9. What a trust is

A definition

Article 2 of the Hague Convention on the Law Applicable to Trusts describes a trust as the legal relationship created, during life or on death, by a person called the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. It is a good working definition. The assets are a separate fund, not part of the trustee's own estate. Title stands in the trustee's name. The trustee must manage the assets according to the trust and the law, and he is accountable for doing so.

Three essentials

A trust needs three things.

Specific property: a trust can only exist over identified property. In Westdeutsche Landesbank v Islington, Lord Browne-Wilkinson said there must be identifiable trust property. A trust cannot be made over future property, such as what you hope to inherit. In Re Goldcorp Exchange, customers who bought unallocated gold had no trust, because no particular gold could be identified as theirs. They were only unsecured creditors.

A trustee with mandatory duties: the trustee must apply the property as the trust says. Breaking the trust does not mean the trustee lacked the power to act. It makes him personally liable for breach.

Beneficiaries who can enforce it: except for charitable trusts and a few odd purpose trusts, a trust must be for persons, who can go to court to enforce it. A trust to promote good journalism, as a private trust, fails because no one can enforce it.

The trust fund

Trust property is often a changing fund. Trustees sell and reinvest. What they buy with trust money is trust property. Income and other products of trust property, such as dividends, are trust property too. So is any unauthorised profit a trustee makes from his position.

Classifying trusts

By how they arise: express trusts are created on purpose. Resulting trusts arise from the presumed or implied intention of the owner. Constructive trusts are imposed by law because of the trustee's unconscionable conduct.

By the beneficiaries' rights: in a fixed trust the shares are set by the settlor. In a discretionary trust the trustees decide who in a class gets what. A discretionary trust can be exhaustive, where the trustees must distribute everything, or non-exhaustive.

Protective trusts: a protective trust gives a beneficiary a life interest that ends if he tries to dispose of it or goes bankrupt. A discretionary trust for the beneficiary and his family then takes over. It protects a spendthrift. In England the standard form is set out in section 33 of the Trustee Act 1925.

Bare trusts: the trustee has no duties except to hold the property for an adult beneficiary who is absolutely entitled and to obey his directions.

Charitable trusts: trusts for public purposes that the law counts as charitable. They are explained in their own chapter.

Trusts and powers

A power of appointment lets a person, the donee, choose who gets property, but does not oblige him to choose. That is the key difference from a trust, which is mandatory. A bare or mere power, held personally, need never be exercised, and objects cannot complain if it is not. A fiduciary power, held by trustees, must at least be considered from time to time.

Powers can be general, where the donee can appoint to anyone, including himself; special, where he can appoint only within a class, such as the settlor's children; or hybrid, where he can appoint to anyone except a class. McPhail v Doulton is the leading case on telling a discretionary trust from a power and on the test for certainty of objects.

Beneficiaries' rights

Beneficiaries can make trustees carry out the trust, even if they gave nothing for it. Under the rule in Saunders v Vautier, adult beneficiaries of sound mind who between them are entitled to the whole beneficial interest can end the trust and call for the property. They cannot, without ending the trust, tell the trustees how to exercise their discretions.