Intro 3 What is a trust?

This webcast will look at the definition of a trust and introduce you to the trust concept.

You will recall from your reading and the webcast on the historical development of equity
that the trust dates back to the Crusades. A good example from those times is where a
Knight went off on the Crusades, sometimes for long periods and before leaving would
transfer the ownership of his land to a trusted friend or relative, the idea being that this
person should look after it whilst the Knight was away. Unsurprisingly Knights would often
return to find that the trusted friend or relative would not transfer the property back or had
sold it on to a third party.

The Knight would have transferred the legal title in the land to the friend and in the eyes of
the common law that would be the end of the matter. So the Knight would be unable to
bring a claim in the common law courts to seek some form of redress.

This is where the King was willing to step in and issue an equitable decree recognising the
fact that the Knight had an equitable or beneficial interest in the land and thereby require
the third party to act in accordance with the initial agreement.

We can see here the origins of the trust with the Knight as the settlor, the friend as the
trustee and then the Knight as beneficiary. In the early days the trust concept was referred
to as the use, with the trustee known as the feofee to uses and the beneficiary as the
cestui que use.

In modern terms then, what is the definition of the trust?

Well the trust is a flexible concept and so there is no rigid definition set out in statute or in
the case law but we can pinpoint some essential characteristics and these would be

- Ownership of property by the trustee

- A benefit accruing to the beneficiary and

- An element of compulsion on the trustee ie that the trustee is bound in equity to

act in accordance with the instructions of the settlor and to act with loyalty to
the beneficiary.

Let us take a simple example. Bob is the settlor, he is the person setting up the trust. He will
ask his solicitor to draw up a trust deed which will set out his wishes in relation to the trust.
He is appointing Amanda to be his trustee and he must transfer the 50,000 to her and she
will then hold the legal title to it. The trust is being set up for the benefit of Lucy, she is the
beneficiary and will receive the money when she is 21.

Amanda is the trustee. She will hold the legal title to the money but she is not entitled to
use it for her own benefit as she does not have any beneficial interest in it. She cannot
spend the money on herself. Once appointed as trustee she will have positive duties to act
for the benefit of Lucy, she must invest and manage the money and distribute it to Lucy
when she is 21. The position of trustee is an onerous one and the duties are applied strictly.

Lucy is the beneficiary. She is entitled to receive the 50,000 capital plus any income that is
earned from it. She also has the right to enforce the trust and being an action against the
trustee if there are any breaches of trust.

Lucy would have a personal remedy against Amanda ie she could sue her personally to
obtain damages for any loss suffered to the trust fund. Examples of this might be where
Amanda takes money out of the trust and spends it on herself or where she is negligent
when investing the money and the value of the fund drops in value.

In addition to this Lucy would also have proprietary rights including the right to trace any
assets of the trust fund that are misappropriated. A good example of this would be where
Amanda invests the money in shares, then transfers some of those shares into her own
name, then makes a gift of the shares to her sister. Lucy would be able to trace the shares
into the hands of Amandas sister and obtain an order that they be returned into the trust.

This gives you an introduction to the structure of a trust and the parties to it. You will be
able to explore further the requirements for creation of trusts and the other issues raised in
this webcast regarding the position of trustees and beneficiaries by watching the other
webcasts on trusts.