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How Trusts Work
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The word “trust” refers to the duty or aggregate accumulation of obligations that
rest upon a person described as a trustee. The responsibilities are in relation
to property held by him or under his control. The trustee is obliged to administer
the trust property in the manner lawfully prescribed by the trust instrument (trust
deed or settlement), or in the absence of specific provision, in accordance with
equitable principles or statute law. The administration will thus be in such a manner
that the consequential benefits and advantages accrue, not to the trustee, but to
the beneficiaries.
The English trust is merely a bundle of rights and obligations in equity and is
thus not strictly speaking a legal entity. Though the law of trusts varies from
system to system, those patterned on the English law of trusts resemble one another
closely, differences usually being of statutory origin. In the case of civil law
systems where the trust is to be found it is invariably a creature of statute.
The trustees stand in a fiduciary relation and must hold the property or exercise
the rights in a fiduciary capacity. In many relationships, e.g. partnership, a person
stands towards another or others in a fiduciary relationship and may be deemed a
trustee for some purposes.
A trust may be created expressly, by statute, by inter vivos declaration, or by
will, or arise by operation of law, which includes constructive trusts and resulting
trusts. It may be a private trust, for the benefit of individuals, or a public trust
for charitable or public purposes. It may extend to any property or interest in
property, which a person can transfer, or assign, or dispose of. It may be in favor
of any person, or for charitable or other lawful purposes. The objects of the trust
must be declared with sufficient certainty to permit the court to enforce it.
Where a trust is created expressly there must be an adequate declaration of trust
and certainty of intention, as to subject matter, and as to objects or persons to
be benefited.
A constructive trust is, in a sense, a remedy that arises by operation of law where
the legal holder of property would, for instance, be unjustly enriched if he kept
the property, and where the interest should actually be transferred to or held for
the benefit of some other person. Frequently, a constructive trust attaches to property,
which a person holding property in trust has acquired by means of his ownership
of or dealings with that trust. A resulting trust arises where an intention to create
a trust is indicated, but the trust is not fully declared or fails in whole or in
part, or where property is put in the possession of a person ostensibly for his
own use but truly to effect a purpose which fails, or where property is put in someone’s
possession without intimation that he is to hold it in trust, and where retention
of the beneficial interest by the purchaser is presumed intended and is held to
be equitable.
The courts have over the centuries greatly elaborated principles laying down the
rights, powers, and duties of trustees. In particular, high standards have always
been demanded of trustees in respect of care for the trust estate, careful investment,
strict accounting, fair apportionment between income and capital, duty to pay the
right beneficiaries, and absence of personal profit or self-interest and trustees
have frequently been held liable to repay to the trust losses caused by lack of
care or other breach of trust. Trust property can be recovered from a third party
who has obtained it unless he obtained a legal title, for valuable consideration,
and without notice that his acquisition was in breach of trust.
Equity has always shown great favor to charitable trusts, which comprise trusts
for the relief of poverty, for the advancement of education, for the advancement
of religion, and for other purposes beneficial to the community, and the court will
not allow a charitable trust to fail because the purpose is uncertain but will give
effect to the trustor’s intention by settling a scheme for administration of the
trust to give effect as nearly as possible to the trustor’s intentions.
A trustee must accept or disclaim office, and persons may be authorized to appoint
new trustees, or the court may do so. A trustee may retire but remains liable for
things done while he was a trustee, or may be removed by the court. A trustee must
not make use of trust property for his private advantage and must account for profit
made out of his trust. As a general rule, in the absence of a provision relating
to remuneration, a trustee is not entitled to any remuneration. Also, in many cases,
the trustee would not be empowered to acquire trust property, and dealings with
beneficiaries may be voidable.
The trustees’ duties are:
- to take possession of and preserve the trust property;
- to be diligent and prudent in administering the trust property;
- to act personally;
- to be impartial as between beneficiaries;
- to
keep accounts;
- to give information to the beneficiaries as required; and
- to invest the trust funds in the manner permitted by statute.
If in doubt, trustees are entitled to obtain the opinion of the court as to the
right course of action, and they may have specific questions determined by the court.
The court now has wide powers to approve arrangements varying or revoking the trusts
or enlarging the powers of the trustees.
A breach of trust is any act in contravention or excess of the duties imposed on
the trustees by the trust, including neglects, omissions, and dishonesty, and trustees
are liable in so far as loss has resulted to the trust estate. They may be relieved
from liability by provision in the trust deed, or by the court under statutory power.
Beneficiaries can obtain no relief against trustees if they concurred or acquiesced
in the breach of trust.
There is no generally accepted definition of the word “settlement” but it may be
defined as any disposition of property, of whatever nature, by any instrument or
number of instruments, whereby trusts are constituted for the purpose of regulating
the enjoyment of the settled property successively among the persons or classes
of persons nominated by the settlor. However, for certain tax purposes the word
“settlement” is given a much wider meaning.
Certain countries, such as South Africa, Panama, Liechtenstein and Monaco, have
introduced trusts by statute. However, these creatures of statute generally lack
the body of equitable principles that characterize the Anglo-American trust.
“Have a little trust” is an ancient folk adage to encourage virtue.
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