Introduction to trusts - Definition and purpose of trusts

Learning Outcomes

This article outlines the fundamental concept of a trust in English law. It explains the key roles involved in a trust arrangement and distinguishes between legal and equitable ownership. For the SQE1 assessments, you need a clear understanding of what constitutes a trust, the main participants, and the basic reasons why trusts are created. Your understanding of these foundational principles will enable you to identify and apply relevant legal rules to SQE1-style single best answer MCQs.

SQE1 Syllabus

For SQE1, you are required to understand the basic nature and purpose of trusts. A foundational knowledge of trusts is essential for several areas of legal practice covered in the SQE syllabus, particularly Wills and the Administration of Estates, Land Law, and Property Practice.

As you work through this article, remember to pay particular attention in your revision to:

• the core definition of a trust, including the separation of legal and equitable title
• the distinct roles and basic responsibilities of the settlor, trustee, and beneficiary
• the essential purpose and common uses of trusts in practice
• the distinction between different types of ownership interests in trust property.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. In a standard trust arrangement, who holds the legal title to the trust property?
   1. The Settlor
   2. The Beneficiary
   3. The Trustee
   4. The Court
2. Which of the following best describes the interest held by a beneficiary in trust property?
   1. Legal interest
   2. Equitable interest
   3. Fiduciary interest
   4. Absolute interest
3. Who is the person responsible for creating a trust?
   1. Trustee
   2. Beneficiary
   3. Settlor
   4. Executor

Introduction

A trust is a fundamental concept in English law, allowing property to be held by one person for the benefit of another. It is a versatile arrangement used in various contexts, from family wealth management to commercial transactions. Understanding the basic structure and purpose of trusts is essential for prospective solicitors preparing for the SQE1 assessments.

The core idea of a trust involves the separation of ownership. One party holds the formal legal title, while another holds the beneficial or equitable interest. This separation enables sophisticated arrangements for managing and distributing assets according to the wishes of the person who created the trust.

Key Term: Trust
An equitable obligation binding a person (the trustee) to deal with property (the trust property) for the benefit of other persons (the beneficiaries), any one of whom may enforce the obligation.

KEY PARTIES AND CONCEPTS

To understand trusts, you must be familiar with the key roles involved and the nature of the property interests created.

The Settlor

The settlor is the individual who creates the trust. They originally own the property absolutely and decide to transfer it into a trust structure, defining its terms and appointing the trustee(s). Once the trust is validly created and the property transferred (constituted), the settlor generally relinquishes control, unless they have also appointed themselves as a trustee or beneficiary.

Key Term: Settlor
The person who creates a trust by transferring property to a trustee for the benefit of a beneficiary.

The Trustee

The trustee is the person (or persons, or sometimes a company) who holds the legal title to the trust property. They are responsible for managing the trust assets according to the terms set out by the settlor and the general duties imposed by law. Trustees owe fiduciary duties to the beneficiaries, requiring them to act in the beneficiaries' best interests with loyalty and prudence.

Key Term: Trustee
The person who holds the legal title to trust property and is under an obligation to manage it for the benefit of the beneficiaries.

The Beneficiary

The beneficiary (sometimes referred to as the cestui que trust) is the person for whose benefit the trust property is held. They hold the equitable (or beneficial) interest in the trust property. This means they are entitled to the benefits derived from the property (e.g., income or use) and/or the property itself, as specified by the trust terms. Beneficiaries have the right to enforce the trust against the trustees if they fail to perform their duties.

Key Term: Beneficiary
The person who holds the equitable interest in the trust property and for whose benefit the trust is administered.

Legal and Equitable Title

The defining characteristic of a trust is the split between legal and equitable ownership.

Legal title is the formal ownership recognised by common law. The trustee holds this title, allowing them to deal with the property (e.g., sell, lease, invest) as the legal owner. However, their powers are constrained by the terms of the trust and their duties to the beneficiaries.

Key Term: Legal Title
The formal ownership of property recognised at common law, held by the trustee in a trust arrangement.

Equitable title (or equitable interest / beneficial interest) is the ownership interest recognised by equity. The beneficiary holds this title, which represents the real value and enjoyment of the property. Equity ensures that the trustee uses their legal ownership for the benefit of the beneficiary.

Key Term: Equitable Interest
The beneficial interest in trust property held by the beneficiary, recognised and protected by equity.

Worked Example 1.1

Aisha owns shares in a company. She wants her young nephew, Ben, to benefit from the dividends but feels he is too young to manage the shares himself. She transfers the shares to her trusted friend, Chloe, instructing Chloe in a formal document to hold the shares and pay the dividends to Ben until he turns 21, at which point Chloe should transfer the shares to Ben.

Identify the settlor, trustee, beneficiary, legal owner, and equitable owner.

Answer: Settlor: Aisha (she created the trust) Trustee: Chloe (she holds the property for Ben) Beneficiary: Ben (he benefits from the trust) Legal owner: Chloe (holds the legal title to the shares) Equitable owner: Ben (holds the beneficial interest in the shares)

PURPOSE OF TRUSTS

Trusts are used for a wide range of purposes, reflecting their flexibility. Some common uses include:

• Managing property for minors: Providing for children or grandchildren who are too young to manage property themselves. The trustees manage the assets until the beneficiary reaches a specified age.
• Provision for vulnerable persons: Ensuring assets are managed for individuals who lack the mental capacity to handle their own affairs.
• Estate planning and succession: Allowing individuals (testators) to control how their assets are distributed after death through trusts created in their wills (will trusts). This can involve providing for a spouse for their lifetime, with the assets then passing to children (a life interest trust).
• Asset protection: Structuring ownership to protect assets from potential future claims or creditors (though trusts cannot typically be used to deliberately defraud existing creditors).
• Tax planning: Utilising trusts to manage and potentially mitigate inheritance tax, capital gains tax, or income tax liabilities, although complex anti-avoidance rules apply.
• Commercial purposes: Trusts are used in pension schemes, employee benefit schemes, investment funds (unit trusts), and certain financing arrangements.
• Charitable purposes: Holding property for charitable objectives rather than specific individuals.

Revision Tip

While the reasons for creating a trust are varied, the core mechanism is always the separation of legal and equitable ownership, managed by a trustee under specific duties for the benefit of a beneficiary. Focus on understanding this fundamental structure.

Key Point Checklist

This article has covered the following key knowledge points:

• A trust involves a trustee holding property for the benefit of a beneficiary.
• The settlor creates the trust.
• The trustee holds legal title and manages the property.
• The beneficiary holds equitable title and benefits from the property.
• Trusts separate legal and equitable ownership.
• Key purposes include managing assets for minors/vulnerable people, estate planning, asset protection, tax planning, and commercial uses.

Key Terms and Concepts

• Trust
• Settlor
• Trustee
• Beneficiary
• Legal Title
• Equitable Interest