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The legal definition of a trust is:

An equitable obligation binding the trustee to deal with property over which he has control (called the trust property) for the benefit of certain persons (called beneficiaries) of whom he may himself be one, and any one of whom may enforce the obligation.

A trust is a means of arranging property to be for the benefit of other persons, without giving them full control over it.

This is often done for persons who could not otherwise appreciate or deal with the property correctly: for example, minor children.

A family head may use a trust as a means of giving property to his family while retaining some control over it by being one of the trustees. Many trusts are set up for tax reasons. The basics of the arrangement is that the trustees possess the legal ownership of the trust property, but cannot treat it as their own personal property.

The trustees have to use the property for the benefit of the beneficiaries according to the terms of the trust.

In every trust there is therefore a division of ownership. The trustees possess the legal interest ; the beneficiaries possess the beneficial or equitable interest . The beneficiaries can enforce their rights against the trustees by legal action if necessary.

Power of Appointment Trusts

A “power of appointment trust” is one where a power exists to vary or appoint beneficiaries. A typical power of appointment trust wording would be as follows:

On trust for all or such one or more of my wife AB and the children of our marriage in such share or shares as the trustees shall from time to time by deed or deeds revocable or irrevocable appoint and subject to and in default of any such appointment and insofar as any such appointment shall not extend or shall fail for any reason on trust for my wife AB absolutely.

The power of appointment is given to the trustees for the time being to use at their discretion. The wording often provides for a “gift over” in case an appointment is never made or fails. The “gift over” beneficiary is sometimes called the “default” beneficiary, and has the interest in possession for inheritance tax purposes.

This type of trust is very flexible, as it gives the trustees power to vary the beneficiaries according to family circumstances.

It can cope with deaths and births in a way in which a fixed-interest trust could not. Maximum flexibility can be retained if any appointments are made revocably.

The power can be exercised only among the prescribed class of beneficiaries. An appointment is a deemed transfer of value for inheritance tax purposes, but will usually be a potentially exempt transfer.

Statutory Trusts

Statutory trusts are trusts specifically created or implied by statute. A common example is that a policy effected by a man on his own life for the benefit of his wife or children will create a trust under the Married Woman’s Property Act 1882 .

Trusts created under this Act and its Scottish and Northern Irish equivalents are sometimes known as the statutory trusts. Another type of statutory trust is that which arises in certain cases of intestacy under the Intestates’ Estates Act 1952

Trust creation

The most usual method of creating a trust is by the property owner (or settlor) “A” executing a deed assigning the property, for example, to trustees “A”, “B” and “C” for the benefit of beneficiaries “X”, “Y” and “Z”. The deed will specify the trust property and name the trustees and beneficiaries. It will also set out the powers of the trustees and the rights of the beneficiaries. The deed will have to fulfil the normal requirements of a deed of assignment. It will have to be signed by the settlor and ideally also by the trustees to show their acceptance of that duty.

Trustees

As has been explained previously, the trustee is the owner at law of the trust property although he is bound to use it for the benefit of the beneficiaries.

Appointment of Trustees

Under a trust created by deed, the initial trustees will be appointed by the deed itself. Where a trust is created by a Will then this should name the trustees, who are usually the executors as well. Under a trust set up under the laws of intestate succession, the administrators will be the trustees.

Beneficiaries

It must be possible to ascertain the beneficiaries of a trust at any particular time. As long as this requirement is fulfilled, the beneficiaries need not be named but can be described, either singly (for example, “my wife”) or as members of a class (for example “my children”). Often a beneficiary will be named but it is common for beneficiaries to be described as a class to gain extra flexibility. For example, if a man has three children X, Y and Z and wants to set up a trust for them, he may name them as beneficiaries. If he then has another child A, this child will not be able to benefit from the trust. However, if the original trust was for ”all my children in equal share” then future children such as A could benefit.

Married Women’s Property Act 1882

Life assurance policies may be effected under trust from outset in two ways. They can either be under the Married Women’s Property Act (or its Scottish or Northern Irish equivalents) or under a non-statutory trust .

Married Women’s Property Act Policies

The policy must be effected by a man on his own life or a woman on her own life.

Despite the title of the Act, the proposer does not have to be married and therefore a bachelor, spinster, widower or widow may utilise the provisions of the Act.

Although the Act applies only to England and Wales , the proposer does not have to be resident or domiciled there. If the contract is made in England then it can be under the Act and be governed by English law. As a policy must be effected by a man on his own life or a woman on her own life, joint life policies cannot be effected under the Act.

If a joint life trust policy is required it will have to be effected under a non-statutory trust. The policy has to be a policy of assurance on life. This phrase is not defined in the Act, but would extend to all types of life assurance except annuities or income protection and critical illness insurances.

The policy must be expressed to be for the benefit of husband, registered civil partner, wife, or children. It is not necessary for the Act to be mentioned in the policy but this is preferable for avoidance of doubt. The words used do not have to expressly declare a trust, as long as they are such as to bring it within the Act.

Married Women’s Property Act Beneficiaries

The class of beneficiaries is restricted to spouses, registered civil partners and children. “Children” does not include step-children or grandchildren but does include illegitimate and adopted children. The beneficiaries can be named or unnamed. If the beneficiary is named then there can be no doubt as to the identity, but if the beneficiary is described by relationship only then the wording will have to be examined to ascertain exactly who is the beneficiary.

Creditors and Married Women’s Property Act Policies

Greater protection from creditors is given to MWPA trust policies than to any other settlement a person may make. Some trusts can be avoided by the trustee in bankruptcy within five years of being set up. In the case of a Married Women’s Property Act policy, the trustee cannot claim the interests of the spouse and children, even if the policy was effected with intent to defraud creditors. This protection is almost unique in English law.

The Married Women’s Policies of Assurance ( Scotland ) Act 1880

The Married Women’s Property Act applies only in England and Wales . The Scottish equivalent is the Married Women’s Policies of Assurance ( Scotland ) Act 1880. The provisions are basically the same but there are a few differences. One remaining difference from the English Act is that, if the assured is made bankrupt within two years of effecting a policy under the Scottish Act, the trustee in bankruptcy can claim any premiums paid by the bankrupt.

Northern Ireland

A man can effect a policy on the life of his wife for the benefit of his children under the Northern Irish Act. In addition, “child” is defined to include a stepchild, illegitimate child, adopted child, and a person of whom the assured is a lawful guardian. The Northern Irish Act applies whether a policy was effected before or after its commencement.

Non-Statutory Trust Policies

A policy can be written under trust even though it is not under the Married Women’s Property Act. Such a policy can be termed a “non-statutory trust policy”. A non-statutory trust policy would be required if the beneficiaries were not within the limits of the Act: for example, partners in business. A nonstatutory trust would also be required if the policy were a joint life assurance. This is the most common type of Trust in use for Life Assurance.