A trust is a private legal arrangement whereby a settlor entrusts specified property and the legal ownership of it to another, known as the trustee. The trustee holds the property for the benefit of one or more beneficiaries. The trustee has a fiduciary obligation to act in the best interests of the beneficiaries and to be diligent in discharging the trust duties. The requirements for creating a trust are as set out below.
The Trust Must Be Properly Constituted
A Trust must be properly constituted by the settlor lawfully vesting the trust property into the trust. Where property is not lawfully transferred to the trustee, then the property remains in the ownership of the settlor and does not become trust property. This can arise where either the settlor lacks the legal title required to transfer the property, or the appropriate legal formalities have not been observed.
Although it may be possible to create a trust orally, generally speaking, trusts are created by way of written trust instrument known as a ‘Deed of Settlement’ or ‘Declaration of Trust’.
The Three Certainties
To be validly and legally constituted, a trust must satisfy three criteria, known as “the three certainties”:
1. Certainty of Intention
It must be clear that the settlor intended to create a trust and to transfer his ownership of the trust property to the trustee to hold on behalf of the beneficiaries.
2. Certainty of Subject Matter
A trust is not valid unless it is clear what property forms part of the trust. The trustee must be able to identify with certainty the property he is to hold on behalf of the beneficiaries.
3. Certainty of Objects
The objects (beneficiaries) of the trust must be clearly identified or readily ascertainable by the trustee.
If any of the three certainties are absent, a valid trust is not created and the assets remain the property of the purported settlor.
The Best Approach
The law of trusts can be complex. Before considering the establishment of a trust, it is important to seek professional, jurisdiction specific advice from those with experience and expertise in the field.
Editor's Note: This post was originally published in September 2012 and has now been updated for freshness and accuracy.