In the second place, a trust is to be distinguished from the relation in which an agent stands towards the property which he administers on behalf of his principal. In substance, indeed, as already indicated, these two relations are identical, but in form and in legal theory they are essentially different. In agency the property is vested solely in the person on whose behalf the agent acts, but in trusteeship it is vested in the trustee himself, no less than in the beneficiary. A trustee is an agent for the administration of property, who is at the same time the nominal owner of the property so administered by him.
A trust is created by any act or event which separates the trust-ownership of any property from the beneficial ownership of it, and vests them in different persons. Thus the direct owner of property may declare himself a trustee for some one else, who thereupon becomes the beneficial owner; or the direct owner may transfer the property to some one else, to hold it in trust for a third. Conversely, a trust is destroyed by any act or event which reunites in the same hands the two forms of ownership which have become thus separated. The trustee, for example, may transfer the property to the beneficiary, who then becomes the direct owner; or the beneficiary may transfer it to his trustee, with the like result.
Trust-ownership and beneficial ownership are independent of each other in their destination and disposition. Either of them may be transferred, while the other remains unaffected. The trustee may assign to another, who thereupon becomes a trustee in his stead, while the beneficiary remains the same; or the beneficiary may assign to another, while the trust-ownership remains where it was. In like manner, either kind of ownership may be independently encumbered. The trustee may, in pursuance of the powers of the trust, lease or mortgage the property without the concurrence of the beneficiary; and the beneficiary may deal in the same way with his beneficial ownership independently of the trustee.
Whenever the beneficial ownership has been encumbered, either by the creator of the trust or by the beneficial owner himself, the trustee holds the property not only on behalf of the beneficial owner but also on behalf of the beneficial encumbrancers. That is to say, the relation of trusteeship exists between the trustee and all persons beneficially interested in the property, either as owners or encumbrancers. Thus if property is transferred to A., in trust for B. for life, with remainder to C., A. is a trustee not merely for C., the beneficial owner, but also for B., the beneficial encumbrancer. Both are beneficiaries of the trust, and between the trustee and each of them there exists the bond of a trust-obligation.[[211]]
§ 91. Legal and Equitable Ownership.
Closely connected but not identical with the distinction between trust and beneficial ownership, is that between legal and equitable ownership. One person may be the legal and another the equitable owner of the same thing at the same time. Legal ownership is that which has its origin in the rules of the common law, while equitable ownership is that which proceeds from rules of equity divergent from the common law. The courts of common law refused to recognise equitable ownership, and denied that the equitable owner was an owner at all. The Court of Chancery adopted a very different attitude. Here the legal owner was recognised no less than the equitable, but the former was treated as a trustee for the latter. Chancery vindicated the prior claims of equity, not by denying the existence of the legal owner, but by taking from him by means of a trust the beneficial enjoyment of his property. The fusion of law and equity effected by the Judicature Act, 1873, has not abolished this distinction; it has simply extended the doctrines of the Chancery to the courts of common law, and as equitable ownership did not extinguish or exclude legal ownership in Chancery, it does not do so now.
The distinction between legal and equitable ownership is not identical with that mentioned in a previous chapter as existing between legal and equitable rights. These two forms of ownership would still exist even if all rights were legal. The equitable ownership of a legal right is a different thing from the ownership of an equitable right. Law and equity are discordant not merely as to the existence of rights, but also as to the ownership of the rights which they both recognise. When a debt is verbally assigned by A. to B., A. remains the legal owner of it none the less, but B. becomes the equitable owner of it. But there are not for that reason two debts. There is only one as before, though it has now two owners. So if A., the legal owner of a share in a company, makes a declaration of trust in favour of B., B. becomes forthwith the equitable owner of the share; but it is the same share as before, and not another. The thing which he thus equitably owns is a legal right, which is at the same time legally owned by A. Similarly the ownership of an equitable mortgage is a different thing from the equitable ownership of a legal mortgage.
Nor is the distinction between legal and equitable ownership merely equivalent to that between trust and beneficial ownership. It is true that, whenever the legal estate is in one man and the equitable estate in another, there is a trust. A legal owner is always a trustee for the equitable owner, if there is one. But an equitable owner may himself be merely a trustee for another person. A man may settle upon trust his equitable interest in a trust fund, or his equitable estate in his mortgaged land. In such a case neither trustee nor beneficiary will have anything more than equitable ownership.
If an equitable owner can be a trustee, can a legal owner be a beneficiary? As the law now stands, he cannot. But this is a mere accident of historical development, due to the fact that the courts of common law refused to recognise trusts at all. There is no more theoretical difficulty in allowing that a trustee and his beneficiary may both be legal owners, than in allowing that they may both be equitable owners. Had the courts of common law worked out a doctrine of trusts for themselves, this twofold legal ownership would have actually existed.
The practical importance of the distinction between legal and equitable ownership is the same as that already indicated as pertaining to the distinction between legal and equitable rights.[[212]]