Discuss the Modern Uses of Trusts

Historical Perspective
Equity developed in England and Wales in the Middle Ages in circumstances where the ordinary common law had failed to afford proper redress; it ‘wiped away the tears of the common law,’ in the words of an American jurist. Equity therefore commenced as a gloss on the common law, with its efficacy being largely due to its ability to adapt and innovate.
In the twelfth and thirteenth centuries, the common law developed the strictures of the writ system. (A writ is essentially a form in today’s general language or a claim in modern civil law.) The slightest error on the writ would invalidate the whole action. Accordingly, individuals became aggrieved by the common law’s failure to develop further remedies. Certainly, the only remedy at that time was damages, that is, compensation. As a result, dissatisfied litigants petitioned the King and Council. Since the King was preoccupied with affairs of the State, the King handed these petitions to the chief minister, the Chancellor. Originally the Chancellor was an ecclesiastic, with the last non-lawyer being Lord Shafesbury, who retired in 1672. It was appropriate for individuals to seek assistance from the head of the court system, since it was the Chancery office which issued writs. The petitions for justice were reviewed by the Chancellor, according to his own discretion. They were thus adjudicated according to principles of justice and fairness, rather than the traditional common law. Over the years, the decisions made by the Lord Chancellor became known as the rules of Equity, having been derived from the Latin meaning ‘levelling.’

It emerged that each individual Chancellor established personal systems of justice, which gave sufficient rise to the criticism that ‘equity was as long as the Chancellor’s foot.’ The situation was however remedied in 1813 when a Vice-Chancellor was appointed to review the substance of work. From this point, equity emerged as a clear set of principles, rather than merely a personal jurisdiction of the Chancellor. Indeed, by the time of Lord Eldon’s Chancellorship in 1827, equity was established as a jurisdiction in its own right.

The formulation of equity was not, however, plain sailing. It is inevitable that a parallel yet separate system of dispute resolution would generate conflict. The situation was ultimately resolved in the Judicature Acts 1873 and 1875; thus where there is conflict, equity prevails. This canon is now enshrined in the Supreme Court Act 1981, s 49.
Perhaps the most important branch of equity is the law of trusts. The trust developed historically from the ‘use.’ This ‘use’ commenced in the Middle Ages, where an individual conveyed property to another, on the agreement that the other was to become seized of it on behalf of the donor or a third party. Therefore, the individual trusted with the property was in a position of confidence; a confidence which could effortlessly be abused. As a result, the rights of the third party called for protection. However, the ordinary common law did not recognise these rights and hence did not provide adequate protection. Accordingly, the Court of Chancery would intervene, to act as a court for justice, and would oblige the individual trusted with the property to administer it for the benefit of the third party, in harmony with the terms of the grant. This benefit or interest became known as an equitable interest, the third party became known as the beneficiary and the feoffee to uses became a trustee.

Family
During the nineteenth century, most trusts were created for the benefit of the family, as a substitute to an outright gift. A family member may lack the necessary skills to properly manage the trust property, for example as a result of their mental or physical incompetence or due to their lack of experience. Indeed, a trust is a simple way for a settlor to provide financially for the welfare of a child, who is unable to manage his or her own affairs. In this situation, the settlor, i.e. the parent, can continue to administer control of the assets, even though the assets are not held in their name.

Modern Perspective
The breadth of the modern application of trust law extends beyond the context of the family, applying to spheres of charities, commerce, investment funds and even pensions. It is worthwhile to note that one of the predominant criticisms to trust law is its failure to keep abreast of the changes in the current social and economic climate. As a result, the Trustee Act 2000, as stated by the Consultation paper, was intended to ‘facilitate the administration of trusts and to ensure better returns for the persons and purposes which develop from trusts.’ (This section is not exhaustive.)
Pensions

In 1971, the House of Lords in McPhail v Doulton recognised the need for trust law, which had developed largely in the context of family trusts, to adapt to take account of the large scale modern trusts, for example for the benefit of employees. It seems that the House of Lords intended its decision to be of general application.

The trust enables the assets of a pension fund to be distinguished from the assets of the employer company. In doing so, it provides safeguards against employers and makes it more difficult for the employer to treat the fund as his or her own property. (The case of Maxwell revealed that the trust merely made it more difficult, i.e. not impossible for the employer to this.)

Furthermore, in the context of irrevocable trusts, tax exemptions may be available. The Maxwell case has important implications for pension trusts, and led to the initiation of the Pensions Act 1995. There is now a regulatory authority with a degree of control over trustees of pension funds. Its regulations have led to a number of stipulations, including the requirement that one third of trustees be member-nominated, minimum funding stipulations and restrictions on an employer’s receipt of surplus for on-going schemes.

There is now clear judicial recognition that the law of trusts is inadequate to control the administration of all powers in the context of pensions. Thus, new duties are being imported from the law of contract. Since it is equity which normally fills the gaps in the common law, this could be seen as a role reversal! An example is Imperial Group Pension Trust v Imperial Tobacco Ltd.

Charities
A charitable trust may be set up to benefit society as a whole or a sufficiently large proportion of society. Donations for charitable purposes are recognised as sentiments to be encouraged, as an issue of public policy. There is no statutory definition of charity; it is thought that if there were a definition it would have the undesirable effect of restricting the flexibility of the law in recognising the changing needs of society. Modern guidance can be found by Lord MacNaghten in IRC v Pemsel 1891, who classified charitable purposes into four categories: trusts for the advancement of poverty; advancement of education; advancement of religion; and for other purposes beneficial to the community. Furthermore, the trust must exist for a public benefit, thereby conferring some tangible benefit on society at large. (Trusts for the relief of poverty are exempt from this requirement.)

Nonetheless, the legal definition of charity is set to change, as the Charities Bill is being considered by Parliament (this was announced in the Queen’s speech in November 2003). It is thought that with these developments pending, there will be a statutory definition for charity and a strengthened obligation for public benefit.
Investments

The 2000 Act has introduced a new power of investment to trustees. Subject to any provisions in the trust instrument, a trustee may make any kind of investment that he or she could make if he or she were absolutely entitled to the trust assets s 3(1), with the restriction of land, section 3(3). The benefits of an investment trusts may include: the ability to pool with other investors, which provides greater investment potential; an opportunity to spread risk, since shares are typically owned in a wide range of companies; regular saving schemes and minimum levels of investment.

With regard to investment funds in general, the trust is effectively the shell within which the investor’s money is held. This has the effect of legally separating investor’s funds from the assets of the investment management company. In summary, trusts are predominately used in this context for investor protection. However, this example is perhaps better exemplified when discussing pension funds. The relevance of trusts in this context can be shown by the recent problems experienced within many major pension funds, in relation to separating investor’s money from the assets of the managing company.

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