Trusts: Can They Be Created Inadvertently?

Trusts are complex legal and financial entities that are typically established with the help of a qualified attorney. They are often used to keep assets safe from family members who might otherwise sell or spend them. Trusts can be created by the expressed intentions of the settlor, also known as the founder (express trusts), or they may be created by operation of law, known as implied trusts. Implied trusts are created by a court of equity due to the acts or situations of the parties involved. Trusts can be established in a variety of ways, including by an instrument in writing, by a unilateral declaration, by operation of law, or by oral declaration.

Implied trusts

Trusts are versatile instruments that can be used for various purposes to achieve specific goals. Trusts may be created by the expressed intentions of the settlor (also known as the founder), or they can be created by operation of law, known as implied trusts.

In South Africa, in addition to living trusts and will trusts, there is a unique type of implied trust called a "bewind trust," inherited from Roman-Dutch law. In a bewind trust, the beneficiaries own the trust assets, while the trustee administers the trust. This type of arrangement provides trustees with limited liability and certain tax advantages.

Express trusts

Trusts are highly versatile instruments that can be used for various purposes to achieve specific goals. Trusts can be created by the expressed intentions of the settlor (also known as the founder) or by operation of law, known as implied trusts. An express trust is created knowingly and intentionally by a settlor over their assets, either now or upon their later death. The person establishing a trust is called the trustor or grantor, and the person who oversees and manages the trust is called the trustee. A trustor's assets are transferred to a trustee, who holds on to the assets for the beneficiary or beneficiaries. The rules of a trust depend on the terms on which it was built. A trust can be used to determine how a person's money should be managed and distributed while that person is alive or after their death.

There are several types of express trusts. The most common kind of trust is probably the revocable living trust, which essentially performs the same function as a will: to leave property at one's death. People who set up this kind of trust typically make themselves the trustees. They then name successor trustees to manage the trust property after they die. This arrangement gives the grantors complete control over the trust property, so they can revoke the trust or name different beneficiaries if they change their mind. It is also common for people to create express trusts that take effect only at their death. For example, grandparents who want to leave money directly to a young granddaughter might use their wills to provide that if the child is still under 22 when she inherits, a trust must be created for the funds. An adult trustee, not the granddaughter, would manage the money until the child was older.

A trust may state that it will last until the beneficiary reaches a certain age or for a specific period. Many trusts now last for the beneficiary's entire lifetime and continue on to the next generation. The amount and type of distributions are based on the trust's terms. In some, net income is required to be distributed each year, and the principal is available for specific purposes. In others, the trustee has full discretion to make distributions, but often they can only be for specific purposes like education and health. The trustee should be able to explain how funds are available to the beneficiary.

A trust in the US may be subject to federal and state taxation. The type of trust will determine who pays the income tax on its income and capital gains. It may be the grantor, the trust, or the beneficiary. Trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members. Trusts can also be used to secure assets for specific purposes, such as a beneficiary's education or to help them start a business. Trusts can be established to ensure that a dependent with a physical disability or mental health condition receives care.

Constructive trusts

Trusts are created by the expressed intentions of the settlor (also known as the founder) or by operation of law, known as implied trusts. Implied trusts are divided into two categories: resulting and constructive.

In trust law, 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 (i.e., it is created by conduct, not explicitly by a settlor).

Other examples of constructive trusts include the case of Attorney General for Hong Kong v Reid, where a senior prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand. His employer, the Attorney General, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty. The Privy Council awarded a constructive trust.

Resulting trusts

Trusts are typically created by the expressed intentions of the settlor, also known as the founder. However, they can also be created by operation of law, known as implied trusts. Implied trusts are divided into two categories: resulting and constructive.

A resulting trust is an implied trust that comes into existence by operation of law, where property is transferred to someone who pays nothing for it and then is implied to hold the property for the benefit of another person. The trust property is said to "result" or revert to the transferor (as an implied settlor). This use of "result" means to spring back: the property in question has come into the recipient's legal ownership, but the legal owner is not permitted to benefit from it, and so beneficial ownership of the property springs back to the settlor.

In common law jurisdictions, a resulting trust is an equitable creation, rather than a common-law concept. Consequently, equitable defences like laches, unclean hands, and the duty to do equity may be recognised in some jurisdictions. For instance, if a transferor conveys property for an unlawful purpose and benefits from it, a court might rule that the transferor has waived the right to claim a resulting trust.

According to Megarry J in Re Vandervell's Trusts (No. 2) [1974], there are two sorts of resulting trusts in English law. These trusts arise when A transfers property to B, and the law creates a rebuttable presumption of a resulting trust if A's intention is unclear (absence of written evidence). For instance, if A transfers property to B, except when the transfer is between parents and children or spouses, the law presumes a resulting trust for A in the absence of evidence to the contrary (unless A provides evidence that the property is actually owned by B).

Some jurisdictions might establish a rebuttable presumption of gift for property transfers between relatives. This presumption could serve as an affirmative defence in petitions to establish a resulting trust implied by operation of law. The law presumes that transferring property to a family member, particularly for supporting a relative, is legitimate. However, when an unrelated party receives substantial value without providing consideration, it's usually presumed that they hold the property in trust for the transferor, unless proven as a gift. This presumption of gift applies to transfers between siblings, uncles, aunts, children, and grandchildren. An exception to the presumption of gift is property transfers between spouses. This exception arises from the fiduciary duty spouses owe each other, based on a special trusted relationship implying utmost good faith and fair dealing.

Totten trusts

Trusts are legal entities that can be created by the expressed intentions of the settlor (also known as the founder) or by operation of law, known as implied trusts. Totten trusts, also known as payable-on-death accounts, are a form of living trust created during the lifetime of the trustor, who also acts as the trustee. Totten trusts are generally used for bank accounts, with the account owner acting as the trustee for a named beneficiary.

As the depositor and trustee of a Totten trust, the account owner retains full control over the management of the assets in the trust and can revoke the trust by removing all assets or providing explicit written instructions to close the account. The beneficiary of a Totten trust has no access to or control over the assets until the account owner dies. Totten trusts are a simple and effective means of estate planning, particularly for those who may not have extensive financial resources.

The main drawback of Totten trusts is that they cannot be used to transfer real property or non-cash assets such as stocks or bonds. Additionally, if the beneficiary of a Totten trust dies before the account owner, the trust is revoked, and the account owner must create a new Totten trust with a different beneficiary.

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