( Assignment of EQUITY & TRUSTS )

Topic : CLASSIFICATION OF TRUSTS

Submitted to : mr. MUKESH KUMAR SIR, (DEPT. OF LAW)

Submitted by : aayush rai (y16190534)

[ b.a.ll.b.(hons) 8th semester ]

TABLE OF CONTENT :

1. INTRODUCTION
2. WHAT IS TRUST ?
3. CLASSIFICATION OF TRUSTS
4. EXPRESS TRUSTS
5. IMPLIED TRUSTS
6. CONSTRUCTIVE TRUSTS: (PRINCIPLE OF
UNJUST ENRICHMENT)
7. PRIVATE TRUSTS
8. PUBLIC TRUSTS
9. SIMPLE TRUSTS
10. SPECIAL TRUSTS

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INTRODUCTION:
A trust is a legal document that can be created during a person's lifetime and survive
the person's death. A trust can also be created by a will and formed after death.

Common types of trusts are outlined in this article.

Once assets are put into the trust they belong to the trust itself (such as a bank
account), not the trustee (person). They remain subject to the rules and instructions of
the trust contract.

In essence, a trust is a right to money or property, which is held in a "fiduciary"

relationship by one person or bank for the benefit of another. The trustee is the one who
holds title to the trust property, and the beneficiary is the person who receives the
benefits of the trust.

WHAT IS TRUST ?
As per section 3 of the Indian Trust Act, 1882, Trust simply means when an obligation
annexed/added to the ownership of property and there is confidence, one person
(settler) places in trust in the hands of another person (trustee) for the benefit of a third
party (beneficiary).

1. A trust is only enforceable in equity; not recognised by common law

2. Equity sees a legal owner who does not own it for himself, but for the benefit of
others
3. Trust has no legal personality, the trustee is a legal person. Hence legal action
must be taken by or against the trustee, not the trust.
4. A trust can be over virtually any form of property, including equitable property.
Therefore a trust can be over a beneficial interest. If a trust is declaration over a
beneficiary‟s interest, a sub trust is created. This chain can go on indefinitely.

What is normally called a trust or a trust fund is actually called a settlement in legal
terminology.
A settlement is an arrangement or construct where person A transfers ownership
of(settles) assets to person B, who manages them for the benefit of person C.

In legal terminology:
 person A is the settlor,
 person B is the trustee, and
 person C is a beneficiary
The terms on which this is done are known as the trusts, and the assets that are
transferred are collectively known as the trust fund. But it is easier to talk about trusts
and trust funds, so we'll do that for the remainder of this article.

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Definitions
The logical starting point is to define exactly what we mean by the term “trust”. A widely
recognised definition is contained in Halsbury‟s Laws of Trusts:

“any disposition of property of whatever nature by any instrument whereby trusts are
constituted for the purpose of regulating the enjoyment of the settled property
among the persons or classes of persons nominated by the settlor”.

Lord Coke’s Definition

Lord Coke defined a trust as “a confidence reposed in some other, not issuing out
of the land but as a thing collateral thereto, annexed in privity to the estate of the
land, and to the person touching the land, for which cestui que trust has no
remedy but by subpoena in the Chancery.”

CLASSIFICATION OF TRUSTS:
In law a trust is a relationship where property is held by one party for thr benefit
of another party . A trust is created by the owner also called a “settler”,” trustor”
or “grantor’ who transfers property to a trustee . The trustee holds that property
for the trust’s beneficiaries.

ON THE ACT OF THE PARTIES:

 EXPRESS TRUST
 IMPLIED TRUST
 SIMPLE TRUST
 SPECIAL TRUST
 PUBLIC TRUST
 PRIVATE TRUST
 EXECUTED TRUST
 EXECUTORY TRUST

BY OPERATION OF LAW: FURTHER:

 RESULTING TRUST  CHARITABLE TRUST OR
 CONSTRUCTIVE TRUST RELIGIOUS TRUST

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Express trust:
An express trust is a trust created "in express terms, and usually in writing, as
distinguished from one inferred by the law from the conduct or dealings of the
parties."Property is transferred by a person (called a trustor, settlor, or grantor) to a
transferee (called the trustee), who holds the property for the benefit of one or more
persons, called beneficiaries. The trustee may distribute the property, or the income
from that property, to the beneficiaries. Express trusts are frequently used in common
law jurisdictions as methods of wealth preservation or enhancement.

Common forms of express trusts:

Bare trust
property transferred to another to hold e.g. for a third person absolutely. May be
of use where property is to be held and invested on behalf of a minor child or
mentally incapacitated person.

Life Interest trust

the income from property transferred is paid to one person, "the life tenant" (e.g. a
widow/er), during their lifetime and thereafter is transferred to another Common forms of
express trust person (who may take absolutely or a second life interest according to the
terms of the trust, in the second case a third beneficiary would come into play). The
trustees may have power to pay capital as well as income to the life tenant.
Alternatively, they may have rights to transfer ("appoint") property to other beneficiaries
ahead of their entitlement.

Discretionary trust
the trustees may pay out income to whichever of the beneficiaries they, in the
reasonable exercise of their discretion, think fit. They will normally also have a power to
pay out capital. They may have extensive powers, even to add new beneficiaries, but
such powers may normally only be exercised bona fide in the interests of the
beneficiaries as a whole Discretionary trusts must not be indefinite and are subject to
'the rule against perpetuities'. In New South Wales, the time prescribed is a statutory
period of 80 years from the date the disposition takes effect.

Charitable trusts
this is also a form of discretionary trust; trusts for a purpose (as opposed to for
individuals) are generally invalid at common law however charities are an exception.
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 (e.g. Jersey
trusts, Danish and US foundations and Liechtenstein Anstallts).

Protective trusts and Spendthrift trusts

can be established to provide an income for persons who cannot be trusted with it.

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IMPLIED TRUST:
An implied trust is a trust inferred by operation of law. It is imposed by law to situations
either by presuming an intention of the participants to create a trust, or simply because
of the facts at hand. Two types of implied trusts are constructive and resulting trusts. A
resulting trust arises from the conduct of the parties. A constructive trust is an equitable
remedy that enables plaintiffs to recover property or damages from defendants who
would otherwise be unjustly enriched.

An implied trust is an element of trust law, and refers to a trust that has not been
"expressly created by the settlor."

There are two types of implied trust:

 Resulting trust
 Constructive trust

These are trusts which court deduces from the conduct of the parties and the
circumstances of the transaction. For example, where a person in return for valuable
consideration agrees to settle property for the benefit of another, that other person
immediately becomes a trustee of the property. Banister vs. Banister [1948] 2 ALLER 133

Resulting trust:
A resulting trust (from the Latin 'resalire' meaning 'to jump back') is the creation of an
implied trust by operation of law, where property is transferred to someone who pays
nothing for it; and then is implied to have held the property for benefit of another person.
The trust property is said to "result" back to the transferor (implied settlor). In this
instance, the word 'result' means "in the result, remains with", or something similar to
"revert" except that in the result the beneficial interest is held on trust for the settlor.
Not all trusts whose beneficiary is also the settlor can be called resulting trusts. In
common law systems, the resulting trust refers to a subset of trusts which have such
outcome; express trusts which stipulate that the settlor is to be the beneficiary are not
normally considered resulting trusts.

The beneficial interest results in the settlor, or if the settlor has died the property forms
part of the settlor's estate (intestacy). It remains with the person and Re Vandervell
case has proven that only the Beneficial interest disappears but not the beneficiary
interest.

Resulting trusts work on a principle of "common intention". This is the idea that a
resulting trust is a mix of the settler's intention, and the trustee's knowledge that he is
not intended to be the beneficiary.

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In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd , [1985] Ch 207
Gibson J [expressed the principle as: The principle in all these cases is that the equity
fastens on 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, so that
such a person will not be permitted to treat the property as his own or to use it for other
than the stated purpose...if the common intention is that property is transferred for a
specific purpose and not so as to become the property of the transferee, the transferee
cannot keep the property if for any reason that purpose cannot be fulfilled .

Constructive Trusts:
This refers to a relationship by which a person who has obtained title to property has an
equitable duty to transfer it to another, to whom it rightfully belongs, on the basis that
the acquisition or retention of it is wrongful and would unjustly enrich the person if he or
she were allowed to retain it.

A constructive trust is an equitable remedy imposed by a court to benefit a party that

has been wrongfully deprived of its rights due to either a person obtaining or holding a
legal property right which they should not possess due to unjust enrichment or
interference, or due to a breach of fiduciary duty, which is intercausative with unjust
enrichment and/or property interference. It is a type of implied trust, i.e., it is created by
conduct, not explicitly by a settlor.

A constructive trust does not arise because of the expressed intent of a settlor. It is
created by a court whenever title to property is held by a person who, in fairness, should
not be permitted to retain it. It is frequently based on disloyalty or other breach of trust
by an express trustee (the person appointed or required by law to execute a trust), and
it is also created where no express trust is created but property is obtained or retained
by other Unconscionable conduct. The court employs the constructive trust as a
remedial device to compel the defendant to convey title to the property to the plaintiff. It
treats the defendant as if he or she had been an express trustee from the date of the
unlawful holding of the property in question.

A constructive trust is not a trust, in the true meaning of the word, in which the trustee
is to have duties of administration enduring for a substantial period of time, but rather it
is a passive, temporary arrangement, in which the trustee's sole duty is to transfer the
title and possession to the beneficiary. The right to a constructive trust is generally an
alternative remedy. The aggrieved party can choose between a trust and other relief at
law, such as recovery of money wrongfully taken, but cannot obtain both types of relief.

A constructive trust, as with an express trust, must cover specific property. It cannot be
predicated on mere possession of property, or on a breach of contract where no
ownership of property is involved.

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Events generating constructive trusts:
1. Breach of fiduciary duty

In a constructive trust the defendant breaches a duty owed to the plaintiff. The most
common such breach is a breach of fiduciary duty, such as when an agent Events
generating constructive trusts wrongfully obtains or holds property owned by a
principal.A controversial example is the case of Attorney-General for Hong Kong v
Reid, in which a senior prosecutor took bribes not to prosecute certain offenders. With
the bribe money, he purchased property in New Zealand. His employer, the Attorney-
General, sought a declaration that the property was held on constructive trust for it, on
the basis of breach of fiduciary duty. The Privy Council awarded a constructive trust.

There was a tension in English law between Lister and Reid which was highlighted in
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd. The United Kingdom
Supreme Court subsequently overruled Sinclair in FHR European Ventures LLP v
Cedar Capital Partners LLC, holding that Lister was no longer good law.

2. Property interference …

In Foskett v McKeown a trustee used trust money together with some of his own
money to purchase a life insurance policy. Then he committed suicide. The insurance
company paid out to his family. The defrauded beneficiaries of the trust sought a
declaration that the proceeds were held on constructive trust for them. The House of
Lords said that the beneficiaries could choose between either: (a) a constructive trust
over the proceeds for the proportion of the life insurance payout purchased with their
money; or (b) an equitable lien over the fund for the repayment of that amount.

There is controversy as to what the true basis is of this trust. The House of Lords said
that it was to vindicate the plaintiffs' original proprietary rights. However, this reasoning
has been criticized as tautologous by some scholars who suggest the better basis is
unjust enrichment (see below). This is because there must be a reason why a new
property right is created (i.e. the trust) and that must be because otherwise the family
would be unjustly enriched by receiving the proceeds of the insurance policy purchased
with the beneficiaries' money. "Interference with the plaintiff's property" can justify why
the plaintiff can get its property back from a thief, but it cannot explain why new rights
are generated in property for which the plaintiff's original property is swapped.

In Foskett v McKeown, the plaintiff's original property was an interest in the trust fund.
The remedy they obtained was a constructive trust over an insurance payout. It is not
obvious why such a new right should be awarded without saying it is to reverse the
family's unjust enrichment.

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 3. Unjust enrichment

In Chase Manhattan Bank NA v Israel- British Bank (London) Ltd one bank paid
another bank a large sum of money by mistake (note that the recipient Bank did not do
anything wrong - it just received money not owed to it). Goulding J held that the money
was held on (constructive) trust for the first bank. The reasoning, in this case, has been
doubted, and in Westdeutsche Landesbank Girozentrale v Islington London
Borough Council the House of Lords distanced itself from the idea that unjust
enrichment raises trusts in the claimant's favour. This remains an area of intense
controversy. These type of trusts are called '"institutional" constructive trusts'. They
arise the moment the relevant conduct (breach of duty, unjust enrichment etc.) occurs.
They can be contrasted with '"remedial" constructive trusts', which arise on the date of
judgment as a remedy awarded by the court to do justice in the particular case.

An example is the Australian case Muschinski v Dodds. A de facto couple lived in a

house owned by the man. They agreed to make improvements to the property by
building pottery shed for the woman to do arts and crafts work in. The woman paid for
part of this. They then broke up. The High Court held that the man held the property on
constructive trust for himself and the woman in the proportions in which they had
contributed to the improvements to the land. This trust did not arise the moment the
woman commenced improvements - that conduct did not involve a breach of duty or an
unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case.

In Bathurst City Council v PWC Properties, the High Court that as constructive trusts
are the most severe remedy in cases of breach of fiduciary duty, they should only be
imposed when other remedies are inappropriate in providing relief.

Theory of Unjust Enrichment:

What is unjust?
Unjust can be defined as something which is not in accordance with the accepted
standards of fairness or justice and which is also unfair.

What is enrichment?
When a person gains something from another, then it is said that the person is
enriched. This enrichment can be both just and unjust. A student receives graduation
present from his parents for the graduation; it is also an enrichment which is just. When
a person wrongfully uses others property at the expense of other, then it is unjust.

What is unjust enrichment?

The principle of unjust enrichment is simply stated as: A person who has been unjustly
enriched at the expense of another is required to make restitution to the other. The
meaning of this line is that if a person has gained benefit from other person and thereby

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causing loss to the other person, then the person who has gained is required to
reimburse the plaintiff equal to the amount of benefit received by the defendant.

The principle of unjust enrichment can be understood in three ways:

 Unjust enrichment can be interpreted as a principle of Aristotelian equity,
providing correction when normally sound rules produce unjust results in
particular cases.
 Unjust enrichment can be characterised as a „legal principle‟ incorporating a
broad ideal for justice, from which courts can deduce solutions to particular
restitution problems.
 Unjust enrichment can be understood simply as expressing a common theme of
restitution cases.
·
Let us take a hypothetical situation-

A owns a house and he approaches B who is a builder to construct a garage for B.

There contract is only for the construction of garage. After constructing the garage, B
also constructs driveway outside the house of A. Then A becomes liable to pay the
expenses incurred by B in the making of driveway.

According to Black Law Dictionary, unjust enrichment is the:

 The retention of a benefit conferred by another, without offering compensation,
in circumstances where compensation is reasonably expected.
 A benefit obtained from another, not intended as a gift and not legally justifiable
for which the beneficiary must make restitution or recompense.
 The area of law dealing with unjustifiable benefits of this kind.

PRIVATE TRUST:
A Private Trust is said to be an instrument of safeguarding the interests of beneficiaries
especially when the beneficiaries are minor and not capable of protecting their interest.
Any person who is a major and is competent to enter into a contract can be a settler or
the person intending to form a trust.

Private trusts are constituted for the benefit of one or more individuals. The individuals
are definite, that means the individuals can be ascertained. A private trust may be
created inter vivos or by will. If a trust is created by a Will, it is subject to the provisions
of Indian Succession Act, 1925.

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Ingredients of a valid Private Trust:
1) Settler of property should make a declaration to set aside certain property for the
benefit of beneficiaries.
2) There must be a trustee to manage the property for the benefit of the beneficiaries as
per the trust deed. A settler can also be a trustee of the same trust.
3) There must be a beneficiary or beneficiaries who derive benefit from the property of
settler (trust).
4) Trust properties demarcated properly .
5) Moreover, the objects of the trust must be clearly specified.

Reasons for creating a private trust?

From the two types of trust, the main reason for creating a private trust is;

The private trust route to succession planning is gaining popularity in India, as the the
rich are increasingly looking at asset protection because it helps secure the property
while the successors can benefit from it. Moreover, it helps the settler to retain his
property instead of the next generation disposing it of in near future. Also he can enjoy
tax benefits or deductions.

Private Trusts also helps in insolvency protection, application of trust assets applied to
retain solvency of beneficiary or trustee being a beneficiary.

Private Trust declared by a will, registration will not be necessary, even if it involves an
immovable property.

There is no statutory requirement to create a trust by any instrument. In the Supreme

Court, the case of Radha Swami Satsung v. CIT, (1992) 193 ITR 321 (SC) held that
creation of a trust does not require a formal document. However, in the case of a will or
where immovable property of Rs 100 and more, written trust thus recommended.

Private trust will cease to exist when the purpose of formation of trust is fulfilled or the
object of formation of trust becomes unlawful or the trust is revoked or trust property is
destroyed.

However, Trust declared by a non-testamentary instrument requires a registration. In

this case, also any exempted instrument declaring the trust under the Indian
Registration Act also requires registration irrespective.

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Public trust:
A particular class of people or the general public benefit from the creation of a public
trust.

A public trust must be created for charitable, educational, religious or scientific

purposes.

However, charitable and religious trusts come under the governance of ”Charitable and
Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable
Endowments Act, 1890, the Bombay Public Trust Act, 1950” enforced as statutes of
public trusts in India.

Central Act does not apply for Public trusts, However, various states have enacted their
own acts suitable to their conditions and administration.

Reasons for creating a public trust?

From the two types of trust, the main reason for creating a public trust;

Public trusts are relatively popular because it is easy to register and manage them.

Public trust created can get benefits of government tax rebates, namely under the
Income Tax Act.

Property dedicated for religious purpose comes under the purview of a public trust as a
religious endowment and/or wakfs.

Personal laws govern religious charitable trusts. The trustee can administer the religious
trust as per the dictates of religious names or as regulated by statute. In Hindus, the
personal law provides for regulation of religious not yet codified and found distributed in
the various religious books and epics.

The State and beneficiaries can regulate the working of public trust.

Furthermore, charitable trust have three requirements:

1. Declaration of trust made by settlor which is binding upon him,
2. Setting apart certain property by settlor and thereby depriving himself of the
ownership rights, and
3. A statement of object on how the beneficiaries shall hold the property.

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 Property once transferred to a trust deemed irrevocable.

Moreover, in case of breach of public trust, either the Advocate General or two or more
persons having interest in the trust can institute a suit regarding:

1. Removal of a trustee,
2. Appointment of a new trustee,
3. For vesting any property in a trustee,
4. Directing an expelled trustee to provide possession of any trust property in his
possession,
5. Also for directing accounting inquiries.

In case of Public Trust, whether in relation to movable property or immovable property

and whether created under a will or inter vivos, registration is not optional but desirable.

In case of Charitable or Religious Trust duly registered in relation to an immovable

property, can claim exemption under Section 11 of the Income Tax Act, 1961,

Simple Trust:

A simple trust must distribute all its income currently. Generally, it cannot accumulate
income, distribute out of corpus, or pay money for charitable purposes. If a trust
distributes corpus during a year, as in the year it terminates, the trust becomes a
complex trust for that year.

There are three basic characteristics that define a simple trust:

 The trust must annually distribute to the beneficiaries any income it earns on trust
assets.
 The trust cannot distribute the principal of the trust.
 The trust cannot make distributions to charitable organizations.

When this type of trust is used, the trust income is taxable income for the beneficiaries,
even if they don't withdraw the income from the trust. Capital gains taxes are applied to
the trust itself.

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 SPECIAL TRUST:

A special trust, is one where a trustee is interposed for the execution of some purpose
particularly pointed out, and is not, as in the case of a simple trust, a mere passive
depositary of the estate, but is required to exert himself actively in the execution of the
settler's intention; as, where a conveyance is made to trustees upon trust to reconvey ,
or to sell for the payment of debts.
it must do at least one of three activities within the year:

 The trust must retain some of its income and not distribute all of it to beneficiaries.
 The trust must distribute some or all of the principal to the beneficiaries.
 The trust must distribute some funds to charitable organizations.

Footnotes:

 http://dictionary.reference.com/browse/unjust?s=t&ld=1089
 Birks, Peter, Unjust Enrichment- Clarendon Law Series 2nd edition
 Pollock and Mulla- Indian Contract & Specific Relief Acts, Volume II 13th edition
2009
 4 Restitution and Equity : A Analysis of the Principle of Unjust Enrichment
available
 at http://papers ssrn com/sol3/papers cfm?abstract id=285563
 at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=285563
 Black Law Dictionary, 8th edition, Page 1573
 Encyclopediac Law Lexicon, Justice C.K. thakkar Volume 4 ashoka law house
page 4874
 Oxford law student dictionary J.E. Penner page 302
 Capital Legal and Medical Dictionary B L Bansal and Rajiv Raheja volume 2
edition2006 page 1778
 Encyclopaedic Law Dictionary Dr. AR Biswas 3rd edition 2008 wadhwa Nagpur
page
 1486
 Merriam Webster’s Dictionary of Law 1st edition 2005 page 515
 Pollock and Mulla Indian Contract Act, 1872 14th edition volume II page 1042
 Ibbetson, ‘Unjust Enrichment in England before 1600’, in Schrage(ed.), Unjust
Enrichment, 121..
 Stone v. Withypole (1588) 1 Leon 113, 114
 United Australia Limited v. Barclays Bank Limited 1941 AC 1,7
 Moses v Macferlan (1760) 2 Burr 1005 at 1012 (97 ER 676 at 681).
 Sadler v Evans (1766) 4 Burr 1984 at 1986 (98 ER 34 at 35)
 R. Pound, ‘ the progress of the law- equity’ (1920) 33 harv LR 420
 (1867) 7 WR (india) 377
 Wikipedia……
 https://www.findlaw.com/

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