Definition of a “Trust”

Most superannuation funds are based on the legal concept of a “trust”.

The trust is an institution developed by equity with its own peculiar characteristics. A trust, unlike a company, is not a juristic person with a legal personality distinct from that of the trustee and the beneficiaries,whether they be individual or corporations.

A “trust” is also referred to as a “settlement”.

A trust can be simply described as a set of equitable obligations between a Trustee (or Trustees) and the beneficiaries of the trust that are enforceable by a Court.

A more detailed definition provided in The Law of Trusts by Thomas and Hudson is:

“The essence of a trust is the imposition of an equitable obligation on a person(s) who is the legal owner of property (a Trustee) which requires that person to act in good conscience when dealing with that property in favour of any person (the beneficiary) who has a beneficial interest recognised by equity in the property. The Trustee is said to “hold the property on trust” for the beneficiary. There are four significant elements to the trust; that it is equitable, that it provides the beneficiary with rights in property, that it imposes obligations on the trustee, and those obligations are fiduciary in nature”.

Under a strict trust there are two owners of the trust estate; the Trustees hold the common law title to the assets of the trust, whilst the beneficiaries hold an “equitable” title to the same assets under a branch of law known as “equity”.

Lord Browne-Wilkinson stated in relation to “strict” trusts:

“Once a trust is established, as from the date of its establishing the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property… other than a purchaser for value of the legal interest without notice.

Westdeutche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 705.

The trustees must be in a position to know with certainty, in favour of whom benefits must be distributed; and in the event of some error of default on the part of the trustees, the Court must know, with certainty, how it should execute the trusts, or what remedy, if any, it ought to make available to whom.

“The principle can be concisely stated by saying that in order to be valid, a trust must be one which the Court can control and execute”

IRC v Broadway Cottage’s Trust [1955] Ch. 20 at 30 , per Jenkins L.J.

A “beneficiary”, in ordinary language, is a person for whose benefit a trust is to be administered and who is entitled to enforce the trust according to its terms.

Kafataris v The Deputy Commissioner of Taxation [2008] FCA 1454 at [42]

The “Fund” is the subject matter of the trust or the assets held on trust, while the “Trust” is the set of legal obligations the Trustee must observe in administering the trust.

For a valid trust to be created the “three certainties” {Knight v Knight (1840) 3 Beav 148 at 172-173; 37 ER 1051 at 1056 per Lord Langdale MR} must be satisfied:

  • – (i) Certainty of intention
  • – (ii) Certain of subject matter, and
  • – (iii) certainty of objects

  • In their joint judgment in Kauter v Hilton (1953) 90 CLR 86 at 97., Dixon CJ, Williams and Fullagar JJ identified:

    “the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries.”

    Also refer to the judgment of Lord Eldon LC in Wright v Atkyns (1823) Turn & R 143 at 157 [1823] EngR 470; [37 ER 1051 at 1056].

    The elements of a trust are illustrated on the following diagram:

    Elements of a Trust

    In A-G (UK) v Downing 1 the Court stated:

    Trust estates do not depend upon the legal estate for an existence. A court of Equity considers devises of trusts as distinct substantive devises, standing on their own basis, independent of the legal estate, or of one another; and the legal estate is nothing but the shadow which always follows the trust estate, in the eye of a Court of Equity.”

    The Court then confirmed that the duty upon a trustee to execute the trust is imperative, stating:

    Powers are never imperative: they leave the act to be done at the will of the party, to whom they are given. Trusts are always imperative, and are obligatory upon the conscience of the party intrusted.”

    (1) A-G (UK) v Downing (1767) Wilm 1 [97] ER 1] Wilmot LCJ at 23; Davey v Thorton (1851) 9 Hare 222 [68 ER 483]

    The modern approach is to use the word “duty” where the traditional term was the word “trust”. Nowadays the word “trust” is more commonly used as a synonym of “settlement”.

    Therefore trust law distinguishes between:

    (i) A power conferred on trustees, which permits them to act

    (ii) A duty imposed on trustees, which obliges them to act

    In the drafting of a Trust Deed the general approach is to adopt the well settled rule that the word ‘may’ confers a power while the word ‘shall’ imposes a duty.

    The New South Wales Court of Appeal reviewed key concepts related to a trust in Re Dion Investments Pty Ltd [2014] NSWCA 367. The Court stated at [41-45]:

    Where an express trust is established in that way by a deed made between a settlor and the initial trustee to which the settled property is transferred, rights of the beneficiaries arise immediately the deed takes effect. The beneficiaries are not parties to the deed and, to the extent that it embodies covenants given by its parties to one another, the beneficiaries are strangers to those covenants and cannot sue at law for breach of them. The beneficiaries’ rights are equitable rights arising from the circumstance that the trustee has accepted the office of trustee and, therefore, the duties and obligations with respect to the trust property (and otherwise) that that office carries with it.

    Any subsequent action of the settlor and the original trustee to vary the provisions of the deed made by them will not be effective to affect either the rights and interests of the beneficiaries or the duties, obligations and powers of the trustee. Those two parties have no ability to deprive the beneficiaries of those rights and interests or to vary either the terms of the trust that the trustee is bound to execute and uphold or the powers that are available to the trustee in order to do so. The terms of the trust have, in the eyes of equity, an existence that is independent of the provisions of the deed that define them.

    Let it be assumed that on Monday the settlor and the trustee execute and deliver the trust deed (at which point the settled sum changes hands) and that on Tuesday they execute a deed revoking the original deed and stating that their rights and obligations are as if it had never existed. Unless some power of revocation of the trusts has been reserved, the subsequent action does not change the fact that the trustee holds the settled sum for the benefit of beneficiaries named in the original deed and upon the trusts stated in that deed. The covenants of a deed may be discharged or varied by another deed between the same parties (West v Blakeway [1841] EngR 591; (1841) 2 Man & G 751; 133 ER 940) but the equitable rights and interests of a beneficiary cannot be taken away or varied by anyone unless the terms of the trust itself (or statute) so allow.

    It is, of course, commonplace to speak of the variation of a trust instrument as such when referring to what is, in truth, variation of the terms upon which trust property is held under the trusts created or evidenced by the instrument. A provision of a trust instrument that lays down procedures by which it may be varied is, of its nature, concerned with variation of the terms of the trust, not variation of the content of the instrument, although the fact that it is the instrument that sets out the terms of the trust does, in an imprecise way, make it sensible to speak of amendment of the instrument when the reference is in truth to amendment of the terms of the trust.

    Where the trust instrument contains a provision allowing variation by a particular process, the situation is one in which the settlor, in declaring the trust and defining its terms, has specified that those terms are not immutable and that the original terms will be superseded by varied terms if the specified process of variation (entailing, in concept, a power of appointment or a power of revocation or both) is undertaken. The varied terms are in that way traceable to the settlor’s intention as communicated to the original trustee.

    The concept of the application of a power of appointment and a power of revocation or both are illustrated in the following diagram.

    Amending the terms of a trust

    If the original Trust Deed does not provide any amending powers then the terms of the trust can only be amended by a Court order or by an Act of Parliament.

    If the founding Trust Deed only provides a power of appointment, then new provisions can be added by a properly executed Deed of Variation, however existing provisions cannot be repealed or amended.

    If the founding Trust Deed provides both a power of appointment and a power of revocation, then existing provisions can be repealed or amended, subject to the equitable doctrines of an “excessive exercise” of the amending powers and the equitable doctrine of a “Fraud on a Power”.

    A transcript of Re Dion Investments Pty Ltd can be found here.

    Lord Justice Millett in Armitage v Nurse [1997] EWCA Civ 1279 stated:

    I accept the submission made on behalf of Paula that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. ……. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts.

    The Privy Council in Fonu v Merrill Lynch Bank and Trust Company [2011] UKPC 17 stated at [29]:

    “Legal title is vested in the trustee, and validly created trusts should not be destroyed to the detriment of the innocent beneficiaries of those trusts.

    A “Strict” Trust

    Superannuation trusts are “strict” trusts as opposed to “discretionary” trusts.

    The differences are discussed by Gummow J in FCT v Vegners (1989) 90 ALR 547 at (551-2), which was cited with approval by Brereton J in Fay v Moramba Services Pty Ltd [2009] NSWSC 1428 at [32].

    Termination of a Trust

    A power to revoke or the power to terminate he trust may be included within the trust instrument which may make an allowance for trustees, third parties, or even settlors to revoke or terminate the trust. However, if there is no power to revoke the trust, it is treated as an irrevocable disposition of property.

    A power of revocation enables the Trust Estate to be returned to the Settlor, while a power of termination will bring the trust to an end by the distribution of the Trust Estate to the beneficiaries in a prescribed manner.

    A power of termination in a superannuation trust will generally prescribe how the assets in the associated Trust Estate (Fund) are to be distributed amongst the beneficiaries of the trust.

    The settlor of a trust may revoke the trust where power of revocation is validly reserved. If a particular mode of revocation is specified, it is essential that the mode specified be strictly followed in order to make the revocation effective. The same applies to a power of termination.

    The power to revoke a trust is discussed in Re Dion Investments Pty Ltd [2013] NSWSC 1941. A transcript of this case is available here.

    A “Company” compared to a “Trust”

    A fundamental difference between a trust and a company is that the latter is deemed at law to be a separate legal entity. The doctrine of separate legal personality means that:

    [for] certain purposes a company is a legal entity separate from the legal persons who become associated for its formation or who are now its members and its directors. For certain purposes there is a corporate screen around the members and directors. Courts often refer to that screen as the ‘corporate veil”.

    To say that a company is a separate legal entity means that the company can have legal rights, privileges, duties or liabilities without those rights , privileges, duties or liabilities of its members or directors1.

    A trust is conceptually different from a company. Like a company, a trust requires real people to administer the trust property, and carry out the terms of the trust deed. However, unlike a company, a trust has no separate personality at law, meaning that individuals who act as trustees are personally liable in an action against the trustee2.



    (1) R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (15th Ed. 2013) 124 [4.140]

    (2) P Agardy, “Aspects of Trading Trusts” (2006) 14 Insolvency Law Journal 7,0.

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    This tab updated on 15 March 2015