Introduction to Trust Law

The concept of a trust traces back to England, and therefore some European countries have no natural concept of a trust. A trust is not a separate legal entity or person – despite much ambiguity in trust law. It is essentially a fiduciary relationship recognised by the courts to be between a trustee who is the legal owner of property and one or more beneficiaries for whose benefit the property is held. The distinguishing feature of the relationship of a trust is the trustee’s obligation to act honestly and in good faith in the interests of the beneficiaries.

A trust can be created by a settlor who wants to transfer their property to a trustee during the settlor’s lifetime (called an inter vivos trust). Or a trust can be created by a will on the death of the settlor (called a testamentary trust). Trust law draws the distinction between assets that are the property of the trust (corpus) and assets that produce income in the trust. There are income tax provisions that are set out in Division 6 of Part III of ITAA 1936. Which uses the term “trust estate” to refer to property in the trust or source of income.

The rule on perpetuities (unless a charitable trust) is that you can not have a trust that doesn’t have a certain time limit, the trust must be wound up, or vest. Many changes to a trust must have the effect of terminating the trust and then creating a new trust. Some implications to terminate a trust include: 

• The loss carried forward tax benefits and disposal by beneficiaries of their interests;
• Acquisition of interests in the new trust with associated capital gains tax consequences; and
• State duty tax implications.

Types of Trusts:

A trust arises from the intention to create a trust interest (an express trust). A trust may also be imposed by law in the absence of an express or inferred intention to create a trust interest (a non-express trust). A trust also does not require consideration of the beneficiary. 

Express Trusts

An express trust arises when a settlor has settled trust property by transferring the legal ownership of the property to a trustee. Because the trust is created within the settlors lifetime it is called an inter vivos trust (created by the settlor making a “declaration of trust” in the form of a trust deed, which describes the trust property and the beneficiaries). A trust with property must include a transfer of title (in writing and give written notice) if it includes land or ownership of a debt. Even though, there is no requirement that a trust must be in writing, it would be beneficial. The reason being, an express trust must have certainty of intention, subject matter and of object. Except, if upon a persons death then a Testamentary Trust would arise, its terms come from the testors will (if there is no will then the law).

Examples of express trusts include both discretionary trusts and unit trusts.

Non-express Trusts

A trust may arise by implication of law called an implied or resulting trust A constructive trust can be imposed by the law as a remedy to protect a persons’ interest in a property (as long as there is present the unconscionable denial by a legal owner of the equitable interest held by another). 

An example case showing the tax consequences from non-express trusts is Zobory V FCT [1995]. In this case, an employee stole one million dollars from his employer, this amount was deposited in a bank account where interest earned was made unaccessible to the employee. In The Employed Accountant and the FCT [2012], an accountant deposited client cheques into his bank which meant to go to the ATO, here the Commissioner (became the beneficiary) of a constructive trust. Howard V FCT [2014], the High Court held the compensation received by a company director, and in the judgment was not a constructive trust.