Define the term ‘TRUST’? What are the essential parts of a valid trust? Define the three types of trust?

1. A.   INTRODUCTION:

 The trust is widely considered to be the most innovative contribution to the English Legal System and today, trusts play an important role in most common law systems, and their success has led to some innovation and in civil law and civil codes. France, for example, recently added a similar though-not-quite-comparable to their civil law as a notion which was modified in 2009 which is known as la feudal. Trusts are widely used internationally, especially in countries within the English law sphere of influence, and whilst most civil law jurisdictions do not generally contain the concept of a trust within their legal systems.

On top of that, it is very important to define trust in terms of law, especially common law and the important parts of the trust should be taken into count and must be understood clearly.. Here in this research, I tried to define the word ‘trust’ and its essential features from the legal point of view. A part from that the different types of trust and its certainties are described in this work. I also clarified the different important terms and condition associated with trust

1. B.    What is a Trust?

The legal concept of trusts dates back to the earliest history of European legal theory.[1] In its simplest form, a trust is a legal relationship in which one party holds property for the benefit of another – in legal terms, a relationship in which the owner of the legal title does not hold the equitable title. There are three participants in every trust relationship: a “settler” or “trustor” who establishes the trust and provides the property to be held in trust; a “trustee,” who is charged by the settler with the responsibility of managing the trust in keeping with the settler’s instructions; and a “beneficiary,” who receives the benefits from the property held in trust.[2]

In order to establish a trust, three elements are necessary: first, there must be a manifestation of intent to create a trust by the settler; second, there must be property that is held by the trustee (the trust “corpus” or trust “res”); and, third, there must be an identified beneficiary or charitable public purpose for which the property is held in trust.[3] Perhaps the most critical of these requirements is the manifestation of intent to create a trust – or, stated differently, the intent to create a relationship that encompasses the essential elements of a trust. Courts will generally not recognize the existence of a trust unless the settler’s intent to create a trust was “clear and unequivocal” or “definite and particular”[4] – in other words, that the language used in the documents or conveyance that create the trust (known as the trust instrument) must indicate the settler’s intent to create the relationship to some reasonable level of certainty.[5]

However, courts will recognize a manifestation of intent if this intent can be inferred from the language, even if the trust instrument does not expressly indicate that a trust relationship is intended. In making this determination, courts will also look to the surrounding circumstances, the parties’ conduct, the purpose of the transaction, the scheme of distribution provided by the trust instrument, and the relationship between the parties.[6] In essence, if there is any ambiguity in the language used by the settler, the court will attempt to place itself in the position of the settler at the time of the grant to discern the settler’s purpose and intent.[7]

1. C.    Essential parts of a Valid Trust

Under the common law, trustees are charged with a series of fiduciary duties – duties which can be either express or implied – to the beneficiary of the trust.[8] The most important of these are,

(1) To manage the trust in accordance with the instructions of the settler;

(2) A duty of good faith, which requires the trustee to put the best interests of the trust ahead of his own;

(3) A duty of prudence, which requires the trustee to manage the trust property with the same degree of skill that a prudent person would exercise in his or her own affairs; and

(4) A duty to preserve and protect the trust assets, or trust corpus, to satisfy both present and future claims against the trust.[9]

1. The Duty to Follow the Settler’s Instructions

 The trustee is normally required to follow the instructions of the settler in administering the assets of a trust; as a general matter, no trust can exist where the trustee has absolute and unqualified discretion in managing the trust assets.[10] However, depending on the level of detail associated with the restrictions established by the settler, the trustee may have broad discretion in the trust’s administration and may enjoy great flexibility in the management of trust assets – as long as this discretion is exercised in furtherance of the purposes of the trust.[11]

An associated requirement is that after a trust has been established, the settler, the trustee, and any beneficiaries deemed to have a vested interest must consent to any change in the terms of the trust.[12] However, courts will authorize changes to trusts under limited circumstances. For example, under the doctrine of “equitable deviation,” courts will authorize the trustee to deviate from the express instructions of the settler in administration of the trust where compliance with the directions becomes illegal, impracticable, or would no longer affect the purpose of the trust due to new information or changed conditions – as long as the deviation will further and not alter the purpose of the trust.[13]

2. The Duty of Good Faith

The trustee’s duty of good faith requires that the trustee act honestly and with undivided loyalty to the interests of the trust and its beneficiary (ies). In essence, this means that the trustee cannot put his own interests (frequently referred to as self-dealing), or the interests of third parties, ahead of the interests of the trust. Common examples of violations of the duty of loyalty are where the trustee attempts to secure a material advantage to himself, to a relation, or to a third party in a transaction on behalf of the trust.[14]

3. The Duty of Prudence

The trustee’s duty of prudence descends in part from the duty of good faith, requiring that the trustee act with due care, diligence, and skill in managing the trust. Although there are various formulations of this duty, most are similar to the following:

“The standard or measure of care, diligence, and skill required of a trustee in the administration of a trust is that of an ordinarily prudent person in the conduct of his or her private affairs under similar circumstances, and with a similar object in view.”[15]

This duty applies to both affirmative and negative conduct on the part of the trustee, including the timing of management decisions.[16] Significantly, the Restatement provides that this standard should be “applied to investments not in isolation but in the context of the trust portfolio.”[17] This portfolio approach represents a significant departure from older trust management rules that considered most aggressive forms of investment to be “speculation” and instead placed the greatest emphasis on caution and the preservation of the trust corpus in every investment, requiring the trustee to make conservative investment decisions.[18] However, it is also very different than a simplistic, short-term “revenue maximization” philosophy. By evaluating investments in the context of an overall portfolio, trustees are empowered to construct a balanced portfolio of diversified investments that meet the trust’s long-term management objectives. Because these investments are evaluated as a part of an overall portfolio of balanced risk and return, these may include investments that involve more risk than would be permitted under the old “prudent man” rule.[19]  This, however, should not be understood as insulating the trustee from responsibility for imprudent investments even if the overall portfolio shows a gain; each investment should still be “prudent” when viewed in the context of the strategy for the overall portfolio and the balancing of risks and returns.[20]

Analyzed more closely, the trustee’s duty of prudence involves a number of interrelated components. First, it requires the trustee to bring the appropriate level of expertise to the administration of the trust asset.[21]  At the most basic level, this requires the trustee to exercise the care and skill of an ordinary prudent person – even if the trustee lacks the competency so to do.[22]

Second, the duty of prudence is generally understood to imply a requirement that the trustee distribute the risks of loss through a reasonable diversification in the trust portfolio – a requirement that is closely related to the trustee’s duty to preserve the corpus of the trust by not putting “all one’s eggs in one basket.”[23] This requirement of diversification is generally understood to apply unless it would be imprudent to do so, or unless the trust instrument directs otherwise.[24] The duty applies both to the retention of existing investments as well as to participation in new investments.[25]

Third, this duty can be understood to require the trustee to arrive at a decision using an appropriate process. As such, the requirement on the trustee when making management decisions is to utilize the proper level of care, precaution, attentiveness, and judgment; investigate and evaluate alternatives; assess risks and rewards; and then make the best choice in light of this information.[26] As a result, it is entirely within the fiduciary duty of a trustee to take some level of risk where the likelihood of success and failure is analyzed; conversely, the doctrine also allows for trade-offs between short-term and long-term returns, with the trustee authorized to accept lower returns from trust assets if the trustee’s analysis suggests that this will result in better outcomes over the long term.

Finally, the duty of prudence implies a requirement to constantly monitor and re-assess trust-related decisions over time. A trustee generally cannot be held liable for trust losses resulting from decisions which, although they seemed prudent at the time given the available information, later turned out to be poor investments that did not achieve investment goals, or were frustrated due to unforeseeable events (such as market downturns or natural catastrophes). However, the trustee is expected to ensure that trust management strategies continue to be based on correct facts and assumptions and if they are not achieving the desired objectives, to change course.[27]

4. The Duty to Preserve the Trust

The duty to preserve and protect the assets of the trust is closely related to the duty of prudence; in essence, it requires the trustee to manage the corpus of the trust in a manner that takes a long-term perspective, and ensures that the trust can satisfy both the present and future needs of the trust beneficiary in accordance with the instructions of the settler. In the context of a perpetual trust, this generally requires the trustee to manage the trust corpus in a manner that will ensure that the trust will remain undiminished to serve the needs of future beneficiaries in perpetuity.[28]

1. D.     Private Trusts, Charitable Trusts, and the Public Trust Doctrine

There are dozens of different types of trusts recognized under American law. Each involves variations on traditional trust doctrines that are based on the character of transaction that creates them, the intentions and instructions of the settler, the nature of the beneficiary, and other variables. These include concepts ranging from business trusts, which operate businesses in a manner similar to a corporation; constructive trusts, which are created by operation of law to prevent frauds; one-party trusts, in which the settler is also the trustee; spendthrift trusts, which are used to protect property interests from being alienated by a beneficiary; and others. However, two principal types of trust relationships are particularly relevant in relation to state trust lands: private trusts and charitable trusts.

  1. Private Trusts

 Private trusts are the form of trust that people most commonly associate with the term “trust.” Private trusts generally involve relationships between private individuals or entities in which one person or entity puts property or money in trust for the benefit of another. A typical example is a trust established by parents for the benefit of their children (or even multiple generations of descendants) to provide for education, health care, or maintenance payments, with a specified person (such as a lawyer, banker, or family member) serving as the trustee.

The private trust is probably the “purest” form of the trust relationship, in which the settler, trustee, and beneficiaries can be easily (and specifically) identified, even if some beneficiaries are not yet born. This has particular significance with regard to who can enforce the terms of the trust, because where there are specific individuals who are the identified beneficiaries (who hold the “equitable” interest in the trust property), only those beneficiaries automatically have the right to enforce the terms of the trust and ensure that the trustee is observing her duties and providing the anticipated benefit.[29] The trustee’s duties are owed to that beneficiary, and no other person (aside from the settler) has standing to contest the management of the trust.[30]

Private trusts are also generally limited in duration, having a purpose that will be achieved within some identifiable period of time, after which the trust terminates. Although courts have generally permitted multi-generational trusts, until very recently, the courts were unwilling to recognize private trusts that had no limitation on their duration. Where the duration of a private trust was not explicitly stated or was not otherwise implicit in the purpose for which the trust was created, courts generally found that the trust was invalid under the Rule Against Perpetuities, a common-law rule that prohibits certain types of permanent restrictions on the use of property under the theory that such restrictions are socially undesirable. “Although most American jurisdictions have recently adopted rules allowing for the existence of private trusts with unlimited duration, these so-called “dynasty trusts” are controversial, as they can permanently devote significant amounts of property to the benefit of a few private individuals.”[31]

2. Charitable Trusts

A charitable trust, in the simplest terms, is a trust in which the beneficiary is some portion of the public. The term “charity,” in this context, has a broad meaning embracing any trust that serves a public purpose and benefits an indefinite number of persons,

“either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burden of government.”[32]

Traditionally, it was the charitable purpose of the trust that provided the necessary justification for property dedication to a single purpose in perpetuity; as such, a purpose is charitable if “its accomplishment is of such social interest to the community as to justify permitting property to be devoted to the purpose in perpetuity.”[33]

Charitable trusts can include relationships in which the trust property is set aside for the benefit of a specific public purpose (i.e., supporting public education or cancer research), for the benefit of a specific class (i.e., a college scholarship or a fund to support homeless children), for the benefit of a charitable institution that serves a public purpose (i.e., a school or hospital).

Unlike the traditional doctrine governing private trusts, charitable trusts are permitted to be “perpetual trusts” (i.e. indefinite in duration), since the public purposes for which they are granted are frequently not limited in time. For example, a charitable trust might provide for the continuing grant of scholarships to qualified students at a public university, a purpose that will endure as long as there are qualified students attending the university; by contrast, a private trust might provide college tuition only for one or more generations of a single family. Similarly, where the beneficiary of a charitable trust is an identifiable entity, the entity is generally an “immortal” entity such as a non-profit corporation or a public institution.[34] The courts have thus held charitable trusts to be exceptions to the rule against perpetuities.[35]

Charitable trusts are normally subject to enforcement by their beneficiaries to the extent that these beneficiaries are sufficiently identified or identifiable. Although the rules vary from jurisdiction to jurisdiction,[36] a member of the general public generally cannot maintain a suit to enforce the terms of a charitable trust, even if that person is a potential future beneficiary of the trust (since the attorney general is the most appropriate representative of the unnamed beneficiaries of a charitable trust).[37] Similarly, taken in isolation, membership in a charity is not generally insufficient to provide standing, nor a merely “sentimental” interest in seeing the purpose of a charitable trust achieved.[38]

One commentator has noted that, in addition to the special interest requirements, there appear to be four other factual elements that will typically influence a court’s willingness to concede standing to enforce a charitable trust. These include:

(a)    The nature of the complaint and the remedy sought. Courts have normally refused to allow charitable beneficiaries to seek monetary damages against trustees, but have tended to grant standing to seek limited remedies (such as a court order or declaratory judgment) where a significant violation of the purpose of the trust is alleged.[39]

(b)   The presence of fraud or misconduct. Although not expressly stated as a cause for granting standing, courts appear to be more likely to grant standing where there are allegations of fraud and abuse, as a matter of ensuring that the public interest in a particular charitable institution is adequately protected.[40]

(c)    The presence or absence of the attorney general as an effective enforcer. Courts will also consider the nature and the degree of the attorney general’s involvement in determining whether or not to grant standing. Where the attorney general is not available or is unlikely to effectively defend the interests of the trust, standing is more likely.[41]

(d)    The social desirability of the suit. Where the suit would serve a broader public purpose, either by defending an important charitable institution or enumerating important principles, courts also appear to be more likely to grant standing.[42]

3. The Public Trust Doctrine

One trust-related concept that is frequently confused with the state trust land doctrine is the “public trust doctrine.” Public trust doctrine is a common-law doctrine, traceable to Roman civil law, which provided that running water, the seas, and the shores of the sea were “held in common by all men,” and thus could not be held as property to the exclusion of the public. This doctrine survived into the English common law, which recognized the public’s interest in navigable waters and waterways and recognized them as property held by the King in trust for the public. This concept survived in American common law after the Revolutionary War, with the Thirteen Colonies held to have inherited the King’s public trust property when they became independent sovereigns. As new states were admitted into the Union, they were admitted on an equal footing with those who came before, and thus took title to the beds of navigable streams and seashores upon their admission to the Union to hold “in trust” for the public.[43]

The public trust doctrine requires the states, as the trustees of the lands underlying navigable waters, to preserve these lands for the benefit of the public for navigation, fishing, recreation, and other uses, and to protect the right of the public to use the lands for these purposes. Under the doctrine, while the state can permit private uses to occur on those lands, the state is prohibited from alienating public trust resources or from allowing their value to the public to be degraded