Chapter 2: Creation and requirements of express trust

Question 1

1 Introduction

2 Methods of creating express trusts

Answer 1

An express trust is a trust which has been intentionally created. Before the trust is created, the settlor is the full legal owner of the asset. After the trust has been created, legal title will be held by a trustee and equitable (and beneficial) title will be held by a beneficiary. A settlor can create
a trust by (i) declaring themselves as a trustee or (ii) transferring property to a third party trustee.

Question 2

Settlor

Answer 2

The person who creates the trust is called the ‘settlor’ of the trust.

Question 3

Full legal owner

Answer 3

A ‘full legal owner’ of property owns it both legally and beneficially.

Question 4

2 Methods of creating express trusts

Answer 4

Note. It is also possible to declare a trust over an equitable interest, including a beneficial interest
under a trust (ie a sub-trust). For simplicity, the examples in this chapter only focus on trusts where the settlor begins as the full legal owner of the trust property.

Question 5

Self-declaration of trust

Answer 5

A self-declaration of trust requires the settlor to manifest an intention
to hold one of their assets on trust for the beneficiary. Once the trust has been created, the settlor remains the legal owner of the asset but is divested of their beneficial interest in it. The settlor becomes the trustee.

Question 6

Transfer on trust:

Answer 6

A transfer on trust requires the settlor to transfer property to a third party and to manifest an intention that the third party should hold the property on trust for the beneficiary. The trustee becomes the legal owner of the property and a new equitable interest is created for the beneficiary, who becomes the equitable and beneficial owner

Question 7

2. Methods of creating express trusts

Answer 7

Note: The examples in this chapter use a simple scenario involving a sole trustee and sole beneficiary. In practice it is common (and usually advisable) to have more than one trustee. It is also common to have multiple beneficiaries. We will consider more complicated examples later in this Workbook.

Question 8

2.1 Self-declaration of trust

Answer 8

A self-declaration of trust involves the transfer of beneficial ownership while legal ownership remains with the settlor. The settlor starts as the full legal owner. They retain the legal title but now hold it in a new
capacity (ie as trustee, meaning they have legal but not beneficial ownership). A new equitable
interest is created for the beneficiary (who becomes equitable and beneficial owner).

Question 9

2.2 Transfer on trust

Answer 9

A transfer on trust involves the settlor transferring legal title to a trustee, who then holds for a
beneficiary. This is more complicated than a self-declaration because it involves changes in both legal and equitable title.

As with a self-declaration, the settlor starts as the full legal owner. They then transfer it to a third party, to hold as a trustee. The settlor therefore parts with legal title and a new equitable interest is created for the beneficiary (who becomes the equitable and beneficial owner).

Question 10

2.2 Transfer on trust

Answer 10

There are two slightly different scenarios to consider here:
(a) A transfer on trust for a third party
(b) A transfer on trust for the settlor

Question 11

2.2.1 Transfer on trust for third party

Answer 11

The settlor may have chosen to create a trust for a third party. In this case, the settlor will part with both legal and beneficial title to the trust property. The trustee now holds the trust property on trust for the beneficiary and the settlor now has no interest in the property at all.

Question 12

2.2.2 Transfer on trust for settlor

Answer 12

A transfer on trust will not always be to a third-party beneficiary. It is possible for a settlor to transfer property to a trustee to hold on trust for the settlor themselves. This would still be a transfer on trust, involving the transfer of legal title to a third-party trustee, but in this scenario the trustee would be holding the property on trust for the settlor (who now becomes the
beneficiary). The settlor therefore changes from having legal and beneficial ownership to having
equitable and beneficial ownership

Question 13

2.2.2 Transfer on trust for settlor

Answer 13

Unlike in our previous scenario, the settlor has not completely divested themselves of all interest in the trust property. The settlor divests themselves of the legal interest in the property but retains the beneficial interest. This necessarily involves the creation of a new equitable interest because
previously the settlor held legal title only. Remember that a full legal owner does not have equitable title because they do not need it. They have the full legal and beneficial interest in the property.

Question 14

3 Requirements for creation of express trusts

Answer 14

Each of the scenarios we considered above is subject to a series of requirements which must be
fulfilled in order to bring a valid, enforceable trust into effect. These will depend on the type of trust, the method of creation of the trust and on the nature of the trust property.

Question 15

3.1 The three certainties

Answer 15

In order to create a valid express trust, it is necessary to comply with the rules known as the three
certainties. These rules are covered in detail in the chapter on ‘The three certainties’ but, briefly:

Question 16

3.1 The three certainties

Answer 16

(a) Certainty of intention: It is necessary to show that a trust arrangement is intended, as
opposed to some other arrangement relating to the property (such as a gift or loan etc).
(b) Certainty of subject matter: It must be possible to identify or ascertain (i) the trust property
and (ii) the beneficiary’s interest in the trust property.
(c) Certainty of objects: It must be possible to identify or ascertain the beneficiaries of the trust
(or, in the case of a purpose trust, the purpose of the trust).

Question 17

3.2 The beneficiary principle

Answer 17

Closely related to certainty of objects is a requirement known as the beneficiary principle. As with
the certainty requirement, the rationale behind the beneficiary principle is the need for a trust to
be enforceable. Without identifiable beneficiaries or objects, there is nobody who can enforce the
trust (ie hold the trustee to account for the performance of their obligations). The beneficiary
principle therefore requires the objects of a trust to be legal persons (whether individuals or other
legal persons). This means that generally a trust which is created purely for purposes is not
permissible but there are limited exceptions to this rule.

Question 18

3.2 The beneficiary principle

Answer 18

The most common exception is charitable trusts, which have charitable purposes as their objects
and are in the public benefit. There is also a much narrower class of anomalous exceptions known
as ‘non-charitable purpose trusts’ or ‘private purpose trusts’. Purpose trusts are considered in the
chapter on ‘Purpose trusts’.

Question 19

Formalities

Answer 19

Additionally, there may be further formalities to be satisfied to bring the trust into existence. The
relevant formalities rules will depend on whether the trust is created during the lifetime of the settlor (inter vivos trusts) or by their will (known as testamentary trusts).
In the case of inter vivos trusts, the relevant formalities rules will also depend on whether there is a self-declaration or a transfer on trust.

Question 20

3.3.1 Self-declaration of trust

Answer 20

As we have already seen, a self-declaration of trust only involves a change in equitable title. Legal
title does not change. For a self-declaration of trust it is therefore only necessary to consider
whether there are any specific formalities required for the declaration of trust (in other words, the creation of the beneficiary’s interest).

Question 21

3.3.2 Transfer on trust

Answer 21

In the case of a transfer on trust, we have seen that there is a change in both legal and equitable title. In addition to considering whether there are any formalities necessary for creating the beneficiary’s equitable interest, there will also be rules relating to the transfer of legal title to the trustee. This is known as ‘constitution’ of the trust. There are different rules applicable to different
types of property but in all cases it is necessary to validly transfer legal title to the trustee in order
to bring the trust into effect.
The formalities and constitution rules are considered in the chapter on ‘Formalities and constitution’

Question 22

3.4 Perpetuity rules

Answer 22

A trust is not intended to be a permanent way of holding property. Trusts are therefore subject to
rules known as the ‘perpetuity rules’ which limit the duration of the trust. These rules are considered in the chapter on ‘Perpetuity’.