A contract is a promise that
may be written or oral. It is a legally binding agreement between parties to
fulfil an obligation in return for a value consideration. The contract must
comprise the four critical elements of offer, acceptance, and consideration,
with the intent to create a legal exchange.
A trust is a legal
relationship created by a benefactor (the settlor) during their lifetime or on
their death in which assets are placed under the control of a third party
(Trustee) for the benefit of another (beneficiary) or a specified reason.
Settlers, Trustees, and beneficiaries act within common law to set up the
trust, run it, and benefit from it. However, the Trust operates and is governed
by Trust law.
The principal types of
Trusts, amongst others, are:
- Revocable Trust: An example of a Revocable Trust
would be to negate probate in transferring estate assets after death. A
revocable Trust is a "Living Trust" created while the owner of
an estate is living. It refers to the fact that the terms of the Trust can
be altered whilst the owner (settler) is living.
- Irrevocable Trust: An Irrevocable Trust cannot be
altered after its creation. One of the main reasons for creating an
irrevocable trust is to transfer an owner’s assets out of their taxable
estate, and income from the assets would no longer be taxable to the beneficiary
during their lifetime. The assets would be non-taxable to the estate upon
the owner's death.
- Living Trust: A living trust may be created
while an estate owner is alive, and it is an efficient way to transfer an
owner's estate to beneficiaries. A Living Trust obviates the need for
probate, where an estate is distributed to heirs by a court after the
owner's death to avoid court fees and potential estate taxes for
beneficiaries.
- Testamentary Trust: is set up after death according
to the estate owner’s wishes. The estate owner can change the terms
anytime until death. It is a more straightforward form of Trust with
greater flexibility than a Living Trust.
Commercial Trusts are used
for transactions where a third-party commercial trading organisation manages
the assets on behalf of the benefactor, which the benefactor or another entity
may have set up. Examples of commercial Trusts may include:
- Infrastructure against public
assets that may produce an income.
- Property Development to develop
property in a syndicated investment.
- Pensions where investments are made
to produce income in the future.
- Insurance to hold assets against
damage or failure of performance.
- Charitable, where the asset of the
Trust is held for tax purposes.
Other principal types of
Trusts include:
- Interest In Possession Trust: Where asset income is passed to
the beneficiary
- Bare Trust: Assets are held for the
beneficiary until a nominated age. The beneficiary generally has the full
entitlement to the asset when they reach the age of 18 or 21.
- Discretionary Trust: Where the Trustee(s) have limited
discretion in distributing the Trust assets regarding who the beneficiary
may be and the timing of payments for Trust awards.
- Accumulation Trusts: Are typically used for pension
funds, where assets are invested to produce future income.
- Non-Resident Trusts: These are used for tax purposes
where the trustees are not domiciled in the country where the trust is
based.
The principal ways in which
a Trust can be created are:
- Declaration of oneself as a
trustee.
- The transfer of property to other
trustees.
The settlor or the person
looking to create the Trust must ensure that they make it clear to their chosen
Trustees that they are under an obligation to carry out their (the settlor)
wishes. Looking at the maxim “equity looks to the substance rather than the
form”, a court would look at what the settler was trying to achieve rather than
the words used when setting up the Trust. In this case, no concise form of
words is required as the Trust can be created without using the word “trust” or
“confidence”.
For a Trust to be created,
specific certainties must always be present, as, without these certainties, a
Trust will not be valid, meaning that the Trust will not be able to be
appropriately controlled and enforced. The certainties that must be present include:
- Intention to Perform: The requisite purpose is the
critical test to establish if the creator of a Trust wanted another to be
under a duty to hold property for the benefit of another. The word
"Trust" would not need to be written or spoken to show the
certainty of intention. However, depending on the context, it may not show
the certainty of purpose.
- Certainty of Subject: A trust can be the subject of all
kinds of property, including intangible property such as covenants or
debts. The property must be clearly defined as the subject or property
within the Trust.
- Specific Property: It is crucial to identify
precisely who the beneficiaries are so the trustees can distribute the
property under the Trust correctly. This is referred to as the
"complete list test," as a full list of all beneficiaries must
be drawn up at the point the property is to be distributed. This is not
required when the Trust is created. Certainty of benefit must be proven
before the property is distributed.
Trust beneficiaries have
several rights that Trustees must acknowledge and carry out if requested by the
beneficiaries. These include the disclosure of:
- Trust documents, which should
generally be made available, including Deeds of Appointment or Variations
to the Trust, except that Settlors’ letters of wishes remain confidential.
However, disclosure may be considered depending on the circumstances.
- Trust Accounts.
- Legal advice documents if paid for
by the trust fund. Benefactors may not see any legal documents relating to
Trustees’ disputes with the benefactors.
- If the Trustees have a controlling
stake in a business, then business documents may be subject to disclosure.
However, Trustees do not need to disclose records detailing why business
decisions were made.
A Trust is unlike a limited
company in that a Trust has no legal personality. The trust assets are vested
in Trustees, who assume the rights and obligations concerning the assets and
administration of the Trust. The person or entity appointed Trustee assumes the
liabilities of a Trustee, who, with the liability, exposes the Trust assets and
their assets to those liabilities.
The general duties of
Trustees are that they must act exclusively in the Trust’s best interests and
actively participate in any Trust business, such as:
- Observing the terms of the Trust.
- Acting impartially concerning
beneficiaries.
- Providing accurate Trust
information.
- Acting unanimously unless the Trust
deed states otherwise.
- Work diligently to distribute trust
assets correctly.
Generally, Trustees remain
liable for the Trust where their actions have incurred a loss, or something has
happened involving a loss to the Trust because the Trustee has been negligent.
Any Trust transaction carries a degree of risk for a Trustee.
Where Trustees have carried
out a Trust transaction, they will want to limit their personal liability, such
that Trust deed clauses limiting a Trustee's liability must be carefully
written to cover the entire transaction.
A Trustee's trust deed
limitation liability clause will typically state that the trustees limit their
liability to the trust asset value at any time. If such a clause is not
inserted, a Trustee may remain liable for the Trust after they are no longer a
trustee.
A Trust is not a separate
personality with a distinct legal entity. Any debts, expenses, or liabilities
incurred by the Trustees are personal. However, a trustee may be indemnified by
utilising two different rights:
- A reimbursement right where
Trustees have the right to replenish their assets where they have
discharged trust liabilities personally.
- An exoneration right where the
Trustees can utilise Trust assets to negate liabilities.
The above rights are subject
to the liability that is to be indemnified, which is incurred by the Trustee
following their duties. The Trustee’s right to indemnity is subject to their
making good any loss or damage to the Trust fund caused by any previous
breaches of Trust utilising the “clear accounts” rule.
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