LAW250: Trusts

Professor D. Peter Ramsay

Fall 2007

Jennifer Lau

Introduction

S = Settlor / T = Trustee / B = Beneficiary

Definition of a Trust

Trust: An obligation imposed expressly, by implication, or by law, whereby a person is obligated to deal with property to which that person has title, for the benefit of people or for purposes or both.

·  Trust is fiduciary relationship imposing certain obligations on person who holds title to the property.

·  Relationship is fiduciary b/c while trustees have substantial control over trust property, they are bound to act in strict confidentiality, with honesty and candour, entirely in the interest of the beneficiary.

·  Unique because it is a flexible tool for making dispositions of property.

·  Key Question: Did transfer create an absolute gift (no strings attached) or a trust (obligations imposed)?

"Obligation"

Obligation is st which a person is bound to do. In trust law, this duty is imposed by law [contrast this w/ voluntary & mandatory obligations imposed by contract and tort law, respectively].

·  Obligations imposed by Equity ~ equitable principles were shaped with a view to prohibiting conduct, and providing relief against prohibited conduct.

·  Obligation creates a relationship whereby trust & confidence are placed in a person to carry out duties ~ by giving them certain assets.

·  Trust = Relationship;Trust ¹ separate legal person.

·  Trustee holds legal title in ppty for beneficiary, who holds equitable interest.

Statutes

Law of trusts is a matter of Private Law, and is generally a matter of common law with some statutes:

·  Trustee Act; Law and Equity Act; Trust and Settlement Variation Act; Conflict of Law Rules for Trusts Act; International Trusts Act

·  Statutory Default: Provision in Trustee Act is default provision in trust deed, if deed doesn't deal specifically w/ issue.

·  But language of the trust can override statutory provision (i.e. by abrogating the even-handed rule).

Elements of a Trust

Settlor

Person who creates the trust. If trust is testamentary, then S is the Testator.

·  Settlor/testator of express trust intends to create the trust.

·  In trusts that arise by operation of law (i.e. resulting and constructive trusts), there is no settlor in the sense of a person intentionally wishing to create a trust

Trustee

Person who holds legal title to trust property for benefit of Bs. May be one T or multiple Ts. S may also be T.

Beneficiary (Cestui que trust)

Person for whose benefit the T holds trust property. May be one or multiple Bs. T or S may also be B.

"Persons or Purposes"

Trust must have defined object(s), which can include either person or purpose (i.e. charity). Definable objects lead to definable (ascertainable!) beneficiaries.

Protector

Individual named in Trust Deed by S, to oversee T. Certain powers can be given to Protector in Trust Deed (i.e. removing Ts).

Trust Property (Subject matter of the Trust)

Property which T holds for benefit of Bs. T may hold either legal or equitable title to trust property depending upon nature of property as it comes into the trust or as it is subsequently dealt with.

·  Property: Real property, personal property (tangible/intangible), or both.

·  Transfer Required: Must be a transfer of property from S to T in order to completely constitute the trust. This transfer can be done via Form A, simple delivery, etc.

·  How Much? Token amount may be transferred at beginning (i.e. $50) so that trust is established ~ w/ remaining amount transferred later. Sometimes, entire amount is transferred at the beginning.

·  Capital: Initial property that is settled on the Trust (i.e. 20 shares)

·  Income from the Trust: Money that is earned from the capital (i.e. dividends paid on the 20 shares)

Trust Instrument

Usually, a trust is created by document called Trust Instrument, which vests trust property in trustee & describes rights/obligations (terms of the trust) of parties to the trust.

·  Usually, trust instrument = deed/will. Not all trusts are created by instrument. Some jurisdictions may require that some trusts (i.e. those involving land) be made in writing.

Types of Trusts

A trust exists whenever title to property is vested in one person to be held for the benefit of another - but there are different kinds of trusts, depending on the powers and duties of the Trustee.

Bare Trust

When T no longer has active duties to perform (that is, duties imposed by S), except to convey trust ppty to Bs upon demand.

Fixed Trust ("Absolute Trust")

Trust in which each B's interest is fixed, either by amount or as proportion of the total. T has no discretion as to distribution - they must distribute the money as the trust dictates.

·  Example: “I leave my estate to my spouse for life & on his death, the capital shall go to my children in equal shares”.

Discretionary Trust

Trust in which Ts are given power to decide how income/capital/both should be distributed to Bs.

·  Example: "I leave my estate to my husband for his life to hold as T for my kids, with capital to go to the kids in such shares as T shall direct"

·  T are under duty to appoint (to pay or distribute). They must pay out trust property to beneficiaries.

·  But Ts have discretion as to (1) amount any B will receive, (2) when Bs may receive property and/or (3) choice of Bs.

·  T is permitted to pay as much money as is appropriate for benefit of Bs.

·  Therefore, a B has no absolute right to income/capital of trust ~ b/c discretion is vested in T to pay (or not).

Discretionary Trust is still a Trust because it contains a Power coupled with a Duty (= obligation) to distribute entire subject matter of the Power.

Fiduciary Trust / Power of Appointment / Mere Power

Fiduciary Trust identifies Bs and gives T both a Power to appoint and a Discretion to appoint.

·  Example: "I leave my estate to my husband for life to hold as T for my children if T so decides, but if there is no distribution to the children, then to the SPCA."

·  No obligation to distribute: at most, fiduciary T must consider whether to make distribution or not.

·  Note: Important to have "ultimate distribution" clause in fiduciary trusts to avoid Resulting Trust.

·  Also called Mere Power. Remember to differentiate from the Discretionary Trust.

See Certainty of Objects: Trusts for People: Administrative Workability for more details on the differences between Fiduciary Trusts and Discretionary Trusts.

Fiduciary Trust (Power of Appointment held by Trustee)

·  Trustee may distribute to the beneficiaries, but is not obligated to

·  Trustee has discretion over the how much and when to distribute as well

Power of Appointment (held by non-Trustee)

Someone who is not a trustee may have a power of appointment: "I leave my estate to be held in trust for my wife for life and upon my wife's death, to such children as the wife appoints".

Power

Power = an authority conferred upon a person to deal with (and dispose of) someone else's property.

·  Powers are embedded in a trust. There may be one or more powers within a trust.

·  Vested Power: A power is fixed, or settled, when it is vested. Can't revoke the power.

·  Contingent Power: A power is possible, but not assured. Vesting of the power depends on some factor which may or may not occur.

·  Donor: Person who creates the power

·  Donee: Recipient of the power

·  Potential Beneficiaries / Appointees: Persons to whom the property may be appointed

Sources of Powers

·  Common law powers: enables the Donee to create or convey a legal estate (i.e. power of attorney)

·  Statutory power - conveyed by Trustee Act (i.e. s.24: T has power to pay maintenance to named B)

·  Equitable powers: enables Donee to affects equitable interests (i.e. power of encroachment, or appointment)

o  Look at Trust Instrument and caselaw

Classification of Powers according to PURPOSE

Whether power is Administrative or Dispositive will impact (1) Ts actions and (2) Certainty of Objects rules.

How to determine whether a power is Administrative or Dispositive:

·  Examine Trust Instrument to see what category Power is in (usually categorized for you)

·  Who has the power? Trustee or Non-Trustee?

·  If Trustee, what is the category of trust? Absolute, discretionary, fiduciary?

Administrative Powers

Powers conferred upon T by trust instrument to manage trust property (i.e. to sell, mortgage and invest). These powers come from Trust Instrument and statute, and may be incidental to a will if testamentary trust.

Dispositive Power

Powers of T to pay or transfer money to Bs.

·  Power of Appointment: allows T the power to select ["appoint"] certain people to be Bs (Re Hay's Settlement Trusts)

o  General: Enables donee to appoint to anyone, including himself

o  Special: Enables donee to appoint to anyone among a named class of persons

o  Hybrid: Enables donee to appoint to anyone, save a named class of persons

·  Power of Maintenance: Enables donee to pay income to infant B for immediate & recurring needs (i.e. basic physical needs - food, shelter, clothing, medical care, education)

·  Power of Advancement: Enables donee to pay capital to B who is not yet entitled to capital yet

·  Power of Encroachment: Enables donee to pay capital to income B (i.e. to encroach on capital)

Classification of Trusts

Express Trusts

Arises when person creating trust has expressed his intention to have ppty held by one or more persons for benefit of another.

·  S transfers property to T, intending that T should hold it for the benefit of B

·  S, T and B can all be the same person

·  Intention may be expressed orally/by deed, or by will. May be either testamentary or inter vivos.

·  Rationale: Allows S to achieve some control over her assets over an extended period of time. But S no longer holds legal ownership. If S has transferred property to himself as T to hold for benefit of himself, S now holds property encumbered by obligation to hold property for benefit of himself. Wacky, yes. But deal w/ it.

Executed and Executory Trusts

·  Executed Trust: S has completely set out beneficial interest in trust deed.

·  Executory Trust: S has established the trust by transferring property to T, but has only expressed general intention about who shall have beneficial interest in ppty. Final disposition left to later time, or to other persons (i.e. trustees). May arise where Power of appointment is given, or in a discretionary trust.

Types of Express Trusts

Trusts for Persons ("Private Trusts")

Trust for Individuals

Can be either (1) inter vivos or (2) testamentary. If will creates testamentary trust , it is revocable up until Testator's death.

Reasons for creating a Private Trust

·  To protect family assets (i.e. Whistler condo), but to allow assets to benefit a number of generations

·  To prevent spoiled child-beneficiary from acquiring the asset outright

·  Protecting assets from claims by creditors, spouses or family

·  Avoidance under the Wills Variation Act (b/c testator no longer holds legal title to their assets)

·  To assist persons with disabilities (income from trust doesn't cause PWD to lose gov't benefits)

·  Tax breaks (i.e. via a spousal trust)

Commercial Express Trust (the "Business Trust")

Trusts set up for people, but in commercial setting. Fact that they are set up for people distinguishes them from Purpose Trusts.

Commercial Trusts have similar characteristics to limited liability companies:

THE BUSINESS TRUST / Corporations / Business Trusts
Ownership of assets / Corporation / Trustee
Management of Assets / Directors / Officers / Trustees
Benefits from assets / Shareholders / Beneficiary
Liability for debts / Corporation / Directors / Trustees

Commercial Trusts are also used as Investment Vehicles (Income trusts; Trusts for bondholders; Pension plans).

Trusts for Purposes

In a Purpose Trust, there is no B - but instead a defined Purpose which benefits from the trust.

·  Main problem w/ purpose trusts is that there is no one to enforce rights of Bs or obligations of Ts

·  Charitable Purpose: provincial AG is designated as person who enforces the trust

·  Non-charitable Purpose: Generally void b/c no one designated to enforce the trust. Not viewed as charitable b/c law does not regard their objects as of sufficient benefit to public to be accorded advantages of charitable trusts.

Trusts Arising by Operation of Law

Certain trusts are said to arise by operation of law b/c they are imposed by law regardless of expressed intention of parties.

Resulting Trust

Imposed in certain situations where property is returned to the person who gave it, and is now entitled to it beneficially from someone else who has title to it. Thus, the property "results" to the true owner.

Two kinds of Resulting Trusts

Those in which an express trust fails in whole, or in part for any reason

This kind of Resulting Trust occurs where an express Trust fails in whole, or in part.

·  Beneficial interest is not exhausted.

·  Trust fails for illegality, or other contravention of a rule of law.

Law rejects hiatuses in ownership of property. B/c trust deed has not effectively disposed of beneficial interest forever and ever, beneficial interest reverts back to S - b/c T not intended to have beneficial interest.

·  Example: A transfers Blackacre to B to hold for C in trust for life. C dies. Not clear who gets beneficial interest. Ownership thus results back to A.

Those in which a person makes an inter vivos gift (transfer without consideration)

This Resulting Trust arises when a person makes either (1) a voluntary transfer of property to another or
(2) purchases property and directs that title be taken in the name of another.

·  Equity presumes that when a person gifts property to another, the giftor does not intend to absolutely transfer the beneficial interest to the recipient because there was no consideration.