Whenever one person holds legal title to property and is obligated to manage the property for the benefit of another person, a trust relationship is created. The person who holds the legal title is called “the trustee” and the person who benefits from the trust is called “the beneficiary.” A last will and testament creates a trust relationship. Upon death, the property of the deceased vests in a personal representative, the executor, who is a trustee of the property for any beneficiaries.
The trustee is in a fiduciary relationship with the beneficiary, similar to the fiduciary relationship of a solicitor and client. However, since a trust relationship cannot exist without trust property, the trustee is required to meet high fiduciary standards because the trustee has the right and power to control property which, in essence, belongs to the beneficiary. There is a strict duty of loyalty to act solely in the best interests of the beneficiary. In other words, the trustee may not permit personal interests to conflict with the responsibilities of the trustee. The key standard is that the trustee must act honestly, with due diligence, and with the utmost candour. The trustee must keep proper accounts, may not delegate fiduciary responsibilities, and certainly may not make unauthorized profits from the relationship.
In order to create a trust, the creator of the trust must have the legal capacity to create it. A mentally incapacitated person, such as an aging person with dementia, will not have the capacity to create a trust. Bankrupt persons and persons under the age of majority also do not have the legal capacity to create a trust. On the other hand, these same persons can be the beneficiaries of a trust. Regarding the choice of a trustee, any person capable of holding property in his or her own right is capable of holding property as a trustee.
Another requirement for the creation of a trust is the three certainties. There must be a clear intention to create the trust, the subject matter of the trust, such as a land lot, must be adequately described, and those who are to benefit from the trust must be described in clear terms. Ambiguous or vague legal drafting of the trust document may lead to litigation about its meaning.