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What is a trust indenture?

A trust indenture is a document outlining the arrangements to set up and administer a trust. It is also referred to as a deed or agreement. Although there is a wide variation between the provisions found in trust indentures, many share the following common essentials.

  • Identification of the parties to the trust: The initial settlor (the party who set up the trust) the trustees and the beneficiaries should be identified.
  • The settlement of the trust: The indenture should refer to the trust property given to and accepted by the trustee.
  • Determination of the beneficiaries: The beneficiaries must be determined with certainty. Children are often defined as beneficiaries in a generic manner (i.e., “my children”) so that if there are subsequent children they will automatically be beneficiaries of the trust. Spouses are sometimes defined in a generic manner so that in the event of a divorce the former spouse will automatically cease to be a beneficiary.
  • Purposes of the trust: The purpose for which a trust is established should be clearly defined.
  • Indemnification of the trustees: Generally speaking, the fiduciary duties associated with being a trustee are so demanding, it would be difficult to recruit trustees if these duties were not limited in the trust indenture. As a result, trust indentures typically have a series of provisions aimed at reducing the high standards that trustees must otherwise meet so that trustees will only be liable in the event of willful default. It should be noted, however, that a limitation on a trustee’s liability in the trust indenture alone might not limit the trustee’s liability to a third party.
  • Trustees’ power: Unless a trust indenture states otherwise, the investment powers vested in a trustee are those set out in the applicable provincial statute. Since these statutory powers are usually restrictive, it is advisable for the trust indenture to enlarge these powers.
  • Time of division: Many trusts that are personal trusts contain a “time of division” clause which is designed to automatically distribute all of the trust property to the beneficiaries on a tax deferred basis immediately before the end of the 21 year time limit.
  • Failure of the trust: If a trust fails for lack of beneficiaries, then the trust property must be returned to the settlor. To ensure that the settlor is not subject to taxation, a trust should provide for an alternative scheme of distribution, which precludes trust property from reverting to the settlor.
  • Deeds of appointment: Trustees often exercise powers of appointment (powers to distribute or hold property for a particular beneficiary) by executing a deed of appointment.
  • Letter of wishes: A declaration of the settlor’s wishes often accompanies a trust indenture as a means of suggesting (in a non-binding manner) how the trustees should administer the trust.