Trust

The trust has its origins in the Middle Ages in the concept of "use." Property was conveyed to one person "to the use" or for the benefit of another.

Trust

The trust has its origins in the Middle Ages in the concept of "use." Property was conveyed to one person "to the use" or for the benefit of another. Through the use, a landowner could arrange for successive enjoyment of land and thus avoid the prohibition that land could not, until the 16th century, be conveyed by will. The use was also a method of avoiding the payment of feudal dues such as wardship, marriage and relief. It was thus an early tax-planning device. Since the Crown became the feudal lord to whom the dues were ultimately payable, Henry VIII persuaded Parliament in 1535 to enact the Statutes of Uses, which were intended to abolish the use. However, the courts decided that it destroyed only uses of real property where the trustee had no positive duties and that it did not affect uses of personal property. The uses which were not abolished by the statute became known as trusts and are the foundation of the modern law of trusts. The law of trusts is a unique achievement of the historically separate jurisdictions of law and equity. No directly comparable concept exists in the civil law system of Québec but the idea that a person may owe fiduciary obligations is well known to the civil law.

The major use of the trust has been for the administration of personal wealth. For example, a testator or testatrix might by will establish a trust of all his or her property, giving to the surviving spouse all the income for life with the capital to be distributed to the children equally on the death of the surviving spouse. The will might also provide a power to encroach on capital in case the income was not sufficient to maintain the spouse. In earlier times, most trusts were administered by family friends or solicitors. Today, where the trust property is substantial, an incorporated trustee, a TRUST COMPANY, will often be selected to administer the property. It is also possible to select one or more individuals to be trustees, together with a trust company. In addition the trust is now being used in many areas of business and commercial life as a security device, for pre-incorporation financial holding and for administering large pension funds.

A trust is an equitable obligation binding a person, called the trustee, to hold or manage property over which he has control for the benefit of persons, called beneficiaries. The person who creates the trust is called the settlor. The beneficiaries may include the settlor and any of the beneficiaries may enforce the equitable obligations which are imposed upon the trustee.

Trusts can be classified according to the way in which they were created. The most important kind of trust is the express trust which arises when the settlor has explicitly stated his or her intention to create a trust. It may be either inter vivos (created by a living person) or testamentary (created by the will of a deceased person). All testamentary trusts must comply with the formalities of the Wills Act and therefore must be in writing. Most express inter vivos trusts are also declared in writing. However, inter vivos trusts of personal property may be made orally but a written document is necessary for land.

At the other end of the spectrum is the constructive trust. It is imposed by the court, regardless of anyone's intent, as a remedial device usually to prevent unjust enrichment which would occur if retention of the property were permitted. For example, in the case of Pettkus v Becker, a 1980 Supreme Court of Canada decision, a "common-law" wife was awarded a one-half interest in property legally owned by her "husband" because of her contribution to the acquisition and maintenance of the property. The court felt it was unjust to allow the common-law husband to retain full interest in the land after he had benefited from her efforts on the land during their 19 years of cohabitation.

For an express trust to be valid, the "three certainties" must be satisfied - certainty of words, certainty of subject-matter and certainty of object. If there is a dispute about the validity of an express trust, the court must be convinced that the settlor intended to create a trust. There must also be certainty as to the property subject to the trust and certainty of object or beneficiaries of the trust. A trust is said to be completely constituted when the 3 certainties exist and the property has been transferred to the trustee. A trust may also come into existence by the owner declaring himself or herself to be trustee of the particular property for the specified beneficiaries. In this case, the settlor is also the trustee and no transfer of property is required for there to be a fully constituted trust. Such a trust is irrevocable in the sense that the settlor cannot get the trust property back unless in the trust instrument the settlor has reserved a power of revocation.

The trustee has a duty to account to the beneficiaries for the management of the trust property. The trustee must not let his or her personal interests conflict with the duties which are owed to the beneficiary. Therefore, a trustee may neither purchase trust property nor sell or lease his or her own property to the trust. A trustee may not obtain private advantage through dealing with the trust property. A rule, developed in the 17th century, excluded the trustee from receiving remuneration for services. However, the trust can expressly provide for payment to the trustee and, where it does not, the Trustee Acts of all the common-law provinces and the territories now enable the courts to award "fair and reasonable" compensation.

Another important duty of a trustee is to be impartial between beneficiaries. This duty is particularly important when there are income beneficiaries and capital beneficiaries. Maintaining an even hand means that the trustee has a duty to select suitable investments. Unless the trust deed provides otherwise, many Canadian jurisdictions limit the trustee to investments contained in the "legal list." This list emphasizes fixed interest securities and the conservation of wealth in terms of its nominal dollar value. Substantial inflation in the 1970s and 1980s brought about a realization that beneficiaries may not be protected by inflexible rules. Consequently a number of provinces and both territories abolished the legal list and now permit trustees to invest in any asset which a prudent person would select.

Trusts are also the vehicle for the creation of most future interests in property. This gives rise to a dilemma for the law in determining the balance between the rights of present and future generations. How long should present owners be able to tie up property through the creation of future interests when this means the property will be so encumbered that subsequent generations will not be able to deal with it as they wish? The compromise evolved by the courts and modified by many provincial legislatures is the Rule Against Perpetuities. This rule strikes down future interests which do not vest within a life or lives in being plus 21 years.


Further Reading

  • Hon. Eileen E. Gillese & Martha Milczynski, The Law of Trusts, 2d ed. (2005).