Out-Law Guide 4 min. read
01 May 2014, 12:52 pm
Trusts are used extensively in the commercial world despite the legal concepts being originally developed as a private family arrangement.
Trusts are used extensively in the commercial world despite the legal concepts being originally developed as a private family arrangement. There are four main areas where trusts are used in a commercial context:
In addition, there are a number of circumstances where trusts are imposed or implied under rules such as those governing constructive trusts.
A trust is an arrangement where property is held by one person, known as the 'trustee', for the benefit of another person, known as the 'beneficiary'. Trust law works on the principle that more than one person can have rights in property at the same time. The property in the trust may have been supplied by a third person, known as the 'settlor'. In a commercial trust it is common for these roles to be held by the same entity. So company A can hold an asset, and declare itself trustee holding the asset for the benefit of company B in certain circumstances or for itself in other circumstances. Or company Z can receive money from customers and declare that it holds that money on trust for those same customers unless, for example, they receive delivery of their goods.
In legal terms, a valid trust needs three certainties:
In a commercial context the first and third conditions are usually fairly easy to determine by the simple inclusion of words such as 'held on trust for'. However sometimes it is not entirely clear what is intended, and it is even more common for there to be a lack of clarity as to who the potential beneficiaries may be which might cause the trust to fail.
Certainty of subject matter can be more difficult. It is essential to be able to ascertain which of the assets held is trust property, and what each beneficiary's entitlement is to which assets. Particular problems arise in respect of cash held in bank accounts where it is important not to mingle trust and non-trust monies.
In many areas trusts over client or customer monies are implied by law: for example, under insurance law. The most common examples of trusts in this area therefore are the specific trusts which work alongside insurance law to ensure that when a customer pays a premium to a broker that money is protected from the broker's potential insolvency before the money passes on to the insurance provider. The other common example is a trust established when a company experiences financial difficulties and may be heading for insolvency. A company could then potentially continue to trade so long as new money taken from customers is held on trust so that it could be returned to them if the company was not able to fulfil the orders.
Trusts can be used as a form of security under a contract. Here again there are some forms of trust which are set out in legislation, such as those in the construction industry. The most common examples involve long term projects where protection is needed against one party going insolvent after it has collected money but before that money is due to be paid on to the other party under the contract.
A connected form of trust is that used in a dispute. If the ownership of an asset is under dispute in litigation, it may be agreed that while the case proceeds through the courts the assets will be held on trust. The trust would set out who, for example, is entitled to the income from the asset during the dispute and would in effect prevent the sale of the asset. The trust would then determine who would receive what portion of the sale proceeds in certain circumstances linked to the outcome of the court proceedings.
There are many examples of trusts which provide employee benefits. These include:
Trusts are the basis of nearly all forms of collective investment, unless a company is used. This includes unit trusts of all types, and various property investment structures from the joint ownership of property between just two people to a property trust with several thousand investors.
One reason why trust structures are so common in the commercial world is that not only do they provide a relatively straightforward structure for joint ownership of a single asset but also the duties imposed on trustees and the protections for beneficiaries are largely implied by law and so do not need to be spelled out in detail in any documentation.
Trustees in essence have to act purely for the benefit of the beneficiaries, avoiding all conflicts of interest and exercising a high duty of care. We have a separate Out-Law Guide on the duties of pension scheme trustees, which may be of interest.
Trusts are perhaps a surprisingly useful structure in the commercial world, combining a high degree of flexibility with strong protections and certainty as to interpretation.
Contacts: Janet Hoskin and Chris Thomas