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NATIONAL LAW INSTITUTE UNIVERSITY BHOPAL

VIII TRIMESTER

TRANSFER OF PROPERTY II Project on: Voluntary trust, Illusionary trust and Trust for value

Submitted Submitted by: Prof. Sushma Sharma Ahirwar NLIU, Bhopal B.A.LLB 69

to:

Sourabh P.

2009

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TABLE OF CONTENTS
1. INTRODUCTION………………. ……………………………03 2. VOLUNTARY TRUST……………………………………….04 3. ILLUSIONARY TRUST……………………………………. 10 4. TRUST FOR VALUE………………………………………. 13 5. CONCLUSION………………………………………… ……..18

A trust conventionally arises when property is transferred by one party to be held by another party for the benefit of a third party. although it is also possible for a legal owner to create a trust of property without transferring it to anyone else. who transfers some or all of his property to a trustee (archaically known. A trust is created by a settlor (archaically known. as the feoffor to uses). who holds that trust property (or trust corpus) for the benefit of the beneficiaries (archaically known as the cestui que use..19 1. tangible or intangible) is held by one party for the benefit of another. the settlor and trustee are the same person. The trustee has legal title to the trust property.3 6. as the feoffee to uses). but the beneficiaries have equitable title to the trust property (separation of control and 3 . simply by declaring that the property will henceforth be held for the benefit of the beneficiary. INTRODUCTION In common law legal systems. in the context of trusts of land. a trust is a relationship whereby property (real or personal. in the context of land. BIBLIOGRAPHY……………………………………… ……. or cestui que trust). In the case of the self-declared trust.

the trustor retains legal title of the gift transferred to the beneficiary. or an artificial person (such as a company or a public body). grantor. The terms of the trust must specify what property is to be transferred into the trust (certainty of subject-matter). and who the beneficiaries will be of that trust (certainty of objects). powers to vary the interests of the beneficiaries. The trust is also governed by local law. even though the beneficiary has actual title and possession. who are the "beneficial" owners of the trust property. except in the case of land.) The trust is governed by the terms under which it was created. In the United States. The trustee is obliged to administer the trust in accordance with both the terms of the trust and the governing law. The terms of the trust are usually written down in a trust instrument or deed but. it is not necessary for them to be written down to be legally binding. A voluntary trust is also defined as an obligation arising out of a personal confidence . and is also known as an inter vivos trust. There may be a single beneficiary or multiple beneficiaries. In some other jurisdictions.ownership). The trustee owes a fiduciary duty to the beneficiaries. and there may be a single trustee or multiple co-trustees. the settlor may also be known as the founder. in England. donor or creator. the settlor is also called the trustor. It may also set out the detailed powers and duties of the trustees (such as powers of investment. The settlor may himself be a beneficiary. and powers to appointment new trustees). 2. In a voluntary trust. (Note: A trustee may be either a natural person. VOLUNTARY TRUSTS A type of living trust that is created during the lifetime of the trustor.

"between the living. and actual delivery and acceptance by the donee. 5 . as opposed to a Testamentary Trust created by a will. An Inter vivos trust is often used synonymously with the more common term Living trust. An inter vivos gift is distinguishable from a gift causa mortis. which is made in expectation of impending death. and voluntarily accepted by. one individual for the benefit of another. Also called living trust. but an Inter vivos trust. the recipient of the trust gives nothing in exchange for the trust but receives it as a pure gift." a gift of property from one living person to another. Intervivos trust From the Latin. No consideration is made in a voluntary trust. by definition. there must be a clear manifestation of the giver's intent to release to the donee the object of the gift. which are trusts made in favor of purchasers and mortgagees. In order for an inter vivos gift to be complete. In a voluntary trust. This distinguishes voluntary trusts from trusts for value. includes both revocable and irrevocable trust.5 reposed in. A phrase used to describe a gift that is made during the donor's lifetime.

Living trusts do avoid probate if properly funded during the grantor's lifetime. So. On the other hand. depending upon the specific objectives that one is trying to achieve. Because testamentary trusts are created under a Last Will and Testament.and ." since the grantor is the only party to the trust.1). by definition. Of course. However. which can be either a trust agreement or a declaration of trust." A testamentary trust. then the trust instrument is simply called a "declaration of trust. For example. LIVING TRUST vs TESTAMENTARY TRUST One of the most basic classifications of trusts is whether they become effective during the grantor's lifetime or whether they become effective only after the grantor's death. if the grantor is the sole trustee. the Last Will and Testament must be admitted to probate before it . testamentary trusts do not avoid probate because they become effective only after the grantor's death. a trust that is created under a Last Will and Testament is called a "testamentary trust. can only become effective after the testator's death because the Last Will and Testament does not become effective until that event occurs. Even then." The term "inter-vivos" is a Latin term meaning "during life. except informal trusts such as our babysitting trust discussed above." Most living trusts. are generally created by a written instrument. there are more formalities to creating . there are differences that may be significant in certain circumstances.and the testamentary trust created therein . If the trust has a trustee other than the grantor. A trust that becomes effective during the grantor's lifetime is called a "living trust" or an "inter-vivos trust. they both have the four basic components discussed above. what's the significance of a living trust versus a testamentary trust? Other than the fact that a living trust becomes effective during the creator's lifetime and a testamentary trust becomes effective only after the creator's death.becomes effective. then the trust instrument is called a "trust agreement" because both the grantor and the trustee must agree to the terms of the trust.

also called a Revocable Trust or Living Trust. and typically you can't make changes without the beneficiary's consent. if you have second thoughts about a provision in the trust or change your mind about a trust beneficiary or fiduciary. whereas a testamentary trust is part of a Last Will and Testament. Living trusts can be either "revocable" or "irrevocable. This means that a revocable trust offers no creditor protection if you're sued and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes. Costs can also be a factor because a living trust requires a separate document. Since Revocable Living Trusts are so flexible. So why use a Revocable Living Trust as 7 . the assets in it are no longer yours. Or. But the appreciated assets in the trust aren't subject to estate taxes. and you are free to revoke or change the terms of the trust at any time.7 changing . With irrevocable trusts. then you can modify the terms of the trust through what's called a trust amendment. then you can either revoke the entire agreement or change the entire contents through an amendment and restatement. why aren’t all trusts revocable? The down side to a revocable trust is that assets funded into the trust will still be considered your own personal assets for creditor and estate tax purposes. Testamentary trusts are also more public than a living trust because a testamentary trust is part of a Last Will and Testament.REVOCABLE vs IRRECOVABLE Revocable trusts allow you to retain control of all the assets in the trust. In other words. a). is simply a type of trust that can be changed at any time. if you decide that you don’t like anything about the trust at all.a testamentary trust than a living trust. Revocable Living Trusts A Revocable Living Trust. which is a public document." 2) .

Estate Tax Reduction . 2. Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals: 1). or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries. To avoid probate .Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside of the probate process. This will keep the details about your assets and who you've decided to leave your estate to a private family matter.By avoiding probate with a Revocable Living Trust.part of your estate plan? For three reasons: 1. such as with the use of AB Trusts or ABC Trusts. To protect the privacy of your property and beneficiaries after you die .it becomes a public court record that anyone can read. b). or a revocable trust that by its design becomes irrevocable after the Trustmaker dies. With the typical Revocable Living Trust. your trust agreement won't become a public record for all the world to see and read. 3. To plan for mental disability . Contrast this with a Last Will and Testament that's been admitted to probate . Irrevocable Trusts An irrevocable trust is simply a type of trust that can't be changed after the agreement has been signed. it will become irrevocable when the Trustmaker dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse.Assets held in the name of a Revocable Living Trust at the time a person becomes mentally incapacitated can be managed by their Disability Trustee instead of by a courtsupervised guardian or conservator.

thus. This works in the same way that an irrevocable trust can be used to reduce estate taxes . can make full use of the deceased spouse's exemption from estate taxes through the funding of the B Trust with property valued at or below the estate tax exemption. AB Trusts that are created for the benefit of a surviving spouse are irrevocable and. and anything over $5 million will go into the A Trust. Then. As mentioned above. the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies. the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. the Trustmaker is giving up complete control over. and access to. so in Massachusetts the first $1 million will go into the B Trust. therefore. are commonly used to remove the value of property from a person’s estate so that the property can't be taxed when the person dies. if the person no longer owns the assets. 2). then next $4 million will go into the C Trust. then they can't be taxed when the person later dies.9 Irrevocable trusts. as compared with the current federal $5 million exemption. In other words. For example. in Massachusetts the state estate tax exemption is only $1 million. Asset Protection Another common use for an irrevocable trust is to provide asset protection for the Trustmaker and the Trustmaker's family. the trust assets and. ABC Trusts can be used by married couples who live in some of the states that collect a state estate tax and the state estate tax exemption is less than the federal estate tax exemption. Thus. if the value of the deceased spouse's estate exceeds the estate tax exemption. the trust assets can't be reached by a creditor of the 9 . such as Irrevocable Life Insurance Trusts.by placing assets into an irrevocable trust.

3). as mentioned above. the Trustmaker's family can be the beneficiaries of the irrevocable trust. offer creditor protection and allow the Trustmaker to be a trust beneficiary. In addition. which will either be a will or a trust deed. such as through a Charitable Remainder Trust or a Charitable Lead Trust. thereby still providing the family with financial support.Trustmaker. Or. over their assets. If the Trustmaker makes the initial transfer of assets into a charitable trust while still alive. The intention of the parties to create the trust must be shown clearly by their language or conduct. then the Trustmaker will receive a charitable income tax deduction in the year of the transfer is made. and Tennessee. Almost all trusts dealt with in the trust industry are of this type. either now. then the Trustmaker’s estate will receive a charitable estate tax deduction. if the initial transfer of assets into a charitable trust doesn't occur until after the Trustmaker's death. or upon his or her later death. including Alaska. Neveda. Charitable Estate Planning Another common use of an irrevocable trust is to accomplish charitable estate planning. . Delaware. Express trust. An express trust arises where a settlor deliberately and consciously decides to create a trust. They contrast with resulting and constructive trusts. There are also irrevocable trusts called Self-Settled Trusts or Domestic Asset Protection Trusts that in some states. However. In these cases this will be achieved by signing a trust instrument. but outside of the reach of creditors. the various irrevocable trusts that can be created for the benefit of the Trustmaker's surviving spouse or other beneficiaries after the Trustmaker of a Revocable Living Trust dies can be designed to offer asset protection for the trust beneficiaries.

11 For an express trust to exist. Discretionary trust: The trustees may pay out income to whichever of the beneficiaries they. 5. in the reasonable exercise of their discretion. 11 . even to add new beneficiaries. Protective trusts and Spendthrift trusts It can be established to provide an income for persons who cannot be trusted with it. They will normally also have a power to pay out capital. The trustees may have power to pay capital as well as income to the life tenant. a widow/er) during their lifetime and thereafter is transferred to another person (who may take absolutely or a second life interest according to the terms of the trust. 4. alternatively they may have rights to transfer ("appoint") property to other beneficiaries ahead of their entitlement. Charitable trusts Trusts for a purpose (as opposed to for individuals) are generally invalid at common law however charities are an exception. Bare trust: Property transferred to another to hold e. for a third person absolutely. They may have extensive powers. Persons wishing to pass money to causes not recognised as charitable may instead make gifts to established companies or associations or may establish trusts or trust-like structures in jurisdictions which do not restrict non-charitable purpose trusts. in the second case a third beneficiary would come into play). there must be certainty to the objects of the trust and the trust property. 2. May be of use where property is to be held and invested on behalf of a minor child or mentally incapacitated person. 1. think fit. Life Interest trust: The income from property transferred is paid to one person "the life tenant" (e.g.g. but such powers may normally only be exercised bona fide in the interests of the beneficiaries as a whole. 3.

3. A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular purpose. The name and trust comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970). no trust exists. although the underlying principles can be traced back further. Any inappropriately spent money can then be traced. express trusts. where the apparent beneficiary (the moneylender. The problems with this idea are that the facts in Quistclose are not those of a normal illusory trust. In illusory trusts the settlor retains so much control that. and returned to the creditors. constructive trusts or. for example) takes no active role. illusory trusts. and is revocable at any time. as Lord Millett said in Twinsectra Ltd v Yardley. this is that the Quistclose trust is an "illusory trust". it is held on trust for the creditor. but is not in fact so because of powers retained in the settlor. express or constructive in nature. Quistclose trusts have variously been considered resulting. Quistclose trusts in English law-Illusionary trust Illusory trust refers to an arrangement that gives the outward impression of being a trust. The apparent trustee has no power to deal with the property of the trust. . and Millett failed to consider the mutual intention of the parties and any underlying contracts. This trust is created by the intention of either party. An alternate explanation is given by Lord Millett in Twinsectra Ltd v Yardley. There has been much academic debate over the classification of Quistclose trusts in existing trusts law: whether they are resulting trusts. in effect. In the event that the debtor uses the money for any other purpose.

with no need for this interest to reverse if the purpose of the loan fails. when the trust's purpose fails. Resulting trust Lord Wilberforce. but held that the lender retains the interest throughout the transaction. in Quistclose. or already be insolvent and the subject of claims by creditors. the complete transfer of money should end the lender's equitable interest. The borrower may already have spent the money. it is not a resulting trust at all. the interest in the money first goes from the lender to the borrower (the primary trust) and then. as explained by Alastair Hudson. Doubts have also been raised about the Twinsectra case in general. there is no remedy. with the borrower holding it on resulting trust for him. if the money is not available when the claim is brought. in that the facts of the case did not create a 13 . Under Wilberforce's two-stage trust. University of London. The problem with Wilberforce's analysis. Another flaw with both Wilberforce's and Millett's explanations is that if the interest is retained by the lender from the outset of the contract. but the creation of a new one. reverses (the secondary trust). It could be argued that the creation of a Quistclose trust is not based on the recovery of the original interest. Professor of Equity and Law at Queen Mary. it may come too late. In Twinsectra Lord Millett also explained that a Quistclose trust is a resulting trust. stated that the contract gives the moneylender an equitable interest in the loan. is that because the resulting trust only comes into existence after the misuse of the loan.13 1.

in that a loan agreement was made where the borrower's explicitly agreed to follow guidelines on the use of the money. This trust would be created as soon as the contract is agreed. and that the courts would require those explicit terms to be part of the contract. In Swiss Bank Corporation v Lloyds Bank Ltd. applying Lord Wrenbury's judgment in Palmer v Carey. The borrower would be a trustee. because it would offer the simplest protection of the money by not requiring the contract to be breached for the trust to come into existence. If the contract included a provision that the money was to only be used for certain purposes. it could be interpreted that this money is held on trust until it is used for those purposes. In . Two problems with this are that it has not been upheld by the English courts. Express trust The second possibility is that Quistclose trusts are express trusts. something they failed to do. 3. The Court of Appeal and the House of Lords refused to constitute any kind of trust or return the money however.when he said that "such a stipulation will not amount to an equitable assignment". this causes problems with applying Millett's analysis. which are created when the future trustee uses the money in an "unconscionable" manner.Constructive trust The third main theory is that Quistclose trusts could be constructive trusts.stereotypical Quistclose trust. with the normal requirement for it to be validly created. 2. the courts considered a situation similar to Quistclose. and so void. using the money for any other purpose would be in violation of the trustee's duties. Hudson considers it the most advantageous however.

the device also found usefulness to control property "beyond the grave". the Quistclose trust principle was given to be that "equity fastens of the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient's own purposes. Gradually. Asset management Trusts are generally unique in that they can provide comprehensive asset management for multiple family generations over great spans of time. no constructive trust could be created until the money is misused. mostly during medieval times when a lord left to fight in battle. although the so-called Rule Against Perpetuities limited this power 1). 4. it could be that if the lender claims an equitable interest in the money after it is used for an incorrect purpose. TRUST FOR VALUE The purposes and uses of trusts historically had to do with management of property in absence of owner. which may be too late for an effective remedy. something which other estate planning devices cannot completely replicate.15 Quistclose situations. this reference to "conscience" could make Quistclose trusts constructive in nature. this could be "unconscionable". In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd. Trusts can hold title to a virtually infinite number and type of disparate assets. so that such person will not be permitted to treat the property as his own or to use it for other than the stated purpose". However. from publicly traded 15 .

real estate and business management. insurance claim processing. Unlike other methods of transferring title. The third-party management of property for the benefit of another is especially valuable for persons who have some form of incapacity. to even collectibles and tangible personal property. Although probate avoidance is certainly a consideration in the use of a "living trust". the trustees' powers over the assets can be incredibly broad and flexible and do not require the supervisory eye of a court (and the attendant additional cost such oversight can create). Particularly in cases where a corporate trustee is used. to real estate. there are many other estate planning techniques which also "avoid" probate. and financial planning just to name a few. tax and legal assistance. such alternatives do not provide the kind of consolidated asset . bill paying. Many create trusts to protect family members from themselves. In addition. to illiquid closely held business interests. This can extend for multiple generations or even. infirmity or are simply unwise with the use of money. in perpetuity (as some states have permitted in some instances the creation of trusts that can last beyond the Rule Against Perpetuities). the trust allows continued management of the assets. the grantor and subsequent beneficiaries receive the benefits of a vast array of financial services – portfolio management. Revocable living trusts were often touted and marketed as valuable solely because of their ability to "avoid probate" and the costs and complications that surrounded it. Typically however. despite the infirmity or even death of the owner – allowing them to specify to successor trustees exactly how to manage the property and use it for the future beneficiaries. in some jurisdictions.securities.

2). The credit shelter trust The credit shelter trust is by far the most common device used to extend the $2 million applicable credit ($3.5 million in 2009) for married couples. jointly held. The terms of the credit shelter trust provide that upon the first spouse's death. in 2009. 4). in 2008. Naturally. Below is a brief summary of certain specific techniques that employ trusts as the vehicle for achieving such savings. say. individuals that own interests in any property (individually owned. Thus an individual would leave. In 2010 there is no federal estate tax unless Congress acts. Estate tax avoidance Trusts are often created pursuant to an estate plan for wealthy individuals to avoid the onerous effects of the federal estate tax. In this technique. this rate is a huge inducement among many with substantial wealth to use various estate planning devices to reduce or eliminate the effect of the tax for their family. or otherwise) which exceeds a fair market value of $2 million is subject to the estate tax at death. the amount is $3. Charitable remainder / Lead trusts 17 . and leave the remaining corpus to his children at her death. An estate that exceeds that value will pay tax on that excess at a rate of 45% under current law. 3).5 million. give his widow the net income from his trust. Although trusts are certainly not for everyone in the context of estate planning. even persons with modest net worths often find the living trust an ideal planning tool. Under current federal estate tax law.17 management that a trust can. the other is left an amount in trust for the benefit of the surviving spouse up to the current federal exemption equivalent to the federal estate tax. $2 million in trust for his wife (keep the $2 million out of her estate). each spouse creates a trust and divides their assets (usually evenly) between the two trusts.

based on a set percentage provided for under the trust instrument and under IRS regulations. MIf the trust meets the requirements of the IRS regulations. If the trust owns insurance on the life of a married person.Trusts are often created as a way to contribute to a charity and retain certain benefits for oneself or another family member. This can be real estate. The annuity can be set for a certain term of years or can last for the lifetime of individual beneficiary(ies). this "giving away" of assets often causes many to forgo this technique. In many cases. Then. when properly structured. when he transfers the property into the CRUT irrevocably. Moreover. preferring to leave the assets directly to children regardless of the potential tax consequences it may create. the CRUT can provide enough tax benefits to beneficiaries through the use of the annuity interest to justify the "giving away" of the asset to charity. highly appreciated stock or a business interest with a low (or zero) tax basis. A common technique is to create a charitable remainder unitrust ("CRUT"). even if he himself receive the individual annuity interest in the trust. Upon the death of the insured. the Trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. the value of that property is out of his estate for estate tax purposes as well. If the trust owns "second to die" or survivorship insurance which . the grantor of the trust will receive a charitable income tax deduction for the calculated future value of the gift. after the annuity term expires. the non-insured spouse and children are often beneficiaries of the insurance trust. typically the asset is sold and invested in a more diversified investment portfolio that can provide income or liquid securities to provide an "annuity" to one or two individual persons. Once the trust is funded. 6). this irrevocable trusts are funded with assets which often are highly appreciated. the principal of the trust goes outright to a charity or charities the grantor named in the trust document. meaning their cost basis for capital gains tax purposes is very low relative to their current fair market value. Typically. non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. Life insurance trust : A life insurance trust is an irrevocable. However.

Unit trusts are open-ended investments. the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net 19 . 3. The fund manager runs the trust for profit. Ireland. The distributors allow the unitholders to transact in the fund manager's unit trusts 5. The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets. South Africa. The registrars are usually engaged by the fund manager and generally acts as a middleman between the fund manager and various other stakeholders. unit trusts offer access to a wide range of securities. Singapore. Malaysia and the UK. 7). Open-Ended: Unit trusts are open-ended. Structure 1. 2. The unitholders have the rights to the trust assets. therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Found in Australia. Unit trust A unit trust is a form of collective investment constituted under a trust deed. the Isle of Man. Jersey. Each fund has a specified investment objective to determine the management aims and limitations. New Zealand. 4. only the children would be beneficiaries of the insurance trust.19 only pays when both spouses are deceased.

Ways To Invest Units can be bought direct from the fund manager. new units are created to match the prevailing unit buying price.asset value. held through a nominee account or through a PEP (Personal Equity Plan ) or ISA (Individual Savings Account). Each time money is invested. Unit trust trades do not have any commission. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. . The bid–offer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets. The trading profits based on the difference between these two sets of prices are known as the box profits. This difference is known as the bid–offer spread. each time units are redeemed the assets sold match the prevailing unit selling price. Subject to regulatory rules these prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The creation price and cancellation price do not always correspond with the offer and bid price. Bid–Offer Spread The trust manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. Mechanics A unit is created when money is invested and cancelled when money is divested.

for example) takes no active role. and is revocable at any time. the recipient of the trust gives nothing in exchange for the trust but receives it as a pure gift. where the apparent beneficiary (the moneylender. and voluntarily accepted by. which are trusts made in favor of purchasers and mortgagees. No consideration is made in a voluntary trust. one individual for the benefit of another. This trust is created by the intention of either party. 21 .21 5. In a voluntary trust. This distinguishes voluntary trusts from trusts for value. and is also known as an inter vivos trust. A voluntary trust is also defined as an obligation arising out of a personal confidence reposed in. In a voluntary trust. CONCLUSION:A type of living trust that is created during the lifetime of the trustor. Quistclose trust is an "illusory trust". the trustor retains legal title of the gift transferred to the beneficiary. express or constructive in nature. Quistclose trusts have variously been considered resulting. even though the beneficiary has actual title and possession.

yale.com/faq.legifrance.fr/affichTexte. http://www.gouv.law.britannica.do? cidTexte=JORFTEXT000000821047&dateTexte 4. http://www.edu/documents/pdf/Faculty/The_Functions_of_Trust_Law.BIBLIOGRAPHY Websites links 1. http://scottrosenberglaw.7.http://www.com/ebc/article-9061389 2.html#Trusts .pdf 3.

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