Creating a Valid Trust Flashcards
What are the requirements for a Valid Trust?
- Certainty of Intention
- Certainty of Objects
- Certainty of Subject Matter
- Perpetuity Rules
- Formalities of Creation
- Constitution
If any of these first 5 requirements are not met, the trust fails and there is an automatic resulting trust for the settlor. If constitution fails, the trust is VOID.
What is Certainty of Intention?
Where there is a self-declaration of trust, it must be clear that the settlor intends to hold the property on trust for the beneficiary (because the settlor is the trustee). This can be written, oral or even by conduct (e.g segregating assets in a separate bank account and allowing withdrawals from it), words such as “what’s mine is yours”. It must be an intention and not merely a desire, the person need not realise it is a legal trust but must simply have intention to create something (which is, unbeknownst to them, a trust).
What is Certainty of Subject Matter?
2 Requirements:
- the subject matter itself must be clearly identified
- the beneficial entitlement to the property must be clear.
Saying ‘the net of X’ or ‘the bulk of X’ is uncertain; however, can create a fractional interest in the bulk as then it can be freely traded in and out of the trust with each beneficiary having a share of each item.
For non-tangible, fungible items (such as shares in the same class), these can be identified by numbers, e.g 4 of my ordinary shares in Tesco plc.
For all other property, it is necessary to specifically identify them, e.g wine bottles, gold bars etc.
In terms of beneficial entitlement, the subject matter will be uncertain (and resulting trust) if the settlor writes ‘I give my blue Volkswagen to A’ but A dies and there is no gift-over. To avoid this, a trustee should be given a power to decide who gets the property otherwise.
What is Certainty of Objects?
Must be able to clearly identify the beneficiaries of the trust. There are different tests, depending on the type of trust. For fixed trusts, the ‘Complete List Test’ is used. For discretionary trusts and powers of appointment, the ‘is/is not test’ is used.
COMPLETE LIST TEST
- The beneficiary’s entitlement will be set out in the trust and if a class is used, then it must be possible to identify all the beneficiaries in that class. Conceptual certainty (clear language) and evidential certainty (extent to which the evidence allows you to identify persons with the benefit).
IS/IS NOT TEST
- Must be able to identify with conceptual certainty whether someone is / is not a member of a class (e.g a legal definition of the word, e.g employees or children, relatives or friends cannot be legally defined). Must also have evidential certainty but do not need as much as for complete list test. Burden is on the beneficiary to show they are a member of the class and if not, they are treated as outside it. The class must not be hopelessly wide, e.g ‘all of the residents of greater London’.
What are the 2 perpetuity rules?
- RULE AGAINST REMOTENESS OF VESTING = used for charitable purpose trusts and normal trusts
- public policy that property cannot be ringfenced forever and passed through families etc.
- The trust must have a duration which is 125 years or less from creation.
- HOWEVER, trust can validly subsist until it becomes clear that it is going to subsist beyond the 125 year period + can save trust by excluding objects who will become entitled outside the 125 year period. - RULE AGAINST INALIENABILITY = non-charitable purpose trusts
- Common law rules, trust may subsist for the specified life of a person + 21 years (or where no life, 21 years).
- Can extend this by ensuring that the trust only comes into being on the person’s death.
Use an express perpetuity clause
e.g ‘income used to maintain my grave’ - fails for perpetuity because the trust could generate income forever.
What are the formalities to create a valid trust?
Can be declared written, oral or by conduct.
- for testamentary trusts, must comply with the requirements under s.9 of the Wills Act.
What are the formalities to create a trust of land?
s.53(1)(b) LPA 1925: valid trust of land must be in writing, signed by the settlor or by will and complying with the Wills Act, s.9.
There is no prescribed form, only evidence of intention is required.
HOWEVER, the trust is unenforceable until these formalities are complied with. Once s.53(1)(b) is complied with, the trust becomes enforceable by the beneficiaries retrospectively. If never complied with, the settlor can take back the property unless promissory estoppel operates. The trust will fail and there will be a resulting trust PROVIDED constitution has not taken place yet.
How is the trust constituted for different assets?
Constitution of the trust is where legal title to the trust property is transferred to the trustee. Where the trustee is the settlor (as is the case on a self-declaration of trust), then the settlor need not do anything as they are already the legal owner.
Where the trustee is a different person from the settlor, the settlor must transfer legal title to them according to the normal rules of transferring different kinds of property.
- Shares = stock transfer form + share certificate + registration in the company’s register of members.
- Chattels or gifts = delivery + intention
- Land = where registrable, deed + registration
- cheque = endorsement by signing
- Debts and money in bank = notice in writing to the debtor or bank.
If the trust is not constituted, it is void. Once transfer of property has taken place, it cannot be done and the settlor ceases to have a legal or beneficial interest in the property.
MULTIPLE TRUSTEES
- where there are multiple trustees, need only transfer to one and that trustee must transfer the trust property into the names of all of them.
What is a resulting trust?
A resulting trust may be automatic or presumed and occurs when the legal title to the trust property has been successfully transferred to the trustee.
- the trustee then holds the trust property on trust for the settlor.
AUTOMATIC
- Where the trust fails for certainty or perpetuity, or where the formalities have not been complied with (except for trust of land), the trust will fail and become a resulting trust.
- Settlor then has Saunders v Vautier rights to collapse trust
- only applies to transfers on trust
- if self-declaration, then settlor just keeps property and there is no trust.
- If will trust fails = VOID.
PRESUMED
- person gratuitously transfers property to another person without intention that it should be a gift / sale / some other legal transfer of property. Usually applies where someone made legal owner but other person paid purchase price.
- DOES NOT APPLY where transfer from parent-child, between spouses or loco-parentis to child (presumed gift).
- If contribution to property with money, presumed to be held on presumed resulting trust for themselves / another in proportion to the contribution price, regardless of what legal title says.
Which rules may apply to remedy failed constitution?
Where a constitution of a trust fails, it is void. However, equity will intervene in certain circumstances to perfect the gift or trust to ensure that it is valid and enforceable.
- Re Rose
- Fortuitous Vesting
- Donationes mortis causa
What is the general rule for failed constitution from Milroy v Lord?
The general rule is that equity will not intervene to perfect an imperfect gift or constitute a void trust.
This is because donees and trustees are volunteers.
Can try to argue that it is a self-declaration of trust but this will only be allowed where it is clear that the settlor intended to take on the obligations of a trustee.
Exception 1 to General Rule: Re Rose
The settlor or donor need only do everything in their power to transfer the property, for example by putting the transfer deed or stock transfer form in the hands of the Land Registry or Companies House.
Must put the matter beyond his control, however giving it to an agent does not count. In these circumstances, equity will perfect the gift or trust if it would be unconscionable to recall the gift (e.g gift made of free will, parties relying on it, signed form of consent).
Exception 2 to General Rule: Fortuitous Vesting
If the intended donee or trustee subsequently acquires legal title to the property in some other capacity, for example as a personal representative of the donor or settlor’s estate.
Where there are several PRs of the estate, this only happens if:
- the settlor or donor intended to make an immediate gift;
- this intention subsisted until death;
- intended donee became PR of estate by whatever means (e.g intestacy).
Exception 3 to General Rule: Donationes Mortis Causa
Deathbed gift, where donor or settlor makes a gift in contemplation of death which they believe is imminent. Must give up dominion (control) of the property or deliver it in some way (e.g giving the keys to the house) + gift is conditional on death so may be revoked prior to death.
