Every Express Trust is a Contract, but Every Contract is Not Always a Trust: The Key Differences
Understanding the legal concepts of trusts and contracts is critical to avoiding confusion, especially since both can involve agreements and obligations. However, as highlighted in Bogert’s The Law of Trusts and Trustees § 17, these legal structures have distinct features and operate under different principles. Below, key terms and concepts are explained to clarify their roles in the legal system.
Trusts vs. Contracts: Defining Features
A trust is fiduciary and a legal relationship where a trustee holds and manages property for the benefit of a beneficiary. A defining feature of a trust is divided ownership: the trustee has legal title, and the beneficiary has equitable title. This further laid out, for example, a trust is a fiduciary relationship where a trustee holds and manages property for the benefit of a beneficiary, characterized by divided ownership: the trustee has legal title, and the beneficiary has equitable title in the Vt. Admin. Code 12-3-224:29.00, Boyle v. Anderson, 301 Va. 52 (2022). In contrast, contracts involve two or more parties agreeing to perform or abstain from certain actions. This involves mutual promises between the parties without any division of property interest Tunick v. Tunick, 201 Conn.App. 512 (2020). Ownership remains unaffected—there is no division of property interest in a contract .
Trusts impose fiduciary duties on trustees, requiring them to act in the best interest of the beneficiaries, which is a higher standard of care than typically found in contracts Tunick v. Tunick, 201 Conn.App. 512 (2020). Trustees are accountable in courts of equity and may face claims related to mismanagement of trust assets In re Naarden Trust, 195 Ariz. 526 (1999). Contract parties, however, generally do not owe fiduciary duties unless explicitly agreed upon Tunick v. Tunick, 201 Conn.App. 512 (2020).
A trust establishes a fiduciary duty, requiring the trustee to act in the best interest of the beneficiary. This is a higher standard of care than what is typically found in contracts, where each party is generally free to pursue their own interests without fiduciary obligations. Trustees, for example, are accountable in courts of equity and may face claims related to mismanagement of trust assets. Contract parties, however, have no such duty unless explicitly agreed upon by the parties.
Trusts and contracts are distinct legal arrangements with different defining features, enforcement mechanisms, formalities, flexibility, and statutory requirements.
Defining Features:
- Trusts involve a fiduciary relationship with respect to property, where the trustee holds legal title and the beneficiary holds equitable title (Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024))[1]. Trusts do not require mutual assent or consideration, and they are created by the transfer of a beneficial interest in property Schoneberger v. Oelze, 208 Ariz. 591 (2004), Boyle v. Anderson, 301 Va. 52 (2022).
- Contracts are based on mutual promises and require offer, acceptance, and consideration Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024). They create obligations between promisor and promisee, and the rights and duties can generally be freely transferred Boyle v. Anderson, 301 Va. 52 (2022).
Enforcement and Legal Recourse
Legal remedies differ between contracts and trusts. breaches of trust often involve equitable claims, allowing courts to compel specific actions, provide accountings, or recover trust property In re Naarden Trust, 195 Ariz. 526 (1999). In contrast, contract disputes typically lead to monetary compensation unless specific performance is deemed appropriate Tunick v. Tunick, 201 Conn.App. 512 (2020).
If a trustee becomes insolvent, a beneficiary can recover trust property from the trustee’s estate due to the equitable ownership principle Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024). Creditors, however, hold only a chose in action, meaning they may only claim payment as general creditors without rights to specific assets Tunick v. Tunick, 201 Conn.App. 512 (2020).
- Trusts are enforced through fiduciary duties, and trustees are liable for breaches of these duties rather than breaches of contract Schoneberger v. Oelze, 208 Ariz. 591 (2004). Beneficiaries cannot typically bring breach of contract claims against trustees Occidental Petroleum Corp. v. Wells Fargo Bank, N.A., 622 F.Supp.3d 495 (2022).
- Contracts are enforced through the legal system based on the terms agreed upon by the parties, and breaches can result in damages or specific performance Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024)
Formalities and Creation
Trusts can be created without mutual assent and consideration, often resembling a conveyance of property interest rather than a mutual agreement (Tunick v. Tunick, 201 Conn.App. 512 (2020). While contracts require mutual assent and consideration to be enforceable, trusts may be created without these formalities. Trust formation often resembles a conveyance of property interest rather than a mutual agreement. Additionally, A trust can exist without the beneficiary’s knowledge, whereas contract formation necessitates the awareness and acceptance of all parties involved Tunick v. Tunick, 201 Conn.App. 512 (2020).
Statutory requirements can also vary. For example, oral trusts may be enforceable in certain jurisdictions, whereas contracts for interests in land often require written agreements under the Statute of Frauds .
- Trusts are created by a grantor/settlor transferring property to a trustee for the benefit of a beneficiary, and do not require the beneficiary’s knowledge or acceptance Boyle v. Anderson, 301 Va. 52 (2022). No consideration is needed for the creation of a trust Boyle v. Anderson, 301 Va. 52 (2022).
- Contracts require mutual assent, offer, acceptance, and consideration to be valid Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024).
Flexibility and Adaptation
Contracts offer extensive flexibility in terms of structure and terms, provided they do not violate public policy. Trusts, though adaptable to some extent, possess inherent characteristics that cannot be altered, such as the trustee’s discretion and accountability. Attempts to limit these core duties render the trust legally invalid.
- Trusts have divided ownership of property and fiduciary duties that cannot be freely transferred or delegated except as permitted by statute Boyle v. Anderson, 301 Va. 52 (2022). Trusts can be adapted to various purposes, including commercial transactions, but are primarily governed by trust law Owner–Operator Independent Drivers Association v. Pacific Financial Association, Inc., 241 Ariz. 406 (2017).
- Contracts allow for the free transfer of rights and duties unless restricted by the contract terms Boyle v. Anderson, 301 Va. 52 (2022). They are more flexible in terms of modification and assignment.
Statutory Requirements:
- Trusts are governed by trust law, which includes statutes and common law principles specific to fiduciary relationships In re National Collegiate Student Loan Trusts Litigation, 251 A.3d 116 (2020). Statutory requirements may vary depending on the type of trust and jurisdiction.
- Contracts are governed by contract law, which includes statutes and common law principles related to mutual agreements and obligations Occidental Petroleum Corporation v. Wells Fargo Bank, N.A., 117 F.4th 628 (2024).
Contracts Held in Trust
In practice, contracts can be held in trust. The trustee, in such cases, has the contractual duty to enforce the agreement for the benefit of the trust beneficiary. However, this does not imply that the contract itself is a trust; rather, it is the contractual rights that are subject to trust obligations.
- Contracts can be incorporated into trust agreements, and the terms of the contract can be enforced as part of the trust’s governing instruments In re National Collegiate Student Loan Trusts Litigation, 251 A.3d 116 (2020). However, the fiduciary duties of the trustee and the nature of the trust relationship remain distinct from the contractual obligations In re National Collegiate Student Loan Trusts Litigation, 251 A.3d 116 (2020).
Trusts and contracts are fundamentally different in their formation, enforcement, and legal nature. While contracts can be incorporated into trust agreements, the fiduciary duties and trust relationship are not typically characterized as contractual.
Key Terms and Concepts
1.Trust
•Definition: A legal relationship in which a trustee holds and manages property for the benefit of another person (the beneficiary).
•Key Characteristics:
•Divided ownership (legal and equitable titles)
•Fiduciary duties
•Trustee accountability in equity courts
•Example: A parent sets up a trust, transferring property to a trustee for the benefit of their child.
2.Contract
•Definition: A legally binding agreement between two or more parties where they agree to perform or refrain from performing certain actions.
•Key Characteristics:
•Requires mutual assent (offer and acceptance)
•Enforceable only if supported by consideration (something of value)
•Governed primarily by courts of law
•Example: A homeowner contracts with a builder to construct a house. Each party has enforceable obligations under the terms of the contract.
3.Divided Ownership
•Definition: In a trust, the property is split between two forms of ownership:
•Legal Title: Held by the trustee, giving them authority to manage the property.
•Equitable Title: Held by the beneficiary, granting them the right to benefit from the property.
•Example: In a trust for real estate, the trustee may collect rent, while the beneficiary is entitled to the income generated from the property.
•In contrast: In a contract, there is no such division. Ownership rights remain with one party unless explicitly transferred.
4.Fiduciary Duty
•Definition: A legal obligation to act in the best interest of another party. This duty requires high standards of honesty, loyalty, and care.
•Application in Trusts: The trustee must manage the trust assets solely for the beneficiary’s benefit, avoiding conflicts of interest.
•In Contracts: There is typically no fiduciary duty unless explicitly agreed upon by the parties.
•Example: A financial advisor managing a trust fund must prioritize the beneficiary’s financial well-being over their own interests.
5.Chose in Action
•Definition: A personal right to bring a legal action to recover a debt or enforce a contractual obligation.
•In Contract Law: A creditor has a chose in action against a debtor but no direct property rights over the debtor’s assets.
•Example: If a lender loans money to a borrower under a contract, the lender can sue for repayment but cannot claim specific property of the borrower.
•In Trust Law: The beneficiary has an equitable interest in the trust property, meaning they can directly claim identifiable trust assets if the trustee becomes insolvent.
6.Mutual Assent
•Definition: An agreement between parties, signified by an offer and acceptance, which is essential for forming a valid contract.
•In Trusts: Unlike contracts, trusts can be created without the beneficiary’s knowledge or consent. However, once aware of the trust, a beneficiary may disclaim their interest.
7.Consideration
•Definition: Something of value exchanged between parties that makes a contract legally enforceable. It can take the form of money, services, or a promise to act or refrain from acting.
•In Trust Law: Consideration is not necessary to enforce a trust that has already been established. However, a promise to create a trust in the future is unenforceable without consideration.
•Example: A service agreement where one party pays a fee in return for professional services is enforceable due to the exchange of money (consideration).
8.Court of Equity vs. Court of Law
•Definition:
•Court of Law: Focuses on legal remedies, often monetary compensation.
•Court of Equity: Handles cases where legal remedies are inadequate, providing remedies such as injunctions, specific performance, or trust enforcement.
•Example: In a breach of trust, equity courts can order the trustee to restore lost assets, while contract disputes may only result in a damages award.
9.Statute of Frauds
•Definition: A legal requirement that certain types of contracts and agreements be in writing to be enforceable, such as those involving the sale of land or agreements lasting more than one year.
•In Trusts: While contracts must meet the requirements of the Statute of Frauds, trusts may not be subject to the same formalities, depending on jurisdiction.
10.Set-Off
•Definition: The legal right to reduce a debt by any claim the debtor has against the creditor.
•In Trust Law: Trustees generally cannot set off personal claims against the beneficiary’s interest in the trust, as the trustee’s legal duties in the trust and their individual rights are distinct.
•In Contracts: Debtors can often set off counterclaims or other debts owed to them by the creditor.
Conclusion
While there is a conceptual overlap between contracts and trusts, their distinctions are pivotal in law. Trusts embody fiduciary duties and divided ownership of property, features absent from most contractual relationships. Understanding these differences is crucial for legal professionals, business owners, and anyone engaging in complex financial or property arrangements. Misinterpreting a contract as a trust—or vice versa—can lead to significant legal and financial consequences .