Back to Articles

Trust Formalities

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

27/09/2018

By Law Central Legal

Trusts are an increasingly popular legal instrument which are utilised by individuals, families and corporations. Often a person (the settlor) will purport to create a trust, but how do they know if the trust was validly created? This bulletin will address some of the key requirements for a trust in Australia.

A trust is a legal obligation imposed on a person or other entity (the trustee) to hold and manage property for the benefit of the beneficiaries. This legal obligation can be created:

The Three Certainties

Regardless of how the trust was created, all trusts must satisfy the three certainties. They are:

Certainty of Intention

A trust will not be validly created unless it is clear that the settlor had intended to create a trust. This element does not require the creator to have in-depth knowledge of trusts in order to create one. No particular words or combination of words have to be used. To satisfying this requirement the court only needs to see evidence that the settlor intended to create the trust.

A trust may be created in circumstances where one party has merely intended to pass on property. For example, in Re Armstrong a bank manager was instructed to give the principal sums to the settlor’s sons when the investments matured. It was held the settlor intended to create a trust. This is because the bank manager would effectively be holding the principal sums on trust for the settlor’s sons.

Certainty of Subject Matter

The ‘property’ or ‘subject matter’ of a trust must be defined and identifiable. Otherwise the trust is void for uncertainty, for there can be no trust without trust property. If vague or ambiguous language is used, it may lead to the trust being voided because the trust property is not identifiable. The subject matter must be legally recognised property. Legal recognised property includes: real property (land), personal property, shares, legal interests, equitable interests, and even a life interest in a property.  

In order to satisfy this requirement the trustee should also be able to ascertain what part of the property each beneficiary is entitled to. However, there are some exceptions. The most common exception involves discretionary trusts, where the trustees have discretion as to what each beneficiary is entitled to receive.

Certainty of Beneficiaries

In order for the trust to be validly created, it must be clear who the beneficiaries are. Property cannot be held on trust if the trustee does not know for whose benefit he is holding the property.

For fixed trusts, the relevant test is the ‘list certainty’ test. Can the trustee compile a list of all the beneficiaries of the trust? If the trustee cannot compile a list of all the beneficiaries then the trust will be void for uncertainty of beneficiaries.

The beneficiaries of discretionary trusts are often wide and very difficult to list. For this reason, the court uses the ‘criterion certainty’ test for discretionary trusts. To satisfy this test, you must be able to identify if any single person is, or isn’t, a beneficiary of the trust.

In the case of Re Gulbenkian’s Settlements a trust failed to satisfy the ‘criterion certainty’ test. The settlor wished a fund be divided equally between ‘my old friends.’ Lord Upjohn held there was too much uncertainty to decide if certain people were included as beneficiaries. Did it include school friends? Did it include family? Did it include friends not seen for many years? It was too unclear and the trust was held void.

Settled Sum has been Paid

When a family trust is being created in Australia, it is usual practice for a nominal payment to be made, which will constitute the initial trust property. In many cases, this payment will only be a small amount such as $10.

If this settled sum is not paid, the family trust may not be validly created. In the Victorian case of Aston (Aust) Properties Pty Ltd & Ors v Commissioner of State Revenue (Taxation) the validity of various trusts were examined with the issue of the payment of the “settled sum” being a relevant factor in the review. 

It is not only important that the settled sum is paid, but it should also be evidenced. A settled sum is best evidenced by the use of cheque or bank transfer which explicitly references the trust. However it is not fatal to the trust if the payment of the settled sum can be evidenced in another way. If the settled sum is paid by cash, a receipt should be issued by the trustee.

Deed of Settlement Executed Correctly

The most common way to establish a trust is to execute a deed of settlement. This will set out the parties to the trust, the relationship between the parties, the trust property and any other terms relevant to the trust. Once correctly executed, the deed of settlement will establish the trust on the terms contained in the deed.

A deed may be ineffectual to establish the trust if it has not been correctly executed. The specific requirements to execute a deed will vary depending on the state. Some general requirements for executing a deed are: it has been correctly witnessed; the document is referred to as a deed; and it meets the requirements of the Corporations Act 2001 (Cth) if being signed by a company. 

Gold and Platinum members read on for information on the legal validity of orally created trusts.

Platinum Members, click here to view content

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

Back to Articles