Introduction to trusts - Definition and purpose of trusts

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Overview

Trusts are central to equity and property law, vital for asset management, estate planning, and various legal transactions. For budding solicitors tackling the SQE1 FLK2 exam, a solid understanding of trusts is key. This article covers the definition, purpose, history, types, and practical uses of trusts, equipping you for exam success and your future legal career.

Definition and Key Principles

A trust involves a legal setup where a person (the trustee) holds property for another's benefit (the beneficiary) under the settlor's directives. This structure forms the basis of trust law, based on these main principles:

  1. Separation of legal and beneficial ownership
  2. Trustee's duty to act in the beneficiary's best interests
  3. The "three certainties" doctrine

The Three Certainties

A valid trust must meet the three certainties from Knight v Knight (1840):

  1. Certainty of intention: The settlor's clear intent to create a trust.
  2. Certainty of subject matter: Clearly defined trust property.
  3. Certainty of objects: Clearly identified or identifiable beneficiaries.

Purpose of Trusts

Trusts are used in legal and financial planning for:

  1. Asset Protection: Safeguarding assets from creditors or legal claims
  2. Estate Planning: Managing wealth transfer across generations
  3. Tax Planning: Optimizing asset distribution to manage tax liabilities
  4. Charitable Giving: Structuring long-term philanthropic efforts
  5. Business Structures: Utilized in commercial and financial settings

Historical Context

Trusts began in medieval England as 'uses,' mainly to bypass feudal land restrictions. Key developments include:

  • 1535: Statute of Uses
  • 1660: Statute of Tenures
  • 19th Century: Growth of trust principles in equity
  • 20th-21st Century: Modern trust law advancements, such as the Trustee Act 2000

Types of Trusts

Trusts are categorized by their creation, purpose, and structure:

Express Trusts

Deliberately created by the settlor, express trusts include:

  1. Fixed Trusts: Specific beneficiary interests
  2. Discretionary Trusts: Trustees decide on benefit distribution
  3. Protective Trusts: Shield beneficiaries from creditors

Implied Trusts

Arising by law, implied trusts include:

  1. Resulting Trusts: Property reverts to the settlor or contributor
  2. Constructive Trusts: Prevents unjust enrichment, imposed by courts

Legal Maxims and Case Law

Several legal principles support trust law:

  1. "Equity looks to the intent rather than the form"
  2. "Equity will not assist a volunteer"
  3. "Equity follows the law"

Key cases shaping modern trust law include:

  • Saunders v Vautier (1841): Beneficiaries' right to end a trust
  • Re Baden's Deed Trusts (1969): Clarity on certainty of objects in discretionary trusts
  • Tinsley v Milligan (1993): Impact of illegality on trust creation
  • Target Holdings Ltd v Redferns (1996): Trustee liability for breach

Duties and Powers of Trustees

Trustees play a critical role in trust administration, governed by both common law and statutory duties:

Fiduciary Duties

  1. Duty of loyalty: Acting for beneficiaries' interests
  2. Duty of care: Using reasonable skill and care in management
  3. Duty to account: Keeping records and providing information to beneficiaries

Statutory Powers

The Trustee Act 2000 gives trustees various powers, including:

  1. Power of investment
  2. Power of delegation
  3. Power to insure trust property

Applications and Examples

Family Trust for Estate Planning

Sarah sets up a trust for her children and grandchildren. The trust gives trustees discretion to allocate income and capital, allowing:

  • Flexible management for changing family needs
  • Tax benefits by spreading income across beneficiaries
  • Asset protection from divorce or creditors

Constructive Trust in Property Disputes

In Gissing v Gissing [1971], it was debated whether a wife's household contributions could establish a beneficial interest in the home. The court ruled no but set a precedent for circumstances where a constructive trust arises from common intention and detrimental reliance.

Application of Saunders v Vautier

John, a trust's sole beneficiary, requests early distribution at 25, despite the trust stipulating age 30. This demonstrates beneficiaries' ability to override settlor intentions under certain conditions, highlighting the balance between settlor wishes and beneficiary rights.

Contemporary Challenges and Developments

Modern trust law faces various challenges:

  1. Digital Assets: Including cryptocurrencies in trusts
  2. Cross-Border Trusts: Managing international legal frameworks
  3. Purpose Trusts: Growing recognition beyond charitable aims
  4. ESG Considerations: Integrating ethical investment principles in trust management

Conclusion

Trusts continue to be a vital part of equity and property law, essential for the SQE1 FLK2 exam. Their role in managing assets and supporting legal arrangements reflects their ongoing importance. Aspiring solicitors must understand both the theory and practical applications of trusts.

Key takeaways:

  1. The tripartite structure of trusts: settlor, trustee, and beneficiary
  2. The three certainties needed for a valid trust
  3. Various types of trusts and their specific uses
  4. Fiduciary duties and powers of trustees
  5. Landmark cases influencing trust law
  6. Contemporary challenges in trust law

A thorough command of these principles will prepare you for trust-related questions in the SQE1 FLK2 exam and improve your future legal practice.