An Introduction to Trusts

Hello. My name is Gary Watt, I'm a Professor of law at the University of Warwick, and I am the author of books on trusts and equity for OUP. And the purpose of this video, and several other short videos like it, is to give you a very brief taste of some key concepts in the law of equity and trusts.

Now, I like to teach using pictures. They say that a picture is worth a thousand words, and I’ve already done a little film on equity—maybe you’ve seen that one—that's a good place to start.

This is about the trust, which is probably the most famous creation of equity. Now, I'm going to use another picture, and it’s this. I'm sure you recognize this.If I were to say to you, ‘What is this?’, you would say, I'm sure, ‘It's a banana. ’ But if I show you this and I say,‘What's that?’, I think you’d also say, ‘That’s a banana.’ You see, we use the same words to describe the banana whether it has a peel on it or it doesn't have a peel on it. And that's actually a really good clue as to what's happening in the trust.

You see that, in English law, we once upon a time had two courts. One court produced the common law, the general rules; and then there was the Court of Chancery that produced the exceptional rules, the equitable rules—in fact, principles. They together worked to produce the trust.

Now, the trust was equity’s way, Chancery’s way, of recognizing something superior to legal title. Now legal title is a bit like a banana's skin. You can see it's hollow; there's no benefit in having your name on the outside of the ownership, on the deed, or on the title document. There's no real benefit. It doesn't taste good. It's a hollow power. What you really want is the benefit of the inside—the inside of course is the good part of the banana.

Now what happened is, for example, someone who was the absolute owner of the land—it was typically land—would own everything, they’d have the whole banana. But they might, for example, want to give the legal title to a friend, a trusted friend, in the friend's name. That friend would get the form of ownership. But if it's given to a friend for the benefit of the family of the real owner, you don't want your friend to take the benefit, you simply want your friend to take the formal title.

So how do we have two owners at once? How does an absolute owner who owns everything divide their ownership between the legal title holder, who you only want to have the form of ownership—the power to sell the land, the power to deal with the land—whilst at the same time giving your family a different type of ownership, the benefit, the good bit of the banana, the inside?

Trust is the way you do this. Equity, Chancery courts, they recognize that you can have two people owning the same thing at the same time. If the absolute owner gives the title to a friend—puts it in their name on trust for the owner's family—we now have two different types of owner of the same asset. We have a formal owner of the outside—their name will be on the title—but we have the family owning the benefit.

The really good thing about this is that benefit can be shared. It could be given to your spouse and then for the children, or it could be divided between your siblings. You can divide the benefit into many parts. In pension trusts, for example, many hundreds—thousands—of people will share the benefits. Whereas legal title, this has no benefits. In fact, if you're a trustee, you have to be very careful because banana skins—the outside—whilst it brings power to deal with a property, it can also bring problems to you. You might make mistakes and have to pay the true beneficial owners out of your own pocket. So, beware. Banana skins for trustees might be something to slip up on.