Law of Trusts

Law of Trusts

The Law of Trusts as the term states symbolises a relationship of trust between the two respective owners, the legal and the beneficial owner. For instead X transferred his property to Y for the use of Z, while Y being the legal owner Z will be the one reaping the benefits of it. Thus, English law at first refused to acknowledge the ‘law of trusts’ as a conveyance of use, a means to both merge the legal and the beneficial owner. In Tyrrel v Tyrrel (73 ER 336), the Common law court observed that there cannot be a use subsiding a use i.e. if A conveys to B to use it in order to preserve it for C to use, there exists an overlapping relationship between the two whereas the common law doctrine only recognizes the rights of the owner who is in possession of the property. It was only later that the court seized it’s earlier opinion and the Law of Property Act abolished the previous statues, modifying the approach towards the law of trusts classifying it into public and private trusts.

In India the law of trusts was dealt with both in acknowledgement of the Hindu and Muslim law. Though public trusts were more commonly recognized, private trusts were not uncommon and were later firmly established by the Indian Trusts Act 1882 (Tagore v Tagore (1874) LR 1 IA389). It was observed that though the Indian Trusts Act mainly dealt with the private trusts, the principles of the Act are also applicable to the public trusts wherever applicable.

Further, the Law of Trusts Act does not incorporate the doctrine of dual ownership of the English law-the legal ownership subsiding in the trustee with an equitable interest in the beneficiary, it rather enforces a legal obligation on the property in the hands of the trustee which is also enforceable against him. The owner in this case can thereby be an owner by a mere declaration.

Kinds of Trusts

Express Trusts-

‘Express’ as the word implies are trusts which are formed specifically by the settlor declaring his intention and describing the objects and the property.

When the declaration is ‘express’ i.e. clear and specific, they are known as direct trusts but when the same trusts have an indirect implication, they are known as indirect trusts.

Implied Trusts-

Implied trusts unlike the express ones aren’t formed out of a clear intention or declaration but are rather a product of an operation of law by the transferor or settlor. Resulting, Constructive and statutory trusts fall under the category of Implied trusts.

For instance, X conveys his property to Z without any consideration. Also there is no express declaration or intention displayed from his side that X wants to convey the beneficial interest on B. No trust is declared in such a situation as ‘a trust results from a transaction.’ Thus the above transaction would have been an express or implied trust had X conveyed his property to Y so that B holds his property in trust for the benefit of X.Similarly, if A buys a property in the name of B and intends to transfer no interest in favour of B, B will the property in trust for A’s benefit.

In English law if a man buys a property in the name of his ‘wife’ or ‘child’ it is safely assumed that he intended to transfer the beneficial interest in their favour, whether he intended so or not unlike in Indian law where no such presumption exists. In India such transactions are referred to as ‘benami’ transactions i.e. transactions without a name.

A Constructive trust arises when a person in disguise of being a ‘trustee’ holds a purpose to be the same for his personal benefit. In Keech v Sanford (25 ER 223), the court held that in such cases, a fraud is not necessary to prove the existence of a constructive trust, mere conflicts of interests between the trustee and the owner is sufficient enough to prove in cases where the trustee favours his own interests above that of the owner’s.

Statutory Trusts are a creation of the English law which can be further classified into a) simple trusts b) special trusts c) executed trusts d) executory trusts-

In the case of a simple trust, a trustee is endowed with preserving the trust for the interest of the beneficiary but has no active duties to perform for the same whereas the trustee in case of a specified trust has a specified role to play for preserving the interest of the beneficiary in the trust held by him.

In the cases where the testator does not clearly declare his intention & leaves it on the court to decide, the trusts formed out of such transactions are then known as executory trusts whereas in cases where the declaration is clear, the trusts formed are known as executed trusts. 

Creation of Trusts

The Indian Trust Act permits the formation of any kind of trusts except for any illegal or immoral purposes as it renders the trust void. A trust of immovable property can be simply created by a written declaration while a trust of movable property may in certain situations require transfer of property to the trustee as a declaration for the formation of a trust. In either case, the following must be clear-

  • Intention and purpose to create a trust
  • The beneficiary
  • The property for the creation of a trust
  • The property must be transferred except in cases where the author is himself the trustee

Section 7 of the Indian Trust Act lays down that anyone including a minor can be a trustee with the permission of the court. Any person who is competent enough to hold property can be a beneficiary and can also renounce his interest at any point in time. Similarly section 10 propagates in favour of the trustee, the only condition being in cases where trusts involve positive actions and so the trustee can only be someone who is competent to contract. A minor therefore, in this scenario cannot be a trustee. Further, the property to be held in trust can be accepted both by word or conduct.

Duties & Liabilities of a Trustee

The Indian Trust Act lays down the duties and liabilities of a trustee under Ss. 11 to 29-

  • To execute the trust in lieu of the instructions of the author
  • To deal with the trust property with reasonable care and precaution
  • To see that the trust property is invested
  • To treat all beneficiaries alike
  • To keep proper accounts
  • To pay for any losses which occur due to breach of trust on the part of the trustee
  • The liability of trustees is joint, one can ask his co-trustee to compensate for the losses in cases of breach.
  • The trustee is liable to act in correspondence to the instructions of the government where the beneficiary’s interest has been forfeited to the government. 

Rights of a Trustee

U/S 31-35 the trustee has the following rights-

  • Right to obtain all relevant documents
  • Right to re-imbrues for all the expenses lawfully incurred
  • Right to approach the court for administrative instructions
  • Right to be compensated for any breach by a third party which forces him to incur personal losses
  • Right to know the accounts of his administration examined

Rights of a Beneficiary

U/S 55-67 a beneficiary has the following rights-

  • Right to gain the benefits of a trust executed for his interest
  • Right to rents and other profits accruing out of the trust property
  • Right to get the property transferred in cases required by all the beneficiaries
  • Right to examine the accounts
  • Right to have proper trustees
  • Right to have the trust property properly administered
  • Right to have any property bought by the trustee declared as trust property
  • Right to have the entire property be declared as the trust property in cases where the trustee tries to mingle his personal property with the trust property.

Illustrations

  • A conveys property to B with the intention of creating a trust and being the beneficiary but the purpose isn’t declared. It is still a trust where B hold the property in trust for A.
  • X conveys property to Z to pay of her debts out of the trust property (either by sale or rent). Z sells the property and pays off the creditors but is left with a surplus amount. The surplus amount is therefore still a part of the trust held by Z for X’s benefits.
  • A out of love conveys property to B without any consideration or intention to declare it as a trust property. A trust is not created.
  • A buys a property in the name of B but not declare his intention to be a beneficiary or the property to be a trust property. The property is an implied trust which has been created by the conduct even though there is no absolute declaration.

Conclusion

The above article gives an overview of the law of trusts as laid down the Indian Trusts Act. The Act elaborately deals with all aspects of how a trust is to be executed, the subject of trust fund, rights, duties and liabilities of a trustee or beneficiary and so on.

Frequently Asked Questions

1. What is a ‘trust’?

When a property or fund is held by another party for the convenience or use or use the former, it is referred to a trust.

2. Who is a beneficiary?

A beneficiary is the person who gains benefits out of the trust property even though it is not in his de facto possession.

3. Who holds power over the trust property?

Even though the de-jure power over the trust property lies with the author, a trustee holds de-facto power to alter or amend investments and to administer the trust reasonably.

4. Can a trustee delegate the trust property?

No, a trustee cannot delegate the trust property unless authorized to do so by the author or the beneficiary.

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 

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I am Alisha Luthra pursuing LLB from Campus Law Centre, Faculty of Law, Delhi University. The endless minutiaes of law is what drives me to read and learn more about it every day. I have been a literature enthusiastic, always nabbing the first seat trying to grasp a little extra information about the subject. Knowledge is what excites me the most to read more and try a hand at writing. Apart from the academic interests I've loved traveling to the mountains since I was a kid. It is these travel and reading experiences that have shaped me to be the person I am today. This internship has been a helpful and learning experience giving me the opportunity to try a hand at writing while grasping in depth knowledge about the various intricacies of contract law.