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Australian trust law is the law of trusts as it is applied in Australia. It is derived from, and largely continues to follow English trust law, as modified by state and federal legislation. A number of unique features of Australian trust law arise from interactions with the Australian systems of company law, family law and taxation.
A trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers ("settles") property (often but not necessarily a sum of money) upon the second party (the trustee) for the benefit of the third party, the beneficiary. [1] This trustee relationship may arise as a result of the trustee entering into an agreement with the settlor (commonly in the form of a trust deed) (also called an inter vivos trust), as a result of a testamentary trust or as a result of the operation of law as a constructive trust or resulting trust. In each case, the trustee holds the legal title to the property but is obliged to act in accordance with the provisions of the deed or will and generally for the benefit of the beneficiaries, and not the settlor.
The word trust specifically refers to the duty or aggregate accumulation of obligation that rest upon a person described as the trustees. [2] The responsibilities of trustees are in relation to property held by them, or under their control. The trustees will be compelled by a court in its equitable jurisdiction to administer trust property in the manner lawfully prescribed by the trust instrument, or where there be no specific provision written or oral, or to the extent that such provision is invalid or lacking, in accordance with equitable principles. [2]
A trustee has a legal interest in the property of the trust. The beneficiary has an equitable interest. If a person holds both the legal interest and the equitable interest, then the equitable interest will cease to exist and a single legal estate will subsist. [3] See also: Stickney v. Keeble [1915] AC 386 Swarb Law UK
Equity recognises cases where a party places trust/confidence in another, these relationships are protected by equity and are called fiduciary relationships. The critical feature of fiduciary relationships is that the trustee undertakes to act for or on behalf of the beneficiary in the exercise of a power or discretion which will affect the interest of the trustee in a legal or practical sense. [4] [5] In the exercise of a fiduciary duty, a trustee must not take a benefit from their position as trustee unless the beneficiary or beneficiaries have given their informed consent. [6]
In an express trust, the settlor indicates an intention to and deliberately creates the trust, while a non-express trust is one that arises by operation of law, such as when created by statute or by judges, such as a constructive trust.
An express trust may be an public express trust such as one for a charitable purpose, or a private express trust with the private purpose.
There are a variety of trusts recognised and used in Australia, including unit trusts, discretionary trusts, hybrid trusts, and testamentary trusts.
Under a discretionary trust the share, if any, which each beneficiary is to receive is determined by the trustees. Therefore, the trustee has a discretion as to which beneficiary is to receive income or capital under the trust even if there is a duty for them to distribute the income. In addition, the trustees also have a discretion as to the amount that each beneficiary will receive. However, the beneficiary has no real right substantively.
Streaming a category of trust income to a particular beneficiary provides tax planning opportunities. For example, foreign tax credits can be best used by resident individual beneficiaries with high marginal tax rates and net capital gains can be best used by beneficiaries with carried forward capital losses, low-income beneficiaries with carried forward revenue losses and minors able to receive excepted trust income. However, discretionary trusts are usually unsuitable for the accumulation of profits as the undistributed income will generally be taxed at 45%.
Family trusts are often used to distribute income to beneficiaries in an attempt to achieve the lowest tax outcomes available to the members of the trust. Discretionary trusts also protect assets when individual members become insolvent or bankrupt. Asset protection is also extended to other types of liabilities.
The power of appointment of the trustee of a discretionary trust is held by the Appointor. In some trust deeds, the person holding the power of appointment of the trustee is called the Custodian or the Principal of the trust. The Appointor is usually a natural person but can also be a company. Generally, upon the death of the Appointor, in the absence of an alternate appointment in the trust deed, the personal legal representative (executor) of the Appointor becomes the Appointor. The real power in relation to the control of the trust rests with the Appointor because of the ability to terminate the appointment of the trustee and appoint a different trustee. This must be kept in mind when considering succession and estate planning involving assets held in a discretionary trust.
Bare trust
A bare trust is a basic trust in which trust assets are held in the name of a trustee but the beneficiary, if he or she is above 18 years of age, has the absolute right to the capital, assets and income of the trust. The trustee has no say in how or when the trust's capital or income is distributed and must act according to the beneficiary's instructions. Bare trusts may be established because they offer tax advantages to the settlor or beneficiary and may arise when all conditions to which a beneficiary is subject (such as age) have been satisfied.
A trust can be intentionally created during the settlor's life (inter Vivos) by declaration or transfer. [7] A deceased estate is a testamentary trust which automatically arises on the death of the testator. Courts may also create trusts, such as constructive trusts, as an equitable remedy.
A settlor can declare him/herself trustee of his/her own property. The settlor already holds title to the property and all that needs to be done is to make a valid declaration. However, a declaration of trust will not be allowed out of an invalid gift.
Formalities relevant depend on nature of trust property. A trust of land must comply with statutory requirements based on the Statute of Frauds 1677.
Where the trust is created by virtue of a contract made as consideration for marriage, or a contact which concerns any interests in land, s 4 of the Statute of Frauds (or their equivalent legislation in other states) [8] may operate to void such a contract unless it is evidenced in writing and signed by both parties to be charged. [9]
A settlor can create an express trust by transferring property to a trustee to hold on trust. Two requirements must be satisfied:
Trusts of land created by transfer must be evidenced in writing, as required by provisions derived from the Statute of Frauds 1677. See also Conveyancing Act 1919 (NSW) s23C. [12]
A trust that fails to meet the requirement to transfer property in writing will not be void, rather it will be unenforceable. [13]
The net income of a trust is determined in accordance with the trust deed, and a beneficiary's entitlement will depend on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.
Generally, under Australian tax law, the net income of a trust (which may be different to that determined under the deed) is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust's income (that is, the share to which they are 'presently entitled') regardless of when or whether the income is actually paid to them. A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee, which is determined by the trust deed as well as any discretionary powers of the trustee.
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In Anglo-American common law, the party who entrusts the right is known as the "settlor", the party to whom the right is entrusted is known as the "trustee", the party for whose benefit the property is entrusted is known as the "beneficiary", and the entrusted property itself is known as the "corpus" or "trust property". With the strategic and legal use of Trusts, individuals can ensure that their children and grandchildren or chosen beneficiaries are able to benefit completely from the inheritance they want them to receive.
Trustee is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to transfer the title of ownership to the person named as the new owner, in a trust instrument, called a beneficiary. A trustee can also refer to a person who is allowed to do certain tasks but not able to gain income, although that is untrue. Although in the strictest sense of the term a trustee is the holder of property on behalf of a beneficiary, the more expansive sense encompasses persons who serve, for example, on the board of trustees of an institution that operates for a charity, for the benefit of the general public, or a person in the local government.
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
A constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enrichment or interference, or due to a breach of fiduciary duty, which is intercausative with unjust enrichment and/or property interference. It is a type of implied trust.
An asset-protection trust is any form of trust which provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.
An express trust is a trust created "in express terms, and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties." Property is transferred by a person to a transferee, who holds the property for the benefit of one or more persons, called beneficiaries. The trustee may distribute the property, or the income from that property, to the beneficiaries. Express trusts are frequently used in common law jurisdictions as methods of wealth preservation or enhancement.
Equitable remedies are judicial remedies developed by courts of equity from about the time of Henry VIII to provide more flexible responses to changing social conditions than was possible in precedent-based common law.
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust or a third party may be the trustee. In the common law of England and Wales, it has been held, controversially, that where a trustee declares an intention to transfer trust property to a trust of which he is one of several trustees, that is a valid settlement notwithstanding the property is not vested in the other trustees.
A testamentary trust is a trust which arises upon the death of the testator, and which is specified in their will. A will may contain more than one testamentary trust, and may address all or any portion of the estate.
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust. Trust instruments are generally only used in relation to an inter vivos trust; testamentary trusts are usually created under a will.
A discretionary trust, in the trust law of England, Australia, Canada and other common law jurisdictions, is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia or New Zealand. Where the discretionary trust is a testamentary trust, it is common for the settlor to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion. Letters of wishes are not legally binding documents.
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often happens in sophisticated commercial transaction structures. With the exception of charitable trusts, and some specific anomalous non-charitable purpose trusts, all trusts are required to have ascertainable beneficiaries.
An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust or the right to enjoy the trust assets for the present time in another way. The beneficiary with the right to enjoy the trust property for the time being is said to have an interest in possession and is colloquially described as an income beneficiary, or the life tenant.
United States trust law is the body of law regulating the legal instrument for holding wealth known as a trust.
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across the Commonwealth and the United States. Trusts developed when claimants in property disputes were dissatisfied with the common law courts and petitioned the King for a just and equitable result. On the King's behalf, the Lord Chancellor developed a parallel justice system in the Court of Chancery, commonly referred as equity. Historically, trusts have mostly been used where people have left money in a will, or created family settlements, charities, or some types of business venture. After the Judicature Act 1873, England's courts of equity and common law were merged, and equitable principles took precedence. Today, trusts play an important role in financial investment, especially in unit trusts and in pension trusts. Although people are generally free to set the terms of trusts in any way they like, there is a growing body of legislation to protect beneficiaries or regulate the trust relationship, including the Trustee Act 1925, Trustee Investments Act 1961, Recognition of Trusts Act 1987, Financial Services and Markets Act 2000, Trustee Act 2000, Pensions Act 1995, Pensions Act 2004 and Charities Act 2011.
An equitable interest is an "interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary". The equitable interest is a right in equity that may be protected by an equitable remedy. This concept exists only in systems influenced by the common law tradition, such as New Zealand, England, Canada, Australia, and the United States.
Schmidt v Rosewood Trust Ltd[2003] UKPC 26 is a judicial decision concerning the information rights of a beneficiary under a discretionary trust. Although the judgment involved a question as to the law of the Isle of Man, the Privy Council's judgment in Schmidt v Rosewood was adopted into English law by Briggs J in Breakspear v Ackland[2008] EWHC 220 (Ch).
The creation of express trusts in English law must involve four elements for the trust to be valid: capacity, certainty, constitution and formality. Capacity refers to the settlor's ability to create a trust in the first place; generally speaking, anyone capable of holding property can create a trust. There are exceptions for statutory bodies and corporations, and minors who usually cannot hold property can, in some circumstances, create trusts. Certainty refers to the three certainties required for a trust to be valid. The trust instrument must show certainty of intention to create a trust, certainty of what the subject matter of the trust is, and certainty of who the beneficiaries are. Where there is uncertainty for whatever reason, the trust will fail, although the courts have developed ways around this. Constitution means that for the trust to be valid, the property must have been transferred from the settlor to the trustees.
Constructive trusts in English law are a form of trust created by the English law courts primarily where the defendant has dealt with property in an "unconscionable manner"—but also in other circumstances. The property is held in "constructive trust" for the harmed party, obliging the defendant to look after it. The main factors that lead to a constructive trust are unconscionable dealings with property, profits from unlawful acts, and unauthorised profits by a fiduciary. Where the owner of a property deals with it in a way that denies or impedes the rights of some other person over that property, the courts may order that owner to hold it in constructive trust. Where someone profits from unlawful acts, such as murder, fraud, or bribery, these profits may also be held in constructive trust. The most common of these is bribery, which requires that the person be in a fiduciary office. Certain offices, such as those of trustee and company director, are always fiduciary offices. Courts may recognise others where the circumstances demand it. Where someone in a fiduciary office makes profits from their duties without the authorisation of that office's beneficiaries, a constructive trust may be imposed on those profits; there is a defence where the beneficiaries have authorised such profits. The justification here is that a person in such an office must avoid conflicts of interest, and be held to account should he fail to do so.
Discretionary trusts and powers in English law are elements of the English law of trusts, specifically of express trusts. Express trusts are trusts expressly declared by the settlor; normally this is intended, although there are situations where the settlor's intentions create a trust accidentally. Normal express trusts are described as "fixed" trusts; the trustees are obliged to distribute property, with no discretion, to the fixed number of beneficiaries. Discretionary trusts, however, are where the trustee has discretion over his actions, although he is obliged to act. The advantages of discretionary trusts are that they provide flexibility, and that the beneficiaries hold no claim to the property; as such, they cannot seek to control it, and it cannot be claimed for their debts. A power, or "mere power", on the other hand, is where not only does the holder have discretion over his actions, he has discretion over whether to act in the first place.