UNDERSTANDING TRUSTS

Trusts cannot be easily defined, resulting in a descriptive rather than a substantive definition. Generally, the trust is an equitable relationship arising where the creator (settlor) confers an enforceable equitable interest in a person or a charitable institution (who may be called the beneficiary or the charitable purpose) in property (known as the trust property), against the legal owner of that property (known as the trustee).

There are primary elements of trusts as follows. Firstly, the trustee must have ownership and possession of the trust property conferred in them; the trust property must be a recognised property interest which is in existence, is identifiable and which has been clearly and accurately described in the trust. It should be noted that trust property does not only have to be legal interest; equally equitable interests are capable of forming the subject matter of a trust. Essentially, all that is required is for the trustee to have ownership of that property.

Secondly, the trustee owes equitable fiduciary obligations to the beneficiary. These obligations can be enforced under equity. The duties and obligations of the trustee automatically arise upon the creation of a valid trust. Where the trustee breaches these duties, the beneficiary can seek equitable relief for all loss flowing from such a breach. The equitable obligations of the trustee do not extend beyond the trust property. The trustee is responsible for looking after the trust property on behalf of the beneficiary and must make sure that they abide by these obligations when dealing with the trust property. In all dealings with the trust property, the trustee should make sure that they are acting in the best interests of the beneficiary, and avoids any conflict between personal interest and the interests of the beneficiary.

Thirdly, the beneficiary must be clearly and accurately described in the trust. Where there is a valid trust the beneficiary acquires an equitable beneficial interest in the trust property. The interest is a property interest similar to a legal interest. However, it is only recognised and enforceable in the equitable jurisdiction. Where a purpose rather than a beneficiary is set out, the trust will only be enforceable if the purpose is charitable.

Fourthly, a trust only exists where legal and equitable title have been separated. It should be clear that the trustee holds the trust property as owner in a legal capacity for the benefit of a beneficiary who holds the trust property in an equitable capacity. The trustee and the beneficiary must be separate persons or exist in separate capacities. One of the most key consequences following the creation of a trust is the emergence of an enforceable, equitable and beneficial interest. Where a valid trust is created, ownership of the trust property is fragmented on the basis of jurisdiction; not only is the trust property owned at law, it is also owned in equity. Wherever a trust is validly created, a beneficial interest will arise. Courts have held this to be the case, even where the trust functions as an investment device and the beneficiary holds an interest in an oscillating fund such as a unit trust.

Another important factor about trusts is the role of the settlor and the automatic legal consequences following a trust that is validly created. Upon the trust being created, the settlor (the person creating the trust) will generally have no further legal rights over the property. The settlor has no right to interfere with the trust unless the settlor is also the trustee, as in the instance where the settlor makes an oral declaration of trust. Unless it is in the rare occasion where the settlor specifically reserves contractual rights, the settlor will have no further rights over the property once it is legally transferred over to the trustee. Traditionally, no contractual relationship has existed between the settlor and the trustee because trusts are only recognised exclusively under equity. Further, where the relationship between settlor and trustee was contractual, no trust could arise until the trustee had accepted the position. In an instance where the trustee disclaimed the office, the legal title of the trust property would re-vest in the settlor and the settlor would then hold the property on trust for the beneficiaries. The refusal by the designated trustee of the position would not, in itself, destroy the intention of the settlor to set up a valid express trust. There are occasions where the settlor would retain legal rights in a trust by expressly reserving the power to revoke, add to or vary the trust. It should be noted that beneficiaries under a revocable trust have vested interests in trust property, which are liable to become divested where the settlor exercises the contractual right to revoke.