Many legal terms and titles are taken for granted by professionals who work in the legal field or by people who come across them often in their daily lives. Sometimes, a person is appointed trustee of a loved one or an estate and doesn’t quite understand what this means. This article explains the basics of trusts and what the role of trustee has meant both historically and today.
The History of Trust Law
Trusts developed in medieval England as a way for landowners to transfer their property to a “trusted friend.” Originally, they were called “uses”. The trusted friend would hold the property to follow the landowner’s instructions. The trusted friend would not try to benefit from the land personally. Under this system, the landowner had an equitable title in the land – i.e. an interest in the land which maintained the landowner’s right to acquire legal title. Meanwhile, the trusted friend held legal title to the property.
When trust law was developed, it helped avoid having the King inherit the land after the landowner’s death. By law, if the landowner had no heirs to pass the land onto, it would revert to the King, who was allowed to keep it. This was referred to as a feudal incident. The reduction in feudal incidents reduced royal income, so the law of uses developed further, eventually becoming what we know today as trusts.
The Obligations of a Trustee
Like a use, a trust is a means to hold property when two different entities or people hold the legal and equitable interests. It is a way to hold property through a series of relationships.
When a trust is created, the trustee holds the legal title to the land. The trustee has certain equitable obligations to fulfill for the beneficiary. If the trustee fails to act in the beneficiary’s best interests or breaches their duties, the beneficiary can sue for breach of trust.
In Ontario, the powers and duties of trustees are set out in the provincial Trustees Act. Some of these duties include:
- The duty to safeguard, preserve and enhance the assets of the trust.
- To distribute the trust assets to the beneficiaries.
- Obligation to act impartially.
- Duty to keep accounts and be ready for inspection by the beneficiaries
- Duty to provide information
If these duties are not met, it might constitute a breach of trust, giving rise to an equitable remedy. Whether the breach is innocent or fraudulent, the purpose of the remedy will be to restore the beneficiary.
The Parties to a Trust
There are three primary parties to a trust:
- Settlor: The person who creates the trust (usually the original owner of the property at issue). If the trust is created in a Will, this is the testator.
- Beneficiary: The person who holds the equitable title to the property and possesses rights in connection with the property. The most notable of these rights is that the beneficiary has the right to enforce the trust.
- Trustee: The person who holds the legal title to the property and owes certain obligations to the beneficiary. As a trustee holds a fiduciary role, they must place the beneficiary’s interests ahead of its own.
Types of Trusts
While there are many types of trusts across multiple areas of the law, there are two broad categories of trusts: express trusts and resulting trusts. Express trusts are created intentionally while resulting trusts are created through the operation of the law. There are also constructive trusts, which are a subset of resulting trusts.
Express trusts can be made in favour of a person or for specific purposes. A trust in favour of a person sets out the individuals who can enjoy the property. A trust for purposes sets out a task that the creator of the trust wishes the trustee to perform through the use of the trust property. Trusts for purposes can be created for charitable or non-charitable purposes.
There are four requirements for creating an express trust:
- Capacity: The settlor must have the capacity to create a trust. Capacity means they are of legal age and have sufficient mental capacity.
- Certainty: Three certainties are required.
- The settlor must have intended to create a trust (certainty of intention);
- The beneficiaries must be described in terms that are clear enough to ensure the trust obligation can be performed properly (certainty of objects); and
- The subject matter of the trust must be quantifiable, and it must define the portion each beneficiary is to receive or give the trustee the power to decide the allocation (certainty of subject matter).
- Constitution: The trust is constituted when the title to the property is conveyed to the trustee. Once constituted, the trust cannot be undone by the settlor unless there is power or a revocation built into the trust. A trust can be constituted either by direct transfer (from the settlor to the trustee) or by automatic transfer (a person declares themselves the trustee of the property for another person).
- Formality: The technical and legal requirements of the trust must be satisfied. These formalities and their rigidity vary depending on the type of trust.
Unlike an express trust, a resulting trust is not created by a settlor but instead arises when factual circumstances exist. Some examples of when a resulting trust occurs include the following:
- When a trustee holds property under an express trust and the trust fails, in whole or in part. In this case, the beneficial or equitable interest will return to the settlor or the settlor’s estate.
- When a person advances funds to contribute to the purchase of a property but does not take legal title to the property. It is presumed that this person receives a beneficial interest in the property proportionate to their contribution.
As per the Supreme Court of Canada in Soulos v. Korkontzilas:
“The constructive trust is an ancient and eclectic institution imposed by law not only to remedy unjust enrichment, but to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in ‘good conscience’ they should not be permitted to retain.”
Constructive trusts are a type of resulting trust. They are typically used to remedy a situation where a defendant has obtained property or assets through some kind of wrongdoing or a breach of duty. As per the Supreme Court’s decision in Soulos, a court may find a constructive trust exists when:
- The defendant was under an equitable obligation to the plaintiff (for example, a fiduciary duty, duty of loyalty, etc.);
- The defendant received assets or property by breaching their equitable obligation to the plaintiff;
- The plaintiff has a legitimate reason for seeking a proprietary remedy (i.e. to obtain an interest in the assets/property and not just damages to compensate for their value); and
- It would not be unjust to impose a constructive trust upon the defendant.
Derfel Estate Law in Toronto Provides Sound Advice to Trustees About Their Obligations
Being appointed a trustee comes with significant obligations and legal and financial risks. Consulting with an experienced estates and trusts lawyer before taking any action can help protect you from liability.
Derfel Estate Law regularly advises trustees, executors, and attorneys on their responsibilities and obligations. We can work with you on a one-time basis to answer any questions that arise during the administration of a trust or can provide ongoing guidance for the duration of your trusteeship. Our office is conveniently located in mid-Toronto, and we proudly serve clients throughout the GTA and Ontario. To schedule a consultation, please contact us online or call 416-847-3580.