We tend to think of a “trust” as a regulated contractual mechanism that people create through an agreement, a letter of authorization to a trustee etc. But is it possible to become part of a trust arrangement without it being formally regulated? The (perhaps surprising) answer is unequivocally “yes.”
What is a trust?
According to the definition in the Israeli Trust Law: “A trust is a relationship with an asset by virtue of which a trustee is bound to hold or act in respect of an asset in the interest of a beneficiary or for some other purpose.” In a situation such as this, the person actually holding the asset does not own it, but is merely holding it in trust for the beneficiary. The beneficiary can be the trustor, but sometimes the trust is created at another person’s initiative.
The law prescribes that a trust is created by law, by contract or by an instrument of endowment. A trust created by way of a contract can be formed in the same manner as a contract is created – in writing, orally or by implication from the parties’ conduct.
In other words, the relationship between a trustor, a trustee and a beneficiary can be created through the parties’ conduct and does not necessarily require a written contract. In practice, the courts have recognized the existence of a trust in various situations.
Implied trust / resulting trust
An implied trust is a legal mechanism that is created by virtue of the parties’ conduct or the circumstances, even without an explicit contract; e.g., when an asset is transferred, but the rights in the asset do not belong to the person actually holding it (i.e. the person did not purchase it for a consideration and did not receive it as a gift). In these instances, when an implied trust is created, the holder of the asset is the trustee, while the beneficiary is the person holding equitable rights to the asset.
Possible examples of an implied trust are: an asset is transferred for an unfulfilled purpose; an asset is transferred to another person without specifying the purpose of the transfer; or property is purchased for another person and is temporarily registered under the buyer’s name. For example, when a friend collects money from a group of friends in order to transfer it to another friend who needs financial assistance, a trust is created, whereby the members of the group are the trustors, the person who collects the money is the trustee and the friend for whose benefit the funds are being collected is the beneficiary.
Implied trusts are often created within families, when trust contracts are informally entered into without specifying the conditions of the trust, due to the familial relations between the trustor and the trustee, his relative.
Constructive trust
A constructive trust is a court-declared trust that is used as a tool to achieve just results, in instances when the intention to create a trust was not explicitly expressed. This becomes necessary, for example, in instances when ownership of a property has been formally registered, but does not reflect the actual state of affairs, such as if a person purchased an apartment and paid the full consideration for it, but was not registered as the owner of the property in the land registers. The courts have ruled that there is a constructive trust in such instances, whereby the seller, who is still registered as the owner of the property in the land registers, holds the property in trust for the buyer, while the buyer, who is the beneficiary of this trust, has the equitable proprietary right.
Presumption of a resulting trust
In order to resolve a legal dispute as to whether or not particular assets are being held in trust, the courts have developed the “presumption of resulting trust” doctrine. This is when a person transfers a real estate asset to another person for no consideration – but not as a gift – the presumption is that at issue is a trust; i.e. the parties agreed that the recipient of the asset is holding it in trust (for the grantor of the asset or for another person, depending upon the circumstances).
The significance of this presumption is that the default is that it is a trust, and the burden of contradicting the presumption is imposed on the trustee (who is claiming that the property registered in his name is owned by him and not held by him in trust).
It is important to note that there are instances when such a transfer is subject to a “presumption of advancement.” This primarily occurs when a property is transferred between immediate family members and the nature of their relationship indicates a relationship of care, such as between parents and their children, and when the nature and value of the transfer is logically consistent with the giving a gift. In these instances, there is a “presumption of advancement,” and not a “presumption of a resulting trust” (since, as stated, one of its criteria is that it is not a gift).
In this instance, the burden of disproving the presumption of advancement and proving that it was not a gift but rather a trust, is imposed on the transferor claiming to be the trustor.
In conclusion
We may often encounter trust mechanisms and arrangements during our routine lives, sometimes without even giving them a second thought. It is important to be aware of situations in which a trust is actually created, imposing both rights and obligations.
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Adv. Gal Livshits is a partner in the Litigation department and is available to assist with any additional questions you may have.