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Trusts, Trustees and Estate Planning

What is a Trust?

The word “trust” has not been defined in the Income Tax Act (ITA), nor is there any definitive guideline to establish whether or not a trust exists. The concept of trust is derived from the English common law and has been defined in various ways by different authors. Generally, a trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he or she has control (the trust property) for the benefit of persons, who are called the beneficiaries (also known as “cestuis que trust”). The creator of the trust is usually known as the settlor. Unlike a corporation, a trust is not a legal entity, it is a relationship between the trustees and the beneficiaries. A trust is the separation of legal and beneficial ownership of property. Thus an individual could act in more than one capacity, that is, as a settlor, a trustee and/or a beneficiary of the trust.

A trust is the vesting of property in a trustee for the benefit of a beneficiary or beneficiaries, when the property is held in a fiduciary relationship. It is created by the intention of the parties (express trusts) or by operation of law (presumptive, constructive, or resulting trusts). It has been developed both as a device to hold property, and thereby create substantive rights, and as a remedy. The mixed origins of trusts in the courts of common law and equity are shown in these dual aspects. So, people should be aware that a sequence of events could give rise to a trust by operation of law. However, general concern is more often about express trusts, established deliberately by an agreement in writing for a particular purpose. Thus, an express trust is a trust, intentionally created by express declarations of the owner of the property (settlor). Its two essential features are that it creates a fiduciary relationship between the trustee and the beneficiary, and it involves a transfer of property to the trustee. Express trusts are of much relevance to the process of estate planning.

Unlike a corporation, a trust is not regarded by the law as a person capable of acquiring rights and obligations independently of those of the parties to the relationship. Though a trust is regarded as an individual for income tax purposes, it should not obscure the fact that the trust is not a legal entity. It is not the trust but the trustees who can enter into contracts, acquire the ownership of property and incur liabilities. Central to the trust relationship is the principle that the trustees are not agents of the beneficiaries. They act as principals and not as agents in their transactions with third parties, subject to the fiduciary obligation that such powers of legal ownership of the assets in the trust fund has to be exercised in accordance with the terms of the trust for the benefit of the beneficiaries.

Generally, the beneficiaries have no rights or powers against or over the trustees except to insist that the terms of the trust are performed in accordance with the provisions of the trust instrument. A trustee’s primary obligation is to carry out the instructions of the settlor by exercising powers and performing obligations for the benefit of the objects (beneficiaries) of the trust.

An exception to the principle that the trustees are not agents of the beneficiaries is the bare trust, that is, a trust under which the trustees have no independent powers or discretions and are subject to the primary and overriding obligations to carry out the instructions of the beneficiaries. Bare trusts are created in commercial transactions where, say, securities are registered in the name of a stockbroker or title to land is held by a nominee corporation to be dealt with subject to the instructions of the beneficiaries.

As a general rule, in order for an express trust to be effective and recognized, it should have three essential characteristics, usually known as the three certainties:

1) Certainty of Words:
The language of the settlor has to be imperative. The language of the instrument creating an express trust should disclose with sufficient certainty an intention to create a trust;

2) Certainty of Subject Matter:
The subject matter or trust property must be certain; and

3) Certainty of Objects:
The objects or persons intended to be benefited by the trust should be certain. In order to be valid, it should be possible to ascertain the intended beneficiaries of the trust.