Trusts: Key Facts
A trust is an equitable duty relating to property. |
There is no single definition of a trust. |
A trust allows the separation of the powers of the legal owner (held by trustees) from the benefits resulting from the exercise of those powers (enjoyed by beneficiaries). |
A trust can confer different types of rights on different beneficiaries at different times. |
Characteristics of Trusts
Trust property: |
There must be an identifiable trust property. |
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The property is the subject matter of the trust. |
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Almost every asset or right can be held on trust. |
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A chose in action is a right (intangible) - e.g. a debt / company share. |
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A chattel is a tangible item (other than land) - e.g. cars, computers, jewellery. |
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A trust ceases to exist if the trust property is destroyed or consumed (without fault of the trustee). |
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Where the trustee is at fault for loss of trust property, they will be liable to restore the property or pay compensation so the trust will not cease to exist. |
Trustees: |
A trustee owns the property and has all the rights and powers of legal ownership. |
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The functions and duties of trustees are not unitary. |
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The function and duty of any specific trustee is determined by the nature of the trust they are administering. |
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Role of trustee is a voluntary office and is typically unpaid although professional trustees are entitled to remuneration. |
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A trustee can be one of the beneficiaries of a trust. |
Trustee duties: |
Basic duty of a trustee is to hold or apply trust property for the benefit of the beneficiary. |
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Trustees who are also beneficiaries still owe duties to the other beneficiaries so cannot simply use the trust fund for their own benefit. |
Objects: |
A trust must have a beneficiary or be for a permitted purpose. |
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A purpose trust is a trust for the promotion or realisation of a purpose (i.e. a trust without a beneficiary). |
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Most trusts will have a beneficiary or beneficiaries. |
Equitable proprietary interest: |
A beneficiary's interest is good against third parties into whose hands the property or its traceable proceeds may have come. |
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Unlike legal proprietary interests, it cannot be enforced against everyone. |
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Equitable proprietary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust. |
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As an equitable proprietary interest in trust property, the property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes: cannot be distributed to trustee's creditors. |
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Thus, a beneficiary enjoys ‘priority’ over the unsecured creditors of the trustee in the event of the latter’s bankruptcy or insolvency. |
............Categorisations........... |
Express: |
A trust which is deliberately created. |
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The person who creates the trust is known as the ‘settlor’. |
Resulting or Constructive: |
Trusts which arise by operation of law. |
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They are imposed by the courts. |
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"Implied trusts". |
Trusts: Comparisons & Distinctions
Trusts vs Contracts: |
It is possible to contract to create a trust - this happens regularly. |
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But, a contract is a creation of common law where a trust in the creation of equity. |
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In a trust, there is no requirement for an agreement between any of the parties. |
Trusts vs Debts: |
Unlike a trust, a debt does not relate to specific assets or funds. |
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A creditor has a personal right to payment but a beneficiary has an equitable proprietary interest in the trust property. |
Trusts vs Charges: |
Both a beneficiary and a chargee have a proprietary interest in (respectively) the trust property and the charged property. |
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But, a chargor can use charged property for their own benefit. |
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A characteristic of a charge (but not a trust) is a right of redemption. |
Trusts vs Agency: |
Both are subject to fiduciary duties. |
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Unlike an agent, a trustee cannot commit a beneficiary to a contract with a third party. |
Trusts vs Bailment: |
Bailment is the transfer of possession of chattels from one person to another. |
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Only tangible property can form the subject matter of a bailment. |
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Bailment involves transfer of possession but does not impact the bailor’s legal title to the property. |
Trusts vs Companies: |
A trust does not have a legal personality. |
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A trust cannot bring or defend a legal action in its own name. |
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Company shareholders do not have a proprietary interest in the company’s assets, but in the company. |
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Company directors' obligations are owed to the company, not to the shareholders. |
Trusts vs Estate Administration: |
The function of a personal representative is to administer and distribute the deceased's estate ASAP. |
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Express trusts are created to endure for many years so trustees have ongoing asset management functions. |
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A person interested in a deceased person’s estate does not have an equitable proprietary interest in any of the estate assets. |
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Beneficiaries of a trust do have an equitable proprietary interest. |
Trusts vs Gifts: |
A "gift on trust" is a gratuitous transfer on trust. |
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An outright gift = - the absolute transfer of full legal ownership - donor is full legal owner - donee becomes full legal owner upon transfer - no separate equitable interest in the property at any stage |
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With a trust, the settlor creates a new equitable interest for the beneficiary. |
Private Express Trusts: Requirements
............Trust Duration........... |
Trusts are **not intended to be permanent |
In a discretionary trust, trustees are obliged to exercise their discretion within a reasonable timeframe, limiting the duration of the trust. |
Often a trust instrument will contain rules dealing with how and when the trust is brought to an end - Trust Period. |
Where there is no mechanism to limit the trust, the law limits the duration by means of rules known as the perpetuity rules. |
............Perpetuity Rules........... |
1. The rule against remoteness of vesting: |
Statutory rule which requires that a person (or charity) must obtain a vested interest in the trust property within a recognised ‘perpetuity period’. |
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This period is 125 years. |
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It is possible for a trust instrument to limit the duration of the trust to a shorter period. |
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Trust interests which do not vest within the statutory perpetuity period is void. |
1a. Wait and see rule: |
The trust can exist until it becomes apparent that the interest cannot vest within the perpetuity period. |
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Anything done before this time will remain valid. |
1b. Class closing rule: |
Objects can be excluded from the trust who might otherwise cause the trust to fail because their interest would vest outside the perpetuity clause. |
2. The rule against inalienability: |
Assets cannot be tied up on trust for longer than the common law perpetuity period of a specified life in being plus 21 years |
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This rule no longer applies to most trusts but is relevant for non-charitable purpose trusts. |
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There is no wait and see rule: it must be clear from the outset that the trust will end within the prescribed perpetuity period. |
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Hence, the trust instrument for these trusts must contain an express perpetuity period. If not, the trust will fail. |
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Express perpetuity clause examples: - 21 years - as long as the law allows - 21 years following the death of the last surviving descendant of Queen Elizabeth II who is alive at the date of my death |
Trusts Arising by Operation of Law
Resulting trusts: |
An implied trust. |
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Arise where a legal owner transfers ownership of their property to a third party but equity recognises that they should retain/regain the beneficial interest in that property. |
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There are 2 sub-categories: |
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1. Automatic resulting trusts: |
Default trusts which arise when a transfer on trust fails wholly or partly. |
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If a trustee is holding legal title but the trust has failed, equity imposes a resulting trust meaning that they hold the property on trust for the settlor. |
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The settlor gets Saunders v Vautier rights: they can collapse the trust and recover the property. |
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Equity’s way of ensuring that the property returns to its original owner when it is otherwise unclear what should happen to it. |
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These trusts do not respond to the actual intention of the settlor. |
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2. Presumed resulting trusts: |
These trusts do respond to the actual intention of the settlor. |
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Where a person makes a gratuitous transfer of property to a third party, equity raises a presumption of a resulting trust. |
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If a person transfers their property to someone else, equity will presume that they wanted that other person to hold it on trust for them. |
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The presumption of resulting trust can be rebutted by evidence. |
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A resulting trust will only arise if there is no evidence rebutting the presumption. |
Constructive trusts: |
An implied trust. |
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All constructive trusts are imposed to correct unconscionability. |
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3 broad situations where constructive trusts arise: |
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1. Institutional constructive trusts: |
Arise because the conscience of a legal owner is affected in some way. |
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Imposed automatically in response to a trigger event. |
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E.g. Constructive trusts imposed to: - prevent fraud - perfect an imperfect gift - profits made in breach of fiduciary duty |
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2. Constructive trusts as remedy: |
Awarded by court as a remedy following misapplication of property. |
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Not imposed automatically. |
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The result of C asserting their rights in the property and seeking to claim beneficial ownership. |
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3. Common intention constructive trusts: |
Used to resolve disputes as to the beneficial ownership of land where there is no express trust declared over the land. |
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The court assesses the common intention of the parties to determine their respective equitable interests in the land. |
Statutory trusts: |
There are some circumstances where a trust arises as a result of a legislative provision. |
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E.g. the statutory trusts that arise under the Intestacy Rules when a person dies without leaving a valid will. |
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The intention of the legal owners of the property is not relevant. |
Beneficiaries: Rights
1. Proprietary rights: |
Fixed trusts: |
Beneficiaries have equitable proprietary rights. |
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Their rights may be vested or contingent but they are proprietary. |
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These rights are assets which are capable of sale or other forms of transfer and can be asserted against third parties. |
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Power to bring the trust to an end by exercising the rule in Saunders v Vautier. |
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Discretionary trusts: |
Beneficiaries do not have proprietary rights, although some of their rights are akin to proprietary. |
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Until the discretion is exercise, beneficiaries can only hope that the discretion is exercised in their favour. |
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They cannot assert their rights against third parties. |
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They do have sufficient interest in the trust property to compel its return to the trust fund. |
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Power to bring the trust to an end by exercising the rule in Saunders v Vautier. |
2. Personal rights: |
Fixed trusts: |
The right to compel the proper administration of the trust by the trustees: they can direct the trustee to take action such as suing a third party on behalf of the trust. |
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Right to be informed of their entitlement under the trust once their interest has vested. |
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Can sue the trustees for breach of trust if they act outside their powers or in breach of their duties. |
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Discretionary trusts: |
Beneficiaries can enforce the trust by asking the court to ensure that discretion is exercised, but no right to request it be exercised in a particular way. |
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Once discretion is exercised in favour of a beneficiary, they have the right to be informed of their entitlement. |
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Can sue the trustees for breach of trust if they act outside their powers or in breach of their duties. |
Beneficial Entitlement: Fixed & Discretionary
............Fixed Trust........... |
A trust in which the entitlement of the beneficiaries is fixed by the settlor. |
Trustees have no discretion in relation to the distribution of the trust property. |
Trustees must distribute as directed by the settlor. |
The settlor cannot tell the trustees what to do once the trust has come into effect, unless they have a reserved power to do so. |
Can have one or more beneficiaries who may have very different entitlements. |
Successive interest trust: |
A type of fixed trust. |
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Involves a series of consecutive interests in the same trust property. |
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Gives some beneficiaries a right to income (income beneficiaries) and others a right to capital (capital beneficiaries). |
Life interest trust: |
A type of successive interest trust. |
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A beneficiary (life tenant) receives income during their lifetime. |
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Another beneficiary (remainderman) becomes entitled to the capital after the life tenant's death. |
Beneficial Entitlement: Discretionary
A trust under which the trustees have discretion to distribute between the objects. |
The settlor determines the objects, but the trustees must decide who from within that class of objects is to receive what sum. |
Discretionary trusts are flexible. |
Enable a settlor to make provision for different beneficiaries according to their future needs |
The objects of a discretionary trust are only potential beneficiaries - they have no equitable interest in the trust property until the discretion is exercised in their favour. |
The objects do have a right to ensure that the trustees exercise their powers properly. |
Power of appointment: a right to choose who, from within a specified class of objects receives, property. |
Saunders v Vautier
............Basic Principle........... |
A sole adult beneficiary of sound mind, with a vested interest in the trust property, is entitled to direct the trustee to transfer legal title to them, thereby bringing the trust to an end early. |
If someone else could obtain a beneficial interest, the beneficiary has no entitlement to have it transferred to them and become the absolute owner. |
If each beneficiary has a distinct interest in the trust property, which can be severed without impacting the others, they can separately exercise their Saunders v Vautier rights. |
In more complex fixed trusts - e.g. successive interest trusts - the rights of beneficiaries are not easily severable, so Saunders v Vautier rights only exercised if all beneficiaries agree (for which they must be of age and capacity). |
Trustee Powers: Investment and Delegation
............Power of Investment........... |
A trustee can make any kind of investment that they could make if they were absolutely entitled to the trust assets. |
A trustee cannot invest in land overseas under s 8 TA 2000 (unless allowed in trust instrument). |
Trustees must: - consider the standard investment criteria in s 4; and - take advice (s 5). |
Standard investment criteria: |
Trustees must invest suitably and diversify the investments. |
Advice: |
Trustees must obtain proper advice provided by a person who the trustee reasonably believes is qualified to give it by their ability and experience in investing. |
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Trustees do not need to seek advice if they reasonably conclude that in all the circumstances it is unnecessary to do so. |
These obligations can be excluded, restricted or extended - s 6. |
............Statutory duty of care........... |
Trustees must exercise such care and skill as if reasonable in the circumstances. |
The standard of care is higher for professional trustees. |
The standard of care is raised for lay trustees who are appointed due to special knowledge/experience. |
The statutory duty of care only applies to trustee acts in Sch 1 TA 2000. |
............Power to acquire land........... |
Trustees have the power to acquire freehold/leasehold land in the UK but not overseas - S 8. |
This power can be exercised for investment purposes but also more widely (e.g. a dwelling for a beneficiary). |
The statutory duty of care always applies here. |
............Power of Delegation........... |
Trustees can delegate their powers of investment and aquisition of land. |
Delegating investment powers: |
Trustees must delegate investment powers by an agreement evidenced in writing - s 15. |
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Agreement should include term ensuring compliance with a written policy statement prepared by trustees. |
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Policy statement should give guidance. |
Trustees must comply with the statutory duty of care when selecting and entering into agreements with agents. |
If trustees comply with these duties, they will not be vicariously liable for any loss caused by the agent acting negligently. |
Trustees: No Conflict Rule
Self-dealing: |
A trustee cannot purchase assets from the trust or sell assets to the trust. |
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If a trustee does so, the transaction will be voidable. |
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Beneficiaries can seek to rescind the transaction. |
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May be allowed by the trust instrument. |
Fair-dealing: |
A trustee may want to directly transaction with a beneficiary to buy their beneficial interest under the trust. |
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The trustee must be able to demonstrate that the transaction was conducted fairly. |
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Trustee should have made full disclosure to the beneficiary, acted honestly and fairly and did not take advantage of the beneficiary. |
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If the trustee cannot demonstrate this, the transaction will be voidable. |
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Beneficiaries can seek to rescind the transaction. |
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May be allowed by the trust instrument. |
If the breach causes a loss to the principal, they can sue the fiduciary personally for breach of fiduciary duty. |
If the breach results in a profit to the principal, they may not require a remedy although they may wish to end the fiduciary relationship. |
If the breach results in a profit to the fiduciary, the principal can recover the profit from the fiduciary. |
Trustees: No Profit Rule
Direct profit: |
Trustees cannot make a profit from the trust. |
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Any income made directly out of the trust's property belongs to the trust. |
Indirect profit: |
Trustees must avoid making unauthorised personal profits which arise from the performance of their role. |
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Where a trustee obtains a director position as a result of being a trustee, they must not accept remuneration for this capacity and pay it to the trust. |
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This rule does not apply if the trustee is independently appointed as director. |
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The trust instrument may allow trustees to retain remuneration. |
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The trustee may also seek the fully informed consent of all beneficiaries. |
Exploiting opportunities: |
A trustee cannot keep a profit made as a result of an opportunity that comes to them in the course of performing their fiduciary duties. |
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This rule is very strict. |
Bribes/secret commissions: |
A trustee cannot accept money from a third party in return for performing their role in a particular way. |
Breach of this rule will result in the trustee being stripped of their profits. |
Beneficiaries may make a personal claim requiring the trustee to pay back an amount equivalent to the profit made. |
Beneficiaries may make a proprietary claim that the profit is held on constructive trust, allowing protection from insolvency and an ability to trace into any subsequent profits made by the trustee. |
Beneficial Entitlement: Fixed & Discretionary
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