Express trusts: Constitution

Question 1

What must a settlor do to constitute an express lifetime trust?

Answer 1

To constitute an express lifetime trust:
1. Make a valid declaration of trust:
* Must clearly demonstrate the settlor’s intent to create a trust.

• Identify the trustees, trust property, and beneficiaries.
• Follow any formalities specific to the type of property (e.g., writing for land under s 53(1)(b) of the Law of Property Act 1925).

2. Transfer legal title of the trust property to the trustee:

• Legal title must be moved from the settlor to the trustee to complete the trust.
• Methods of transfer depend on the property type (see below for details).

Elaboration:
* A trust is not valid if only one of these steps is completed.

• For example, if the declaration of trust is valid but legal title to the property is not transferred to the trustee, the trust is unconstituted, and the settlor remains the owner.
• Once constituted, the settlor cannot revoke or change the trust.

Question 2

How is a trust constituted when the settlor declares themselves as trustee?

Answer 2

1. The settlor, as the owner of the property, holds both legal and equitable title before the declaration of trust.
2. A valid declaration of trust separates the equitable title (for the beneficiary) from the legal title (retained by the settlor as trustee).
3. No additional steps are required because the settlor already holds legal title to the property.

Question 3

What additional steps are required when appointing a third party as trustee?

Answer 3

1. Make a valid declaration of trust: Clearly identify the trust property, trustees, and beneficiaries.
2. Transfer legal title to the trustee: The settlor must follow the specific transfer rules for the type of property involved.

Elaboration:
* Without transferring legal title, the trust remains incomplete, and the trustee cannot act.
* Example: A settlor declares, “I give £50,000 to my brother to hold on trust for my children.” The trust is not valid until the settlor transfers the money into the trustee’s bank account.

Question 4

How is legal title transferred for different types of property?

Answer 4

1. Land:
   * Steps Required:
   * Execute a deed (e.g., Form TR1), signed and witnessed.

• Deliver the deed to the trustee or Land Registry.
• Register the trustee as the new legal owner at Land Registry.
• Legal title is not transferred until registration is complete.

2. Shares:
   * CREST System: Electronic transfer for public companies (instantaneous).

• Outside CREST (Private Companies): Execute a stock transfer form and deliver it with the share certificate to the company for registration.

3. Money:
   * Cash: Transfer by physical delivery to the trustee.

• Electronic Transfer: Funds must arrive in the trustee’s account.
• Cheques: Legal title transfers when the cheque clears.

4. Chattels:
   * Transfer by physical delivery or execution of a deed if physical delivery is impractical.

Key Point: Until the final step of transfer is completed, legal title remains with the settlor, and the trust is unconstituted.

Question 5

What happens if the settlor does not complete the transfer of legal title?

Answer 5

1. General Rule: The trust is unconstituted, and the property remains with the settlor.

• The intended trustee has no legal authority to manage the property.
• The beneficiary cannot enforce the trust.

2. Equity Will Not Assist a Volunteer:

• Beneficiaries usually provide no consideration and are considered “volunteers.”
• If transfer rules are not followed, equity will not step in to enforce the trust.

Elaboration:
* Example: A settlor declares a trust over shares but fails to execute the required stock transfer form. The trust fails, and the property remains with the settlor.

Question 6

In what situations will equity enforce a trust despite incomplete transfer of legal title?

Answer 6

1. Every Effort Test:
   • If the settlor does everything within their power to transfer legal title but the final step depends on a third party, equity enforces the trust. The settlor must have passed the point of no return or put the property being transferred ‘beyond recall’

A good way of testing whether property has been put ‘beyond recall’ is to ask what has happened to the transfer documents that the settlor must execute. If those documents are still within the possession or control of the settlor, the settlor has not satisfied the every effort test. If those documents are no longer within the possession or the control of the settlor, the test has generally been satisfied.)

• Example: The settlor executes a deed to transfer land and delivers it to the trustee, but Land Registry delays registration

2. Rule in Strong v Bird:

• Legal title transfers if the intended trustee becomes the executor or administrator of the settlor’s estate.
• Conditions:
  (a) the settlor intended to create an immediate trust with a third party acting as trustee;

(b) that trust was not immediately created due to a failure to comply with a relevant transfer rule;

(c) the settlor’s intention continued up to their death; and

(d) the intended trustee acquired legal title to the trust property by becoming the settlor’s executor or administrator.

Question 7

What happens when the settlor appoints themselves and a third party as co-trustees?

Answer 7

1. The settlor must transfer legal title from their sole name into the joint names of themselves and the co-trustee.
2. If the transfer is incomplete, equity may enforce the trust (Choithram v Pagarani (2001)):

• Once a valid declaration is made, the settlor’s conscience is bound, and it is unconscionable to deny the trust.
• Equity requires the settlor to complete the transfer, even posthumously through their executors.

Elaboration:
* Example: A settlor declares, “I and my sister will hold my house on trust for my niece.” If the settlor dies before transferring the title into joint names, equity may enforce the trust.

Question 8

What are the steps required to transfer legal title of land to a trustee?

Answer 8

1. Execute a deed (e.g., Form TR1), signed as a deed in the presence of a witness.
2. Deliver the deed to the trustee or Land Registry.
3. Land Registry registers the trustee as the legal owner.

Elaboration:
* Example: A settlor appoints a trustee for land but does not register the transfer at Land Registry. The trust is not constituted, and the settlor remains the legal owner.

Question 9

What must the settlor do to satisfy the “every effort test”?

Answer 9

1. Complete all steps required to transfer legal title within their power.
2. Any remaining steps must depend solely on a third party.
3. Transfer documents must be out of the settlor’s possession and beyond recall.

Elaboration:
* Example: A settlor executes a stock transfer form and delivers it to the company for registration but dies before registration. Equity enforces the trust because the settlor completed all required steps.

Question 10

How does the rule in Strong v Bird allow a trust to be constituted?

Answer 10

1. The settlor intended to create an immediate trust.
2. The trust was not constituted due to incomplete transfer of legal title.
3. The settlor’s intention persisted until their death.
4. The intended trustee becomes the executor or administrator of the settlor’s estate.

Elaboration:
* Example: A settlor declares a trust for their wedding ring but fails to deliver it. If the intended trustee is named executor, they acquire legal title to the ring, and the trust is valid despite incomplete transfer.

Question 11

What are the key steps to constitute a valid express trust as shown in the flowchart?

Answer 11

1. Declaration of Trust:
   * Ensure certainty of intention, certainty of subject matter, and certainty of objects.

• For fixed interest trusts, satisfy the complete list test (conceptual and evidential certainty).
• For discretionary trusts, satisfy the given postulant test (conceptual certainty + administrative workability).
• Comply with the beneficiary principle and perpetuity rules.
• Formalities: For land, comply with s 53(1)(b) LPA 1925 (signed written evidence).

2. Constitution:
   * If the settlor is the only trustee, the trust is constituted upon a valid declaration.

• If a third party is appointed as trustee, legal title must be transferred following the relevant rules for the property type.
• Examples: Execute deeds for land, stock transfer forms for shares, or physical delivery for chattels.

3. Failure to Follow Transfer Rules:
   * If rules are not followed, the trust is invalid unless:
   * An exception applies (e.g., every effort test or rule in Strong v Bird).
   * If no exception applies, the trust is invalid.

Key Point: Both a valid declaration of trust and proper constitution (transfer of legal title) are required for the trust to be enforceable.