Equity & Trusts Basics Flashcards
What is a trust?
- A trust is a relationship in which the trustee is required to use something (subject-matter) for the benefit of the beneficiary (object) for a particular purpose. It arises when the owner of the property declares himself a trustee of it(intention), or transfers it to someone else to be a trustee of it, for the benefit of one or more beneficiaries, or for a charitable purpose.
Who is the settlor?
Creator of the trust which is created by the settlor transferring property to the trustees to hold on trust.
Who are the beneficiaries?
Beneficiary: cestui que trust
Those for whom the property is held on trust and who have an equitable interest in the property.
What are the duties of trustees?
Trustees are to
i) hold and administer the trust assets
ii) in the case of a trust for beneficiaries,
distribute the income from the trust assets to appropriate beneficiaries
iii) in the case of a charitable trust, to apply the income from the trust assets to the charitable purpose
iv) provide the beneficiaries or charity with accounts explaining the state of the trust assets
v) act in good faith for the beneficiaries’ interest in preference to their own interests
vi) invest only in investments authorised under the Trustee Act 2000 – they cannot speculate and have to exercise as much care as a prudent man of business would
vii) obey the trust – strictly liable to unauthorised use of assets
What are the rights of trustees?
i) Unfettered discretion with management the trust (paternalist function)
ii) No distinct legal personality in his representative capacity separate from himself in his personal capacity and is generally liable to the extent of his whole personal fortune for debts contracted in managing the trust fund
iii) Be vested with the legal title. Legal ownership.
iv) Be indemnified
v) In some cases, be remunerated
What are the rights of beneficiaries?
i) A right in personam against the trustee (equitable chose in action) to perform the trust
ii) An equitable right in rem to recover assets from strangers when the trustee has become insolvent or when things have gone wrong and the trust asset reaches the hands of a third party who is not equity’s darling
iii) Be vested with beneficial ownership, not equitable ownership. Beneficial interest.
iv) Bare trust: right to demand transfer of legal title from the trustee and obtain the trust property in rem for himself as legal and beneficial owner
v) Fixed trust: disposable equitable proprietary interest
vi) Discretionary trust: merely the hope of receiving something. He cannot compel the trustee to pay him anything
What are express trusts? What are the categories of express trusts and explain them.
Express trusts are trusts which are made expressly by a settlor (the person making a trust). Express trusts can be inter vivos (made during the lifetime of the settlor) or testamentary (made through the settlor’s will to take effect upon his or her death). After death the settlor is referred to as the testator.
- Fixed Trust: an express trust in which the beneficiaries’ interests are defined and predetermined. In other words, the cestui qui trust has a fixed entitlement to an ascertainable part of the net income of the trust fund. For example, ‘to my two children Luke and Katie I create a trust of £20,000 in equal parts’. They each have £10,000 held on trust.
- Discretionary Trust: i) an express trust under which the trustees are given discretion over who, within the specified class is to benefit, what their share of the trust property will be, or both.Hence, the cestui qui trust has no absolute current right to direct the trustees to pay him an ascertainable part of the net income of the trust. But the trustee must distribute the assets under the duty!
ϖ Klug v Klug[1918] — In other words, the trustee has complete discretion as to the amount of income payable to the beneficiary (unlike a fixed trust)
- Express trusts for purposes (without beneficiary)
- Charitable purpose trust
- Private purpose trust
What are the classifications of interest under a trust?
An important point to understand is that trusts can contain different types of interests. Interests can be either vested or contingent.
An interest under a trust is said to vest in the beneficiary when the beneficiary has a present right over the trust property. However, this vested interest can be to either a present right to a present interest, or a present right to a future interest. It is important as a vested interest is owned by the beneficiary. This means that if the intended beneficiary dies this interest will pass with his or her estate.
EXAMPLE: ‘I leave my home Heath Farm to my husband Dell for life then to my son Luke.’ Dell’s interest is a present right to a present interest; it is said to be vested in possession. He has the property for his lifetime. This is particularly important when we look at trustee powers. Luke’s interest is a present right to a future interest; it is said to be vested in remainder. Luke has the home when Dell dies, but at this time he has the right to expect the trustee to ensure that he has a home (or its value) to take possession of.
This must be distinguished from a contingent interest. A contingent interest is one that is conditional.
‘I leave my home Heath Farm to Dell for life and then to Sumita should she reach 25.’
Dell’s interest is the same as in Example 1 but Sumita’s interest is contingent. She has no interest until she reaches 25.
Note: Students often mistake Luke’s interest as contingent. But death is something that will happen and this is not a contingent interest. Sumita may not reach 25, so her interest is conditional.
What is an implied trust?
Implied trusts are those which are not expressly created. There are three broad types of implied trusts: resulting, constructive, and statutory
Statutory: In certain circumstances statutory provisions impose a trust. For example, a trust for land is created under the Trust of Land and Appointment of Trustees Act 1996 where joint owners hold the legal title on trust for themselves
Resulting Trusts: Resulting trusts arise either when:
- there has been a failure to validly create a trust, ie it is a failed formalities trust: Vandervell v IRC [1967]. This situation has been called an automatic resulting trust because it happens regardless of the intention of the settlor. Indeed, in Vandervell v IRC a resulting trust arose contrary to the express intention of the settlor to give away property;
or
- property is voluntarily transferred to another or purchased (either wholly or partly) in the name of another: Tinsley v Milligan [1994]. This category is based on the presumed intention of the resulting beneficiary. Lord Browne-Wilkinson said in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] that resulting trusts were based on the intention of the parties.
- Constructive Trusts - based on the presumed intention of the parties. This intention is found by the courts in a variety of situations, increasingly where they feel that it would be unconscionable for a person to deny that another has an interest in the property.
What is a power of appointment?
the authority to deal with property that one does not own a right given to the donee of the power (power-holder) to dispose of property that is not within bounds established by the donor of the power (the property owner)for persons (objects of power) or purposes within the scope of the power. The donee of a power can appoint property to such objects of the power as he sees fit (discretion).
What are administrative powers?
powers to invest, insure, rent out, exchange, sell etc
What are fiduciary powers? What are soem cases relevant to this?
Fiduciary powers are powers in a different sense. They are not part of a trust but a ‘pure’ power, ie something that can be done but does not need to be done; something valid but unenforceable. The person who may benefit from the power cannot make the fiduciary exercise the power but can make sure that the fiduciary considers exercising the power, and the donee of the power must not act unreasonably in making the decision to exercise the power (Re Hay’s Settlement Trusts [1982]).
ϖ Mettoy Pension Trustees Ltd v Evans [1991] — Where the donees of the power refuse to act or have died, or is unsuitable to exercise the power, the court can appoint a fit and proper person to exercise the power in his place.
ϖ Re Manisty’s Settlement [1974] — A settlor conferred on his trustees a power to apply trust funds for a class made up of his infant children, his future children, and his brothers and their future issue born before a closing date defined as 79 years from the date of settlement. An ‘excepted class’ consisting of the settlor, his wife for the time being and any other person settling property on the trust was excluded from the benefit. The trustees were given power at their absolute discretion to declare that any person, corporation or charity other than a member of the excepted class or a trustee was to be included in the class of beneficiaries. The trustee’s then exercised that power to add the settlor’s mother and any widow of the settlor to the class of beneficiaries. A summons was taken out to determine whether the power to add beneficiaries was valid. Held: the court will intervene if the trustee exercises his discretion “capriciously” (“irrational, perverse or irrelevant to any sensible expectation of the settlor”).
ϖ Schmidt v Rosewood Trust Ltd [2003] — the court has an inherent jurisdiction to ensure that fiduciary powers held by the trustee/executor/fiduciary officials are properly exercised, pursuant to which it can order the donees of the power to provide information to the objects of the power
- Unlike a trust, the power is voluntary and may go unexecuted! In a discretionary trust, however, the trustee MUST distribute the assets!
What is the difference in regards to discretionary trusts and fiduciary powers?
In a discretionary trust the Trustee is under a duty to carry out the trust + distribute the trust assets.
In a fiduciary power the donee is under NO duty to appoint to the objects. The power may go unexecuted.
The court may, however, exercise the power on behalf of the donee Where the donees of the power refuse to act or have died, or is unsuitable to exercise the power (Mettoy Pensions Trustee v Evans [1990])
In a discretionary trust, the scope of the duty is wide. they need to consider when, to whom to distribute and a more extensive survey of the objects as per McPhail v Doulton. There is a duty to actually distribute the trust assets!
In a fiduciary power the scope of the duty is Narrow: donee only has to consider from time to time whether to exercise the power + less extensive survey (McPhail)
There is duty to consider exercising the power!
The test for certainty of objects with discretionary trusts is the is or is not test (Re Gulbenkian’s ST; McPhail)
In fidicuary powers, the test is the is or is not test (McPhail
Discretionary trusts are invalidated by administrative unworkability (ex p West Yorkshire MCC), conceptual uncertainty, but not evidential uncertainty as per Re Baden’s ST No 2)
Fiduciary powers are invalidated by capriciosness (Re Manisty’s ST) and conceptual uncertainty (McPhail)
