Contents
Why A Trust?
Trust law.
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 sizeable amount of money and ensuring that the money is earmarked for a specific project: all these are best achieved by trust law.
You could also use a trust to provide for a person yet protect your anonymity.
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.
Just what is a trust?
There are as many definitions as there are authors on the subject.
The simple definition is a right of property held by one person (the trustee) for the benefit of another person, the beneficiary, which legal experts sometimes refer to by the Latin name of cestui que use.
The person giving up the property is called a settlor. Some lawyers prefer to call the settlor a "donor" and the beneficiary the "donee".
It should be noted that there is no impediment for a settlor to constitute themselves trustee nor is there any prohibition against a trustee also being the, or one of, the beneficiaries. Where a trustee is also a beneficiary, though, all conflicts of interests must be avoided because the primary duty of the trustee is to protect the property to the benefit of all of the beneficiaries even as may hinder the trustee's own private interests.
The trustee is the key person to any successful trust. It is the "trust" placed upon them by the settlor that is the basis of the trust. It is a responsibility of honor and integrity as the trustee manages the property for the benefit not of themselves, but for another: the beneficiary. Lawyers say that the trustee's duties are fiduciary which implies acting for another's benefit and with candour and honesty.
An oddity of the law of trusts is that once the subject matter of the trust is conveyed to the trustee, the rights of property with regards to the subject matter are split between the trustee and the beneficiary.
Under normal circumstances, persons enjoy full property of an object; for example, a piece of land.
But when a trust is operational, the property rights leaving the settlor are split two ways. Certain rights go to the trustee and certain rights go to the beneficiary. In short, the trustee is interim holder of the legal title and administers the property. The beneficiary enjoys all the fruits or product of the property (such as dividends or rent) without the right to administer it, or has the right to claim title once the trust has run it's course.
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 trustees and 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:
Certainty of words or intention
Students of the law of trust are quickly introduced to what law professors like to call the "three certainties". If a lawyer says they know about trust law, ask them to name the three certainties as a test!
These are the three basic requirements for a legally enforceable trust.
#1: The words or actions of the settlor must clearly show that a trust was intended. The language used need not be technical. If the trust results from a document, the intention is usually easier to find. But even if a document does not contain the words "trust", "in trust", "on trust" or trustee, a judge could still find that the document creates a trust if that intention is clear from the rest of the document (Luscar Ltd. v. Pembina Resources Ltd. (1995) 165 Alberta Reports 104).
Precatory words are the biggest difficulty of this requirement.
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 (1884) 27 Ch. 394 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.
Certainty of subject matter (property)
#2: The subject matter or property given up by the settlor must be certain or "ascertainable."
In Re Romaniuk (1986) 48 Alberta Law Reports 225, the court found that the attempted trust failed. In the case, a woman had divided up several objects of her estate and then added that she wanted money from the sale of certain items and "other property" to be used to set up a trust. The judge found the description led to three different possibilities; all involving different items of the deceased's property and held the trust failed because the "corpus of the trust is uncertain."
But in some cases, if the uncertainty just involves the amount of money to be received, the courts have bent the rules.
In Re Golay's Will Trusts (1965) 1 WBR 969, the English court reviewed a will which gave a person "a reasonable income from my properties" without quantifying the "reasonable income." The court felt that it could quantify this and held the trust as valid.
The law is not clearly set in this area but a consensus seems to be emerging: "if a court has objective standards by which to determine the quantum" of the trust property, the trust will manage to survive the requirement of this certainty (quote taken from Law of Trusts in Canada, D. Waters, 1984: Carswell, p. 120. Professor Waters also suggests that "courts undoubtedly lean as far as possible in favour of upholding the settlor's disposition, but it is at least arguable whether this case (Re Golay's) does not lean too far.")
There are no limits as to what may constitute the subject of a trust except those things which are in themselves illegal such as the proceeds of crime. Land, money, shares, jewelry: anything can be the subject of a trust, even something which, in monetary terms, is considered worthless.
Certainty of object (beneficiary)
#3: A person or persons must be clearly designated as beneficiary.
At common law, the beneficiary must be one or more individuals; organizations can only be beneficiaries if they are charitable (see discussion under Charitable Trusts).
This is necessary so that the trustee will know the identity of the beneficiary; to whom or what class of persons he or she is serving. For example, if the trustee later has one or more 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 the McPhail 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 from Carson 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 occured. 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 the holograph 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:
- 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.
- 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.
References or Further Reading
This article is one of a set of six on Trust Law as follows:
- Introduction To The Law of Trusts
- Trust Law: The Players
- Trust Law: When Things Get Nasty
- Charitable Trusts
- Constructive and Resulting Trusts
- Trust Law: The Big Cases