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Trust (law)

A trust is a legal relationship in which the owner of property (or any other transferable right) gives it to another person or entity, who must manage and use the property solely for the benefit of another 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",[1] and the entrusted property is known as the "corpus" or "trust property".[2][3] 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.

For the monopolistic business, see Trust (business). For other uses of the word "trust", see Trust (disambiguation).

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.[4]


Trusts have existed since Roman times and become one of the most important innovations in property law.[5] 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.[6] 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.

Significance[edit]

The trust is widely considered to be the most innovative contribution of the English legal system.[7] 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.[8] France has recently added a similar, Roman-law-based device to its own law with the fiducie,[9] amended in 2009;[10] 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 (partly only the extent that they are parties thereto). 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 (in certain countries essentially always trusts) and mutual funds (often trusts).[11]

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.

Employee ownership: Shares in a company may be held by the trustee of an , often indefinitely, as part of the employee ownership of that company.[27]

employee trust

Employee share ownership: Shares in a company may be held by the trustee of an as part of an employee share or share option plan.

employee trust

Privacy: Trusts may be created purely for privacy. The terms of a will are public in certain jurisdictions, while the terms of a trust are not.

: Trusts may be used to protect beneficiaries (for example, one's children) against their own inability to handle money. Courts may generally recognize spendthrift clauses against trust beneficiaries and their creditors, but not against creditors of a settlor.[28]

Spendthrift clauses

Wills and estate planning: Trusts frequently appear in (indeed, technically, the administration of every deceased's estate is a form of trust). Conventional wills typically leave assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the 'contingency age' is reached. The executor of the will is (usually) the trustee and the children are the beneficiaries. The trustee will have authority to assist the beneficiaries during their minority.[29]

wills

Charities: In some common law jurisdictions all charities must take the form of trusts. In others, may be charities also. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).

corporations

Unit trusts: The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the .

unit trust

plans: typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.

Pension

Remuneration trusts: for the benefit of directors and employees or companies or their families or dependents. This form of trust was developed by Paul Baxendale-Walker and has since gained widespread use.

[30]

Corporate structures: Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g., corporations) in their structure.

: Trusts may allow beneficiaries to protect assets from creditors as the trust may be bankruptcy remote. For example, a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement, the settlor may be in a position to benefit from the trust assets without owning them, and therefore, in theory, protected from creditors. In addition, the trust may attempt to preserve anonymity with a completely unconnected name (e.g., "The Teddy Bear Trust"). These strategies are ethically and legally controversial.

Asset protection

Tax planning: The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases, the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for legal . For an example see the "nil-band discretionary trust", explained at Inheritance Tax (United Kingdom).

tax avoidance

: Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one or both owning the legal title as trustee.

Co-ownership

: In Canada[31] and Minnesota monies owed by employers to contractors or by contractors to subcontractors on construction projects must by law be held in trust. In the event of contractor insolvency, this makes it much more likely that subcontractors will be paid for work completed.

Construction law

– Lawyers in certain countries often require that a legal retainer be paid upfront and held in trust until such time as the legal work is performed and billed to the client, this serves as a minimum guarantee of remuneration should the client become insolvent.[32] However, strict legal ethical codes apply to the use of legal retainer trusts.[33]

Legal retainer

Common purposes for trusts include:

: The concept of an asset-protection trust encompasses any form of trust that provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts may be proscribed or limited in their effect by governments and the courts.

Asset-protection trust

: This is an irrevocable trust established for charitable purposes and, in some jurisdictions, a more specific term than "charitable organization". A charitable trust enjoys a varying degree of tax, economic, and creditor protection benefits.[34]

Charitable trust

: Unlike an express trust, a constructive trust is not created by an agreement between a settlor and the trustee. A constructive trust is imposed by the law as an "equitable remedy". This generally occurs due to some wrongdoing, where the wrongdoer has acquired legal title to some property and cannot in good conscience be allowed to benefit from it. A constructive trust is, essentially, a legal fiction. For example, a court of equity recognizing a plaintiff's request for the equitable remedy of a constructive trust may decide that a constructive trust has been created and simply order the person holding the assets to deliver them to the person who rightfully should have them. The constructive trustee is not necessarily the person who is guilty of the wrongdoing, and in practice it is often a bank or similar organization. The distinction may be finer than the preceding exposition in that there are also said to be two forms of constructive trust, the institutional constructive trust and the remedial constructive trust. The latter is an "equitable remedy" imposed by law being truly remedial; the former arising due to some defect in the transfer of property.

Constructive trust

: In a discretionary trust, certainty of object is satisfied if it can be said that there is a criterion which a person must satisfy to be a beneficiary (i.e., whether there is a 'class' of beneficiaries, which a person can be said to belong to). In that way, persons who satisfy that criterion (who are members of that class) can enforce the trust. Re Baden’s Deed Trusts; McPhail v Doulton

Discretionary trust

: In these types, a directed trustee is directed by a number of other trust participants in implementing the trust's execution; these participants may include a distribution committee, trust protector, or investment advisor. The directed trustee's role is administrative which involves following investment instructions, holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating trust participants and offering dispute resolution among the participants

Directed trust

Dynasty trust (also known as a 'generation-skipping trust'): A type of trust in which assets are passed down to the grantor's grandchildren, not the grantor's children. The children of the grantor never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets were transferred to their children first. Generation-skipping trusts can still be used to provide financial benefits to a grantor's children, however, because any income generated by the trust's assets can be made accessible to the grantor's children while still leaving the assets in trust for the grandchildren.

: A trust for the benefit of employees. A United States example is a trust established to operate an Employee Stock Ownership Plan.

Employee trust

: An express trust arises where a settlor deliberately and consciously decides to create a trust, over their assets, either now, or upon their later death. In these cases, this will be achieved by signing a trust instrument, which will either be a will or a trust deed. Almost all trusts dealt with in the trust industry are of this type. They contrast with resulting and constructive trusts. The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. In the USA Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate.

Express trust

The settlor must be of sound mind and of the right age.

The settlor must not be a resident of Cyprus for at least 1 year prior to the establishment of the Cyprus International Trust.

The beneficiaries must not be residents of Cyprus for at least 1 year prior to the establishment of the Cyprus International Trust.

At least one trustee must be residing in Cyprus during the whole duration of the trust.

Blind trust

Foundation (charity)

Rabbi trust

the international professional association for the trust industry

Society of Trust and Estate Practitioners

Totten trust

Trusts & Estates (journal)

Use (law)

Hudson, A (2003). Equity and Trusts (3rd ed.). Cavendish Publishing.  1-85941-729-9.

ISBN

; Hayton, DJ (2005). Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies (12th ed.). Sweet & Maxwell.

Mitchell, Charles

; Hayton, DJ; Matthews, P (2006). Underhill and Hayton's Law Relating to Trusts and Trustees (17th ed.). Butterworths.

Mitchell, Charles

(PDF), Studio legale Tedioli, 28 April 2001

Trust Law of the People's Republic of China (Order of the President No. 50)