Introduction to the_law_of_trust-_law_of_equity_trusts_probate_i

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trust and equity

trust and equity

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  • 1. INTRODUCTION TO THE LAW OF TRUST Introduction Definitions of Trust Terms Associated with Trusts Legal and Equitable Ownership Nature of Beneficiary’s Interests Trusts Distinguished from other Relationships/Concepts Conclusion
  • 2. INTRODUCTION TO THE LAW OF TRUST Introduction: • Many attempts have been made to define the term “trust”, but none as yet have been wholly successful. A trust is, therefore, easier to describe than to define. Although trusts come in a variety of forms and cater for different types of property and purpose, they all share the same essential characteristics. At its heart, a trust involves the fragmentation of legal title (legal ownership) and equitable title (beneficial ownership). The legal title is vested in a character known as the “trustee” and the trustee holds the trust property on behalf of the “beneficiary”. It is only on this separation of title that equitable title assumes importance because the general rule is that the legal title carries with it all rights. • The existence of a trust is dependent upon identifiable property (whether tangible or intangible) being transferred from its legal owner to one or more trustees to hold and manage property for the benefit of ascertainable beneficiaries. The trust may be created inter vivos (i.e. during the lifetime of the settlor) or may be post-mortem/testamentary (i.e. on the death of the settlor).
  • 3. INTRODUCTION TO THE LAW OF TRUST Introduction: (Continuation) • The trustee owes a “fiduciary” duty (i.e. a duty of utmost good faith) to both the settlor and the beneficiary. The entitlement of the beneficiaries will normally be set out in the document creating the trust (the “trust instrument”), but where this is not the case the rights of the beneficiaries can be implied by equity. Trusts can be of any sort of property: land, money, chattels, cheques and debts, etc. • In general terms, therefore, a trust is either a self-imposed obligation or an obligation imposed on a third party (in whom legal title to the property becomes vested) to act for the benefit of another which is enforceable in equity. The equitable interest in the property thereby becoming different and distinct from the nominal legal ownership vested in the trustee. .
  • 4. INTRODUCTION TO THE LAW OF TRUST Definitions of Trust: (1) Halsbury’s Laws of Malaysia • Meaning of “trust”. Where a person has property or rights which he holds or is bound to exercise for or on behalf of another or others, or for the accomplishment of some particular or particular purposes, he is said to hold property or rights in trust for the other or those others, or for that purpose or those purposes, and he is called a trustee. A trust is a purely equitable obligation and is enforceable in the High Court. (2) Maitland • ‘I should define a trust in some way as the following- When a person has rights which he is bound to exercise upon behalf of another or for the accomplishment of some particular purpose he is said to have those rights in trust for that other and for that purpose and he is called a trustee’.
  • 5. INTRODUCTION TO THE LAW OF TRUST (3) • (4) • Definitions of Trust: (Continuation) Pettit A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property) either for the benefit of persons (who is called beneficiaries or cestui que trust) of whom he may himself be one, and any one of whom may enforce the obligation, or for a charitable purpose, which may be enforced at the instance of the Attorney-General or for some other purpose permitted by law though unenforceable. Underhill A trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called beneficiaries or cestui que trust), of whom he may himself be one, and any one of whom may enforce the obligation. Any act or neglect on the part of a trustee which is not authorised or excused by the terms of the trust instrument, or by law, is called a breach of trust.
  • 6. INTRODUCTION TO THE LAW OF TRUST (5) • Definitions of Trust: (Continuation) Lewin ‘The word “trust” refers to the duty or aggregate accumulation of obligations that rest upon a person described as trustee. The responsibilities are in relation to property held by him, or under his control. That property he will be compelled by a court in its equitable jurisdiction to administer in the manner lawfully prescribed by the trust instrument, or where there be no specific provision written or oral, or to the extent that such provision is invalid or lacking, in accordance with equitable principles. As a consequence the administration will be in such a manner that the consequential benefits and advantages accrue, not to the trustee, but to the persons called cestui que trust, or beneficiaries, if there be any; if not, for some purpose which the law will recognise and enforce. A trustee may be a beneficiary, in which case advantages will accrue in his favour to the extent of his beneficial interest’.
  • 7. INTRODUCTION TO THE LAW OF TRUST (6) • (7) • Definitions of Trust: (Continuation) Keeton ‘All that can be said of a trust... is that it is the relationship which arises whenever a person called trustee is compelled in Equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one and who are termed as cestui que trust) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust’. The Hague Convention on the Recognition of Trust For the purpose of this Convention, the term “trust” refers to the legal relationship created- inter vivos or on death- by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. Note: A trust is an equitable obligation imposed on the person who has legal title to act for the benefit of others.
  • 8. INTRODUCTION TO THE LAW OF TRUST • • • • • • Terms Associated with Trusts: Trust Instrument: This is the document which creates a trust, vesting the trust property in the trustees. It also describes the term of the trust. A trust instrument is not always required to create a trust which is in appropriate circumstances may be created orally. Settlor: The person who actually creates a trust by donating property to be managed and administered by a trustee but from which all profits would go to a beneficiary. Trustee: The person in whom the trust property is vested. He is concerned with the administration and management of the trust for the benefit of the beneficiaries. Beneficiary or cestui que trust: The person who benefits from the trust property Trust Property: The subject matter of the trust which may include real property (land) tangible property (cars, computers) and intangible property (company shares, loans, intellectual property rights). Note: A settlor can also be one of the trustees or one of the beneficiaries and a trustee can also be one of the beneficiaries.
  • 9. INTRODUCTION TO THE LAW OF TRUST • • • Legal and Equitable Ownership: Once the trust is created and completely constituted the settlor drops out of the picture unless he has reserved for himself an interest in the trust (he may be a trustee or a beneficiary or both). In the absence of such reservation, the settlor is a stranger in respect to the trust. The trustees who control and manage the trust property are treated as legal owners whereas the beneficial or equitable ownership vests in the beneficiaries. The separation of the legal and equitable title is characteristic of the successful creation of a trust. Legal title represents to the world that the legal owner has a right to retain and control the property, for example, the registered owners of share certificates or persons named in the register of title relating to a parcel of land. On the other hand, equitable or beneficial title which is enforceable in equity is the right to enjoy the trust property. As long as the trustees are managing the trust property as prudent and reasonable managers, the beneficiaries, as equitable owners have no right to interfere with such management (see the case of Cowan v Scargill [1985] Ch. 270)
  • 10. INTRODUCTION TO THE LAW OF TRUST Nature of Beneficiary’s Interests: • There is a controversy as to the nature of the equitable interest arising as the result of the creation of a trust. Does it involve a right in rem (available against ‘the world at large’, i.e. persons generally) or a right in personam (that is, against a specific person)? There are basically three views regarding this issue: (a) The traditional view- It suggests that the beneficiary’s interest involves a right in personam. Maitland argues that to hold a contrary view is to ignore the important rule that an equitable interest does not prevail against a bona fide purchaser for value of the legal estate without notice of the trust. See the case of Pilcher v Rawlins (1872), where the court echoed the same sentiment. (b) The realist view- It suggests that the right is in rem. Thus, a beneficiary who follows trust property is a exercising a proprietary right allowing him to follow the property into the hands of a trustee or any person receiving property from the trustee other than by a purchaser for value without notice. See the case of Re Hallett’s Estate (1880), where Jessel MR said: ‘the moment you establish the fiduciary relation, the modern rules of equity, as regards following trust property apply’. (c) The hybrid view- Hanbury argues that the equitable interest of the beneficiary might be in the nature of a hybrid, partaking of both the right in personam and the right in rem.
  • 11. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (a) Trust and Contract • A contract is a common law, personal obligation resulting from a negotiated agreement between the parties. In other words, contract developed under common law. A trust arises from equity and confers property rights (rights in rem) on the beneficiary that can be enforced against both the property itself and third parties. Hence, trust is ‘a creature of equity’. • A contract is valid only if supported by consideration or made by deed. In other words, valuable consideration is generally necessary to a contract. On the other hand, a beneficiary under a properly constituted trust, however, can enforce trust even though he has not given any consideration. Thus, in a case of completely constituted trust it need not have been given (i.e. consideration). • A contract cannot usually be enforced by third parties (“privity of contract” is necessary). This rule is, however, subject to certain statutory exceptions as, for example, contained in the Contracts (Right of Third Parties) Act 1999 and sec 56 of the English LPA 1925. In contrast, a beneficiary can always enforce a trust even if he is not a party to the agreement that created the trust. In other words, beneficiaries who are strangers to the creation of the trust can nevertheless sue to enforce it.
  • 12. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (a) Trust and Contract • The terms of a contract can only be varied by the original contracting parties. In a trust unless the settlor has reserved a power of revocation, the trust can only be varied through the consent of all beneficiaries who must be sui juris or by court order. See the case of Saunders v Vautier, where the beneficiary wished to terminate an accumulation which was to continue until he reached 25, he was able to claim the fund at 21. See also sec 59 of the Trustee Act 1949 giving the courts the power to carry out variation of trust.
  • 13. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (b) Trust and Bailment • Bailment is a common law relationship which arises when goods owned by A are, with A’s permission, in the possession of B. This may be a contractual relationship (e.g. if you leave your car in a secure airport car park while on holiday or a gratuitous relationship (e.g. when you store furniture in a relative’s attic). This is very different from a trust because there is no transfer of ownership involved and the duties expected of the bailee are much less than those expected from a trustee. In other words, in bailment goods are delivered to a bailee to be held for a particular purpose upon an express/implied condition that it will be redelivered to the bailor when the purpose of the bailment has been carried out. Thus, the legal and equitable ownership of property is vested in the bailor. On the other hand, in a trust, the legal ownership of property is vested in the trustee and equitable ownership is vested in the beneficiary. • The subject matter of a bailment is limited to personal chattel whereas a trust covers all kinds of property including future expectancies. See the example of after acquired property or covenant to settle property.
  • 14. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (b) Trust and Bailment • The bailee is not a fiduciary whereas a trustee has fiduciary duties. Thus, duties and responsibilities of bailee and trustee are in sharp contrast too with the trustee bearing a heavy responsibility. • A bailor can only lose his title to the goods in the same manner by which any legal owner can be deprived (i.e. through estoppel) but the interest of a beneficiary can be defeated when trust property is sold to a bona fide purchaser for value without notice of the trust. Thus, an unauthorised sale by a bailee does not convey a good title whereas a sale in breach of trust by the trustee to a bona fide purchaser for value without notice prevails over the equitable rights of beneficiaries. • All in all, bailment involves a delivery of goods on the condition that they are to be restored by the bailee to the bailor as soon as the object for which they were bailed to the bailor is achieved. See the case of Coggs v Barnard (1703).
  • 15. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (c) Trust and Agency • An agency relationship comes into being “when one person, called the principal, authorises another, called the agent, to act on his behalf, and the other agrees to do so. Generally, the relationship between the principal and agent arises as a result of the agreement entered into between the parties. In contrast, this is not so in the case of trustee and beneficiary (cestui que trust). • An agent does not have title to the subject matter of the agency while a trustee has the legal title of the trust property vested in him. In other words, in contrast to a trusteeship, the title need not be with the agent. Hence, the concept of trust necessarily involves the concept of trust property over which the trustee has control, but an agent need not have any control over property belonging to his principal.
  • 16. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (c) Trust and Agency • Since agency is based on an agreement, the terms can be varied by further agreement. Normally a trust is created without an agreement and once it is completely constituted the settlor cannot vary it unless he has reserved an express power to do so. In other words, trust can arise without an agreement. See for example, the operation of constructive trust, which comes into picture by operation of the law or even the concept of unjust enrichment. • An agent acts on behalf of and under the control of his principal. In other words, the agent usually acts on behalf of the principal. In contrast, beneficiaries cannot interfere with the administration of a trust although they can compel the due performance of the trust. Also, a trustee does not represent the beneficiaries, though he performs his duties for their benefit. • An agent can subject his principal to liabilities with other whereas a trustee cannot involve the beneficiaries with third party liabilities. In other words, the trustee does bring the cestui que trust into any contractual relationship with third parties while it is the normal function of an agent to do so.
  • 17. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (c) Trust and Agency • An agency can be terminated by mutual agreement or by death but equity will not allow a trust to fail for want of a trustee. See sec 40 of the Trustee Act 1949 on subsequent appointment of a trustee by the court. See also sec 45 of the same Act. • The importance of the legal consequence between trust and agent becomes critical on the insolvency of an agent. The principal ranks as a general creditor in the absence of an agreement to keep his property separate from the agent’s. On the other hand, a beneficiary under a trust has the right to trace the trust property or its proceeds and would rank in priority to other creditors. See the example of tracing in equity. See the case of Chase Manhattan Bank v Israel-British Bank [1981] CH 105, where the court held that if the trustee has applied the money in breach of trust the beneficiary may ‘trace’ in equity to recover it. • Note: To some extent, there is a similarity between the two concepts i.e. there are times when both the trustee and the agent are fiduciaries and stand in a fiduciary relationship.
  • 18. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • A power of appointment is a power (usually conferred under a trust or settlement) given to a person which enables him to dispose of real or personal property which is not his. Powers fall into three main categories: (i) a general power (e.g. ‘to X for life, remainder as he may appoint’) enables X, the appointer (or donee of the power) to appoint in favour of any person including himself. In other words, the donee of the power is not subject to any restrictions as to who he shall exercise the power in favour of. For example, a will or trust may contain a devise ‘to A for life with remainder to whomsoever he shall appoint’. (ii) a special power (e.g. ‘… as he may appoint among the children of Z’) allows him to appoint only with reference of a particular class (the ‘objects of the power’). In other words, the donee of the power is restricted to exercising it among a class or description of persons designated by the terms of the power. For example, ‘£10,000 to such of A’s children as he (A) shall appoint’. (iii) a hybrid power- these are powers under which the donee may appoint to anyone except a certain class or certain description of persons (e.g. ‘£50,000 to X to whomsoever he shall appoint except my brothers and sisters and their
  • 19. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • A power is discretionary and permissive i.e. the donee may or may not exercise the power and until the donee exercises power of appointment in favour of the relevant objects, all they can hope for is that the appointment will be in their favour. In contrast, a trust is imperative and mandatory i.e. he or she must act and beneficiaries own the beneficial ownership in the relevant property. An example of a power of appointment is where a trust is set up and the trustee is given the power to donate up to £500 to charity. If this power was not given, any donation would be unauthorised and in breach of trust. This power, therefore, allows the trustee lawfully to siphon some of the trust fund away from the beneficiaries. It is, however, purely up to the trustee to decide whether or not to give any money to charity. The trustee must, however, address his mind to whether or not to exercise the power.
  • 20. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • A power can be legal (as with power of attorney) or equitable. Trusts are always equitable. • Unlike the beneficiary under a trust, a potential beneficiary under a power has no interest in the property before the power is exercised. In other words, until the donee exercises power of appointment in favour of the relevant objects, all they can hope for is that the appointment will be in their favour. • The rule of certainty of objects was once different for powers than for trusts. Prior to the case of McPhail v Doulton (1971), all trustees would need a full list of potential beneficiaries before they could carry out their duties. This was unnecessary where someone had only a power. It was sufficient if it could be said of any given individual that he or she was or was not within the class of objects specified by the donor of the power. The rule for powers has now been extended to discretionary trusts. The old complete list rule still applies to fixed trusts. • If a donee of a power makes no appointments the property reverts, as appropriate, either to the settlor or stays in the trust fund.
  • 21. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • It is important to note that when a power of appointment is given to a trustee under the terms of a trust instrument two issues may arise: (i) Whether what appears to be a power also involves a trust, i.e. a power in the nature of a trust and (ii) What criteria the trustee should apply in deciding who are the objects of the power in whose favour it may be exercised, i.e. certainty of objects. It is worth noting that trustees who hold a power of appointment or any other power are under a fiduciary duty to consider whether it is appropriate to exercise it even though they are under no obligation to do so. See the case of Re Gulbenkian [1970] AC 508, where Lord Reid said: ‘It may be true that when a mere power is given to an individual he is under no duty to exercise it or even to consider whether he should exercise it. But, when a power is given to trustees as such, it appears to me that the situation must be different. A settlor or testator who entrusts a power to his trustees must be relying on them in their fiduciary capacity so they cannot simply push aside the power and refuse to consider whether it ought in their judgment to be exercised.
  • 22. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • In addition to the above, the reference to ‘mere power’ is one that covers a power given to the donee which need not be exercised; indeed there is in fact no obligation or fiduciary duty on the donee to exercise the power at all. An example would be a general power of appointment. See the case of Re Combe [1925] Ch 210, statement used ‘in trust for such person or persons as my son … shall by will appoint’. • It has to be acknowledged that the problem of deciding if a power involves a trust is really a matter of construction of the words used. Sometimes a provision in a will or settlement may be referred to as a power when on construction it is in fact a trust i.e. a power in the nature of trust. This difficulty has frequently arisen in cases where there is a fund to such members of a class as A shall select. As already state, A would have no obligation to make a selection and the objects of the power could not force him to do so. But if A fails to make a selection, the issue arises whether the objects are entitled to the fund in any event in equal shares on the basis that there is a trust.
  • 23. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • Still on the issue raised above, reference could be made to the leading case of Burrough v Philcox (1840), where a testator gave his surviving child a power ‘to dispose of all of my real and personal estates amongst my nephews and nieces or their children, either all to one of them, or to as many of them as my surviving child shall think proper’. The surviving child failed to make any appointment but it was held that the fund should be divided equally among the objects because there was in fact a trust in favour of them subject to the power of appointment.
  • 24. INTRODUCTION TO THE LAW OF TRUST Trusts Distinguished from other Relationships/Concepts: (Continuation) (d) Trust and Power of Appointment • Furthermore, it would appear that or in other words the rule of construction to be applied is whether the settlor intended the objects to benefit in any event, and merely gave a power of appointment to enable the beneficial interests to be altered if circumstances required this. Much will depend on the words used in the instrument. Cases in which the court refused to construe a power in the nature of a trust arising include: Re Weekes’ Settlement [1897] 1 Ch 289 where a testatrix gave her husband ‘power to dispose of all such property by will amongst our children’; Re Combe [1925] Ch 210 ‘in trust for such person or persons as my said son… shall by will appoint’; and Re Perowne [1951] ‘Knowing that he will make arrangements for the disposal of my estate, according to my wishes, for the benefit of my family’.
  • 25. INTRODUCTION TO THE LAW OF TRUST Conclusion: • Although a precise definition of trust has not been entirely successful, the concept of trust has contributed significantly in our understanding of the general application and operation of the law in a legal discourse. For example, a trust concept enables property to be given to a person who in law does not have the capacity to hold property i.e. infants, mentally unsound person and minors as in Wan Naimah v Wan Mohamad Nawawi [1974] 1 MLJ 41. It enables property to be given to persons in succession. Unincorporated associations which lack a legal personality and so cannot hold property can do so by way of trusts. Also, a variety of charitable trusts may be used to create trusts for the public or for the section of the public or for relief of poverty.