1 & 2 - Introduction and Creation of Trusts

Question 1

What is equity in the context of English law?

Answer 1

Historically, equity was a distinct system of English law that was developed and administered separately from the common law. Its purpose was primarily twofold:

• To mitigate the rigors of the common law, which could be applied universally and inflexibly, resulting in injustice and unfairness in certain cases.
• To provide victims of a wrong with more options for redress beyond the common law remedy of damages.

Question 2

How does equity achieve its purposes?

Answer 2

• Equity focuses on the consciences of the parties involved, examining whether one party seeks to engage in conduct that is unconscionable or unfair.
• It developed new remedies available at the discretion of the court, usually awarded when damages would be inadequate to address the wrong suffered by the victim.

Question 3

What are maxims of equity?

Answer 3

‘He who comes to equity must come with clean hands’: This refers to the fundamental idea of doing justice between the parties. If the claimant has done something untoward, they may be denied a remedy in equity, as it would be contrary to principles of justice and fairness to allow a wrongdoer to benefit.

‘Equity will not assist a volunteer’: This maxim restricts the assistance equity can provide to individuals who have not provided consideration for the benefit they seek.

Question 4

How does a trust arise in property ownership?

Answer 4

It is possible for one person to hold the legal interest in property while someone else holds the equitable interest. This scenario gives rise to the concept of the trust.

For instance, Charlotte owns shares in McDowell Properties Limited but wishes for future dividends to fund her granddaughter, Danielle’s education. Charlotte instructs her solicitor, Elliot, to hold those shares for Danielle, meaning Elliot is the legal owner while Danielle is the equitable owner.

Question 5

What is a trust?

Answer 5

At its most simple, a trust is an arrangement where a trustee holds property for the benefit of another.

A trust involves:
A duty imposed on one or more trustee(s) to manage property over which they have control.
The trustee must act for the benefit of beneficiaries, who have the right to enforce this duty.

Question 6

Who is involved in a trust?

Answer 6

Settlor: The individual who creates the trust, selecting trustees, beneficiaries, and the property to be held, along with laying down the terms of the trust, often referred to as the declaration of trust or trust deed.

Trustee(s): The individual or individuals chosen to hold the trust property for the benefit of the beneficiaries. The trustee must adhere to the terms set by the settlor.

Beneficiaries: The individuals who will ultimately benefit from the trust and the property being managed by the trustee, gaining rights over the trust property.

Question 7

How is trust property owned?

Answer 7

When a trust is created, the ownership of the property automatically splits:

• Legal title goes to the trustee, who manages the property.
• Equitable or beneficial title goes to the beneficiary, who ultimately benefits from the trust property.

Question 8

Why is the splitting of legal and equitable title important?

Answer 8

The splitting of legal from equitable title is crucial because the trustee is essentially the owner of the trust property in name only.

The real value of the trust lies in the equitable title that belongs to the beneficiary, who has rights over the property that the trustee must uphold and manage according to the trust’s terms.

Question 9

What is the characteristic of legal title held by a trustee?

Answer 9

The legal title to the trust property is held by the trustee, who appears as the absolute owner in the eyes of the external world.

This means:
The trustee’s name is used for any trust property, such as:
- A bank account held on trust, where statements are sent to the trustee.
- Shares in a company, which are registered in the trustee’s name, who receives all related information.

This legal title grants the trustee the authority to manage and control the trust property.

Question 10

What does equitable title held by a beneficiary entail?

Answer 10

Equitable title is held by the beneficiary, who carries all the benefits of the trust property. This means:

• The trust fund ultimately belongs to the beneficiaries, granting them entitlement to all benefits without the responsibility of managing it.
• Beneficiaries possess a proprietary right in the trust fund itself and a personal right to enforce the trustees’ duties and seek compensation for any breaches of trust.

Question 11

What is one of the main duties of trustees?

Answer 11

One of the primary duties of trustees is to manage the property for the beneficiaries. This means:

They are responsible for ensuring that the trust fund is maintained and that its value is protected and potentially increased for the benefit of the beneficiaries.

Question 12

What can beneficiaries enforce against third parties?

Answer 12

Beneficiaries can assert their proprietary rights against third parties.

This includes:
- If a trustee becomes bankrupt, the trust fund will not be distributed among the trustee’s creditors but will be preserved for the beneficiaries.
- If the trustee mistakenly transfers trust property to someone who is not a beneficiary, the rightful beneficiaries have the right to recover that property.

Question 13

What onerous duties are imposed on trustees?

Answer 13

Equity imposes very onerous duties on trustees to prevent misuse of trust property. These duties include:

• They must invest the trust fund with the aim of growing its value for the beneficiaries while avoiding unreasonable and speculative investments.
• They are required to distribute the trust fund in accordance with the terms specified in the declaration of trust.
• They must make good any loss in value of the trust fund resulting from any breach of their duties.

Question 14

Can beneficiaries sell or give away their interests in the trust property?

Answer 14

Yes, beneficiaries have the right to sell or gift their interests in the trust property. This means:

Beneficiaries possess a proprietary right that allows them to deal with their interests in the same manner as any property owner would, including selling or gifting their share of the trust property.

Question 15

What are the two main categories of trusts?

Answer 15

1. Express Trusts
   Created intentionally by the settlor with the purpose of benefiting individuals or achieving a specific purpose.
2. Implied Trusts
   Arise automatically due to the law, even without express intention from the settlor.

Question 16

What are express trusts that benefit individuals?

Answer 16

Express trusts that benefit individuals are created when the settlor directs trustees to distribute trust property to specific individuals. Examples include:

• Bare Trusts
• Contingent Interests
• Life Interests
• Discretionary Trusts

Question 17

What are express trusts?

Answer 17

Express trusts: Created with the settlor’s explicit intention.
- Express trusts that benefit individuals: The settlor directs trustees to distribute trust property to named individuals, including examples like bare trusts and discretionary trusts.
- Express trusts to achieve a purpose: Established to fulfil specific objectives, such as funding community projects.

Question 18

What are implied trusts?

Answer 18

Implied trusts: Arise when the law creates a trust, even without express intention from the settlor.
- Resulting trusts: Presumed when the settlor likely intended for the property to revert to them.
- Constructive trusts: Imposed to ensure fairness when it would be unjust for the legal owner to have sole enjoyment of the property.

Question 19

What is a resulting trust?

Answer 19

A resulting trust is implied in situations where it is presumed that the settlor would have intended such a trust if they had considered it.

Example:
Robert creates an express trust for Susan and Tia, conditional on them reaching 30 years of age.
If Susan dies at 26, her interest fails because she did not meet the condition.
If Tia dies at 24, her interest also fails, leaving no beneficiaries.
A resulting trust arises, allowing the brother to hold the trust fund for Robert, as equity assumes he wants the property returned.

Question 20

What is a constructive trust?

Answer 20

A constructive trust is implied to achieve a fair result between the parties involved, especially when it would be unfair to allow the legal owner full enjoyment of the property.

E.g., Contributions towards the mortgage of a property.

Question 21

When can trusts be created?

Answer 21

Trusts can be established to take effect either:
- During the settlor’s lifetime (inter vivos trusts).
- Upon the settlor’s death in their will.

Question 22

What are the requirements for a valid lifetime trust?

Answer 22

To create a valid lifetime trust, the settlor must:
- Make a valid declaration of trust.
- Ensure property is placed into the trust; if appointing another as trustee, the settlor must transfer the property.
- If the settlor is the trustee, a valid declaration suffices, and no further action is needed.
- Completing both steps means the trust is ‘constituted’.

Question 23

What is a will trust?

Answer 23

A person can create a trust to take effect on their death. We call this person the ‘testator’
(if male) or ‘testatrix’ (if female)
A will trust is established to take effect upon the death of the testator/testatrix.

To create a valid will trust, the testator must:
- Make a valid declaration of trust in compliance with the Wills Act 1837.
- Direct that the title to the trust property is transferred to the trustee.

Question 24

What is the residuary estate?

Answer 24

The residuary estate consists of what remains of the settlor’s property after settling debts, taxes, and specific legacies at death.

Example:
William’s will states he gives his paintings to Yasmin, £5,000 to Anita, and the remainder to Bernard (the residuary beneficiary).
If a trust fails, the equitable interest reverts to Bernard as the residuary beneficiary.

Question 25

What is the difference between beneficial and equitable interest?

Answer 25

Equitable Interest:
Definition: An equitable interest is a right or interest enforceable in equity (rather than strict common law).
Context: It arises typically in situations where formal legal ownership exists but fairness demands that another party has some stake or claim over the property, such as under a trust arrangement.
Legal Enforceability: Courts of equity, like the Chancery Division, will enforce equitable interests.
Examples: In a trust, the trustee holds the legal title, but the beneficiary holds the equitable interest in the property.

Beneficial Interest:
Definition: A beneficial interest refers to the right to benefit from property or assets, such as receiving income, dividends, or proceeds from a sale.
Context: In a trust, a beneficiary enjoys the beneficial interest, meaning they have the right to the benefits of the property, even though the legal title is held by the trustee.
Scope: Beneficial interest is essentially the same as equitable interest in the context of trusts, as it is the right to enjoy the benefits of property held by another party (the trustee).

All beneficial interests are equitable interests, but not all equitable interests are beneficial interests. For example, equitable interests could include rights to performance of obligations or injunctions, which are broader than just the right to benefit from property.