TRUST
Categories of trusts
What is a trust?
Equitable duty relating to property (temporary)
- Property Component - trustee holds proprietary interest ‘on trust’ for the beneficiary
Trustee = legal interest
Beneficiary = equitable interest - 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
- Perpetuity rules: ensure that trusts must be brought to an end within a defined period. They prevent a trust lasting more than 125 years
- 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.