Trust Winter 2014

introduction TO TRUSTS

Definitions

THE TAXATION OF TRUSTS

History and development of Equity

Development of the Law of Uses and Trusts

THE FORMATION OF EXPRESS TRUSTS

The 4 Elements of a Valid Express Trust

Capacity

The Three Certainties

Certainty of Intention

Certainty of Subject Matter

Certainty of Objects (Beneficiaries/Purposes)

Constitution of Express Trusts

Ways of Constituting a Trust/Gratuitous Promises

Gratuitous Promises and the Constitution of Trusts

Formalities

Trusts with Respect to Land

Testamentary Trusts

Secret and Semi-Secret Trusts

Legality & Public Policy

Traditional Prohibitions

Conditions Precedent/Subsequent/Words of Limitation

Contrary to Public Policy

Fraud on Creditors

The Rule Against Perpetuities

Spendthrift Trusts

Termination and Variation

Termination

Variation

Purpose Trusts

Non-Charitable Purpose Trusts

Gifts to Unincorporated Associations

Charitable Purpose Trusts

The Legal Meaning of Charity Generally

Public Benefit

The Relief of Poverty

The Advancement of Education

The Advancement of Religion

Other Purposes Beneficial to the Community

Associated Doctrines: Exclusivity

Associated Doctrines: Political Purposes

Associated Doctrines: Discriminatory Conditions

Administrative Schemes and the Cy-pres Doctrine

Administration of Express Trusts

Appointment of Trustees

Retirement and Discharge of Trustees

Removal of Trustees

Duties vs. Powers of Trustees

Seeking direction from the court

When a Court will not intervene

General Duties of Trustees: Duty of Care

Exculpation Clauses

General Duties of Trustees: Duty Not to Delegate, but with modern Exceptions

Duty of Impartiality

Impartiality – Settled Shares in a Company

Duty of Loyalty to the Beneficiary

Duties (and limits) to Provide Information

Specific duties: investments

Remuneration of Trustees

Resulting Trust

Purchase Money

Voluntary transfers of Money or Land

Joint Bank Accounts

Presumption of Advancement

Failure of Express Trust

Words of a Gift Followed by Trust that Fails

Constructive Trusts

Breach of Fiduciary Duty

Breach of Confidence

Disgorging of Criminal Profit

Unjust Enrichment

Equitable Fraud

Stranger Operating as a Trustee

introduction TO TRUSTS

  • The trust is not easy to define because it has its roots in the Middle Ages and has grown gradually over the centuries, adapting to the demands that the needs of society have made upon it. - Dr. Waters
  • Most definitions consequently suffer from the fact that they are really an attempt either to find the essence of a trust, which all too often means emphasizing one kind of trust (i.e. too simple), or to contain within a sentence all the facets of an institution that has grown pragmatically (too unwieldy and difficult to comprehend) - Dr. Waters
  • Put simply: a trust arises where one person transfers property to another person with instructions that the property is to be used for the benefit of a third person
  • Where the legal owner of property is constrained by a court of equity to deal with it as to give effect to the equitable rights of another (Re: Astor’s Settlements)
  • Better definition: A trust is the relationship which arises whenever a person (called the trustee) is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one, and who are termed beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust. - G.W. Keeton and L.A. Sheridan

Definitions

  • A settlor is a person who creates an express trust.
  • The trustee is the person who holds title to the trust property for the benefit of the beneficiaries.
  • The beneficiary/cestui que trust is the person for whose benefit the trust property is held.
  • The trust property/trust res/corpus is the property that the trustee holds for the benefit of the beneficiaries.
  • The trustee may hold either a legal or equitable interest in trust property depending on the nature of the title conveyed to the trustee by the settlor.
  • The trustinstrument expresses the intention to create the trust and may describe the rights and obligations of the parties to the trust (can be a will, deed, contract, etc).(deed of settlement, deed of trust, declaration of trust)
  • A bare trust/simple trust/naked trust is when a trustee has no duties with respect to the property other than conveying it to the beneficiaries.
  • A discretionary trust is a trust in which the trustee is granted a discretionary power to determine either the amount that beneficiaries receive or which beneficiaries will receive income or capital of the trust or both.
  • A fixed trust is a trust where the beneficiaries are specified and the amounts they are to receive are set
  • A testamentary trust is a trust created by a will which comes into effect when the testator dies.
  • An intervivos/livingtrust is a trust created during the life of the settlor.
  • An automatic resulting trust arises when an express trust fails. There was no intent to have the property come back to the settlor (Vanderbilt Trusts) i.e. S creates a trust giving a life interest to a person who dies, with no remainder. The trustee now holds the property on an automatic resulting trust for S.
  • A presumptive resulting trust arises when property is transferred without value. Can rebut the presumption by showing that it was a gift.
  • Constructive trusts are used to remedy situations that would otherwise appear to be unjust.
  • Implied trusts: you better ask a person what they mean by this!
  • Might mean an express trust implied by the circumstances
  • Might refer to resulting trusts (implied because it seems reasonable to presume that this is what S had in mind given the circumstances)
  • Might refer to all trusts by operation of law whether resulting or constructive
  • Legal vs. equitable title: trustees generally* have legal title, beneficiaries have equitable interest. (*B may transfer equitable interest to another trustee for another beneficiary, legal title to shares are held by depository so trustee really only has equitable title)
  • Duties are things the trustees must do
  • The duty of loyalty requires that the trustees act in the best interests of the beneficiaries and that the trustees not engage in transactions in which their personal interests conflict with the interests of the beneficiaries. (absolute duty)
  • The duty of impartiality requires that the trustees not favour one or more beneficiaries over other beneficiaries, i.e. where there is a life interest and one or more beneficiaries with a remainder interest. (absolute duty)
  • The duty of care requires the trustee to manage the property in the way a reasonably prudent trustee would manage the property.
  • The duty not to delegate (absolute duty…modified by statute)
  • Duty to make distributions to beneficiaries when required (absolute duty) (National Trustees Company of Australia – underpaid a beneficiary)
  • Absolute duty: no defence for a trustee to say he acted with reasonable care
  • Duty to take care: taking reasonable care is a defence (duty to invest, duty to sell property, duty to manage property, duty to retain property)
  • A power gives a person permission to do something. A power can be constrained or limited.
  • The person who grants the power is referred to as the donor of the power. The person who has the power is the referred to as the donee of the power.
  • An administrativepower allows the trustees to manage the trust property (i.e. power to sell trust property, postpone the sale of trust property, lease real property, renew a lease of real property, grant an option to purchase property, repair and make improvements to real property or other assets of the trust, insure trust property, issue receipts, settle debts, employ agents, obtain a passing of accounts, and invest)
  • Dispositive powers are powers that allow for the disposition of the trust property (i.e. power of selection among a described class of beneficiaries, to determine the amounts of income or capital beneficiaries are to receive, to accumulate income, to apply income or capital for the maintenance or education of one or more beneficiaries, or to make a payment out of capital in favour of a capital beneficiary before the time he is to receive the capital – power of advancement) A fixed trust wouldn’t have dispositive powers.
  • Power of appointment: power to decide who gets property
  • Special/limited power of appointment: the power may only be exercised in favour of someone from a specific list or class.
  • Hybrid/intermediate power of appointment: the power may be exercised in favour of anyone except people on a specified list or class of persons.
  • Bare power/mere power/personal power: no obligation to exercise it or even consider the exercise of the power.
  • Fiduciarypower: must at least reasonably consider the exercise of power.
  • It is possible that persons who are appointed trustees under a trust instrument could be given a power purely in their individual capacity, but that would be an unusual case. The normal inference made when a power is given to a person who is in a fiduciary relationship is that the power is held in a fiduciary capacity. (Re Gulbenkian)
  • Trust power: the donee must exercise the power

THE TAXATION OF TRUSTS

  • Attribution of income: A settlor who retains a power of revoke a trust or to determine who will receive income or capital from the trust, or has a power to consent to whom distributions of the property of the trust will be made, will be taxed on the income of the trust (s. 75(2) ITA).
  • Rationale: S has not really relinquished control over the property and, in a sense, still retains a benefit from the property (the ability to control the disposition of the property)
  • A trust is a conduit of income: Although a trust is not considered a separate legal entity, under the ITA it is a separate taxpayer. However, income earned on trust property that is paid, or payable, to beneficiaries can be deducted from the income of the trust (because it is taxed in B’s hands)
  • Note: courts are left to determine the obligations of trusts by operation of law
  • Bare trust – does not exist for tax purposes
  • Charitable purpose trust – not subject to taxation
  • Note: the trustee can designate that the tax on some income that has been paid to the beneficiary will be paid by the trust (a provision like this would allow you to use losses)
  • Taxation of intervivos trusts: The danger with inter vivos trusts is that a person can create many of them so that income could be split between many trusts. To prevent this inter vivos trusts are taxed on income retained in the trust at the highest rate for individual taxpayers.
  • Taxation of testamentary trusts: The position taken with testamentary trusts was that since it was a one-time creation of a trust the opportunities for income splitting would not be as significant, so the tax rate for testamentary trusts is the same as it is for individuals (i.e. regular marginal rates).
  • Trusts and capital gains: Creating a trust counts as a disposition of the trust property and triggers the capital gains tax. But, there is a provision in the ITA that gives a choice as to whether the capital gains tax will be paid at the time of the creation of the trust or later when the beneficiary disposes of the property. (rollover)
  • Alter-ego trust: must be 65; put your property in a trust, have a life interest, put the remainder interest to someone else when you die. Since you only have a life interest, none of it goes to your estate when you die (and you don't have to pay the estate tax) -> the capital gains tax is not triggered until you die.
  • Deemed disposition every 21 years: The purpose of this is to prevent the trust from not having to pay tax on its capital gains for what the CRA considers too long of a time. There is an exception where all of the interests in the trust are indefeasibly vested.
  • Trusts law and charities under the ITA: Generally, it is the FCA that decides what is a charitable purpose for a trust. The ITA uses the trust law definition of charities. These can be trusts or corporations. Where the question is the validity of a purpose trust, the focus is on whether the purposes of the trust are charitable. If so, a failure of the trustees to carry out the trust for those purposes will be a breach of trust. Where the question is whether registration as a charitable organization under the ITA should be revoked, the focus is on whether the organization is actually carrying on charitable activities. The non-taxation of a charitable organization and its ability to provide tax receipts is only allowed when the donated funds are actually used for charitable purposes.

History and development of Equity

  • Four different meanings of equity: equity as fairness (pay equity, employment equity), equity as net worth (the amount one retains after creditors have been paid), equity as a corrective to common law injustice, and mere equities (the defense developed by equity known as taking “subject to the equities”)
  • Maitland’s definition: Equity is now that body of rules administered by our … courts of justice which, were it not for the operation of the Judicature Acts, would be administered only by those courts which would be known as Courts of Equity.
  • Administrative beginnings of Equity: Courts of equity originated with petitions to the King in the 14th century. Complaints were made concerning injustices created by orders of the King’s courts. These complaints were originally procedural in nature (bribed jurors, sherriff refusing to enforce order)

Development of the Law of Uses and Trusts

  • The early forms of trusts were expressed as conveyances to the use of another. In other words, X would convey property to A to the use of B. Originally used for Franciscan monks or for people leaving to fight in the Crusades.Also used to avoid the feudal burdens of wardship and marriage, to avoid the feudal requirement of forfeiture for treason or escheat for felony, to avoid creditors, and to effect testamentary disposition of land.
  • The early non-recognition of the use in courts of law gave it some of its advantages for beneficiaries. For instance, the avoidance of creditors or feudal burdens depended on the law not recognizing the cestui que use as having any right or title to property enforceable in a court of law (or equitable interest recognized in the Court of Equity)
  • King was losing money, so he petitioned Parliament to pass the Statute of Uses in 1535, which has the effect of executing the use so that C is the recognized owner.
  • Getting around the Statute of Uses:
  • The use upon a use: “A to B for the use of C in trust for D” or “A unto and to the use of B in trust for C”.
  • With the enactment of the Statute of Uses, and before the development of the use upon a use, the use could no longer be employed to effect a testamentary disposition of property. This led to a rebellion that resulted in the Statute of Wills in 1540 which permitted a person make a testamentary disposition of property.
  • Development of Equity and Trusts After 1550: From “Conscience to Equity”
  • Growing popularity of the Court of Equity and Conflict with Courts of law
  • Equity had a simple procedure (initially)
  • Equity would usurp the CL and this caused resentment
  • Attempts by Parliament to get rid of it
  • Courts of Equity Survive the Civil War and Removal of the Monarchy
  • The attempts by Parliament were unsuccessful - could not agree on details
  • Equity as a Body of Substantive Law
  • Chancellor was now creating important legal concepts and institutions unknown to CL
  • Expansion of trustee powers
  • Equity and Trusts, 1700-1900
  • Equity continues to develop as a body of rules
  • The “simple procedure” of equity got more and more bogged down in this period (multiple parties, many documents had to be transcribed by hand)
  • In 1873, the Judicature Actsrolls the Court of Chancery and the body of rules into CL courts
  • Historical Development of Equity in Canada
  • Atlantic Provinces
  • The Governor had the “Great Seal”, and therefore the power to exercise equitable jurisdiction
  • In NB and NS, the court of Chancery was transferred to the provincial supreme court by the 1850s (23 years before the Judicature Act) (this was because Chancery was seen as political)
  • PEI kept a separate equity court until 1974
  • NFL: equity was dealt with by the Supreme Court of the Province by 1825
  • Ontario and Quebec
  • Quebec: when civil law was introduced in the late 18th century, there was no separate concept of equitable courts (only had equity briefly between the Royal Proclamation and the Quebec Act)
  • Ontario: didn't start exercising equitable jurisdiction until 1837, presumably to favor creditors
  • The West and North
  • When these courts were created, the notion of merging courts was already well under way, and so they did not adopt separate courts. They were separate divisions within a single court until the beginning of the early 20th century
  • Fusion
  • Procedural fusion: manner of pleading is identical; could go to a single court for a single procedure; court could grant either remedy
  • In 1978, HL claimed that substantively, the law is also fused (United Scientific Holdings)
  • LeMesurier v Andrus (ONCA 1986) claimed that law and equity is substantively fused in Canada
  • Three forms of fusion (Paul Perell)
  • Areas were fusion has already occurred because the equitable rule has usurped CL
  • Areas where both CL and equity have fused to create a new legal obligation (i.e. negligent misrepresentation which comes from CL negligence and equitable fraud)
  • Areas where no noticeable movement toward fusion exists but where none seems necessary
  • Canson v Boughton(SCC 1991) The main factor is the policy basis of the doctrine, rather than their origin in CL or equity.P says that equitable compensation does not have the notion of causation. Since the action was not framed in CL, D can’t claim causation as a defense. The court dodges it by saying that equity does have notions of causation. McL: Although the conclusion can be reached by using equitable principles, “we will take wisdom where we find it.”
  • Current status: The issue is not totally resolved, but where there is a conflict the court will resolve it by drawing on concepts from either body of law where it makes sense to do so, presumably with broader policy considerations in mind (Canson)

THE FORMATION OF EXPRESS TRUSTS

The 4 Elements of a Valid Express Trust

  1. Settlor has legal capacity
  2. Three certainties are met
  3. Certainty of intention
  4. Certainty of subject matter
  5. Certainty of objects
  6. Trust is constituted by transfer of the property to the trustee
  7. Any applicable formalities are met

Capacity

  • The settlor must be a legally recognized person, have an interest in property, and have the legal capacity to dispose of that interest.
  • Any legally recognized person can be a trustee and hold property subject to a trust obligation, even if the person does not have legal capacity to deal with the property. (but it’s better if they do)
  • A beneficiary must be a legally recognized person in order to receive and hold an interest, legal or equitable, in property. Not necessary for the beneficiary to have capacity to deal with property.
  • Can be either an individual or corporation
  • Minors
  • Subject to very limited exceptions, a minor cannot make a valid will and therefore cannot create a testamentary trust.
  • But see exceptions in s. 7 of the Wills Act (BC)
  • Ks are non-binding on minors unless a) contract for necessaries of life, b) minor ratifies the K upon obtaining the age of majority, c) long-term K concerning property where the minor fails to repudiate within a reasonable time after obtaining the age of majority
  • Generally, same as the law of contract, voidable unless ratified after attaining age of 19
  • Thus an inter vivos trust to be created by a minor pursuant to a K may be voidable by the minor. A minor as trustee is likely to have difficulty managing the trust property since it will be difficult for the minor to enter into binding legal Ks. Law varies from province to province.
  • With respect to land, in BC minors can hold title but cannot dispose of it on their own
  • Mental incapacity
  • The question as to whether a particular mental incapacity creates a legal incapacity is whether it would make the person incapable of understanding substantially the nature and effect of the particular transaction.
  • The settlor should appreciate the extent of the property that is being disposed of and who will be benefitting.
  • Where a person is making a will, the testatormust understand the nature and effect of making a will, the extent of the property being disposed ofand must have anappreciation of the needs of his dependents.
  • Bankruptcy
  • Subject to very limited exceptions, where a person is a bankrupt their property is held by a trustee in bankruptcy to be dealt with according to the terms of the Bankruptcy and Insolvency Act. Bankrupt persons have limited capacity to dispose of/deal with their property since the bankrupt’s property is held by the trustee in bankruptcy so the bankrupt is no longer able to deal with it
  • An unincorporated association, a partnership, and a trust are not legally recognized persons