What is a trust?
A trust is a type of legal relationship that arises where at least one entity holds property on behalf of another entity.
The entity which holds the property is called a trustee, and is subject to specific duties as a result of that role. The entity which the trustee holds the property for is called a beneficiary. The entity which gave the property to the trustee to be held on trust for the beneficiary is called the settlor. While the trustee may hold legal ownership of the trust property, he or she is not allowed to apply that property for his or her own benefit. Instead, the Trustee is obligated to apply that property for the benefit of the beneficiary.
Most commonly, a trust is expressly created by executing a trust deed. The trust deed should specify how the trust is to be administered by the trustee, including how the beneficiaries can benefit from the trust property. This can include how the trustee is allowed to make distributions of cash assets of the trust as well as how the beneficiaries can otherwise utilise tangible trust assets like a house or a vehicle. Both the trustee and the beneficiaries are obligated to comply with the terms of the trust deed, except in situations where the terms of the trust are invalid by operation of law.
While a trust can consist of a single trustee and a single beneficiary, it is far more common for a trust to have multiple beneficiaries. This can occur in one of two ways. The trust deed may identify more than one primary beneficiary by expressly naming more than one person as a beneficiary. Alternatively the deed may specify a class of persons who are beneficiaries of the trust without being specifically named. This is commonly utilised to provide for secondary beneficiaries that will receive an interest in specific circumstances. A common example is to provide for the children or spouse of a beneficiary to receive an interest in the event that the primary beneficiary is unable to receive their interest.
The trustee can also be a beneficiary of the trust, although that may complicate complying with their obligations as trustee. However, the trustee cannot be the only beneficiary of the trust. A trust can only arise where the legal interest in the trust property has been separated from the equitable (beneficial) interest in the property. If the same person holds both interests as whole, then a trust cannot exist.
As a trust is only a legal relationship, it does not create a separate legal entity, therefore a trust does not have any legal standing to take action in its own name. Accordingly, any actions for the trust must be undertaken by the trustee on behalf of the trust. This broad principle does have some exceptions. For example, the trust will be subject to separate taxation, and any distributions of trust property by the trustee to the beneficiaries may also be subject to taxation.
Because the trust is entirely reliant upon action by the trustee, the law imposes stringent obligations upon a trustee in order to protect the beneficiary’s interests. These obligations are commonly referred to as “Fiduciary Duties”, and the penalties for breaching those duties is often severe.
The most prevalent fiduciary obligations are:
- The duty to act in the best interests of the beneficiaries;
- The duty to avoid conflicts; and
- The duty to act in good faith.
In circumstances where the trustee has breached one or more of their fiduciary duties, the beneficiaries are entitled to commence a claim against the trustee to hold the trustee accountable for their breach.
What are the types of trusts?
Trusts are split into three distinct categories: express trusts, resulting trusts and constructive trusts. Each type of trust arises from a specific set of circumstances, as set out below.
An express trust is the most common type of trust, with multiple sub-categories defined by various factors. An express trust is created when a settlor gives property to a trustee to be held on trust for a beneficiary. The term “express” is a reference to the intention of the settlor, which must be expressed to the trustee in some form. Most commonly, an express trust will be formed by a trust deed which sets out the terms and intention of the parties. Because the definition of an express trust is so broad, there are multiple sub-categories of express trust. An express trust may fall within the definition of multiple categories, as they are not mutually exclusive.
Under a fixed trust, each beneficiary has a set interest in the trust which will vest once conditions are met. The beneficiaries’ interests may be contingent upon some external event, or they may be a right to the property outright. The beneficiaries’ interests are fixed in that the interest is only subject to the terms of the deed, and if those are satisfied then the interest will vest, as opposed to subject to the decisions of the trustee, as per a discretionary trust.
In a discretionary trust, the beneficiaries do not have any fixed interest or specific right to the trust property, but rather the trustee has discretion about when and how the beneficiaries will receive an interest. One example is a family trust which has a significant number of beneficiaries. The settlor may not wish to establish fixed interests in the trust as a beneficiary with a fixed interest could require the trust to distribute the trust property on election. This could cause significant disruption and subsequent detriment to the other beneficiaries in circumstances where the trust property is either a business or other type of illiquid asset acquired as part of a long term financial strategy.
Additionally, distributions from the trust may give rise to taxation liabilities which undermine other tax minimisation strategies being employed by one or more of the beneficiaries.
The general rule is that all trusts are required to have an identifiable person(s), or a class of persons, in order to meet the formal requirements for a trust. However, charitable trusts are an exception to this rule. A charitable trust does not have any set beneficiaries, but rather has an express charitable purpose that falls within one of four categories:
- Trusts for the relief of poverty;
- Trusts for the advancement of education;
- Trusts for the advancement of religion; and
- Trusts for other purposes beneficial to the community, not falling under any of the preceding heads.
In addition to falling within one of the four categories, a charitable trust must also be available to the public. A charitable trust will be available to the public if it is “for the benefit of the community or of an appreciably important class of the community” as per Verge v Somerville  AC 496 at 499. If the class of beneficiaries are linked by blood, contract, family association membership or employment then that class will not be consider to be the public for the purposes of establishing a valid charitable trust.
A valid charitable trust may be eligible for significant taxation concessions from the Australian Taxation Office, as well as the respective state authorities. Due to the significant nature of those concessions, there is a high incentive for exploitation of charitable trusts by unscrupulous members of the public. As such, charitable trusts are commonly subjected to a high level of scrutiny before they are granted those concessions.
A testamentary trust only differs from other forms of trust in that the trust property must be gifted from the estate of a deceased under a will. The terms of the testamentary trust can provide a wide range of different aspects of the trust, and may provide for either fixed or discretionary interests, with differing levels of obligations on the trustee. In rare situations, a testamentary trust may also be a charitable trust. Testamentary trusts are most commonly utilised to provide for minors under the will, where the testator wishes to impose conditions on the use of those funds by the trustee for the beneficiary. Additionally, testamentary trusts can provide taxation benefits for the beneficiary in certain circumstances.
A bare trust is a trust where the beneficiary has the absolute right to the trust property and the Trustee is merely holding the trust property as a nominee for the beneficiary. This differs from a normal fixed trust in that a beneficiary under a bare trust will be able to call to the trustee to transfer the assets into his or her own name, at the beneficiary’s discretion. A trustee under a bare trust will have no discretion or active duties beyond merely holding the property and transferring the property once call on to do so. Bare Trusts are most commonly established where a beneficiary is unable to hold the property for some reason, yet does not wish to dispose of the asset.
A unit trust differs from other forms of trust in that the trust deed provides for multiple units in the trust which entitle their holder to an interest in the trust property. The units in the trust are property in themselves, as opposed to a normal trust interest which is merely a personal right attached to that specific person. Accordingly, the holder of a unit in the trust can choose to transfer their unit to another person, who will then be entitled to the interest in the trust. As such, units in a unit trust operate similarly to shares in a company, with the trust deed specifying the rights attached to ownership of a unit in the trust. Unit trusts are frequently used in situations where multiple persons are contributing to the purchase of a joint asset which they wish to be held by a trustee for the joint benefit of all purchasers. Most commonly, there will be terms dealing with the shared use of the trust property as well as restrictions on the transfer of a unit in the trust.
A resulting trust differs from all the previously mentioned types of trust in that it is not specifically created by a settlor, but rather arises when certain circumstances are present. There are 3 common circumstances in which a resulting trust will arise:
- Where property is given on trust to a trustee and the trust fails because it is void, unenforceable or the beneficiaries have predeceased the settlor;
- Where there is an undistributed surplus after the trustee has fulfilled all of the purposes of the trust; and
- Where a party has contributed funds to the purchase of property, but has not received an interest in the property in proportion to their contribution.
In both the first and second circumstances, the trust property cannot be fairly claimed by the trustee or any other party, so the law will presume that there is a resulting trust in favour of the settlor for the residuary funds.
In the third circumstance, the law will presume that any party that holds the property, or a proportion of the property, does so on resulting trust for the benefit of the party that advanced the funds, if the funds were advanced in the character of a purchaser (as opposed to as a lender). This most commonly occurs where a family member provides the purchase funds for property that is held by another family member who did not contribute to the purchase price of the property, such as a husband providing the funds for a house to be held solely in the name of his wife. In those circumstances (subject to any subsequent application of the presumption of advancement), the law presumes that the transferor husband did not intend to gift the transferee wife with beneficial ownership of the whole of the property. Another common scenario is where the property is purchased solely using the funds of one person but is held by two persons as either joint tenants or tenants in common. In that scenario, the person who failed to contribute to the purchase of the property will be deemed to be holding their interest in the property on resulting trust for the other person.
The trusts that result under the third circumstance are imposed because of the presumption that a person does not gift funds or property to another without receiving any benefit. It should be noted that this is only a presumption, which can be rebutted by evidence showing the intentions of the party contributing the funds at the time the funds are advanced. This may be where the funds are expressly declared to be a gift, where the parties have made representations that contradict the beneficial ownership in favour of the party advancing the funds or where the presumption of advancement applies.
The presumption of advancement will apply where the relationship between the parties is one where the transferor is under a natural obligation to provide for the transferee. In those circumstances, the court will presume that the transferor intended to gift the funds or property to the transferee unless there is evidence to the contrary.
It should be noted that although a resulting trust may be present under the law of trusts, it will not be determinative in situations that fall within the scope of family law, such as the distribution of property at the breakdown of a relationship. Whilst the existence of the resulting trust can have a bearing on the rights of the parties, it is not an automatic bar to a claim by one spouse against another under the principles of family law.
A constructive trust is similar to a resulting trust in that it is not specifically created, but rather arises from the circumstances. However, whilst a resulting trust can be found to exist by the court based on the presumed intentions of the parties, a constructive trust is imposed by the principles of equity in circumstances where it would be unequitable for one party to assert beneficial ownership over certain property. However, equity will only impose a constructive trust as a last resort, where there are no other remedies available which would provide relief to the affected party. Due to the fluid nature of equity, there are no specific principles which dictate when all constructive trusts will arise.
A constructive trust will be applied to property held by a party where the property has come into that party’s possession through either a breach of trust, or some other form of impropriety. Some common examples are:
- where a fiduciary has received a profit or benefit in breach of their fiduciary duties. In that situation, equity will apply a constructive trust on the fiduciary so that the property improperly received is held on trust for the beneficiary who should have received the profit if not for the breach by the fiduciary;
- where property is received by a transferee under an agreement that is liable to be set aside for fraud, mistake or undue influence. In that situation, the transferor retains an equitable interest in the property and the constructive trust can be imposed to protect that interest; and
- where a third party instigates or participates in a breach of trust or other fiduciary duty with knowledge of the existing trust or other fiduciary duty. A third party who receives property that is either existing trust property or is a benefit that should have flowed to the beneficiaries if not for the breach by the trustee, cannot assert beneficial ownership when the third party has knowledge that the property or benefit has come into their possession by improper means.
The nature of a constructive trust is one which can apply in a multitude of different situations and, accordingly, the above examples are far from exhaustive.
If you wish to set up or vary a trust, or if you wish to better understand your rights as a beneficiary of an existing trust, please contact Stone Group Lawyers on (07) 5635 0180 or use the below booking form to book your complimentary 30 minute consultation with one of our friendly commercial lawyers.