Trust (law)


A trust is a legal relationship in which the owner of property, or any transferable right, gives it to another to manage and use solely for the benefit of a designated person. In the English common law, the party who entrusts the property is known as the "settlor," the party to whom it is entrusted is known as the "trustee," the party for whose benefit the property is entrusted is known as the "beneficiary," and the entrusted property is known as the "corpus" or "trust property." A testamentary trust is an irrevocable trust established and funded pursuant to the terms of a deceased person's will. An inter vivos trust is a trust created during the settlor's life.
The trustee is the legal owner of the assets held in trust on behalf of the trust and its beneficiaries. The beneficiaries are equitable owners of the trust property. Trustees have a fiduciary duty to manage the trust for the benefit of the equitable owners. Trustees must provide regular accountings of trust income and expenditures. A court of competent jurisdiction can remove a trustee who breaches their duty. Some breaches can be charged and tried as criminal offenses. A trustee can be a natural person, business entity or public body. A trust in the US may be subject to federal and state taxation. The trust is governed by the terms under which it was created. In most jurisdictions, this requires a contractual trust agreement or deed. It is possible for a single individual to assume the role of more than one of these parties, and for multiple individuals to share a single role. For example, in a living trust it is common for the grantor to be both a trustee and a lifetime beneficiary while naming other contingent beneficiaries.

How trust works

Trusts have existed since Roman times and become one of the most important innovations in property law. Specific aspects of trust law vary in different jurisdictions. Some U.S. states are adapting the Uniform Trust Code to codify and harmonize their trust laws, but state-specific variations still remain.
An owner placing property into trust turns over part of their bundle of rights to the trustee, separating the property's legal ownership and control from its equitable ownership and benefits. This may be done for tax reasons or to control the property and its benefits if the settlor is absent, incapacitated, or deceased. Testamentary trusts may be created in wills, defining how money and property will be handled for children or other beneficiaries. While the trustee is given legal title to the trust property, in accepting title the trustee owes a number of fiduciary duties to the beneficiaries. The primary duties owed are those of loyalty, prudence and impartiality. Trustees may be held to a high standard of care in their dealings to enforce their behavior. To ensure beneficiaries receive their due, trustees are subject to ancillary duties in support of the primary duties, including openness, transparency, recordkeeping, accounting, and disclosure. A trustee has a duty to know, understand, and abide by the terms of the trust and relevant law. The trustee may be compensated and have expenses reimbursed, but otherwise turn over all profits from the trust and neither endebt nor riskily speculate on the assets without the written, clear permission of all adult beneficiaries.
There are strong restrictions regarding a trustee with a conflict of interest. Courts can reverse a trustee's actions, order profits returned, and impose other sanctions if they find a trustee has failed in their duties. Such a failure is a civil breach of trust and can leave a neglectful or dishonest trustee with severe liabilities. It is advisable for settlors and trustees to seek legal advice before entering into, or creating, a trust agreement and trustees must take care in acting or omitting to act to avoid unlawful mistakes.

History

English common law

had a well-developed concept of the trust in terms of "testamentary trusts" created by wills but never developed the concept of the inter vivos trusts which apply while the creator lives. This was created by later common law jurisdictions. Personal trust law developed in England during the 12th and 13th centuries. In medieval English trust law, the settlor was known as the feoffor to uses, while the trustee was known as the feoffee to uses, and the beneficiary was known as the cestui que use, or cestui que trust.
Legal historians believe that inter vivos trusts were first developed for the benefit of Franciscan friars, who were forbidden to own any sort of property. Benefactors would convey land for the use of the friars to a suitable local person to hold legal fee simple title, while promising to allow the friars to live on and receive the profits of the land. However the feoffee had no legal obligations to the beneficiary in English common law, so after the death of the feoffor, there was no one to enforce the promises made by the feoffee or his ancestor. However, disgruntled beneficiaries could petition the King's Lord Chancellor. The Lord Chancellor could decide a case as "keeper of the king's conscience". After the chancellor began to consistently enforce the promises of feoffees, uses developed into a popular means for circumventing primogeniture and feudal death taxes.
As the proliferation of uses impacted tax revenue and complicated land sales, King Henry VIII pressured parliament to pass the Statute of Uses in 1535, which purported to abolish uses by "executing" them. This transferred title from the feoffee to the beneficiary. However, lawyers and judges soon found holes in the statute and courts held that the statute did not apply if the feoffee had active duties to perform. The courts began to refer to these title holders with active duties to manage the property as "trustees" of a "trust" in place of the medieval terminology.

Significance

The trust is widely considered to be the most innovative contribution of the English legal system. Today, trusts play a significant role in most common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. In Curaçao, for example, the trust was enacted into law on 1 January 2012; however, the Curaçao Civil Code only allows express trusts constituted by notarial instrument. France has added a similar, Roman-law-based device to its own law with the fiducie, amended in 2009; the fiducie, unlike a trust, is a contractual relationship. Trusts are widely used internationally, especially in countries within the English law sphere of influence, and whilst most civil law jurisdictions do not generally contain the concept of a trust within their legal systems, they do recognise the concept under the Hague Convention on the Law Applicable to Trusts and on their Recognition. The Hague Convention also regulates conflict of trusts.
Although trusts are often associated with intrafamily wealth transfers, they have become very important in American capital markets, particularly through pension funds and mutual funds.

Basic principles

Property of any sort may be held in a trust. The uses of trusts are many and varied, for both personal and commercial reasons, and trusts may provide benefits in estate planning, asset protection, and taxes. Living trusts may be created during a person's life or after death in a will.
In a relevant sense, a trust can be viewed as a generic form of a corporation where the settlors are also the beneficiaries. This is particularly evident in the Delaware business trust, which could theoretically, with the language in the "governing instrument", be organized as a cooperative corporation or a limited liability corporation, although traditionally the Massachusetts business trust has been commonly used in the US. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors, making it "bankruptcy remote", and leading to its use in pensions, mutual funds, and asset securitization as well protection of individual spendthrifts through the spendthrift trust.

Terminology

  • Appointer: This is the person who can appoint a new trustee or remove an existing one. This person is usually mentioned in the trust deed.
  • Appointment: In trust law, "appointment" often has its everyday meaning. It is common to talk of "the appointment of a trustee", for example. However, "appointment" also has a technical trust law meaning, either:
  • * the act of "appointing" an asset from the trust to a beneficiary ; or
  • * the name of the document which gives effect to the appointment.
  • 'As Trustee For' : This is the legal term used to imply that an entity is acting as a trustee.
  • Beneficiary: A beneficiary is anyone who receives benefits from any assets the trust owns.
  • 'In Its Own Capacity' : This term refers to the fact that the trustee is acting on its own behalf.
  • Protector: A protector may be appointed in an express, inter vivos trust, as a person who has some control over the trustee—usually including a power to dismiss the trustee and appoint another. The legal status of a protector is the subject of some debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities, then the courts—if asked by beneficiaries—could order him or her to act in the way the court decrees. However, a protector is unnecessary to the nature of a trust—many trusts can and do operate without one. Also, protectors are comparatively new, while the nature of trusts has been established over hundreds of years. It is therefore thought by some that protectors have fiduciary duties, and by others that they do not. The case law has not yet established this point.
  • Settlor: This is the person who creates the trust. Grantor is a common synonym.
  • Terms of the Trust means the settlor's wishes expressed in the Trust Instrument.
  • Trust deed: A trust deed is a legal document that defines the trust such as the trustee, beneficiaries, settlor and appointer, and the terms and conditions of the agreement.
  • Trust distributions: A trust distribution is any income or asset that is given out to the beneficiaries of the trust.
  • Trustee: A person who administers a trust. A trustee is considered a fiduciary and owes the highest duty under the law to protect trust assets from unreasonable loss for the trust's beneficiaries.