Welcome to the last blog post in a series on the theme of legal personhood. Each fortnight La Trobe Law School academics were asked to write about how the concept of legal personhood intersects with their research interests. The last post is written by Tobias Barkley, who researches and writes about property, equity and trusts.
Trusts are sometimes conceived of as entities—legally separate ‘things’ like companies. Phrases such as ‘the family trust owns the beach house’, ‘her trust’ and ‘corporate and trust entities’ are often found in judgments. But this is not doctrinally correct: a trust is not a separate legal person and is not like a company. Rather, it is a relationship between two types of legal person: trustee and beneficiary.
Another common mistake made in relation to trusts is the misconception that the trustee is two separate legal persons. This is associated with the idea that trustees wear two hats (a ‘trustee’ hat and a ‘personal’ hat), but goes further; it concludes that what a person does wearing the trustee hat is completely separate from they do when wearing their personal hat. This is incorrect; the trustee is in a special role, but is still one unitary legal person. They are like an employee of a business: an employee wears two hats but is the same legal person whether they are at work or at home. If an employee negligently injures someone while acting as employee, then their whole legal personality will be personally liable.
An example illustrates these points. If a trustee hires a builder to put a new roof on a trust property the builder will be owed money when she is done. Who owes her this money? If the trust were a legal person then the trust would owe the money. If the trustee had two legal personalities the trustee would owe the money as trustee but not personally. Neither scenario accords with how trusts work in common law countries. Instead, trust doctrine holds that the trustee will be personally liable to the builder. This means that the builder can seize the trustee’s personal assets if a debt is owed.
So if the idea of a trust as a separate legal entity is incorrect, why is it so popular, even among judges and lawyers?
One reason is that the trust does appear like a separate legal entity when we look at trust property. It is useful, here, to refer to the concept of ‘patrimony’. Each legal person has a patrimony, which is like a container for all the assets and liabilities that belong to them. If a person owes you money, but has not paid, the debt becomes part of their patrimony, and in order to satisfy that debt you can take assets out of their patrimony. As a trustee owns trust property, you would expect the assets of the trust to be in her patrimony alongside the liabilities she incurs on behalf of the trust. But this is not the case.
Trust property must be kept separate from the trustee’s personal property. What this means is that: the trust property acts like a separate fund of property outside the trustee’s patrimony; trust assets do not go into the patrimony container with the rest of the trustee’s assets; and the trustee’s creditors are prohibited from taking them in order to satisfy debts owed. This contrasts with those trust liabilities that remain within the trustee’s patrimony. In the scenario above, the builder may take the trustee’s personal assets, which form part of her patrimony, but not the trust assets, which lie outside it.
And this is why it is so easy to slip into calling a trust an entity: although there is no separate legal person involved, there is a separate fund of property. Unlike normal property, trust property does not belong to the patrimony of any legal person. Which means trust property starts looking like a patrimony of its own.
Tobias Barkley, ‘Legal Personhood #9: The Trustee’, Law and Justice, 24 June 2015 (La Trobe Law School Blog, http://law.blogs.latrobe.edu.au/)