Week 4 - Introduction to Trusts - Coggle Diagram
Week 4 - Introduction to Trusts
a trust is a legal obligation whereby a trustee holds property for a beneficiary
a trust is created when a settlor transfers property to a trustee for the benefit of a beneficiary
result is that the trustee is the legal owner of the property (i.e., she holds the legal title) and the beneficiary is the equitable owner
Example (simple trust)
A simple example of a trust would be circumstances in which one of your grandparents (
gave some money (
to one of your parents (
to open a bank account for you (
Registrar of the Accident Compensation Tribunal v Commissioner of Taxation
(1993) 178 CLR 145, 175
A trust is an obligation, recognised by a court of equity, imposed upon the holder of an interest in property to hold at least a part of the property for the benefit of another:
Commissioner of Stamp Duties v Livingston
(1960) 107 CLR 411.
There must be a separation of the legal and equitable interests in property for a trust to exist
Elements of the Trust
(person who operates the trust and if trust has legal property, the trustee takes the legal title of the property).
A trustee is a fiduciary to the beneficiary of the trust
The trustee has a personal obligation to the beneficiary with respect to trust property:
DKLR Holdings Co (No 2) Pty Ltd v Commissioner of Stamp Duties
 1 NSWLR 510, 518-9
property which is held on trust is subject to two different types of interest
There is the legal interest held by the trustee
beneficial or equitable ownership held by the beneficiary/beneficiaries
If the person who holds the property is not holding it for the benefit of another person, there is no beneficial interest and
therefore no trust.
Trustees are always fiduciaries:
Mills v Mills
(1938) 60 CLR 150
(person/s who obtain the benefit of the trust); the object of the trust.
Every trust must have at least one beneficiary (i.e., the
A trustee can also be a beneficiary:
Goodright v Well
(1781) 2 Doug 170
sole trustee cannot be the only beneficiary:
DKLR Holdings Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW)
(1982) 149 CLR 43.1.
If this occurs, the title to the property and the beneficial interest in the property merge and a
trust will no longer exist
Re Cook  Ch 212;  1 All ER 231.
The beneficiary does not have to know the trust exists:
Middleton v Pollack
 2 Ch D 104, 106.
The beneficiary does not have to be a human.
For example, it could be a company or a superannuation fund.
The beneficiary has the right to enforce the trustee’s obligations
property in real or personal form which is identified or ascertainable and capable of being held on trust; the trust property can be legal or equitable property
Controller of Stamps (Vic) v Howard-Smith
(1936) 54 CLR 614, 621-2
Any type of legal or equitable interest in real or personal property may be subject to a trust. This is the case unless it is not permitted on policy grounds
McGowan v Commissioner of Stamp Duties  2 Qd R 499.
Since almost any type of property may be subject to a trust, the property element for the existence of a trust will normally be easily fulfilled
Herdegan v Federal Commissioner of Taxation
(1988) 84 ALR 271, 277-80.
the property must be clearly identified and identifiable
Some forms of property cannot be the subject of a trust, for example, future property cannot be trust property
Re Rule’s Settlement  VLR 670
Express trusts are usually created by the execution or signing of a trust deed known as a trust instrument
The deed sets out;
the name of the trustee,
the exact identification of the property,
the names of the beneficiaries, and the terms of the trust
In an express trust, the settlor creates the trust
. Express trusts are classified as follows
Private and public express trusts
a private trust, where the trust is intended to benefit one or more natural or corporate persons,
are formed for the benefit of specific beneficiaries or classes of beneficiaries
Testamentary trusts are created pursuant to the terms of a will
a public trust, where its purpose is recognised as charitable in law and for public benefit
Fixed and discretionary trusts
the powers and duties of a trustee are set out in the trust deed
trustee does not execute these duties, he or she will be in breach of trust
A trustee of a fixed express trust generally has very little discretion as to how the trustee powers may be exercised
A trustee of a fixed express trust generally has very little discretion as to how the trustee powers may be exercised
Trustees of a discretionary trust have a discretion to apply the income and capital of the trust property to the beneficiaries:
Chief Commissioner of Stamp Duty (NSW) v Buckle
(1998) 192 CLR 226
under a discretionary trust the trustee’s discretion may include
1 Selecting ‘from the designated range of objects of the trust those who are to receive benefits of income, capital or both;
2 Deciding the amount or proportion of income or capital to be allocated to the selected object or objects; and
3 Deciding not to allocate benefits to some objects or, indeed, to allocate benefits to one object to the exclusion of all the others’: Evans et al, (2016) 392.
trustee will be subject to any obligations set out in the instrument as well as those imposed by equity and statute.
Beneficiaries of a discretionary trust do not have a proprietary interest in the trust property
they hold a right to due administration of the trust:
Cypjayne Pty Ltd v Rodskog
 NSWSC 301 .
They also have the right to be considered by the trustee in the exercise of the trustee’s powers: Re Smith  Ch 915;
Fay v Moramba Pty Ltd
 NSWSC 1428 .
there are distinctions between the rights of beneficiaries of a discretionary trust depending on whether the trust is exhaustive or non-exhaustive
exhaustive trust requires the trustee to distribute income to the beneficiaries.
Under a non-exhaustive trust, the trustee has the option of accumulating the trust income.
a trust under which the only obligation of the trustee is to distribute the trust property to the beneficiary upon demand:
Thorpe v Bristile Ltd
(1996) 16 WAR 500;
Jessup v Lawyers Private Mortgages Ltd
 QCA 432;
Wade v Wade
 WASC 118.
term ‘bare trust’ was defined by Gummow J in
Herdegen v Federal Commissioner of Taxation
(1988) 84 ALR 271, 281
trustee of a bare trust has an obligation to preserve the trust property:
CGU Insurance Ltd v One Tel Ltd
(in liq) (2010) 242 CLR 174, 182-3
One example of a bare trust is the circumstance in which a person has paid a purchase price for land. The vendor may still be in possession, but he will hold the land in trust for the purchaser:
Stern v McArthur
(1988) 165 CLR 489, 523.
trust generally requires a beneficiary, in certain circumstances a valid trust can be created for a charitable purpose:
Attorney-General (NSW) v Perpetual Trustee Co Ltd
(1940) 63 CLR 139, 144
Charitable trusts may be created inter vivos or by will and must fulfil the requirements of certainty of intention and subject matter
Critical to a charitable trust is that its ultimate beneficiaries are members of a class of persons that represents a section of the community sufficient to meet the ‘public benefit’ criterion
Charitable trusts are under the control of the court
. The court has the power to review the administration of a charitable trust and ‘to execute the trust where the trustees fail to do so’
There are four categories of charitable trust
Trusts for the relief of poverty;
Trusts for the advancement of education;
Trusts for the advancement of religion; and
Trusts for purposes beneficial to the community.
Since charitable trusts attract taxation benefits and have no specific beneficiaries who can enforce the terms of the trust deed, the c
ourts construe the requirements as to what constitutes a charitable trust strictly
Commercial trusts include trading trusts, unit trusts, and superannuation trusts
used for commercial purposes to reduce tax liabilities and as a vehicle for investment
Unit trusts often involve a corporate trustee who invests funds on behalf of beneficiaries. The beneficiary investors purchase units to enter the investment scheme
AIT Investment Group Pty Ltd v Markham Property Fund No 2 Pty Ltd
 NSWSC 216  (Bergin CJ), the terms of the trust must be referred to in deciding the nature of the interest the unit holder has in the trust property
Although the unit holders have an equitable interest in the trust property, they are more like shareholders in a company than the beneficiaries of a fixed express trust
Family trusts are established for the benefit of a family group.
The main advantage of the family trust is the associated taxation benefits
Family trusts usually take the form of a discretionary trust held by a family member or ‘a proprietary company in which the family members are shareholders and directors’
The capacity to split income between family members can lessen the impact of taxation
Certainty of Intention
express a wish or desire. Precatory words include ‘prayer’, ‘beg’, ‘hope’, ‘desire’, ‘understanding’, ‘recommendation’ and ‘wish’
no legal or equitable obligations will arise
Chang v Tjong
 NSWSC 122 the court considered whether a father had created a trust or had used precatory words.
Method of creation
Generally, proving that the settlor had a clear intention to create a trust will not be an issue if the trust is created by way of deed:
Hyhonie Holdings Pty Ltd v Leroy
 NSWCA 72
Generally, the court will look at the conduct of the parties at the time of ‘the alleged creation of the trust’
creation of a trust may arise in three possible circumstances
● The immediate creation of a trust, with the trust coming into operation immediately;
● An expression of an intention to create a trust at a future date; or
● The trust is created immediately, but the trust does not come into operation immediately.
‘intention must be to create a trust at that time, so it becomes operative at the time of creation’:
Harpur v Levy
(2007) 16 VR 587.
Burden of Proof
The burden of proving intention is on the person asserting the existence of the trust:
Herdegen v FCT
(1988) 84 ALR 271.
The parol evidence rule
apply to the interpretation of an intention to create a trust where a disposition is made in writing
prevents the admission of evidence beyond the written document.
where the document was created under alleged fraud, mistake, or duress:
Rochefoucauld v Boustead
 1 Ch 196;
Menezes v Salmon
 NSWSC 2
If the relevant document is lost or destroyed, the court may admit oral evidence:
Maks v Maks
(1986) 6 NSWLR 34
Whose intention matters when creating a trust?
creator’s intention that is most important
may be circumstances where the trustee’s intention is also relevant
Certainty of Subject Matter
What is ‘trust property’?
subject matter of the trust must be either legal or equitable property
Trust property includes ‘real property in tangible and intangible forms, such as choses in possession (goods), contractual rights, and other choses in action’:
Parkview Qld Pty Ltd v Commonwealth of Australia
 NSWCA 422 .
St Vincent de Paul Society Qld v OZcare Ltd
 1 Qd R 47 the Queensland Court of Appeal found that the rights of members were choses in action. Therefore those rights could be assigned
A trust has a subject and an object
trust property is the subject of the trust
If the trust property cannot be ascertained the trust will fail: Re
(1930) 25 Tas LR 126
beneficiaries are the objects of the trust
Certainty of objects
Discretionary trusts: certainty of objects
A ‘beneficiary’ of a discretionary trust does not have a beneficial interest in the trust property. Instead, she is ‘an eligible object’
The decision in
Deed Trusts has been accepted in several cases in Australia, such as
Herdegen v FCT
(1988) 84 ALR 271
y: the meaning of the words used are not clear: Re Blyth  2 Qd 567
is not fatal in and of itself. All that is required is that the trustee can ‘determine whether or not a person is within the class’ of beneficiaries: Re Baden Deed Trusts
encompasses semantic uncertainty, evidential uncertainty, and administrative uncertainty
: the call is so wide it is unworkable, for example ‘all of the inhabitants of London’
To be valid, a trust must have certainty of objects: either one or more beneficiaries.
’ states that a trust will fail if the beneficiaries are not identified with sufficient certainty:
Morice v Bishop of Durham
(1804) 32 ER 656, 658.
two exceptions to the beneficiary principle
‘trusts for animals and tombs'
Fixed Trusts: certainty of beneficiaries
certainty of object criteria, the court must be able to create a list of the beneficiaries ‘at the time their beneficial interest comes into effect’:
Kinsella v Caldwell
(1975) 132 CLR 458
needs to be met at the time that the trust or will comes into force: Kinsella v Caldwell (1975) 132 CLR 458.
addition to meeting the requirements for the three certainties, a trust must be completely constituted
To be properly constituted the ‘settlor must ensure that the proposed trustee obtains title to the property’
If the property is legal property, ‘the trustee requires legal title’
There are three ways a trust can be created
Commissioner of State Revenue v Lunn & Kym Pty Ltd (2004) 10 VR 420
Declarations of a trust are dispositions ‘for the purposes of legislation that deals with the requirements for writing’: Comptroller of Stamps (Vic) v Howard-Smith (1936) 54 CLR 614, 621-2
Property Law Act 1974 (Qld) (PLA) s 11
Declarations of trust over realty
‘valuable consideration is not required for a declaration of trust’: Robson v Robson  QSC 234 .
Declarations of trust over legal personalty
trust over legal personalty do not need to be in writing
Valuable consideration is not required
Declarations of trusts over an equitable interest in realty or personal property
A declaration of trust over a subsisting equitable interest needs to be in writing; this applies to realty and personalty.
“Manifested and proved in writing”
Property Law Act 1974 (Qld) s 11(1)(b)
Secretary, Department of Social Security v James (1990) 95 CLR 276, Lee J stated that the legislative provision would be ‘satisfied by a combination of documents capable of being read together
the Property Law Act 1974 (Qld) s 11(1)(c) applies
Simonson Properties Pty Ltd v Hardy  NSWSC 229 concerned a declaration of trust relating to the right to display a license plate, the right was found to be an equitable chose in action and thus required writing for the trust to be properly constituted
A trust created by direction refers to circumstances in which a beneficiary of an existing trust directs the trustee to hold her interest in trust for another person. This constitutes a disposition of a subsisting equitable interest and must be in writing:
Grey v Inland Revenue Commissioner
 AC 1
PLA s 11(1)(c).
A trust created ‘by transfer will be executed when the title of the trust property has been completely and irrevocably transferred to the trustee’.
Trusts established post-mortem
For a trust established post-mortem (via a will), see the
Succession Act 1981
(Qld) section 10(1) ‘A will must bs (a) in writing; and (b)signed by (i) the testator; or (ii) someone else, in the presence of and at the direction of the testator.
Inter vivos trusts (the settlor is alive and is making the trusts to operate during their life)
it may be necessary for the disposition to be evidenced in writing if the trust property consists of realty or a subsisting equitable interest’: Euuscorp Pty Ltd v Jiminez  SASC 225.
Resulting Trusts and Constructive Trusts
are a type of trust that gives effect to a presumed intention on the part of the settlor – i.e., the settlor did not intend to relinquish beneficial ownership when she initially transferred the trust property
Courts of equity adopt the constructive trust to hold a party accountable in circumstances in which it would be unconscionable for that party to escape accountability.
imposed by the courts
the intention of the creator is not an essential element in finding a constructive trust
It is the court that identifies or treats the relationship between the parties as one in which a trust arises
Trusts and Other Forms of Legal Relationships
These relationships may arise from different legal bases (e.g., the common law) and have different legal consequences and remedies. They include
● Contracts for the benefit of third parties;
● Conditional dispositions;
● Unsecured Debts and Trusts; and
● Romalpa clauses/Retention of title.
A Quistclose trust is a trust that arises in the context of a debt
More specifically, it arises when A provides money to B and the parties intend that
i) The funds are to be held by B for a specific purpose;
ii) If that purpose cannot be achieved or can be only partly achieved, the money will be repaid.
Barclays Bank Ltd v Quistclose Investments Ltd  AC 567
see notes page 10 for facts of case
Variation of a Trust
Varying a trust means that the trust instrument will be amended, although the overall administration of the trust continues
‘express trusts can be varied in three ways’
● via a power to vary a trust contained in an express trust;
Andtrust v Andreatta
 NSWSC 38 the power to vary the trust included varying the vesting date of the trusts in question. This was followed in
Bull v Boreas Ltd
The power granted to the trustee must be used ‘bona fide for the benefit of the trust overall’:
Wilson v Metro Goldwyn Mayer
(1980) 18 NSWLR 730
The ‘fraud on the power’ doctrine would apply if the trustee does not exercise the power to vary in a proper manner: Further, the power to vary attracts fiduciary obligations
● via the court’s inherent power to vary trusts; and
The courts have no general power to vary trusts for the sole reason that it will be advantageous to the beneficiaries’ interests: Re New  2 Ch 534
courts do have a power to declare that a trustee can deviate from the trust terms
exercise its power in this regard there must be an emergency, or a variation must be necessary to prevent the trust property from experiencing an unexpected loss
types of emergency: Chapman v Chapman  AC 429.
● payment of maintenance out of income: Re New  2 Ch 534.
● where the beneficiary is (or beneficiaries are) an infant changing the form of an investment from personalty to realty Lord Ashburton v Lady Ashburton (1801) 6 Ves Jun 6
The court cannot exercise its inherent power to salvage a charitable trust: James N Kirby Foundation v A-G (NSW) (2005) 213 ALR 366
Courts can only create schemes for charitable trusts ‘where the operation of the trust becomes impossible’: Ku-Ring-Gai Municipal Council v A-G (1954) SR (NSW) 65; Radan and Stewart [22.7].
● via statutory powers conferred on the courts to vary trusts.
Trusts Act 1973 (Qld) Section 94
allows the court to vary trusts where it is expedient to do so and there is no power in the trust deed to ‘take part in an advantageous dealing