Trusts Sharing Ownership
Introduction
“Trusts” is defined as “a relationship created at the direction of an individual, in which one or more persons hold the individual's property subject to certain duties to use and protect it for the benefit of others.” The main aim of creating such a relationship is to enable the separation of the legal and beneficial ownership of property. It allows the trustee to control property and at the same time vesting in the beneficiaries the ultimate entitlement of that property. This may seem simple, but such a relationship is of great significance in many areas in practice and the main aim of this essay is to shed light on this.
Significance of Trusts in Property Matters
Trusts can be utilised to enable the sharing of ownership in property concurrently. This is particularly significant where the property concerned is land because statute provides that only the legal title to land can be held by joint tenants, thus a tenancy in common can only exist in equity, i.e. it has to exist under a trust. Only where land is held by a single absolute owner is trusts irrelevant and this means that “the trust is the foundation of most land holding under English law.”
Trusts can also be utilised to enable the sharing of ownership in property successively. For example, a father wants the family home to be passed on to his son upon his death but ultimately for it to be passed to his grandsons. The father can grant his son a life interest in the family home and upon the death of that son, the family home will then be passed to the grandchildren. Trusts is significant in this aspect as such an arrangement can only be achieved by means of a trust.
Trusts is also significant where the owner of property wants to delegate the decision as to how the property should be allocated. A discretionary trust can be utilised. Such trusts gives the trustee a degree of discretion. An example can be seen through the case of McPhail v. Doulton.
Trusts is also significant where the intended beneficiary is a minor. As minors cannot hold legal title to property, a trust has to be created to enable the trustee to have control of property for the minor until they reach the age of majority.
Trusts can also be an “effective mechanism for hiding the identity of the true owner of property.” Where property is held on trust, the trustee may “appear to all the world” to be the absolute legal owner. The true owner can thus remain anonymous as there is no obligation to disclose the existence of a trust. In practice, this could be significant for example, where a rich and famous person wants to buy property without getting the undesired attention. He may create a bare trust, by arranging for the property to be bought on his behalf by a trustee, thus effectively concealing his identity.
Significance of Trusts in Employment
Trusts is also significant in the area of employment. It can be seen to “perform crucial employment related functions.” For example, it is significant in relation to pension schemes because it enables the trust fund to be managed by a number of people for the benefit of members of the scheme. Watt noted that pension trusts “have a special social significance” and a “special legal significance” as it works together with contractual rules of a pension scheme as well as statutory rules which aims to protect the scheme members.
Significance of Trust in the World of Commerce
Trusts can be utilised as “a core technique in taking security in a transaction.” This is evident in the case of Re Kayford. This is significant where parties to a transaction are worried about each other's ability to perform their obligations under the contract as it allows for money to be held on trusts until both parties carry out their contractual obligations.
It is also significant where a party to a commercial transaction wishes to exclude his assets from his balance sheet, for insolvency risk management or taxation purposes. This is called a “hold back trust” and is significant as Hayton, Kortmann and Verhagen noted, such “trusts are frequently drawn” in practice to solely carry out such a purpose.
Significance of Trusts in Preventing Injustice
In Agip (Africa) v. Jackson, a senior employee had misappropriated money from a company. The courts imposed a constructive trust on the stolen funds in favour of the company even though it had passed through a mixed fund. As such, trusts in this case can be seen to be utilised to prevent injustice by preventing a person from benefiting from his crime.
Significance of Trusts in Relation to Tax Avoidance
Trusts can be used “effectively and creatively to reduce taxation.” The use of trusts for tax avoidance is legitimate as reflected in IRC v. Duke of Westminster through the speech of Lord Tomlin.
Today, however, this statement is qualified by more recent case law and anti-tax avoidance statutes.
Nevertheless, as Watt noted: “the Inland Revenue and the English courts can do nothing about trusts, such as non-resident or off-shore trusts, over which they have no jurisdiction.” Another manner in which tax may be avoided is by “using trustees resident in other tax jurisdictions where little or no tax is payable” to raise the argument that it should not be subjected to UK taxation.
Trusts is significant in this area because almost everyone will be subjected to taxes at some point in life. As Watt noted: “there is nothing in life more certain than death and taxes”
Conclusion
The above practical examples clearly portray the significance of trusts in practice, but it definitely is not an exhaustive list.
In conclusion, the significance of trusts can be summed up through the words of Professor Maitland, where he said: the “invention and development” of the trust is the “most important” part of equity and is “perhaps the most distinctive achievement” of Englishmen.
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