05 Beneficial Entitlement Flashcards
What is a vested interest?
A beneficiary has a vested interest if that beneficiary exists and does not have to satisfy any conditions imposed by the terms of the trust before becoming entitled to trust property. Their interest is unconditional.
If the beneficiary dies before the trust property is paid over to them, the trust property will belong to the beneficiary’s estate, i.e. it will pass as part of the beneficiary’s property under their will or intestacy.
The vested interest can take effect in possession or in remainder.
What is the difference between vested in possession and vested in interest?
Vested in possession = a present right to present enjoyment
Vested in interest = a present right to future enjoyment
What is a contingent interest?
A beneficiary has a contingent interest if it is conditional upon the occurrence of some future event that may not happen, or if the beneficiary is not yet in existence (e.g. a trust for grandchildren and the settlor does not yet have any grandchildren but might in the future).
Once/if the condition is met, the interest becomes a vested interest.
If a beneficiary dies before the condition is met, their interest will revert to the settlor unless the settlor has provided that the beneficial interest should pass to someone else (a ‘substitution clause’, i.e. a clause in a trust deed that identifies who will take beneficial interests in substitution should the primary trust fail).
The contingent interest is void if not limited in perpetuity.
What is the perpetuity period?
The perpetuity period is ‘lives in being’ plus 21 years. The period is calculated as follows: all the lives in being must have died, and 21 years is added on after the death of the last surviving life in being.
Can a settlor chose to bypass the perpetuity period test?
Under the Perpetuities and Accumulations Act 2009, a settlor can choose to bypass the perpetuity period test by expressly specifiying a period of up to 125 years.
What is a fixed trust?
The beneficial interest of each beneficiary is fixed and they have an automatic right to payment in accordance with the terms of the trust. The beneficiary has an equitable proprietary interest in the property, which they can enforce against anyone who comes into possession of it through the mechanism of a constructive trust or through the process of tracing.
What is a discretionary trust?
The beneficiaries of a discretionary trust do not have an automatic right to payment. They have no proprietary interest in the trust assets unless and until the trustees decide to distribute.
What is a bare trust?
The trustees are holding the property for the sole benefit of an adult beneficiary. The beneficiary has full control over the actions of the trustees. The trustees must comply with the beneficiary’s instructions, incl. how to invest the assets, how much to pay the beneficiary, etc.
What is the Rule in Saunders v Vautier?
Saunders v Vautier [1841]: a sole beneficiary who is sui juris and is absolutely entitled to the whole beneficial interest may compel the trustees to transfer the legal title to them, thereby terminating the trust. The rule has since been extended to apply to a group of beneficiaries. If all the beneficiaries are adults, under no disability and together are absolutely entitled, they may agree to bring the trust to an end.
