Is Your Trust Valid?

Not all Trusts are Created Equal

A trust is an ancient device which has evolved over several hundreds of years to be commonly used today to protect and control property (both real and personal). A trust holds property by splitting rights in that property into legal (held by the trustees) and equitable/beneficial (held by the beneficiaries).

The Trusts Act 2019 (Act) applies in respect of all express trusts, with limited scope for modification, despite anything to the contrary in the terms of the trust. Express trusts can be established by writing and/or implied by actions.

What makes a Trust Valid?

For a trust to be valid, it must comply with any relevant statutory formalities, exhibit the three certainties, and hold property. More particularly, a trust is a valid trust only if:

1. there is a fiduciary relationship whereby the trustees hold or deal with trust property for the benefit of the beneficiaries or for a permitted purpose (as defined in the Act);
2. the trustees are accountable for the way they carry out the duties imposed on them by law;
3. it is created by a person (the settlor) who, clearly and with reasonable certainty:
   a) indicates an intention to create a trust; and
   b) identifies the beneficiaries or the permitted purpose of the trust; and
   c) identifies the trust property; and
4. its trustees hold the trust property.

Once a trust is established, it creates a ‘ring-fenced’ set of assets that are separate from the trustees’ own personal assets protecting them (with exceptions and limitations) from creditors, claims against the trustees’ estate(s), and/or relationship property claims. However, without the above characteristics, compliance, and formational certainty, there will be no trust and consequently no protection.

What Duties are imposed on Trustees by Law?

The Act imposes a number of duties on trustees which are set out in sections 22 to 38 of the Act. These duties are not new but are derived from caselaw and the previous Trustee Act 1956 to be incorporated and recorded in the new Act. The Act divides these duties into Mandatory Duties – which cannot be modified or excluded and Default Duties – which can be modified or excluded. Certain duties, such as to act honestly and in good faith or to act for the benefit of the beneficiaries are irreducible core duties without which, there would be no trust. Other duties, such as to invest prudently or to avoid conflicts of interest can be modified or excluded by the terms of the trust.

The duties in the Act are broadly worded and one action or inaction by a trustee can amount to a breach of several duties. Further, an attempt to modify or exclude one default duty may inadvertently affect another and so careful consideration and specialist drafting is required. It is mandatory that trustees not only know the terms of the trust and act in accordance with them, but trustees should also ensure that those terms comply with the Act and are fit for purpose so they can act honestly, in good faith and for the benefit of the beneficiaries.

What should be considered when establishing a Trust?

There are a number of matters to consider when establishing a trust. Crafting a purposeful and flexible trust deed requires specialist legal advice and skill – no two trusts are the same. The settlors must consider the purpose of the trust – why is it required or desired, who will be appointed to act as the trustees, who will benefit from the trust, and what property it will hold. Further, what powers and indemnities will be awarded to the trustees to ensure that they can act and administer the trust with proper purpose, and will they be remunerated for their efforts? It is also important for the settlors to understand that although the trustees will hold the legal title to the trust’s property, they are assigning the equitable rights to the beneficiaries and therefore, all future decisions in respect of that property must be in the best interests of the beneficiaries – trustees should not exercise power (directly or indirectly) for their own benefit.

What is required to ensure a Trust remains compliant and fit for purpose?

Trustees should actively and regularly consider whether they should be exercising one or more of the powers awarded to them under the Act or the terms of the Trust. Further, when administering the trust, trustees must exercise reasonable skill and care. Although these are default duties, they complement the mandatory duties to act honestly, in good faith, and for the benefit of the beneficiaries. For this reason, as a minimum, trustees should hold an annual general meeting where they discuss and consider the trust’s assets and liabilities, the trust’s financial and tax position, the terms of the trust, the beneficiaries, disclosure requirements (section 51), and legislation and caselaw updates. It is also important that a record of these meetings be kept by written minute which sets out any planned actions and these minutes are stored with the trust’s core documents.

Key Takeaways

Trusts are complex and require time, effort and knowledge to ensure that they are not only valid on formation but remain valid and fit for purpose. If crafted and administered well, a trust can be a flexible device which provides protection and control of assets. However, if crafted and/or administered poorly, a trust may be deemed invalid.