A contract is a promise
that may be written or oral, a legally binding agreement between parties to
fulfil an obligation in return for a consideration of value. 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
relationship created legally by a benefactor (the settlor) within their
lifetime or on their death where 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 the Trust
up, 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 the transfer of estate assets after death. A revocable Trust is a "Living Trust" as it is 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 to create 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 benefactor 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 its 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.
- Interest In Possession Trust: where asset income is passed to the beneficiary
- Bare Trust: Assets are held for the beneficiary until a nominated age, who has the full entitlement to the asset generally 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: 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 a 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: All kinds of property can be the subject of a Trust, which may include intangible property, such as covenants or debts. The property must be capable of being clearly defined as the subject or property within the Trust.
- Specific Property: It is crucial to be able 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 to benefit must be proven before the property is distributed.
- 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, consideration to disclose may be given 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.
- Working diligently in distributing 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 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 own assets where they have discharged trust liabilities personally.
- An exoneration right where the Trustees have the power to utilise Trust assets to negate liabilities.
The above rights are subject to the liability that is to be indemnified, is incurred by the Trustee following their duties and that the Trustee’s right to indemnity is subject to their making good any loss or damage to the Trust fund by any previous breaches of Trust utilising the “clear accounts” rule.
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