Formation of Trusts
Last Updated on Saturday, 19 September 2009 16:04
Trusts in Cyprus are not required to be registered.
The standard private trust needs
- property
- a trustee
- a beneficiary, and
to have the trustee under an obligation (known as a fiduciary obligation) to act in the best interests of the beneficiaries with respect to the trust property.
It is possible for one person to be the settlor, the trustee and a beneficiary of the one trust. However, it is unusual for a person to be more than two of these. If a person is trustee and the only beneficiary, there is no trust. The person would be holding both the equitable and legal title to the property which means that there is complete ownership (and no trust relationship ).
Property of a Trust
Trust property is defined as
"All property real or personal, legal or equitable, at home or abroad and whether in possession or action, remainder or reversion, and whether vested or contingent, may be made the subject of a Trust unless the policy of the law or some statutory enactment has made it inalienable"
Almost any property that can be legally transferred may be the subject of a trust. It is not possible, however, to create a binding trust over certain types of future property, generally referred to as expectancies or possibilities. Expectancies are things which do not presently exist, but which may be acquired in the future. That is, they are property which the settlor is yet to acquire or expects to acquire in the future. For example, a settlor cannot create a trust where the trust property consists of damages they expect to receive from pending litigation.
A trustee is generally appointed by the settlor of the trust. There are cases where a trustee may be appointed by a court. An example of a court appointment would be where a trustee who was previously appointed by the settlor dies. A person does not have to accept the position of trustee. If they have not done anything which could be taken as implied acceptance of the appointment as trustee, they are free to disclaim the trust. If the person disclaims the trust they automatically disclaim ownership of the trust property. Once a person has signified acceptance of the office of trustee, they are bound by the terms of the trust and can retire from the trust only when the trust so allows or in other special circumstances (by application to a court).
If the trust has been created in writing, the powers of the trustee are those set out in the written document which is called the trust deed. Such powers may include the power to carry on a business, the power to repair the trust property and so on. Where there is no trust deed or the powers in the trust deed are inadequate, or silent on a particular matter, the relevant Trust Law will apply.
Trustees are also under an obligation to deal with the trust property for the benefit of the beneficiaries. These obligations are known as fiduciary duties. This relationship owed by the trustee to the beneficiaries is the essence of a trust. Broadly speaking, a trustee is in breach of these fiduciary duties if they act for their own benefit with respect to the trust property or if they make a personal gain as a result of being in the position of trustee. The rationale behind such a rule is to prevent the trustee placing themselves in a position of conflict with respect to their position as trustee.
Trustees who act in breach of trust or in breach of their fiduciary duties are generally liable to the beneficiaries for any loss the beneficiaries suffered as a result. That is, the trustee must compensate the beneficiaries for losses caused by a breach.
Furthermore, trustees must account to the beneficiaries for any personal gain made as a consequence of a breach. Beneficiaries acting unanimously can authorise a breach of trust by the trustees provided they have legal capacity and have been furnished with all of the material facts.
Trustees are entitled to be reimbursed out of the trust property for any moneys properly paid by them in the course of their duties as trustee. If the trust funds are exhausted the trustee may be personally liable, although there are circumstances where the trustee can recover from the beneficiaries. Further rights of trustees can be included in the trust deed.
A beneficiary is the person for whose benefit the trust property is held by the trustee. Beneficiaries can include persons actually in existence, unborn persons, public or charitable institutions, companies and other trusts.
A trustee may be a beneficiary, but cannot be the sole beneficiary.
Beneficiaries of a trust can benefit in different ways depending on the terms of the trust. They may be entitled to
- the whole or part of the income, but not the corpus (capital), for example, a life tenant (an income beneficiary), or
- the whole or part of the corpus, but not the income of the estate, for example, a legatee under a will (a capital beneficiary), or
- the whole or part of the income and also the corpus. Example
Where there is only one beneficiary under a trust and that beneficiary has full contractual ability (is over 18 and of sound mind) and is absolutely entitled to the property, the beneficiary can extinguish the trust and require the property to be fully distributed. This is the case even if the trust states that the property is to be held on trust until the beneficiary reaches a certain age or a certain event occurs.
Similarly, if there is more than one beneficiary and one of them is absolutely entitled to a particular identifiable piece of property under the trust, that beneficiary can demand the distribution of that particular piece of trust property.
To extinguish the trust the beneficiaries must:
- be unanimous in their decision to wind up the trust
- have full contractual ability, and
- be absolutely entitled to the whole of the trust property between them.
They would then receive the trust property in their respective shares.
Classes of Trusts
A trust can be classified as an express trust, an implied trust or a constructive trust.
Express trusts (also known as direct trusts)
An express trust is a trust that is deliberately created by the settlor. The trust will usually be constituted in one of two ways.
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By transfer of the property (the subject of the trust) to a trustee to hold or to apply the property according to the terms of the trust. The trust may be created inter vivos (that is, while the settlor is still alive) or by will or codicil.
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On declaration by the person who holds or owns property that they are a trustee for the benefit of another.
The creation of an express trust can be made orally or in writing.
Implied Trusts (also known as resulting trusts)
An implied trust is a trust that is implied from the presumed intention of the owner of property. That is, where it can be inferred that it was the intention of the transferor of property that the person in whom they have vested it should not hold it for their own benefit. Whether there is an implied trust is to be determined objectively from the facts and circumstances of the case.
Constructive Trusts
These are trusts which are created by the Court without any reference to the intention of the parties, either express or implied. A court imposes a constructive trust when it would be inequitable for the holder of property to be permitted to hold it for their own benefit.
The Court usually imposes this type of trust in order to facilitate an equitable resolution between parties.
