What is a trust?

Basic working definition of a trust

A trust is a relationship which arises where one party (the trustee) is ordered in equity to hold property for the benefit of another party (the beneficiary) or for some purpose permitted by law.   

Note however:
  • There may be more than one trustee and more than one beneficiary;
  • The same party may be both a trustee and a beneficiary.

The obligatory nature of a trust

Some definitions refer to a trust as an obligation; others use the word “compelled” to convey the same idea. This reflects the fact that a trust gives rise to duties which are imperative in the sense that the trustees must carry them out or be answerable for breach of trust. A person who sets out to create a trust must declare his intention using imperative words

The trust property 

Trusts do not exist in a vacuum but by reference to some form of real or personal property which becomes the subject-matter of the trust. As a rule, it is only where the trust property is vested in the trustee that the trust becomes completely constituted and therefore enforceable.

 Lord Browne-Wilkinson who declares in Westdeutsche Landesbank Girozentrale v Islington L.B.C [1996] A.C 669, that

            “in order to establish a trust, there must be identifiable trust property”.

Anything capable of being owned may be held on trust. The subject-matter of a trust may range from tangible assets such as land and objects, to intangible assets such as company shares and investment products and intellectual property rights.

Typically the person creating the trust (the settlor or testator) will own a legal estate in the property and will take steps to vest the legal estate in the intended trustee. A trust is however capable of arising even if the settlor/testator is not the legal owner of the property but has only an equitable interest in which case it is this equitable interest that will be assigned to the trustee to hold on trust not the actual property.

Dual ownership of the trust property

  • Historically, the common law regarded the trustee (T) as the owner of the trust property and even to this day recognises his legal ownership.
  • Equity, while acknowledging this legal ownership insisted from the outset that it was purely nominal and that the benefits gained from the property where to be gained by the beneficiary.
  • As time has passed, it became accepted that the beneficiary acquired a class of equitable ownership of the trust property.
  • Since the beneficiaries interest is a species of property it can be disposed of or acquired like any other interest in property and can constitute the subject matter of a trust
  • The proprietary nature of the B’s interest ensures that in the event of the Trustees bankruptcy the beneficiary can lay claim to trust funds/property held by T in priority to T’s other creditors
  • Where the trust property has passed out of the Trustees hands, B may assert a claim against the recipient once he is able to trace the property product into the recipient’s hands.
  • The Beneficiaries proprietary interest exists alongside his personal rights against the trustee 

Trust beneficiaries and trust purposes 

  • It can be deduced from our definition that T’s primary function is to hold property on trust for beneficiaries  

The beneficiary principle   

  • A settlor or testator who sets out to create a private trust must take into consideration that for the trust to be valid there must be identifiable human beneficiaries.
  • The reasoning underlying this principle is that it is an obligation of B to enforce the trust against T. In the absence of any beneficiary there will be nobody in whose favour the court can decree performance and hence the trust will fail. 
  • Problems arise where the trust is created not for the benefit of identifiable human beneficiaries but for  particular purpose. This kind of trust would only succeed where the purpose is permitted by law. Most purposes permitted by law are charitable.  
The descriptions of purposes that are to be considered charitable are now set out in:
  • section 2(2) Charities Act 2006 and include such things as the relief of poverty, the advancement of education and the advancement of religion.
  • Because such purposes serve to further the interests of society, trusts within this realm are categorised as public trusts which are enforceable by the Attorney-General and hence do not infringe the beneficiary principle.
  • Where the purpose for which the trust is declared is decided not to charitable the absence of human beneficiaries able to enforce it will mean that the trust offends the beneficiary principle and will ordinarily fail.