Ch 1 Flashcards
Explain why it can be difficult to provide a definition of the trust
Has developed over 100s of yrs and adapted to wide range of situations
Waters: difficult to define bc has roots in middle ages and has grown and adapted to needs of society, this adaptability prompted maitland to consider it greatest achievement of equity. Most definitions are either an attempt to find essence of a trust (which often means emphasizing one kind of trust or trying to contain everything about trusts in one sentence).
Some best definitions of a trust
“A trust is the relationship which arises whenever a person (called the trustee) is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one, and who are termed beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust.” (Keeton, Sheridan - regarded as best def)
It is an equitable obligation the binds the trustee, to deal with property owned by him, the trust property, for the benefit of persons, known as beneficiaries, of whom he my be one, and anyone of who may enforce the obligation OR for the furtherance of certain purposes, such as charitable purposes. (Hayton)
Explain the nature of the 2 typical flaws in attempted definitions of the trust
Some definitions are too narrow
Some too encompassing
(making them difficult to comprehend)
Critical thing is that property is distinct from own property of trustee
AG might step in for charitable purpose trusts
Explain particular parts of the definitions provided in this part
SETTLOR: a person who creates an express trust through expressing an intent to create a trust in relation to a specific property and conveying that property to the trustee. The person may also declare themselves a trustee of the property they have title to.
TRUSTEE: the person who holds title to the trust property for the benefit of the beneficiaries.
BENEFICIARY: the person for whose benefit the trust property is held in trust for persons.
PERSON: settlor, trustee, beneficiary, corporation or other entity capable of holding an interest in property.
TRUST PROPERTY: the property the trustee holds for the benefit of the beneficiaries OR for purposes. The trustee may hold either legal or equitable interest in trust property.
TRUST INSTRUMENT: a document which creates an express trust by expressing the intention to create the trust and it may describe the rights and obligations of the parties to the trust. (but isnt necessary to create a trust)
BARE TRUST: a trust in which the trustee has no duties other than taking care of the property and conveying it to the beneficiaries (ex. Canadian repository for securities).
DISCRETIONARY TRUST: where the trustee has the discretion/power to determine which beneficiaries will receive income from the trust or how much income the beneficiaries will receive.
FIXED TRUST: the beneficial interests have been determined. There is no discretion on the part of the trustee.
TESTAMENTARY TRUST: a trust created by will. The settlor is then referred to as the testator.
INTER VIVOS TRUST: a trust created during the life of a settlor as opposed to a created on the death of the settlor through a will.
Origins of the Trust Concept
Pragmatic origins
Middle ages - Take care of property while gone on crusades, holding property for Fraciscan monks
Theoretical origins
Roman Law - Fidei Commissum - Leaving someone in charge of conveying property to someone else at end of life
CL - to avoid misuse of church property by priests
Islamic Law - Waqf concept of leaving property to god but this can be deferred so someone can get it and kinda like a charitable remainder
German - Salman - person in charge of administering property in life or on death of transferor for designated purpose
Development of concept
Early use to avoid feudal incidents, avoid creditors, devise real property on death before wills leg in manner different from succession of real property
Court expansions on concept (ie constructive trusts)
Court of chancery decided to recognize use in late 14th or early 15th century
Courts build on the use
Courts of equity borrowed from the trust concept to deal with inequities such as unjust enrichment → constructive trusts
Remedies such as accounting and equitable damages or, if didnt quite fit, deemed constructive trustees (ie fiduciary relationship)
Situations where a Trust is Used
express trusts are divided into trusts for persons and trusts for purposes
Trusts for Persons: property held for benefit of identifiable ppl or class of persons defined in a way that it can be determined whether a person is a member
Education of grandchild
Gift for spendthrift child for the benefit of child, spouse, and dependent children
Life interest for spouse, remainder to charity
Estate freeze
Security for pmt on long-term contract
Pension fund protection
Purpose Trust Examples
Democracy and Freedom of Expression - probably not possible
Endowed professorship (charitable purpose)
Generally not valid unless for charitable purpose.
Beneficiary has right to sue the person if trust not being managed right - so problem is that trust for purpose makes it hard to say who is to sue.
AG enforces for charitable purposes
Other applications of Express Trust
Restoration Trust - needs to be a charitable purpose to be legally valid… would need to set it up in a way to facilitate this.
Self governance trust - same issue.. Can set it up for persons but if purpose then must be charitable.
Situations in which a trust may be said to have arisen or in which a court may order that property is held on Trust
Resulting Trust Situations
Automatic Resulting Trust
Result = goes back to settlor (or their estate). It is the outcome of failing to say what happens with remainder interest in circumstances.
Ex. mother leaves to daughter and daughters children. Daughter dies w/o children. Property would auto result
Automatic because it arises whether or not settlor had intent to have property returned, and even if clearly intended property not to be returned - ie operation of law.
Presumptive Resulting Trust
Where a trust was presumed to be intended in the circumstances, trust arises by operation of law
Problem with this is that Lord Brown Wilkenson said this division in automatic and presumed resulting trust doesnt make sense - but gillen thinks it does make sense because sometimes its obv they dont want property back.
Constructive Trust Situations
Profiteering Fiduciary
Ex. trustee holds land in trust and must sell asap. Trustee purchases land himself using a corporation to purchase the land. Fair price. Land is only asset of corp. Land doubles in value and there is a corresponding rise in share value. Court may order that the corp holds land in constructive trust for beneficiaries or that trustee holds shares of corp in trust for beneficiaries. No express intent that corp be a trustee, thus it would be by operation of law.
Knowing Receipt of Trust Property
Purchaser knows land held in trust, doesnt ask to see instrument. Would have been known that trustee had no power to sell land. Land price now doubled. COurt might order that purchaser holds land in trust for beneficiaries of original express trust
Trustee de son Tort (“defacto trustee”)
If sole trustee dies and none has been appointed by court yet and solicitors do something with trust that loses all the funds, the court will find them to be constructive trustees and thus remedies will be available against them for equitable damages etc.
See Blyth v Fladgate - trustee de son tort applies to anyone who takes on role of trustee w/o being appointed as such and who, in doing so, commits an act that would have been a breach of trust had the person been a trustee
Knowing Assistance in Breach of Trust
Ex. Solicitor knows new appointed trustee will be breaching trust - solicitor might be a constructive trustee
Constructive Trust Remedy Generally
Cohabitating, business partners where rltn breaks down and is all in one person’s name → constructive trust as remedy for unjust enrichment or unlawful conduct
Be able to draw the schematic diagram for trusts and explain the distinctions made in each of the various parts of the diagram.
Trusts
A) Express trusts
A1) Trusts for persons (inter vivos or testamentary, fixed of discretionary)
A 1 a) Fixed
A 1 b) Discretionary
A2) Trusts for Purposes (inter vivos or testamentary)
A 2 a) Non Charitable
A 2 b) Charitable
B) trusts by op of law
B1) Resulting Trusts
B 1 a) Automatic Resulting Trusts
B 1 b) Presumptive Resulting Trusts
B2) Constructive Trusts
C) Statutory Trusts
Notes
1st distinction is how trust is created (express, operation of law, statute)
Note that non charitable are not valid legal trusts
If this happens, the property reverts back to the settlor. Where the trust is to be created under a will (i.e., it is testamentary) the property reverts back to the estate of the deceased. If the trust was to be created by a bequest of specific property then the property becomes part of the residue of the estate. If the residue of the estate was to be held in such a trust then when it reverts to the estate it will be property of the estate that has not been dealt with in the will and it will then be dealt with under the applicable scheme for the distribution of “intestate property” (i.e., property that has not been distributed on death pursuant to a will). If the intended trust was an invalid inter vivos trust, the property would revert (or “result”) to the settlor, which may not be something the settlor wants and it may also have adverse tax consequences
Some people might put resulting trusts under express trusts - intended by implication from circumstances in which they arise. There is authority for division into auto resulting and presumptive, and there is authority that no such division should be made
Express trust includes implied by circumstances, words, words used together, conduct, etc. “implied trust” is usually used to mean by operation of law… so be careful of terms
Identify three issues that need to be addressed in the administration of trusts
Trustees: Acceptance of trust obligation? Retirement? Removal? Appointment of new trustee? Conveyance of title ?
Duties:
Presumed duties?
Consequence of breach (ie remedy)?
Exculpation?
Management:
Multi trustees - how are decisions made?
What are trustees permitted to do (ie powers)?
What powers are trustees presumed to have?
What powers are trustees not presumed to have?
Briefly distinguish duties and powers
Duties = obligations - must do
Presumed duties are attached to a trustee
5 presumed duties:
1)Carry out terms of trust
2)Loyalty
Act in best interest of bens
3)Impartiality
Being fair btwn different beneficiaries
4)Care
This duty of care has been around for a long time. Equity.
Care must be taken in investing etc, managing property, repairing trust property
5)Non delegation
Dont delegate trustee duties, carrying out of the trust
Presumed that settlor had faith in named trustee
Other duties may be imposed
Powers
Give permission/authority to do something (may do x)
Powers can be given to any person, not just trustees
Powers needed to administer a trust, to take care of property
Infinite range of powers possible (except if against public policy - will be invalid)
Grantor is called donor of power
Person w power is called donee of power
Power can be granted w respect to donors property, or can be given to act on behalf of donor to affect legal relations (agency).
Sometimes granted re distribution of trust income or capital to bens
Document granting power to enter legal relations = power of attorney
Examples of powers:
Invest funds
Sell property
Lease property
Insure property
Decide who gets gift of donor property
Only donee can exercise power unless given power to delegate
Trustees have title to property subject to trust
Must protect value of trust for bens
Distribute income or capital
The Overlap Between Duties and Powers
Distinction can become blurred since duties and powers overlap
Trust power has duty to exercise, but exercise invovles a choice
Ex. decision to exercise power of investment involves duty to invest prudently
Identify three duties of trustees (by referring to the duties by the name customarily given to them) and briefly describe the duties
Loyalty - Act in best interest of bens
Impartiality - Being fair btwn different beneficiaries
Care - This duty of care has been around for a long time. Equity.
Care must be taken in investing etc, managing property, repairing trust property
Non delegation - dont delegate duties
+carry out terms of trust
Describe and distinguish administrative powers and dispositive powers in the context of express trusts
Administrative vs dispositive powers: admin powers allow trustee to manage property, powers are power to sell, invest, to insure trust prop, repair etc
Dispositive powers allow for disposition of property (may have power of advancement ie to take capital right now and give it to person who would only get it at end of interest of current ben, some bens may be able to encroach, some trustees may be able to accumulate income rather than distribute it throughout life, appoint, determine amounts, etc)
Describe and distinguish personal powers, fiduciary powers, and trust powers
Power of appointment: May allow trustees to choose persons among a class of persons for a distribution of income or capital Can be general (donee can make gift to anyone they want) or special/limited (exercised only from specific list of persons) or hybrid (anyone except certain list)
Personal Power (aka Bare Power or Mere Power): When granting power of appointment it may be expressed or implied that the donee is under no obligation to exercise the power or to consider exercising the power. Power is given to donee in their personal capacity The only obligation of donee is to exercise power in accordance w terms of the power
Fiduciary Power (ie power held in a fiduciary capacity)
May have expressly said or implied that the person must at least expressly consider the exercise of the power.
Where donor is the settlor and donee is trustee, this normally suggests that trustee holds the power in a fiduciary capacity (fiduciary is btwn trustee and bens - must consider if in best interests of bens)
Trustees given power in their capacity as trustees must act accordingly - expected to consider exercise of that power and so must
As a solicitor, if you are drafting a trust instrument and the settlor wanted to give a personal power, you are probably going to have to say it expressly otherwise it will be interpreted as a fiduciary power. Must make it clear if it is a personal power (ie say theyre not obliged to exercise or consider exercising)
Trust power
the donee must exercise the power. Considering is not enough, failure to exercise the power is a breach of trust. There is a duty (legal obligation) to exercise the power but the exercise involves a choice.
it is a duty to exercise the power – to give income to a beneficiary – but the power allows them to choose which beneficiary
The Overlap Between Duties and Powers
Distinction can become blurred since duties and powers overlap
Trust power has duty to exercise, but exercise invovles a choice
Ex. decision to exercise power of investment involves duty to invest prudently
When will income earned on property held in a trust will be attributed to settlor
If the settlor retains certain powers (which the default is that they do not - must be express) the income will be taxed in hands of settlor under s75(2) of ITA
(i) the power to determine who will receive income,
(ii) the power to revoke a trust or
(iii) the power to consent to whom distributions of the property of the trust will be made,
This occurs because the settlor has not really relinquished control over the property and, in a sense, still retains a benefit from the property
Usually it would make sense for the beneficiaries to pay the taxes because they are usually in a lower tax bracket, however sometimes the settlor may want to retain some control over the trust – even if it means the settlor pays the taxes
Note: Alter ego trusts allowed under ITA allow you to avoid probate tax by putting all your property in trust for yourself for life with the remainder to someone else. Interesting that the probate tax is provincial. You must be the only one with the right to property for life. BUT remember that if there is remainder interest it becomes vested in interest. Wont be subject to the wills legislation.
The issue with this is once you make yourself the trustee what obligations do you want to give yourself legally … probably none, but you should probably have some to be a trust. Weird.
Gives capital gains exemption ( because otherwise disposing of remainder interest in prop would trigger capital gain tax)
Taxation of Trusts as a conduit
Trusts are considered a separate taxpayer under ITA and therefore a tax return must be filed for a trust and tax paid by the trustees on income earned from the trust property (but amts paid to bens can be deducted in determining taxable income of the trust)
Income earned on trust property that is paid or payable to beneficiaries can be deducted from the income of the trust (flow through)
Income that is paid to the beneficiaries is treated as their income and they are taxed on it
But sometimes trustee can make an election to pay the tax instead of ben (where ben is disabled) – used before all the time for testamentary trusts but not anymore.
