Law of Trusts - Basics

What is Trust Law? - Justin Santiago

The law of trusts deal with trusts, an equitable device used by the settlor to split the rights over his or her money or property into legal and equitable rights. The legal rights are held by the trustee on behalf of the beneficiary who holds the equitable rights (the right to enjoy the benefits of the money or property).

The equitable rights created by the trust enables the beneficiary to enforce the trust in his own name, although he was not a party to the original agreement evading the doctrine of privity. This is why the trust is only recognised by equity not the common law which requires the doctrine of privity in any agreement.

In Westdeutsche Landesbank Girozentrale v Islington Borough Council, Lord Browne-Wilkinson, conveniently identified the relevant principles of trust law which can be summarised as follows:

(i) equity operates on the conscience of the owner of the legal interest;
(ii) the owner of the legal interest cannot be a trustee of the trust property until aware of the facts alleged to affect his conscience;
(iii) in order to establish a trust there must be identifiable trust property (
(iv) once the trust is established, a trust beneficiary has an equitable proprietary interest in the trust property enforceable against subsequent holders other than the bona fide purchaser of the legal interest.

Rights which the settlor had prior to the creation of the trust are vested in their entirety in the trustee. But he is not free to use those rights for his own benefit in the way he could if no trust existed. At the same time new rights are created in the beneficiary of the trust, which enables him to hold the trustee to account for his exercise of those rights : DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duties.

It should be noted that if, at any time, the full legal title and equitable title are held by a single individual, a merger has happened, which means the titles have fully merged such that the individual has full ownership of the property and the trust is over. The beneficiaries are also entitled to terminate the trust by directing the trustees to transfer the legal title to them, provided that they have attained the age of majority and are mentally sound.

A settler can declare himself trustee of property for someone (settler and trustee can be the same person), a settler can also convey property to a trustee on trust for himself (settler and beneficiary can be the same person). A trustee can also be one of several beneficiaries. A beneficiary can declare a trust of the equitable title which is called a sub-trust.

Express trusts are a species of trusts that have been created specifically and are associated with the traditional meaning of a trust. An express trust is created when a settlor effectively exercises his powers of ownership to do so. A power is the capacity to change or create rights, duties or other powers. An express trust can be testamentary which is set out in a person’s will or it can be inter vivos which is created by the settlor when alive.

An express trust has to fulfill the substantive requirements, be properly constituted, adhere to the formalites and there must be a valid disposition.

There are variations of express trusts :-

Sub trust - a beneficiary may create a trust of his interest in favour of another. In this situation the original beneficiary adopts the role of the settler and trustee for the benefit of another.

Trust of a promise – a legal fiction designed to make a promise between 2 parties the subject matter of a trust for the benefit of a 3rd party which can enforce the promise – Les Affreteurs Reunis v Walford. The courts have undermined the device by insisting upon strict proof of an intention to create a trust of a promise – Re Schebsman.

A bare trust - when the trustee holds property for a beneficiary on no specific trust terms but to do as the beneficiary dictates. Bare trustees are often called nominees. Most common example of a trust of this kind is the trust upon which a solicitor holds his client’s purchase moneys prior to completion of the sale of land.

There are trusts which arise through the courts :-

Statutory Trust – legislature has thought it convenient to use the trust device as a cure for certain problems. If I attempt to convey a title to land to Fred and Joe as tenants in common, statute provides that the effect of my action is to convey the title to Fred and Joe as joint tenants on trust for themselves as tenants in common : S34(2) LPA 1925.

There are also trusts that arise by operation of the law namely constructive and resulting trusts :-

Constructive Trust – a trust constructed by the court rather than by the individual right holder. An example is Aluminium Industrie Vaasen B.V. v Romalpa Aluminium Ltd n the case of reservation of title clauses sellers retain equitable title and to make the company to which the goods were supplied a trustee of the goods until the seller has been fully paid.

Resulting Trust – any situation in which A conveys rights to B which B for whetever reason then holds on trust for A.