What is the Difference Between a Commercial vs Estate Trust in England and Wales

The law of trusts in England and Wales is a tricky area of law. In a commercial context, you may have come across “trusts” and “trustees”. Likewise, you may be curious about the distinction between a corporate trustee and an individual trustee. This article will explain the foundation of all trusts and their commercial functions. It will also explore the difference between a commercial and estate trust, and how corporate trustees differ from individual trustees. 

Foundations of Trusts

You can think of a trust as a unique way to hold and manage property, such as cash, shares, or land. All trusts operate by separating the legal principle of ownership in a piece of property into three different kinds of people:

• a settlor;
• a trustee; and 
• beneficiaries. 

A trust arises when ownership rights in property are separated so that different ownership rights and obligations in the property are split into these three categories. This happens when the “beneficial owner” of the property declares their intent to create a trust. The beneficial owner will then transfer the legal title to the property to the trustees. The trustees will then manage the property on behalf of the beneficiaries. 

Ownership 

Ownership in any piece of property, such as land, cash, or shares in a company, implies that there are two things you can do with the property:

1. You get to enjoy the benefit of the property; and
2. You have the right to “dispose of” the property, such as by selling it, gifting it, loaning it, or using it as collateral to borrow some other kind of property. 

The first right is called the “beneficial interest” in the property, sometimes referred to as the “equitable interest” or simply “equity in the property”. The second right is called the “legal title” of the property.

Let us say you are the beneficial owner of a house. By having a beneficial interest in the house, the obvious benefit is the right to live there. If you have the legal title to the house, you can also do certain things such as mortgage the house or lease it to someone else. If you lease the house, you will still retain some beneficial interest because you will collect rent from the house. 

Ownership Under a Trust

Say you own a country home that you want to leave to your wife and kids in case you die. However, you do not want anyone to sell the house so long as they are alive. 

Accordingly, you can create a trust that arises when you die where you transfer the legal title to a trustee. This could be your friend or a professional trustee. Under the terms of the trust instrument, you can specify that your wife and children are entitled to live in the country house for all of their lives but have no right to sell it. 

In this case, you would be the settlor, and your family would be the beneficiaries. Further, the person you nominate to hold the house on trust for your family would be the trustee, who would hold the legal title to the house. 

Commercial Contexts of Trusts

Trusts can exist in two contexts:

• private “estates”; and 
• commercial trusts. 

You can think of estates as wealth planning, such as in the case above regarding your country home. 

A commercial trust is more concerned about the management of money in a distinctly commercial context, such as holding money on behalf of several parties to a joint venture, like a big investment project. 

Examples of Commercial Trusts 

Trusts in a commercial context can arise expressly, such as where parties intend to create a trust). Alternatively, trusts can arise automatically, such as when the law says that there is a trust because of the circumstances. 

Additionally, you can create and use a commercial trust to facilitate certain financial relationships and transactions, including when:

• banks lend large sums of money to a big company; 
• companies hold customer money on trust to ensure the customer’s money will not be lost should the company go insolvent;
• a company goes insolvent and its property is transferred to a liquidator or administrator; 
• creating security interests in property as part of a loan; 
• issuing bonds and other commercial papers to professional investors; 
• creating employee share schemes; 
• creating agreements between groups of creditors for a single borrower; and 
• reserving employee pension money in a pension scheme. 

Corporate vs Individual Trustees

For both estates and commercial trusts, it is possible to nominate either a corporate trustee (also called a commercial trustee) or an individual trustee (i.e. a natural person) to hold the legal title of the property on behalf of the beneficiaries. 

A corporate trustee is an incorporated body like a company or limited liability partnership that acts as a trustee. By and large, the duties and powers of both corporate and individual trustees are similar. However, the law tends to put more restrictions on what individual trustees can do compared to corporate trustees, such as the right of the trustee to:

• pay themselves for their services; 
• obtain investment advice; 
• deal with land in certain ways. 

Key Takeaways 

All trusts split up the legal concept of ownership of property into three different categories: the legal title, the beneficial interest, and the trust itself. A settlor, who has beneficial ownership in the property, transfers the legal title to the trustee. The trustee then manages the property on behalf of the beneficiaries. It is possible for some of these positions to overlap, such as the settlor creating a trust on their own behalf. In a commercial context, trusts facilitate complex transactions and relationships, such as large investment projects and employee pension schemes. 

If you need help with managing your commercial trust, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page. 

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