A key feature of a trust is that it separates legal ownership from beneficial ownership of property.
The basic idea of a trust is that:
- the trust property is owned by the trustees
- for the benefit of the beneficiaries
- not for the benefit of the trustee
To define “trust” in formal legal terms, I would have to rely on the textbook definition:
- ‘A trust is an equitable obligation, binding a person (called a trustee) to deal with property (called trust property) owned by him as a separate fund, distinct from his own private property, for the benefit of persons (called beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.’
Underhill and Hayton, Law of Trusts and Trustees 18
th edn (2010) Chapter 1, Article 1
The person who creates a trust is known as the “settlor.” A trust is not a legal entity, but rather a legal relationship, which sets it apart from a partnership or a corporation.
In a trust, property is vested in the trustee for the benefit of the beneficiaries. The creation of a trust involves the clear intention of the parties, which may be established in several ways:
- Expressly
- Through fiduciary relationships
- By transferring property to a trustee
- Or by operation of law (e.g., presumptive trusts, constructive trusts, resulting trusts, etc.).
For an express trust to be valid, three certainties must be present:
- Certainty of Intention
- The intention to create a trust must be clear
- Certainty of Subject Matter
- The property held in trust must be clearly identified
- Certainty of Objects
- The beneficiaries or objects of the trust must be certain
Sometimes the situation is straightforward, e.g. one marital spouse comes to a lawyer for drafting a will and he intends to distribute his entire estate to the other spouse, then it would be appropriate to appoint his spouse as sole trustee.
But sometimes two or more persons act as joint trustees. At this juncture, the it is a question for the settlor/testator that how decisions are made during the trust administration? Unanimously or by majority votes?
Another possible issue is that the trustees live far apart or not in Canada, in this situation, it will likely require a foreign estate trustee’s bond.
Also, if a surviving spouse makes equalization claim against the estate, they will forfeit the right to act as estate trustee.
As to any type of trust, only the trustee has the authority to enter into contracts on behalf of the trust. The trustee is not an agent of the beneficiaries, and the beneficiaries hold no direct control over the trustee. However, beneficiaries have the right to go to court to enforce the terms of the trust if necessary.
An exception to this is a “bare trust,” where the trustee has no independent powers and must act according to the beneficiaries’ directions.
A trustee holds following fiduciary obligations:
- Duty of care – reasonable and prudent businessperson, e.g. “prudent investor”
- Duty to act personally – one of the trustee’s obligations is to act personally; however, the trustee may hire an expert or appoint an agent to handle matters in a specific area of investment. The extent to which trustees delegate their responsibilities has always been a sensitive issue, as outsourcing of their duties could impact the beneficiaries’ interests.
- Trustees must avoid conflicts of interest – always act in the best interest of the trust
- Trustees cannot profit from the administration of trust, but they can be reasonably compensated
- Trustees can hold absolute discretion if conferred upon by settlor
A trust can either be revocable or irrevocable.
- A revocable trust is one that can be revoked or amended by the settlor, allowing the property held in trust to be returned to the settlor.
- An irrevocable trust cannot be revoked or altered by the settlor once it is established.
Each of these types has distinct legal and financial implications depending on the settlor’s needs and objectives.
Trusts for Minors and Incapacitated Individuals
Trusts are often used to provide for the maintenance and education of minors or individuals who cannot manage their own affairs. By placing the property in trust, the trustee can act as the legal owner, handling transactions and decisions on behalf of the beneficiaries. This structure ensures the efficient management of assets, overcoming any legal or natural incapacity of the beneficiaries to control property themselves.
Delayed Financial Control
A trust can offer financial independence to an adult child while delaying their full control and management of the assets. This can provide support during early adulthood while safeguarding the trust assets until the child is ready to take full responsibility.
Care for Medically Incapacitated Individuals
Trusts can be established to care for individuals who are unable to manage their own affairs due to medical reasons. This ensures their needs are met without requiring them to handle the financial and legal complexities themselves.
Spousal Lifetime Care and Control
A trust can provide for the care and maintenance of a spouse during their lifetime, while also controlling the distribution of trust property upon the spouse’s death. This is particularly useful for protecting the interests of children from a previous marriage or ensuring assets are distributed according to specific wishes.
Tax Planning and Income Splitting
Trusts can be utilized to achieve tax-planning goals, such as income splitting and capital gains planning with minor beneficiaries. This can help minimize tax liabilities while ensuring the efficient transfer of wealth.
Important Notice:
This blog series offers readers a basic understanding of the concept of “Trust.” It does not constitute legal advice from our firm. If you encounter any trust-related matters, it is essential to consult your lawyer. As always, it is best to leave professional matters to the professionals.