Abdullah Manto
Associate
In Legal context a trust is a foundational concept that has played an incremental role in property ownership and the protection of equitable interests for centuries. Trusts are versatile legal arrangements that allow individuals to transfer property,assets, or wealth to a separate entity, who holds and manages the assets for the benefit of another. This article will provide a comprehensive understanding of the various applications of a trust by examining its significant elements and diverse classifications.
There are three distinct parties in a trust, namely, the settlor, trustee, and beneficiary. The settlor, also known as the trustor, is the absolute owner of the property. A trust is created by the settlor when ‘property is vested in a person or persons called the trustees, who are obliged to hold the property for the benefit of other persons called the beneficiaries.’[1] ‘There are four significant elements to the trust: that it is equitable, that it provides the beneficiary with rights in property, that it also imposes obligations on the trustee, and that those obligations are fiduciary in nature.’[2] Equity serves as a vital element of a trust relationship due to its careful consideration, recognition and administration of the equitable interests involved. It provides beneficiaries with proprietary rights over the trust property as displayed in Quistclose Investments Ltd 1970[3] where the beneficiaries claim to the trust property during insolvency outweighed the creditors who had claimed debt collection. Furthermore, a trust relationship imposes fiduciary duties upon trustees which was defined as an obligation of loyalty in Mothew 1996[4]. These obligations ensure that trustees safeguard trust property in a bona fide manner with the best interests of the beneficiaries. Equity is an inherent part of all trusts underlying the legally enforceable equitable rights of beneficiaries and the fiduciary duties of the trustees to act with integrity in accordance with the settlor’s intentions. Simply put, a trust relationship divides the legal and equitable ownership of property, amongst distinct parties, each with their own clear rights and obligations.
Although numerous types of trusts are available thereby catering to various distinct purposes, generally all trusts can be classified as either expressed or implied. Expressed trusts are formed by the settlor inter vivos or testamentary.[5] These trusts may be private, meaning that the beneficiaries could be a private individual or group of people; They may also be public in which case the beneficiaries could be public entity such as a charitable organization. According to the settlor’s specifications the equitable rights of the beneficiaries can be fixed, however, the settlor may also leave some rights to the discretion of the trustee. One may argue that an expressed trust is merely‘a gift projected on the plane of time and meanwhile, in need of management.’[6]Although an absolute gift shares similarities with an expressed trust such as the conveyance of property being irrevocable, it is notably distinguishable when considering that an expressed trust can be formed for beneficiaries who may not be sui juris. In Bare Trusts a trustee has a duty to hold the property for a sole beneficiary who may not be of legal age or mental capacity. This kind of trust leaves no discretion or contingencies upon the trustee. Following Saunders 1841,[7] bare trusts can be terminated by the beneficiary once they are an adult of mental capacity. Another form of expressed trusts are protective trusts which aim to protect beneficiaries by preventing misuse of the property by an immature or reckless beneficiary. In protective trusts the trustee is given some discretion to reduce the risks of property being wasted by the beneficiary. S.33 of the Trustees Act 1925[8] gives the beneficiary life interest of the property, however this can be void in certain circumstances such as bankruptcy or a sale of the property. The elements of expressed trusts can be distinguished from an absolute gift by catering to a wide range of beneficiaries including those who are not sui juris, thereby contributing to the multifaceted nature of a trust.
One may claim that a trust ‘is functionally indistinguishable from the modern third-party beneficiary contract’.[9]Unlike contracts where both parties may enforce contractual rights, in a trust the rights belong to the beneficiary, therefore, the settlor cannot enforce any rights upon the trustee. Although the beneficiary’s rights are like contractual rights, a key difference is that beneficiaries also possess proprietary rights in the trust property itself.[10]While‘every trust originates from some arrangement of consent or assent,’[11]it is difficult to apply this belief regarding implied trusts where the court appoints a trustee without the settlor’s expressed intentions. The two main types of implied trusts are resulting and constructive trusts.
Resulting trusts arise in situations where a valid trust has not been properly established. These trusts can contradict the explicit intentions of the settlor as seen in Vandervell 1967[12], where a resulting trust materialized despite the settlor’s clear intention to give away property. This type of resulting trust is often referred to as an automatic resulting trust. In other cases, property may be voluntarily transferred to or purchased by someone, as exemplified in Milligan 1994[13], where the resulting trust’s formation was based on the presumed intentions of the resulting beneficiary. As highlighted by Lord Browne-Wilkinson in Landesbank 1996[14], resulting trusts rely on the parties’ intentions, demonstrating the court’s commitment to upholding equitable principles and rectifying trust arrangements in cases of ambiguity or failure to establish a valid trust.
Constructive trusts are administered by the court’s evaluation of an individual’s equitable interest in a property whilst presuming the settlor’s intentions. In certain circumstances, constructive trusts prove invaluable in rectifying equitable disputes. For instance, when breaches of fiduciary duty occur, as evidenced in Sandford 1726[15], the establishment of a constructive trust is prompted. This ensures that any advantages derived from the property are held in favor of the claimant. In cases involving immoral receipt, demonstrated in Re Sigsworth 1935[16], wherein property is acquired through wrongful means such as killing, the application of a constructive trust is instrumental. Unauthorized profit situations, exemplified by Ried 1994[17], reveal that when individuals obtain profits due to unethical conduct in positions of responsibility, like bribery, the court deems them held on constructive trust for the state. Additionally, in scenarios such as El Ajou 1994[18], when property exchanges hands without appropriate consideration, it is determined that the recipient holds the property on constructive trust for the rightful owner. Constructive trusts also play a crucial role in matters concerning family homes, illustrated by Edwards 1986[19], where one party holds the title to the home while the other contributes, under an implied understanding to their interest in the property. Constructive trusts contribute to the multifaceted concept of a trust by safeguarding equitable interests in various complex situations that may not have been explicitly addressed in express trusts.
The aforementioned classifications of trusts consistently illustrate a trust as a property being held by the trustees for benefit of the beneficiaries. Furthermore, they contribute to the vast concept of a trust through the unique circumstances wherein certain types may arise. These classifications evidently distinguish a trust from an absolute gift and third-party contract whilst establishing significant common elements such as the fiduciary duties of trustees and proprietary rights of beneficiaries. In conclusion a trust can be defined as a separation of legal and equitable interests vested in a property which ensures that beneficiaries rights are safe guarded, trustees act with integrity, and the trust property is administered in accordance with the settlor’s intentions.
[1] Jill E. Martin, Hanbury and Martin: Modern Equity, 19th edition (Sweet & Maxwell 2012) at 49
[2] Geraint Thomas and Alistair Hudson, The Law of Trusts, 2nd edition (Oxford University Press, 2010)
[3] Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4
[4] Bristol and West Building Society v Mothew [1996]EWCA Civ 533
[5] Re Duke of Norfolk’s settlement Trust [1981] EWCA Civ 5
[6] F. H. Lawson and B. Rudden, The Law of Property, 2nd edition (Oxford University Press, 1982) at 55
[7] Saunders v Vautier [1841] 4 Beav. 115
[8] Trustee Act 1925, s 33.
[9] J. H. Langbein, Contraction basis of the Law of Trusts ‘ (1995) 105 Yale LJ 625 at 627
[10] Gary Wyatt, Trusts & Equity, 7th edition (Oxford University Press, 2016) at 20
[11] Professor Kevin Gray ‘Property in thin air’ [1991] 50(2) CLJ 252 at 302
[12] Vandervell v IRC [1967] 2 AC 291
[13] Tinsley v Milligan [1994] 1 A.C. 340
[14] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12
[15] Keech v Sandford [1726] 25 E.R. 223
[16] Re Sigsworth [1935] 1 Ch 98.
[17] Attorney General of Hong Kong v Reid [1994] UKPC 36
[18] El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4
[19] Grant v Edwards [1986] 3 WLR 114