Equity And the Law of Trust - Literature review Example

Trusts are relationships between two or more parties such that one of the parties, the trustee, is vested with the legal to real or personal property and this relationship is subject to obligations imposed by a court of equity, or expressly undertaken to keep or use the property for the benefit of the other party or parties known as the beneficiary of the trust. The party who creates a trust is known as the settlor who might make himself either the trustee or the beneficiary. Based on their creation, Trusts are classified as express, resulting or constructive. An express trust is created by the settlor’s conveyance of property by will or deed to a party, for this property to be held in trust for others. Creation of a trust does not require consideration. Written and formal documents are needed only for Trusts of real estate as required by the Statute of Frauds. A resulting trust is created when the intention is inferred or presumed, by a court of equity, from the terms of disposition of the property. Finally, a constructive trust results when a court of equity compels the person having legal title, to hold it for the benefit of another. A person guilty of fraudulent acquisition of title to property will be deemed by the court to be the trustee and will be ordered to hand over the property to the defrauded party. (Trust – property law-, n.d). Trusts are set up for the joint ownership of the matrimonial home, reduce amount of tax payable, provide for infants, the elderly or mentally disordered and to protect people from their vices. Sometimes the public donates money in response to some disaster or crisis and the law has to formulate a mechanism to administer the resulting fund. (Equity and the law of Trusts, n.d). In the present day world, the role of Trusts has assumed great significance. Trusts minimize estate taxes or help people who cannot manage their own assets for example minor children, disabled children or aged parents. Sometimes a trust is created to provide support and property management for a surviving spouse and minor children or for the educational purpose of children and grandchildren. Conditions of Revocable Trusts can be changed only during the lifetime of the settlor. This is beneficial for adapting to the changes taking place in tax and estate laws. Irrevocable Trusts cannot be changed, revoked or terminated once they are set up and do not provide for changes in the tax and estate laws. Some of the modern day varieties of Trusts are: Living Trusts or Trusts which are created and activated while the settlor is still living and Testamentary Trusts which become effective at death and are usually contained within a will. These are irrevocable and generally include Trusts that benefit a spouse, a minor children, a charity or other organization (Suzanne Badenhop, n.d). An offshore trust is a trust in any jurisdiction other than that of the settlor’s. This term is applied to tax havens (Trust law non – USA, 16 January 2006). Tax havens are characterized by either the levy of some taxes at a lower rate or the absence of certain taxes. A trust is established in this place and assets are transferred to this trust and any income earned by these assets will be deemed to have been earned by that trust. For example, in the UK no tax need be paid for foreign income not remitted to the UK. Monaco and Andorra do not levy income tax. In Switzerland the amount of one’s income is negotiable to what is generally accepted as being five times the rent paid on accommodation (Tax haven, February 2006). Trusts in the modern administrative state can be instrumental in eliminating the discord between political accountability and managerial flexibility. The development of a model of public trust in the government will prove beneficial in addressing this complex issue. The basis of this concept can be drawn from social science literature regarding the conceptualizing of trust and by the identification of the factors affecting the trustworthiness of government. “A trustworthy government requires both accountability and flexibility of administration and that trust would serve as a key variable in reconciling this tension by expanding citizens’ willingness to accept government authority” (Seok – Eun Kim, 2005). The National Health Service in the United Kingdom provides ambulance services by means of local Trusts. In a manner analogous to the distribution of the British Police across the various counties these ambulance Trusts are distributed across the various counties. There are three categories of personnel in these Trusts, namely care assistants, technicians and paramedics. The patient transport services or PTS are the prerogative of the Care assistants, which entails moving the patients from the hospital to their home. Technicians and paramedics operate the emergency ambulances and provide more urgent transport and paramedical care to casualties. The Government has set a target of reaching 75% of Category A or life threatening calls within 8 minutes, to these Trusts. This has been done with the objective of measuring their performance and a “number of initiatives have been introduced to assist meeting these targets, including Rapid Responders and Community Responders.” In the UK these services have gained the same status as that enjoyed by the Red Cross and the St. John Ambulance. The relevant UK legislation applies to all ambulance services without any discrimination as to who owns or operates them. This system to be found in the UK is very efficient and illustrates the proactive role played by Trusts in public life (Ambulance, February, 2006). Charitable Trusts are non profit organizations whose funding is mainly through gifts. The majority of Trusts are created for the benefit of specific persons or classes of persons. Such Trusts are known as private Trusts. The charitable uses mentioned in the preamble to the act of 1601 were classified into four categories in a leading English Case in 1891. In this case also known as the Pemsel’s Case Trusts were categorized as those formed for the relief of poverty, for the advancement of education, for the advancement of religion and for other purposes, beneficial to the community and not included in the first three categories. Many Trusts and foundations assist the cause of charity. Trusts for the benefit of the blind and deaf people of UK were formed along these lines and they render special services to these people (Charitable trusts, n.d). A Will Trust is one in which no inheritance tax has to be paid and in which all the possessions are transferred to the surviving spouse. The Will Trust comprises two separate wills, with a direction that the first partner to die may leave money up to the tax exempted limit to the surviving partner and subsequently to the offspring. The surviving partner is appointed as the trustee and this enables in deciding the manner of disposal and use of the inherited assets. On the demise of the surviving partner, the assets remaining in the Trust will be transferred to the children without any inheritance tax (How a family ‘Will Trust’ works, n.d). Trusts constitute very beneficial tax planning tools. The act of giving property to trustees, after making certain that neither the settlors nor their spouses benefit determines the settlors inheritance tax position for that particular gift. Gifts made to a life interest trust are deemed to be potentially exempt transfers (PETs) and whenever the settlor lives for seven years from the date of that gift, no inheritance tax needs to be paid. Transferring of assets to trustees is considered to be a disposal for the purpose of capital gains tax; however in the majority of such cases any capital gain that arises can be deferred. Any gains that are made within the trust are charged at 34%, which is 6% less than what a higher rate taxpayer would be charged. Income arising from Life interest Trusts are taxed at 10% for dividends, 20% for interest earned and 22% for other income earned. Discretionary Trusts, which encompass accumulation and maintenance Trusts during the discretionary period have to pay tax at 25% on dividends and 34% on other income earned. In respect of income paid to life interest beneficiaries there will be an appropriate tax credit available such that these beneficiaries will be treated as if they received the income as the owners of the assets. Whenever, income is released at the trustees discretion from discretionary Trusts, the beneficiaries will receive the income net of 34% tax. These tax payers will be eligible to obtain refunds for tax amount overpaid. In case they have paid tax at 40%, they are eligible for credit for the 34% paid. Along with, this Inheritance tax may also have to be considered during the trust period. Valuation of life interest Trusts is performed on the death of the income beneficiary. In order to determine the rate of tax payable, the value of the trust assets is combined with his personal assets. From the assets held by them the trustees have to pay the trust share of the inheritance tax. Discretionary Trusts are charged once in ten years, hence by careful planning this value can often be maintained under the taxable limit. In case this is neither possible nor desirable it is to be taken into consideration that the maximum tax rate charged is 6% of the value of the assets in the trust every 10 years. There may alternatively be a charge if assets are apportioned out of the trust before a 10 year charge is due. It is necessary to note that accumulation and maintenance Trusts do not pay inheritance tax if the funds are released to the nominated beneficiaries (Use of Trusts, n.d). Some of the major problems of the Victorian era were that of the fortune-hunting husband and the spendthrift heir. Trusts became popular as legal devices in the 19th century, to thwart these problems. Till such time as the passage of Married Womens Property Acts, a husband gained complete ownership of any assets that his wife brought into the marriage. This was especially true of countries governed by the English common law. Under these circumstances, the wifes family could provide her with an income, while protecting the principal, by putting money into a trust. The trustee a third party was obligated to act in the interests of the beneficiary, and thus would prevent a husband from spending the major portion of his wifes money. The problem of the spendthrift heir was addressed by holding assets in trust until the heir had sown his wild oats and settled down. This on many occasions saved the estate from the ruinous effect engendered by the racetrack, the card table and women of ill fame. However, many unscrupulous persons made themselves trustees of suitably designed trusts to retain control of assets while being immune to one’s creditors. This malpractice became the dominant use of Trusts. Over a period of time, creditors gained some protection from this misuse. Paradoxically the other group who are cheated by Trusts consists of married women. Trusts are largely protected from property settlements under the Family Law Act. “A husband who anticipates divorce well in advance can put himself in a very strong position by transferring as much as possible of the couples joint wealth into a trust under his own control” (John Quiggin, 16th April 1997). In Living Trusts a person transfers ownership of his assets to a trust and then selects a trustee to administer it. One’s family members can be benefited enormously by means of a correctly prepared and funded living trust because it avoids probate as the assets are technically owned by the trust. (Holetzky, Sherry. 2006). From the foregoing we conclude that Trusts are highly beneficial in as much as that there is a tax benefit and a secured future plan for close relatives and disabled persons. Certain types of Trusts like Investments Trusts, Testamentary Trusts, Unit Investment Trusts, Family Trusts, Educational Trusts, etc, are extremely useful and profitable to the community. A Trust permits a person to plan the future of his children even after his death. However, there a number of drawbacks to these Trusts, for example if a trustee is dishonest and unaccountable then the beneficiaries will be swindled. Hence, the settlor has to exercise extreme caution and discretion whilst appointing a trustee. To summarize it can be surmised that the old, infirm, mentally and physically handicapped, penurious persons, etc, are to a large extent dependent on these Trusts for their survival. References Trusts – property law, n.d. Microsoft Encarta Reference Library 2004 Use of Trusts, http://www.goldwyns.co.uk/information/Trusts.html Equity and the Law of Trusts, n.d. http:// www.aber.ac.uk /modules /future/LA32920.html John Qiggin, A relationship taken on trust, Australian Financial Review, 16th April 1997, retrieved from http://www.uq.edu.au/economics/johnquiggin /news97 /trust9704.html Holetzky, Sherry. (2006). What is a Living Trust? Retrieved from wiseGEEK: http://www.w3.org/TR/REC-html40 Badenhop, Suzanne. (n.d). Estate Planning: Trusts, Cooperative Extension Service, University of Kentucky, College of Agriculture. Trust law non – USA, Wikipedia, retrieved from http://www.gnu.org /copyleft /fdl.html Tax haven, Wikipedia, retrieved from http://www.gnu.org/copyleft/fdl.html Eun Kim, Seok. (2005), The Role of Trust in the Modern Administrative State, Sage Publications, Administration & Society, retrieved from http://online.sagepub.com Ambulances. (February 2006), retrieved from http://www.gnu.org/copyleft/fdl.html Charitable trusts. (n.d), Deafblind UK, retrieved from http://www.deafblind.org.uk /text/helpingus/trusts.html How a family ‘Will Trust’ works. (n.d), UK Will & Trust Ltd, retrieved from http://www.avoidinginheritancetax.com/how_it_works.htm Read More