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Trust (law): the story on HearLore | HearLore
Trust (law)
In the 12th and 13th centuries, personal trust law began to develop in England. Legal historians believe that inter vivos trusts were first created for the benefit of Franciscan friars who were forbidden from owning property. Benefactors would convey land to a local person known as the feoffee to hold legal fee simple title while promising to allow the friars to live on and receive profits from the land. However, English common law provided no legal obligations to the beneficiary if the feoffor died. Disgruntled beneficiaries could petition the King's Lord Chancellor to enforce these promises. The Lord Chancellor decided cases as the keeper of the king's conscience under what became known as equity in English law. After the chancellor consistently enforced these promises, uses developed into a popular means for circumventing primogeniture and feudal death taxes. As the proliferation of uses impacted tax revenue, King Henry VIII pressured parliament to pass the Statute of Uses in 1535. This statute purported to abolish uses by executing them and transferring title directly from the feoffee to the beneficiary. Lawyers soon found holes in the statute, and courts held it did not apply if the feoffee had active duties to perform. Courts began referring to these title holders with active management duties as trustees of a trust.
Core Legal Structure
A trust is a legal relationship where an owner gives property to another to manage solely for the benefit of a designated person. In English common law, the party entrusting the property is called the settlor. The party receiving the property is known as the trustee. The party benefiting from the property is the beneficiary. The entrusted property itself is referred to as the corpus or trust property. The trustee acts as the legal owner of assets held on behalf of the trust and its beneficiaries. Beneficiaries are equitable owners of the trust property. Trustees owe a fiduciary duty to manage the trust for the benefit of these equitable owners. They must provide regular accountings of trust income and expenditures. A court of competent jurisdiction can remove a trustee who breaches their duty. Some breaches can be charged and tried as criminal offenses. A trustee may be a natural person, business entity, or public body. It is possible for a single individual to assume more than one role within a trust. For example, in a living trust, the grantor often serves as both a trustee and a lifetime beneficiary while naming other contingent beneficiaries.
When did personal trust law begin to develop in England?
Personal trust law began to develop in England during the 12th and 13th centuries. Legal historians believe that inter vivos trusts were first created for the benefit of Franciscan friars who were forbidden from owning property.
What is the legal definition of a trust under English common law?
A trust is a legal relationship where an owner gives property to another to manage solely for the benefit of a designated person. In English common law, the party entrusting the property is called the settlor, the party receiving the property is known as the trustee, and the party benefiting from the property is the beneficiary.
Why was the Statute of Uses passed by King Henry VIII in 1535?
King Henry VIII pressured parliament to pass the Statute of Uses in 1535 because the proliferation of uses impacted tax revenue. This statute purported to abolish uses by executing them and transferring title directly from the feoffee to the beneficiary.
How are living trusts used to avoid probate in the United States?
Living trusts may help a trustor avoid probate while maintaining privacy and saving costs. Avoiding probate records available to the public allows distribution through a trust to remain private, though they involve upfront legal expenses and annual administration costs of about 1% of the estate.
Which countries have adopted trust law within civil law jurisdictions?
Trust law in civil law jurisdictions generally including Continental Europe only exists in limited number of countries such as Curaçao, Liechtenstein, and Sint Maarten. Cyprus legislators enacted the Cyprus International Trusts Law of 2012 to facilitate establishment of trusts by non-Cypriot residents.
Trusts may be created by the expressed intentions of the settlor or through operation of law. An express trust arises where a settlor deliberately decides to create a trust over their assets either now or upon later death. This is achieved by signing a trust instrument which will be either a will or a trust deed. In some jurisdictions, certain types of assets cannot be subject to a trust without a written document. For instance, trusts over land must be evidenced in writing under section 56 of the Law of Property Act 1925 in England. Generally, a private express trust requires three elements known as the three certainties. These were determined in Knight v Knight to be intention, subject matter, and objects. The certainty of intention allows the court to ascertain a settlor's true reason for creating the trust. The certainties of subject matter and objects allow the court to administer the trust when trustees fail to do so. A mere expression of hope that a trust be created does not constitute intent to create a trust. Disputes in this area mainly concern differentiating gifts from trusts. The property subject to the trust must be clearly identified as established in Palmer v Simmonds. One may not state they are settling the majority of their estate since the precise extent cannot be ascertained.
Fiduciary Duties And Liability
Trustees have many rights and responsibilities which vary based on jurisdiction and trust instrument. They owe fiduciary duties such as loyalty, prudence, and impartiality to beneficiaries. Trustees must provide regular accountings of trust income and expenditures. If trustees do not adhere to these duties, they may be removed through legal action. A trustee can be held personally liable for problems even where the trust has made a profit but consent was not given. In addition, a trustee may be liable to its beneficiaries if assets are not properly invested. Fiduciary liability insurance similar to directors and officers liability insurance can be purchased to mitigate risk. Commercial banks acting as trustees typically charge about 1% of assets under management. In the United States, an exculpatory clause may minimize liability although this position has changed over time. Courts can reverse a trustee's actions and order profits returned if they find a failure in duties. Such a failure is a civil breach of trust that can leave a neglectful or dishonest trustee with severe liabilities. It is advisable for settlors and trustees to seek legal advice before entering into or creating a trust agreement.
Commercial Applications
Trusts play a significant role in most common law systems and have become very important in American capital markets. They function particularly through pension funds which are essentially always trusts in certain countries. Mutual funds often operate as trusts within these financial structures. The Delaware business trust could theoretically be organized as a cooperative corporation or limited liability corporation according to language in the governing instrument. Traditionally, the Massachusetts business trust has been commonly used in the US. One of the most significant aspects of trusts is the ability to partition and shield assets from creditors. This makes them bankruptcy remote and leads to their use in pensions, mutual funds, and asset securitization. Employee ownership shares in a company may be held by the trustee of an employee trust indefinitely. These trusts form part of an employee share or share option plan of that company. Unit trusts prove to be such a flexible concept that they work as investment vehicles where beneficiaries called unitholders each possess a certain share called units. A unit trust serves as a vehicle for collective investment rather than disposition since the person giving property to the trustee is also the beneficiary.
Estate Planning And Taxation
Living trusts may help a trustor avoid probate while maintaining privacy and saving costs. Avoiding probate records available to the public allows distribution through a trust to remain private. Living trusts have become very popular as substitutes for wills to minimize administrative costs associated with probate. However, negative aspects include upfront legal expenses and the expense of trust administration compared to one-time probate costs. The cost of the trust may be 1% of the estate per year versus the 1 to 4% for probate which applies whether or not there is a drafted will. Unlike trusts, wills must be signed by two to three witnesses depending on jurisdiction law. Legal protections that apply to probate but do not automatically apply to trusts include provisions protecting decedent assets from mismanagement. Living trusts generally do not shelter assets from U.S. federal estate tax though married couples may effectively double the exemption amount by setting up the trust with a formula clause. As of 2013, transfers to spouses are exempt from estate tax. If a living trust fails, property usually holds for the grantor on resulting trusts which in some notable cases has had high tax consequences.
Global Jurisdictional Variations
While trusts originated in England, their impact has been wide and varied across different legal systems. Trust law in civil law jurisdictions generally including Continental Europe only exists in limited number of countries such as Curaçao, Liechtenstein, and Sint Maarten. Cyprus legislators enacted the Cyprus International Trusts Law of 2012 to facilitate establishment of trusts by non-Cypriot residents. In South Africa, minor children cannot inherit assets without a trust since they are released to children in adulthood through the Guardian's Fund. Under South African law, living trusts are considered taxpayers paying income tax at a flat rate of 40% compared to individuals who pay according to income scales usually less than 20%. The Taxation Law Amendment Act of the 30th of September 2009 commenced on the 1st of January 2010 granting a 2-year window period from the 1st of January 2010 to the 31st of December 2011 affording natural persons opportunity to take transfer of residence with advantage of no transfer duty being payable or CGT consequences. In the United States state law governs trusts variable from state to state though many states have adopted the Uniform Trust Code.