What is a Trust and what are it’s principle applications?

First this article will discuss what the exact nature of the trusts is? Furthermore, it will discuss whether we should continue on the premise that is can be exactly defined. Second this article will critically examine the principle applications of the trust instrument.

What is a trust?

The concept of trusts in parlance of property law has been a subject of several attempted definitions but none seem wholesome enough to encompass all the possible usages of trusts. This is largely because a trust has a range of possible applications and different variants of it exist. To seek to provide a generally workable definition of a trust will be impossible, since it will shallow, and incapable of reflecting other possible applications and types of trusts. This position was confirmed by Scott: “Even if it were possible to frame an exact definition of a legal concept, the definition would not be of great practical value.”[1]

In truth, instead of attempting to provide a wholesome definition for trusts, as Scott suggests it is better to describe the trust. To this end he opines that:

“All that one can properly attempt to do is give such a description of a legal concept that others will know in a general way what one is talking about. It is possible to state the principal distinguishing characteristics of the concept so that others will have a general idea of what the writers mean.”[2]

 This is exactly what Mayo J in Re Scott (an Australian case) did, and won academic embrace. He described trusts as referring to “the duty or aggregate of accumulation of obligations that rest upon a person described as trustee.” [3] He continued this description on the footing that the basis of the obligations lie in property held by one. Second that the capacity in which one holds this property by be one of confidence reposed by another, or where there is no specific oral or written instructions to hold it, or for some other necessary reason, to the extent that equitable principles ordain.

From Mayo J’s encapsulated description one can glean a trust (.i.e. the holding by of property one for another) can be initiated by deliberate measures, such as where the transfer of property by A to B to hold for the benefit of C or for a particular purpose. This would be an express trust. This could be by oral instructions or written instructions. It can be inferred too from the summary of Mayo J’s statement that where property is not given to another on an express understanding to keep, equity could still conjecture a trust where it thinks it necessary. Such trusts are considered imputed trusts. They could come in form of a constructive trust or resulting trust[4].

A constructive trust is one which arises from equity’s consideration of circumstances surrounding a situation and deems it essential that property in issue be held on trust for an innocent person. This could be to prevent fraud as in Bannister v Bannister,[5] where there is non-conformity with formality requirement Re Rose[6] or to prevent unconscionability as inPennington v Waine.[7] A resulting trust on the other will be one to arise as postulated by Lord Wilberforce in Wesdeutche v Islington LBC [8] where property is transferred to another voluntarily, and it is shown that it was not intended to be parted with by the transferor (type A resulting trust) or where there was an intention to benefit another but that benefit was not properly disposed. In either circumstance equity will ordain that the benefit or property result back to the original owner.

Application of the trust

Having been able to deduce the major classifications of trusts based on their modes of creation, it is apt to discuss the applications of trusts. Adopting Graham Moffat’s taxonomy of trust, we can identify four purposes. They are:

1) Preservation of family wealth: In the preservation of family wealth trusts can be created to prevent the alienability of dynastic property[9]. In other words a trust might be created to prevent the possibility to disposition of family property outside the family circle. This can be done by the adoption of a fee-tail trust settlement whereby property is given to A, that upon his demise it shall vest in B and upon her demise to her grandchildren. This offends the circulation of capital in the economy and to counter this, the Perpetuities and Accumulations Acts[10] came were enacted to prevent remote vesting.

Tax considerations might warrant the need for trusts in other situations to protect family wealth. The upsurge in of the usage of discretionary trusts whereby property is transferred to a trustee for the benefit of unknown beneficiaries was due to the fact that the Revenue office will not be able to tax the settlor for the property which he had transferred, nor will the trustee be liable to tax on property held by them on trusts, so too will the unknown beneficiaries escape tax liabilities. Asides this there are other tax advantages inherent in discretionary trusts.[11]

There is also the use of offshore trusts, such as seen in Vesty v IRC,[12] where families could transfer wealth to a tax-haven, while allowing it to generate income there and hold it on trust for some beneficiaries which in fact were them.[13]

2) Family Breakdown: Before divorce a couple could make divorce settlements in which they would agree amongst each other how property acquired during marriage will be held or shared. A good example of this was seen in Cannon v Hartley.[14] Even in circumstances where there were no express agreements as to how property will be shared upon family breakdown equity can impute trusts, on the basis of a constructive or resulting trusts depending on the circumstances of the case, in favour of a family member where there has been joint acquisition of property[15]. Examples are seen in Gissing v Gissing[16], McKenzie v McKenzie [17]andStack v Dowden [18] among others.

3) Finance and Commerce: For the promotion of financial and security purposes, trusts are very valuable. For instance where money is given to a company for a particular purpose a trust known as ‘Quistclose Trusts’ is considered to have been created in favour of the lender, so that the lender can supervise the borrower’s usage of the funds and if possible retrieve it where it considers it is improperly been used. This was confirmed in Twinsectra v Yardley.[19] There has been some recent debate into how creditors have been using the Quistclose Trusts has a method of making themselves secured creditors in the event the borrower goes into liquidation.[20]

Trusts might be created within commercial circles also where Romalpa clauses are inserted into contractual terms .i.e. clauses which still confer the seller with proprietary rights over goods sold (retention of title). Therefore until the buyer has met the conditions of the seller, he cannot treat the goods bought has his property. He therefore holds a trust over the goods in favour of the seller.[21]

4) Voluntary activities: Trust could be created to promote certain acceptable public purposes under the head of charitable trusts. Trusts which are intended to education, religion, alleviate poverty and to promote public welfare.[22] Trusts could also be used to promote non-charitable aims such as the maintenance of public buildings, the provision of domestic animals, etc among other non-charitable ends.[23]

Beyond Moffat’s Taxonomy trust could be employed to ends such as the joint acquistion of property, for caretaker purposes such as the care of one’s disabled relatives and the funding of one’s relatives children at university.[24]

 


[1] Culled from David Hayton and Marshall, Commentary and Cases on The Law of Trusts and Equitable Remedies, 2005, Sweet and Maxwell, 12th edition. page 4

[2] Ibid

[3] [1948] SASR 193 at 168

[4]  Ross Grantham & Charles Rickett; On the Subsidy of Unjust Enrichment, Law Quarterly Review, 2001, 117(Apr), 273-299

[5] [1948] 2 All E.R. 133

[6] [1949] Ch 78

[7]  Mark Pawlowski, Constructive trusts, illegal purpose and locus poenitentiae,Conveyancer and Property Lawyer, 2009, 2, 104-126

[8] [1994] 1 WLR 938

[9] Laurence M Friedman, The Dynastic Trust, 1964, Yale LJ 547

[10] Perpetuities and Accumulations Acts 1964 and  2009

[11] Chris Whitehouse and Emma Chamberlain, Trust Taxation, Private Client Business, 2009, 3, 230-237

[12] [1980] A.C. 1148

[13] Mark McLaughlin, Offshore Tax Planning, 2009, Busy Practitioner. B.T.R. 2009, 3, 276-305

[14] [1949] Ch 213

[15] Graham Moffat, Trusts Law, 5th edition, 2009, pg 607.

[16] [1971] AC 886

[17] [1970] 3 All ER 1034

[18] [2007] UKHL 17

[19] [2002] 2 All ER 377

[20] Wayne Beglan, Alice Belcher, Jumping the Queue J.B.L 1997 Jan – ‘attractive to those who provide loans where they would otherwise become simple unsecured creditors’

[21] Indian Oil v. Greenstone Shipping [1987] 3 WLR 869

[22] David Hayton and Marshall, op. Cit, page 429

[23] Ibid, page 201

[24] Graham Moffat, Op Cit, page 33-37.

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