Creation of Private Express Trusts Flashcards
Methods of creating express trusts
(1) A self-declaration of trust
(2) A transfer on trust
A self-declaration of trust
Requires the settlor to manifest an intention to hold one of their assets on trust for the beneficiary. The settlor remains the owner of the asset but is divested of their beneficial interest in it. The settlor becomes the trustee. This type of trust can only be created during the settlor’s lifetime.
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. This type of trust can be created during the settlor’s lifetime or by their will. In the latter case, the settlor’s intention is manifest in their will. The property is transferred to the trustee by the settlor’s personal representatives.
Requirements for creation of express trusts
Core requirements:
- The three certainties
- The beneficiary principle
- Compliance with the perpetuity rules
Further formalities:
- Formalities for declaration of the trust (i.e. creation of the beneficiary’s interest)
- Formalities for constitution of the trust (i.e. vesting the trust property in the trustee)
- Formalities for registration of the trust
The three certainties
(1) Certainty of intention: Is it clear that the intention is to create a trust rather than some other form of arrangement relating to property?
(2) Certainty of subject matter: This has two components:
(a) The trust property requirement: It must be possible to identify the trust property.
(b) The beneficial entitlement requirement: It must be possible to ascertain the beneficiary’s interest in the trust property.
(3) Certainty of objects: Are the intended objects of the trust sufficiently certain? The test for certainty of objects depends on the nature of the trust, with fixed trusts requiring a greater degree of evidential certainty than discretionary trusts.
The beneficiary principle
- Without identifiable beneficiaries or objects, there is nobody who can enforce the trust (i.e. 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) (Morice v Bishop of Durham)
- Exceptions of charitable purpose trusts, Endacott and Denley
The perpetuity rule
- The rule against remoteness of vesting: requires that a person must obtain a vested interest in the trust property within a recognised ‘perpetuity period’. By s 5(1) Perpetuities and Accumulations Act 2009 this period is 125 years.
- Any interest which does not vest within the 125 year period is void.
- This need not be clear from the outset of the trust. Section 7 contains a ‘wait and see’ rule which means that the trust can subsist until it becomes apparent that the interest cannot vest within the perpetuity period. Anything done before this will remain valid.
- Section 8 also contains ‘class closing’ rules which can save a trust by excluding objects who might otherwise cause the trust to fail because their interest would vest outside the perpetuity period.
Perpetuity example 1
(a) A trustee holds property on trust for A for life, remainder to B: There is no problem with perpetuity in this case as B has a vested interest.
Perpetuity example 2
(b) A trustee holds property on trust for A for life, remainder to B if B survives A: In this case B has a contingent interest so the perpetuity rules are technically relevant, but are extremely unlikely to be problematic. It is not certain that B’s interest will vest as A may die first. The wait and see rule applies, as the trust could fail for perpetuity, but only if A lives more than 125 years after the trust is created. The perpetuity period is deliberately long enough to prevent simple life interest trusts like these from failing.
Perpetuity example 3
(c) A trustee holds property on trust for A (age 2) for life, the remainder to be divided equally between A’s children and grandchildren: At the date the trust is created, only A has a vested interest in the trust property. When A dies, any of their children and grandchildren who have already been born will have vested interests. However, there may be grandchildren yet to be born. As this is a fixed trust in equal shares, the trustee cannot divide the property between the objects until they are all ascertainable. It could take many years before it becomes impossible for more grandchildren to be born. Rather than the trust failing, the class closing rules will apply to limit the class of beneficiaries to A’s children and grandchildren, if any, who are alive as at the end of the perpetuity period.
Perpetuity example 4
(d) A trustee holds property on trust for A for life, the remainder to be divided equally between such of A’s children and grandchildren as are living at the date of A’s death. This final example is less problematic from both a perpetuity and a practical perspective as the remainder interests vest at A’s death. Only A’s children and grandchildren who are living at that date obtain an interest, allowing the trustee to immediately divide the property between them. Any children or grandchildren who die before A or are born after A’s death are not included in the class. This means the trust property can be distributed immediately.
Formalities
- Depend on both the nature of the trust property and the method of trust creation.
- Although it is possible to create trusts of equitable interests, in general a settlor will create a trust of a legal interest.
- Where a settlor makes a self-declaration of trust, they already have the legal title to the trust property and the trust will be automatically constituted. In such cases it is only necessary to consider the formalities for the declaration of the trust.
- Where a settlor attempts to transfer property on trust to a third party trustee, it is necessary to consider both the formalities for creating the beneficiary’s equitable interest (if any) and the legal formalities for constituting the trust (i.e. transferring legal title to the trustee).
Formalities for creation of equitable interest
- For most trusts, there are no specific formal requirements for creation of the equitable interest. It is sufficient that the settlor has expressed the requisite intention to create a trust (Paul v Constance)
- However, there are specific formal requirements for the creation of an express trust of land which are found in s 53(1)(b) Law of Property Act 1925 (‘LPA 1925’).
- This section provides that trusts of land must be ‘manifested and proved’ in signed writing by the person declaring the trust.
- The creation of a testamentary trust requires compliance with s 9 Wills Act 1837. If the will does not comply with s 9, the will itself will be void, meaning that no gifts or trusts created in the will can take effect.
Exceptions to formalities rules
- The formalities rules in s 53(1)(b) LPA only apply to the creation of express trusts.
- There is an express exception in s 53(2) for resulting, constructive and statutory trusts. This means that there are cases where trusts of land can arise in the absence of written evidence.
- There are also some exceptions to the rules requiring testamentary trusts to fully comply with the requirements of section 9 Wills Act 1837. These include trusts known as ‘secret trusts’ which involve the identity of the beneficiary or even the existence of the trust itself being kept off the face of the will.
Constitution of trusts
- A transfer on trust will not be complete until the trust property has been transferred to the trustee. This is known as constituting the trust.
- The relevant formalities for constituting the trust will depend upon the nature of the property being transferred, as there are different formalities for transferring legal title to different types of property.
- These rules are separate to any formalities required for creation of the equitable interest. So, for example, both of the following are required for a successful transfer on trust of registered land:
(a) Registration of the trustee as the legal owner of the land with the Land Registry.
(b) Written evidence of the beneficiary’s equitable interest satisfying s 53(1)(b) LPA 1925. - In the case of a testamentary trust, all this work is done by the will itself. As long as the will complies with s 9 Wills Act 1837 the trust will be valid and the personal representatives must ensure that legal title is vested in the trustees.
