TRUST

Categories of trusts

What is a trust?
Equitable duty relating to property (temporary)

  1. Property Component - trustee holds proprietary interest ‘on trust’ for the beneficiary
    Trustee = legal interest
    Beneficiary = equitable interest
  2. Obligation Component - trustee owes equitable obligations to the beneficiary (hold property for their benefit)

Benefits

Separation of ownership and management of property

Expertise

Protection

Flexibility

Control

Ringfencing on insolvency

Tax benefits

Key uses

Commercial arrangements
Share ownership
Investment funds
Pension funds
Other forms of tax-efficient employee remuneration
Corporate tax avoidance

Private arrangements
Testamentary planning
Land ownership
Tax planning

Charitable purposes

Enforcement

The beneficiary’s rights are enforceable against third parties.

The beneficiary’s rights are protected against the insolvency of the trustee

Property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes. It therefore cannot be distributed to the trustee’s creditors

Beneficiary's equitable proprietary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust

A trust ceases to exist if, without any fault on the part of the trustee, the trust property is destroyed or consumed.
In contrast, if the trustee is at fault, they will be personally liable to restore the trust property (using their own funds). If they cannot, they will need to pay compensation.

Express trusts

Testamentary and Inter vivos trusts

Fixed and discretionary trusts

Charitable and non-charitable purpose trusts

Bare trusts

Temporary nature of trusts:


Trusts are a temporary way of dealing with property


  1. Perpetuity rules: ensure that trusts must be brought to an end within a defined period. They prevent a trust lasting more than 125 years
  1. The rule in Saunders v Vautier: The beneficiary or beneficiaries of a trust can ‘collapse’ the trust by directing that the trustee transfers legal title to them or to another person that they choose. This results in the equitable interest merging into the legal interest and brings the trust to an end.

1. The rule against remoteness of vesting


A person (or charity) must obtain a vested interest in the trust property within a recognised ‘perpetuity period’ (125 years) BUT trust instrument can limit the duration more

Rule against inalienability


Assets cannot be tied up on trust for longer than 21 years.


It must be clear from the outset that the trust will end within the prescribed perpetuity period.


Relevant for non-charitable purpose trusts which should include an express perpetuity clause.