Chapter 8 Trusts

What is a Trust? “a structure developed and enforceable in equity law which exists where one person, the trustee, becomes the legal owner of certain property for the purpose of using that property for the benefit of others, who are known as beneficiaries.”

8.1 Elements of a Trust (a) the settlor – who creates the trust; (b) the trust property – which will be legally owned and controlled by the trustee for the benefit of the beneficiaries; (c) the trust deed or instrument – the document which creates the trust, identifies the trust property and the potential beneficiaries, and the duties and powers of the trustee; (d) the trustee – who becomes legal owner and controller of the trust property; (e) the beneficiaries – who become the equitable owners of the trust property.

8.2 Types of Trust Discretionary trusts and fixed trusts. (a) Express trusts Discretionary trusts and fixed trusts. Executed trusts and executory trusts. Bare trusts and special trusts. Constituted trusts and incompletely constituted trusts. (b) Non-express trusts A resulting trust (or implied trust). A constructive trust.

8.3 Functions of Express Trusts People create trusts because of the advantages that result from their property owned by a third party who may be independent but nevertheless subject to some sort of control by either the creator of the trust or the trustee.

Advantages Taxation benefits Trusts enable collective investment May benefit in insolvency law Testamentary Trusts enable control over property after death Charitable Trusts

8.4 Express Trusts For an express trust to be valid the “three certainties” must be present. (1) certainty of intention to create the trust (2) certainty of the subject matter of the trust (3) certainty of the objects of the trust

Certainty of intention An express trust may arise either by: a settlor transferring their property to a trustee which is known as a “trust by transfer”; or a settlor declaring that he or she holds certain of their property on trust, the settlor becoming the trustee which is known as a “declaration of trust.”

Certainty of subject matter The trustees must be able to identify clearly the trust property and in the case of a fixed trust, the trustees must also be able to identify the entitlement of the beneficiaries.

Certainty of object The identity of the beneficiaries of the trust must be clear. Strangely beneficiaries are often termed ‘objects’

Limited Life of a Trust A trust has a limited lifespan because of the application of the “rule against perpetuities.” This is a property law rule which tries to stop some property interests being locked up indefinitely.

Unit Trusts A unit trust: ■■ is an express fixed trust because all the unit holders are known by name ■■ may be a public unit trust (with investments by the public) or a private unit trust ■■ may be a trading trust (where the proprietors of a business have transferred the goodwill and assets of the business to a trustee).

8.5 Advantages and Disadvantages of Express Trusts Advantages of Discretionary Trusts A discretionary trust is simple to operate. The trustee must fulfill the trust by ensuring the beneficiaries or objects of the settlor’s intentions receive what the settlor actually intended. The trustee may choose to make an annual distribution of trust income, Flexible operations. The trustee has discretion on how to allocate the income and losses of the property settled on the trust Unnamed beneficiaries have no rights of enforcement.

Advantages of fixed and discretionary trusts Trusts can be used for income-splitting for tax planning Ownership of property by a discretionary trust allows for the splitting of capital gains tax as the trustee lodges an annual tax return and any trust distribution goes on the tax returns of the beneficiaries. Limited liability if the trustee is a company. The trust can hold property. Holding property in a trust may allow for passing wealth from one generation to the next. Holding property in a trust may be useful for property that is increasing in value.

Holding property in a trust may protect assets from creditors or other legal claims (although there are no protections from bankruptcy proceedings for the beneficiaries and the trust property may be available for distributions to creditors). Holding property in a trust may reduce the accumulation of assets in one name which may protect the pension entitlements of a beneficiary. Privacy, unless the trustee is a company which must report to ASIC. The trustee has the option to terminate or to continue with the trust. Winding up or bringing the trust to an end is easy to achieve.

Disadvantages of fixed and discretionary trusts Accountability Costs to establish, run and manage the trust, including accounting, financial planning, legal and taxation advisors. The filing of necessary documents and reports by corporate trustees and on public record at ASIC. Loss of absolute ownership Loss of control

8.6 The Beneficiary The beneficiary is the person or persons who the trust was set up to benefit. The beneficiaries’ interest under a trust may be: if it is a fixed trust – a fixed entitlement; or if it is a discretionary trust – an expectancy only.

8.7 The Trustee The trustee is the person who the settlor appoints to carry out the settlor’s instructions A person may become a trustee through the operation of law even if there is no instrument – as in the case of a resulting or constructive trust.

The Law which Governs Trustees Each state and territory jurisdiction has a trustee act that regulates some aspects of the conduct of trustees. Trustee Act 1925 (ACT) Trustee Act 1925 (NSW) Trustee Act 1893 (NT) Trustee Act 1936 (SA) Trustee Act 1898 (Tas) Trustee Act 1958 (Vic) Trusts Act 1973 (QLD) Trustees Act 1962 (WA)

Fiduciary Relationship The three major elements of a fiduciary relationship are as follows: The fiduciary must act with trust and confidence The disadvantage, vulnerability and unequal bargaining power on the part of the person placing reliance on the fiduciary Reliance.

Fiduciary duties No conflict rule – the fiduciary must not allow themselves to be in a situation in which their interests are in conflict with those of the beneficiary. No profit rule Undivided loyalty rule. Duty of confidentiality – information obtained for the beneficiary must not be used by the fiduciary for private advantage or to cause disadvantage to the beneficiary.

Possible remedies for breach of fiduciary duty The remedies for breach of fiduciary duty are broad and varied, and the court will decide which is most applicable to the particular context

Trustee Companies Are large public companies with resources and stability authorised by state and territory licensing legislation to carry on trustee business and to charge for their work

Trustee Companies The trustee companies legislation: ■■ sets out the duties and responsibilities of trustee companies in their role as trustee; ■■ sets out the powers of trustee companies; ■■ enables trustee companies to establish common funds; ■■ regulates fees; ■■ in some jurisdictions, provides for controls on trustee companies’ ownership and exposure to debt.

Trustee’s Duties Duty to obey the terms of the trust Duty to use diligence and prudence Duty to keep proper accounts and provide information Beneficiaries’ right to information Duty to administer the trust personally and not to act under direction Duty to avoid conflict and unauthorised profit – the duty of loyalty

Trustee’s Duties The purchase rule – the purchase of trust property by trustee Duty to act impartially Duty to invest Duty to pay correct beneficiaries

The Exercise of Trustee Discretion Where the court assesses the trustee’s discretion, it will examine; evidence of the inquires the trustee has made; the information the trustee had; and the reason for and the manner of the exercise of the discretion.

Rights of Trustees Trustee’s right to remuneration Right to indemnity Right to seek advice and directions from the court Trustee’s right to a discharge

Liabilities of the Trustee Constructive trust – recipient liability Shelter behind the $2 nominee company

8.8 Trust – Continuity of Existence Death of a Beneficiary: If trust property is vested in a trustee, either a natural person or a corporate body, the death or disability of an individual beneficiary does not affect the existence and continuity of the trust Death of Trustee: If a trustee who is the sole or last surviving trustee dies, the position of trustee becomes vacant. If there is no person nominated in the trust to take over as trustee, and if there is no personal representative of the last surviving trustee willing to make an appointment, appointment of a new trustee can be made by the beneficiaries

8.9 Winding up trusts Trusts may be wound up or terminated in a variety of ways, including the following; Distribution of trust property Release or variation. Revocation Court order