Introduction To The Law of Trusts: Trust
Introduction To The Law of Trusts: Trust
Trust law.
Contents
Why A Trust?
Egad!
The horror of all law school students and the end of many of them.
Because trusts were essentially created to manipulate property rights so as to shield an
actual owner or operator, and to present another, in an era where land-owners had onerous legal
obligations to the Crown, this field of law is deceptive and esoteric by design. In the result, there
is hardly a more complex or technically difficult field of English common law.
Yet the law of trusts allows so many to imaginatively and safely give effect to their legal wishes,
deftly leaving assets out of the hands of the incompetent, irresponsible or youth yet leaving them
the benefit of those assets all the same.
A education fund for a great-grand child or giving a charity a sizable amount of money and
ensuring that the money is earmarked for a specific project: all these are best achieved by trust
law.
Trusts are sometimes used as a form of incorporation (eg. the Massachusetts trust) or
by real estate or stock investment clubs or syndicates. Mutual funds, pension funds and
some types of insurance (eg. to protect the investment of a partner) are common uses of the
mechanics of trust law.
You can even use a trust to protect assets from creditors, if the trust has been set up before
the debts have been incurred.
And although the topic exceeds the scope of these articles, trusts can be used to minimize
or avoid taxation.
Wills always almost create a trust if just for the brief time for an executor to collect the assets
and distribute same. Frequently, a will creates a trust such as, for example, to hold the money
destined for a minor until he/she attains the age of majority.
Equity
Historically, equity ranks higher than the common law. This branch of the English legal
system has spawned many English legal institutions including trusts. Historically, the common
law ignored the rights of the beneficiary as legal title appeared, in law, to pass from the settlor to
the trustee. Property, under the auspices of the common law, could not be split: you either owned
something or you did not. But equity championed trusts and recognized the property rights of
both trusteesand beneficiaries. Today, the law of trusts is a myriad of subcategories and
divisions, each with their own distinct rules or exceptions.
Legal experts talk of two "equitable" estates being created: that of the trustee and that of the
beneficiary of the trust. They are called "equitable" because their origin is in equity and not in
common law.
Equity is a branch of English law which developed in England to impose fairness or "equity" upon
the common law, which is traditionally rigidly enforced without regard to the "fairness" of the
application of the law. Equity was imposed under the King's personal authority, and is now an
integral part of English-based legal systems, such as those in England, Canada, the USA,
Australia and New Zealand (although, at least in the USA, the equity/common law distinction
seems now to be mostly of historic significance).
trusts in wills and estates, although the most widely-known and most widely-used form of trusts,
are not the only game in town. trusts by persons still living are very prevalent in the business
world. Trusts are either:
Inter vivos, also called a "living trust", in which the settlor transfers the property to the
trustee in his or her lifetime. In these cases, a settlor could even name himself or herself as
trustee or even beneficiary.
Testamentary trusts are created by will and transfers property of the deceased settlor
to a trustee for the benefit of a beneficiary. A testamentary trust, contrary to a living trust,
must be probated, which is a complicated legal procedure required to give legal effect to
a will.
For example, the courts have found, in Johnson v. Farney, [1913] 29 OLR 223, that the use of
the words "I wish" are not sufficient to create a legal obligation such as a trust; it is a suggestion
only.
Likewise, in Re Adams and the Kensignton Vestry, 27 Ch. 394 (1884) which reviewed a will
which gave all property to a spouse "in full confidence that she will do what is right as to the
disposal thereof between my children." This was held not to be a trust.
The words "on behalf of" were not considered to be sufficient to create a trust (Funds
Administrative Service v. Northern Steel Ltd., [1993] Alberta Law Reports 293) and
the same result ensued in O'Neill Community Ratepayers Association v. City of
Oshawa, ([1995] 22 Ontario Reports 648) where a transfer of land was "for the purposes of
a park" without further reference to a trust.
beneficiaries claim the benefit of the Saunders v. Vautiers rule, the trustee must be in a
position to assess the position of those claimants as being the absolute beneficiaries.
A trust set up to benefit "my friends" runs the risk of being held invalid by courts as the
beneficiary is not ascertainable.
In Re Connor Estate, 10 Dominion Law Reports 5, the Alberta Court of Appeal ruled as
invalid a trust that was to be set up for the "close friends" of the testator. But "my children" or "my
nephews" would be acceptable as, then, the court could draw a line around an ascertainable
group of people to benefit from the trust.
The words "my relatives" has been held to be valid as it requires evidence of a common ancestor
(Re Baden's Deed Trusts [1973] Ch. 9).
If the trust is fixed (i.e. the trustee has no discretion over the distribution of the trust benefits),
each of the beneficiaries, if not named, must be clearly identifiable.
If the trust is discretionary (ie. the trustee can pick and choose which of the beneficiaries can
benefit from the trust), the courts have developed a two-pronged test: (1) the description must be
clear enough to determine whether any person is a member (McPhail v. Doulton: "the power is
valid if it can be said with certainty whether any given individual is or is not a member of the class
and does not fail simply because it is impossible to ascertain every member of that class"); and
(2) all the members of the group must be determinable.
When the trust is made out to a group as a whole such as "any needy or deserving Toronto
members of the T. Eaton Company Ltd. Quarter Century Club", it is only necessary to pass the
first test (Re Bethel).
This area of law is still one where some uncertainty reigns. For example, the decision in McPhail
v. Doulton was followed by Re Baden (referred to above), in which all three judges interpreted
theMcPhail decision differently.
In principle, trusts can not be set up to benefit a "purpose" but an exception has been made for
charities, provided that they are "ascertainable." More about this under the title of Charitable
Trusts.
Constitution
To the three certainties must be added a fourth (#4): the property must be received by a trustee.
If a settlor creates a trust with all three traditional certainties accounted for, but refuses to transfer
the property to the trustee, then there is no trust. Legal experts, never at a loss when it comes to
creating a term (not that there's anything wrong with that!), call this the "incompletely constituted
trust."
Incompletely constituted trusts sometimes survive or die depending on a simple rule: did the
trustee or beneficiary give any valuable consideration in exchange for the trust?
If so, the trust is enforceable against the settlor, who can be forced to transfer the property of the
trust or pay substantial damages to either the trustee or the beneficiary.
If not, the beneficiary is out of luck (beneficiaries who have not given consideration are called
"volunteers").
The acceptable mode of transfer depends on the type of property in question.
Land usually has rigid legal rules of registration and official changes to land titles.
If the property is a chattel, they are simply handed over.
For patents, shares or other securities, written documents may be required.
Re Rose, [1952] Ch. 499 is an interesting case. The settlor gave share certificates and
completed share transfer forms to the trustee but in order for the transfer to be complete, the
transfer had to be endorsed and entered in the company's books. These latter two steps only
occurred after the settlor's death. Nevertheless, the English court held that a sufficient transfer
had occurred to create a trust because the settlor had done all that he could do; that no further
steps remained to be taken by the settlor.
And perhaps it is the fact of the settlor doing all he could do that can distinguish this case
fromCarson v. Wilson [1961] 26 Dominion Law Reports. In this latter case, an Ontario
court refused to complete a "gift" of land because the testator never completed the transfer by
handing over the deeds to the intended recipients, during his lifetime. Said the court:
"The respondents are asking the court to perfect by indirection an imperfect gift something to which the equitable
jurisdiction of the court does not now and never did extend."
Once the declaration of trust is completed by transfer, the "constitution" of the trust is said to
have occurred. Unless the settlor put in a revocation clause, the trust is then final, binding and
irrevocable.
When settlors want to create a trust naming themselves as trustee, there must be:
"... a clear declaration of trust and that means there must be clear evidence from what is said or done of an
intention to create a trust."
This quotation is taken from Paul v. Constance [1977] 1 WLR 527 in which the judge found a
trust to have been created from the circumstances of a relationship and the fact that the
deceased settlor had many times said that "the (trust property) was as much (the beneficiary's)
as it was his."
To this mix must be added two caveats: many provinces have a Statute of Frauds which
requires that all transactions affecting land must be in writing. Also, wills must be in writing and
in a form acceptable depending on the laws of each province. For example, some jurisdictions
accept theholograph will (a will in one's own handwriting). Others do not. These are major
exceptions which certainly diminish the relevance of the general rule that trusts do not have to be
in writing.
Type of trusts
The law also distinguishes between express, resulting, constructive and statutory trusts:
Express trusts are the easy ones. They result from a clear statement by the settlor to
create a trust.
Resulting trusts are legal presumptions where an intent to create a trust is presumed by
the person who buys property in the name of another. The property is deemed to be held in trust
for the purchaser.
Constructive trusts are another judicial creation where a court will "construct" or invent
a trust out of a certain set of facts. Constructive trust is also known as unjust enrichment.
Case law (see Pettkus and Peter in The Big Cases of Canadian Trust Law) has required
three elements before unjust enrichment can be found: an enrichment by somebody,
deprivation by somebody, and the absence of any legal justification for the enrichment.
Statutory trust; a trust created by the effect of a statute. They tend to be temporary in
nature and serve the purpose of bridging ownership of property to benefit a certain class of
individuals which the statute is designed to protect. Some examples are the temporary trusts
that the law of some states impose on the executor of an estate, the holding and administration
of tax or other pay deductions (including vacation pay) by employers, the trust accounts of
lawyers and the statutory trust on money paid for a construction project on behalf of any person
who might have a construction lien on the property.