduciary duties, common law duties to take care of the goods arise.
A power is a right vested in a person to exercise a particular authority on behalf of another. It may or may not be, by its terms, wholly or partly discretionary. A person may have the power to appoint assets.
Powers do not need to meet the test of certainty of objects (beneficiaries) that applies to trusts. A general power entitles a person to appoint the assets as he sees fit. A special power is subject to limitations as to the class of person to whom they may be appointed.
Trustees have trust powers, but a person may have trust-like powers without being appointed a trustee. A bare power may be similar to a discretionary trust. However, the persons to whom the assets may be appointed are not the beneficiaries of a trust, so (for example) they may not collectively terminate the power, in contrast to the position where the beneficiaries of a trust are fully ascertained, mentally competent and of full age.
Under a general power, the person holding the power usually has complete discretion as to its exercise. Certain powers are interpreted as being in the nature of trust.
This may apply to special powers, where there is a limited class of potential beneficiaries. In these cases, the courts of equity may find there to be an intention to benefit the particular objects of the power. The courts will not readily allow the gift to lapse, by reason of failure to exercise the power.
Power of Attorney
A power of attorney is a special form of agency. It allows the person to whom it is given (the donee) on to act in the name of the person who makes it (the donor) to the extent provided in the instrument.
The Powers of Attorney Act allows for the creation of a general power of attorney by use of a very simple form of wording specified in the Act. The general power entitles the donee to do every legally binding thing which the donor may do. The donee is also referred to as the attorney.
A power of attorney may be limited, in which case it is necessary to examine and interpret the terms of the instrument in order to ascertain the extent of the authority.
A power of attorney is terminated by the donor’s death or incapacity. Certain protections are provided for third parties dealing in good faith with the attorney who do not have knowledge of the death or incapacity of the donor, or do not have notice of its revocation. An enduring power of attorney, is valid in the event of and notwithstanding the donor’s subsequent incapacity.
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