§ 90 Trust and Beneficial Ownership
A trust is a very important and curious instance of duplicate ownership. Trust property is that which is owned by two persons at the same time, the relation between the two owners being such that one of them is under an obligation to use his ownership for the benefit of the other. The former is called the trustee, and his ownership is trust-ownership; the latter is called the beneficiary, and his is beneficial ownership.210
The trustee is destitute of any right of beneficial enjoyment of the trust property. His ownership, therefore, is a matter of form rather than of substance, and nominal rather than real. If we have regard to the essence of the matter rather than to the form of it, a trustee is not an owner at all, but a mere agent, upon whom the law has conferred the power and imposed the duty of administering the property of another person. In legal theory, however, he is not a mere agent but an owner. He is a person to whom the property of some one else is fictitiously attributed by the law, to the intent that the rights and powers thus vested in a nominal owner shall be used by him on behalf of the real owner. As between trustee and beneficiary, the law recognises the truth of the matter; as between these two, the property belongs to the latter and not to the former. But as between the trustee and third persons, the fiction prevails. The trustee is clothed with the rights of his beneficiary, and is so enabled to personate or represent him in dealings with the world at large.
The purpose of trusteeship is to protect the rights and interests of persons who for any reason are unable effectively to protect them for themselves. The law vests those rights and interests for safe custody, as it were, in some other person who is capable of guarding them and dealing with them, and who is placed under a legal obligation to use them for the benefit of him to whom they in truth belong. The chief classes of persons in whose behalf the protection of trusteeship is called for are four in number. In the first place, property may belong to persons who are not yet born; and in order that it may be adequately safeguarded and administered, it is commonly vested in the meantime in trustees, who hold and deal with it on account of its unborn owners. In the second place, similar protection is required for the property of those who lie under some incapacity in respect of the administration of it, such as infancy, lunacy, or absence. Thirdly, it is expedient that property in which large numbers of persons are interested in common should be vested in trustees. The complexities and difficulties which arise from co-ownership become so great, so soon as the number of co-owners ceases to be small, that it is essential to avoid them; and one of the most effective devices for this purpose is that scheme of duplicate ownership which we term a trust. Fourthly, when persons have conflicting interests in the same property (for example, an owner and an encumbrancer, or different kinds of encumbrancers) it is often advisable that the property should be vested in trustees, whose power and duty it is to safeguard the interests of each of those persons against the conflicting claims of the others.
A trust is to be distinguished from two other relations which resemble it. It is to be distinguished, in the first place, from a mere contractual obligation to deal with one’s property on behalf of some one else. A trust is more than an obligation to use one’s property for the benefit of another; it is an obligation to use it for the benefit of another in whom it is already concurrently vested. The beneficiary has more than a mere personal right against his trustee to the performance of the obligations of the trust. He is himself an owner of the trust property. That which the trustee owns, the beneficiary owns also. If the latter owned nothing save the personal obligation between the trustee and himself, there would be no trust at all. Thus if a husband gratuitously covenants with his wife to settle certain property upon her, he remains the sole owner of it, until he has actually transferred it in fulfilment of his contract; and in the meantime the wife owns nothing save the contractual obligation created by the covenant. There is therefore no trust. If, on the other hand, the husband declares himself a trustee of the property for his wife, the effect is very different. Here also he is under a personal obligation to transfer the property to her, but this is not all. The beneficial ownership of the property passes to the wife forthwith, yet the ownership of the husband is not destroyed. It is merely transformed into a trust-ownership consistent with the concurrent beneficial title of his wife.
In the second place, a trust is to be distinguished from the relation in which an agent stands towards the property which he administers on behalf of his principal. In substance, indeed, as already indicated, these two relations are identical, but in form and in legal theory they are essentially different. In agency the property is vested solely in the person on whose behalf the agent acts, but in trusteeship it is vested in the trustee himself, no less than in the beneficiary. A trustee is an agent for the administration of property, who is at the same time the nominal owner of the property so administered by him.
A trust is created by any act or event which separates the trust-ownership of any property from the beneficial ownership of it, and vests them in different persons. Thus the direct owner of property may declare himself a trustee for some one else, who thereupon becomes the beneficial owner; or the direct owner may transfer the property to some one else, to hold it in trust for a third. Conversely, a trust is destroyed by any act or event which reunites in the same hands the two forms of ownership which have become thus separated. The trustee, for example, may transfer the property to the beneficiary, who then becomes the direct owner; or the beneficiary may transfer it to his trustee, with the like result.
Trust-ownership and beneficial ownership are independent of each other in their destination and disposition. Either of them may be transferred, while the other remains unaffected. The trustee may assign to another, who thereupon becomes a trustee in his stead, while the beneficiary remains the same; or the beneficiary may assign to another, while the trust-ownership remains where it was. In like manner, either kind of ownership may be independently encumbered. The trustee may, in pursuance of the powers of the trust, lease or mortgage the property without the concurrence of the beneficiary; and the beneficiary may deal in the same way with his beneficial ownership independently of the trustee.
Whenever the beneficial ownership has been encumbered, either by the creator of the trust or by the beneficial owner himself, the trustee holds the property not only on behalf of the beneficial owner but also on behalf of the beneficial encumbrancers. That is to say, the relation of trusteeship exists between the trustee and all persons beneficially interested in the property, either as owners or encumbrancers. Thus if property is transferred to A., in trust for B. for life, with remainder to C., A. is a trustee not merely for C., the beneficial owner, but also for B., the beneficial encumbrancer. Both are beneficiaries of the trust, and between the trustee and each of them there exists the bond of a trust-obligation.211