October 16, 2020
Trusts and agency are both legal concepts about relationships. Perhaps because of this commonality, people often confuse the two. They are quite different and recognizing which relationship exists in a particular situation may be crucial to understanding what your legal rights and responsibilities might be.
There are many differences. Some of them include:
- Agency arises when one person, the agent, acts on behalf of another, the principal.
- An agent may owe similar duties to the principal as a trustee owes to the beneficiaries of the trust.
- However, in an agency relationship, the principal retains both legal and beneficial ownership of property. A trustee must have legal title to property.
- An agent is subject to direction by the principal. A trustee is not subject to direction by the beneficiaries.
- No beneficiary can interfere with the exercise of the trustee’s duties. Their control is limited to ending the trust in certain circumstances, or suing to compel performance of the trustee’s duties.
- Once a trust is created, it cannot be revoked, unless that power was reserved by the person creating it. In most cases, a principal may end an agency at any time.
- An agency relationship normally ends upon the death of either party. A trust is not terminated by death.
- An agency relationship is contractual. It is a debtor-creditor relationship. A trustee derives their powers, and duties, by operation of law and equity. It is an equitable relationship.
- Acts of an agent affect the legal obligations of the principal. A trustee acts independent of the legal position of the beneficiaries or settlor.
- As a result, when an agent becomes insolvent, the principal claims in line with other creditors. Trust beneficiaries have rights to claim the trust property in priority over creditors.
If you doing business with a trustee or agent, knowing which they are is essential. If you are structuring a relationship, or entering into a relationship, selecting the appropriate vehicle is critical. This outline only scratches the surface of the important distinctions between the trust and agency relationships. Legal advice may be a sound investment in avoiding problems before they occur.
(References: Eileen E. Gillese, The Law of Trusts, Irwin Law; Mark R. Gillen et al, The Law of Trusts, A Contextual Approach, third edition, Emond Montgomery Publications)