This article provides a brief introduction to the law of trusts including the requirements for the formation of a trust and the obligations of the various parties.
A trust is a means of separating legal and beneficial ownership of property. In a trust a Settlor enters into an agreement with a Trustee to oversee the management of certain assests for the Beneficiaries of the trust. Trusts have always been used as a method of limiting the exposure of assets to taxes and other legal claims as well as to specify the use of those assets in ways not otherwise recognized under the law.
LEGAL OWNERSHIP
Legal ownership of the property contained within a trust lies with the trust itself. The Trustee as the administrator of the trust is generally granted all the powers necessary under the trust to invest, transfer, sell, divide or dispose of the property within the Trust as he/she sees fit. However, the Trustee is always bound in the trust relationship to only exercise his/her powers in ways that are to the benefit of the Beneficiaries. In some trusts very specific wording is included to guide the Trustee in terms of what the Settlor’s original intent was in setting up the Trust for the Beneficiaries. In other situations the nature of the property itself limits to role of the Trustee to a very narrow set of options. In any event, the relationship between the Trustee and the Beneficiaries is akin to a fiduciary relationship in that a Trustee has an absolute duty of loyalty to the Beneficiaries in exercising any power under the Trust.
BENEFICIAL OWNERSHIP
Beneficial ownership of the property contained within a trust lies (not surprisingly) with the Beneficiaries. The Beneficiaries have rights under the Trust to the property that is contained within the Trust but they do not have the ability to enforce the legal rights associated with the property in their personal capacities. Issues that arise concerning the legal status of the property itself have to be dealt with by Trustee in his/her role as the administrator of the Trust. Not surprisingly, disputes often arise between the Trustee and the Beneficiaries concerning the management of the property contained in the Trust. To the extent that the Trustee is mismanaging or derelict in his/her duties, the Beneficiaries can make court applications to force certain decisions on the Trustee, or to have the Trustee removed, or to have the Trust dissolved entirely.
THE USE OF TRUSTS
Trusts have existed in one form or another for hundreds of years and they have always been used as a way of managing and sheltering assets. The basic legal theory around trusts has not changed much over the centuries but the application of trust law has expanded significantly to accommodate changes in society that the law would otherwise have a difficult time reconciling. For example with the rise of unmarried couples and the problems of the dissolution of those relationships outside matrimonial law, the courts invoked the doctrine of the constructive trust to ensure that an equitable division of property could take place. Furthermore in some jurisdictions the courts have endorsed the concept of a resulting trust on money paid to a contractor for the benefit of his/her employees to the extent of their unpaid wages.
Other than situations where trust like relationships are deemed to arise as a matter of law, trusts are generally set up as a means of avoiding taxes. For example a family trust can be set up whereby the parents are made Trustees and both the parents and the children are named as beneficiaries. Income accumulated through the property owned by the trust can then be paid out to the beneficiaries in the most tax beneficial way. Parents of children approaching university age can therefore use a family trust to split income and fund their child’s education with money that would otherwise be paid in taxes.
New trust applications are always being developed and inevitably vary depending on the jurisdiction in which the trust is created and administered. It is therefore crucial to contact both your accountant and your lawyer before entering into a trust agreement to determine if it will accomplish the goals that you are seeking.
This article is legal commentary only and should not be taken as legal advice. Consult a lawyer in your area with any particular legal questions that you may have.
