Though this entry is to do with a trustworthy subject it is not about the sort of trust that one individual may have for another. Instead it deals with 'trusts' - legal agreements between a number of parties that involve monetary or property dealings.

A trust is in some ways similar to a conventional Shakespearian drama that favours convention and predictability. There is the same collection of people involved in every trust, the stock characters if you will, and normally, unless there's something fraudulent going on, a trust will run smoothly and achieve the outcome intended by the person who set it up in the first place. The identities and roles played by the main characters will be revealed in this entry along with the essential tropes and characteristics of a trust.

Definition of a Trust¹

From Underhill and Hayton, Law Relating to Trusts and Trustees

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries), of whom he may be himself one, and any one of whom may enforce the obligation. Any act or neglect on the part of trustee which is not authorised or excused by the terms of the trust instrument, or by law, is called a breach of trust. The control of the trustee, may, under the terms of a trust, be subject to fiduciary ² or personal powers vested in another person, who may sometimes be expressly designated a "protector".

So what does all this mean? Well the easiest way to explain it is with an example. You've probably heard of a trust fund; this may be an amount of money or property which an individual, for instance a wealthy businessman, puts into a trust for the benefit of someone, for instance his family. Once he creates the trust he gives up ownership in and rights over the trust fund or property to the trustee, normally a company, who effectively looks after the trust for the benefit of the family. This company may, on the terms of the 'trust instrument' (the agreement signed when the trust is formed), invest or otherwise manage the trust, increasing its value for the benefit of the family.

Dramatis Personae

Those characters that are common to almost all trusts.

The Settlor

This is the person who sets up the trust in the first place. In our example the settlor is played by the wealthy businessman; it is he who transfers the funds or property to the trustees for them to hold upon the terms of the trust. These terms are set out in what is known as the 'trust instrument' which must be adhered to by the trustees. If they fail to do so they can be taken to court for breach of trust.

In theory, once the trust has been created, the role of the settlor disappears, though in practice a settlor may be reluctant to simply be ousted from the matter altogether and may instead have made express provision in the trust instrument to reserve a certain influence over the trustees in the way that they administer the trust. However, this is risky business because if the powers reserved by the settlor are large then there is a risk that the trust may be set aside as a sham.

The Trustee(s)

These are appointed by the settlor and are usually a company, say a large banking firm, who deal with trusts professionally. A benefit to using a large company like a bank is that, on top of dealing in trusts, they can provide banking services, investment advice, professional administration of the trust fund, company management and accounting services at the same time. This is popularly known as 'one-stop shopping'. However, since the word 'trustee' means one who can be trusted, in law virtually anyone who is capable of owning legal interest in property may be assigned to the role of trustee as long as they are sui juris³.

The trustees receive legal ownership (or title) to the trust property when the trust is created, and from then on are obliged to manage the trust in accordance with the settlor's wishes as expressed in the trust instrument. Failure to do so can result in legal action and sometimes even the removal or replacement of trustees.

The Beneficiaries

Those for whose benefit the trust fund was created; in our example these are the family of the wealthy businessman. Beneficiaries may be named and identified in the trust instrument or described by reference to a specific class of beneficiaries, as is often the case with charitable trusts set up to help unfortunate groups of people.

A beneficiary has a personal right to enforce the terms of the trust and make sure that they are being adhered to by the trustee, though they have no right to influence how the trust should be administered by the trustees as long as they are operating within the terms of trust. So if the banking firm were to invest some of the wealthy businessman's trust fund in, say, British Airways, the family can't complain because this doesn't go against the terms of trust. The bank is investing with the best interests of the family at heart in an attempt to increase the value of the trust. If however the banking firm were to spend the trust fund on something else, say, golf clubs for the bank directors, then this not only goes against the terms of trust but also probably against a lot of laws, and the family are able to enforce the terms of trust against the bank to prevent this, or, in some cases, to give the bank the boot altogether in favour of a different trustee.

The Protector

Particularly in relation to offshore trusts, a fourth character may take part in the drama - the protector. Virtually anyone may be assigned this role, though usually he will be a trusted friend or professional adviser of the settlor. As the name suggests, his role is broadly to protect the trust assets on behalf of the beneficiaries and ensure that the trustee complies with the terms of the trust. So if the bank did try to buy new golf clubs then the protector would step in and stop them. The protector however is not a trustee and has no legal title to the trust assets. His role is purely supervisional, and the nature and extent of his powers, should the settlor want a protector, are set out in the trust instrument.

A protector may have powers to veto decisions made by the trustees (so maybe Virgin instead of British Airways if he thinks this is a more prudent investment), and may also have the power to remove trustees and appoint new ones should he see fit to do so.

Trusts are a very common part of the legal traffic of today, literally thousands are established each year all over the world. Occasionally some will make news headlines because of fraud or some other such misdemeanour, but the majority are carried through to completion without a hitch.