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A nominee trust is a legal arrangement whereby a person, termed the settlor, appoints another person, termed the "nominee" or "trustee", to be the owner of the legal title to some property. [1] Although the legal title is transferred to the nominee, the beneficial ownership of the property is transferred to a third person, termed the beneficiary. [2]
The arrangement is simple and passive: generally, the nominee is not required to do anything except carry out specific (lawful) actions if so directed by the beneficiaries. [1] [3] For example, in England and Wales, the Official Custodian for Charities, which acts as nominee for numerous charities, can only buy and sell assets on behalf of charities if instructed to do so. [4]
A nominee trust is an example of a bare trust: [5] this is a simple type of trust where the trustee acts as the legal owner of some property but is under no obligation to manage the trust fund other than as directed by the beneficiary, [6] and where there are no restrictions beneficiary's right to use the property. [7] A nominee trust is also an example of an agency arrangement, [2] whereby the beneficiary acts as principal, and the nominee acts as agent. This agency relationship means the nominee has limited, or no, discretion as to how the trust property is managed. [8]
In the event a nominee becomes insolvent, the beneficiary should not be affected as the nominee's creditors cannot take possession of the trust assets. [9] For bankruptcy purposes, the directed agency feature of a nominee trust prevents the trust itself from being a debtor-person. [10] Therefore, a nominee trust cannot declare bankruptcy.
Nominee trust law has been adopted around the world, but the rules differ by jurisdiction as a result of historical and cultural factors. For example, China has a very recently adopted nominee shareholder law but in the context of a society where escaping liability from indebtedness is unacceptable. [11] Therefore, the Supreme People’s Court of China rules provides a general principle for interpreting nominee shareholding contracts: the nominee shareholder is bound except where in violation of the law; beneficial ownership is governed by the general principles of contract law, and creditors can bypass the corporate veil to pursue liability against a nominee shareholder. The Supreme Court reasoned that the purpose of veil-piercing laws is to balance creditor interests in collection against corporate investor interests in limited liability. [12]