Introduction to Trusts and Equity

Question 1

What does it mean to say someone holds legal title to an asset?

Answer 1

Free to use it for our own benefit and to further our own interests.

Question 2

What does it mean to be a trustee?

Answer 2

Someone who still possesses legal title to an asset, but must further the beneficiary’s interest.

Question 3

Who is the beneficiary?

Answer 3

Someone who is owed fiduciary obligations by the holder of a legal title to an asset.

Question 4

Does the beneficiary have a proprietary interest in the asset?

Answer 4

Yes, they have a proprietary interest and title to the property. This called the equitable title.

Question 5

So what two titles exist for a trust?

Answer 5

A separate legal and equitable title.

Question 6

What would it mean to have someone who is both the sole trustee and sole beneficiary?

Answer 6

This would just be standard legal beneficial ownership.

Question 7

What is a discretionary trust?

Answer 7

There is a potential class of beneficiaries, and the trustee must choose who will receive the benefit. No beneficiary has a guaranteed entitlement. No equitable title exists.

Question 8

What is a purpose trust?

Answer 8

Trustee is required to use the property to achieve a certain object or purpose. No equitable title exists.

Question 9

What is an express trust?

Answer 9

These arise precisely because this is what the property owner (i.e. the holder of the legal beneficial title) intended.

Question 10

What does inter vivos mean?

Answer 10

Owner decides to create trust whilst alive.

Question 11

What is a testamentary trust?

Answer 11

Creates a trust to take effect on death.

Question 12

Did common law historically provide justice for beneficiaries of trust?

Answer 12

No - often allowed the legal title holder to keep and use the property for himself.

Question 13

How did the Courts of Chancery and equity remedy the situation common law had provided trusts?

Answer 13

Ruled that the property must be held by the legal title holder not for his own benefit but for the benefit of someone else. Hence imposed separate equitable title.

Question 14

What are the arguments for fusion of equity and common law?

Answer 14

Provides the opportunity to weed out inconsistencies and achieve harmonisation so that like cases should be treated alike.

Question 15

What are the arguments against the fusion of common law and equity?

Answer 15

The common law and equity are very different in nature - you’re not comparing like with like. Equity needs to maintain its own personality to ensure fairness is applied to general, or ‘common’, rules, thereby allowing judicial discretion in circumstances of rigid rules.

Question 16

Can you name three maxims of equity?

Answer 16

1) ‘Equity abhors a vacuum’
2) ‘Equity regards as done that which ought to be done’
3) ‘Equity will not assist a volunteer’ [Plenty of occasions where this is not the case].

But this are often unclear and carry no obvious moral weight. Overall, they are unreliable. Tendency to obscure and mislead.

Question 17

Does the maxim ‘equity looks to intent, not to form’ valid?

Answer 17

Yes - it is both clear and, largely, accurate.

Question 18

Why do we use trusts?

Answer 18

The express trust is a facilitative institution. It allows you to transfer to others the benefits of the property we have at our disposal, in some form other than outright transfer.

Question 19

Why is it not better to use contractual rights to give away the benefit of assets to others?

Answer 19

It will only bind the parties of a contract. Only effective so long as one party retains the property.

Question 20

In what other way are trusts useful?

Answer 20

If you want property to be used for someone else’s benefit but without giving them control over it.

This can be desirable if you want one person to achieve the benefit while taking advantage of another’s investment acumen.

Question 21

What two rights does a beneficiary have?

Answer 21

1) Has rights against the trustee that the property must be applied solely for his benefit.
2) Has his own, equitable title to the trust property.

Question 22

What is a fixed trust?

Answer 22

Trustee has no discretion as to what property the beneficiary is to receive under the trust.

Question 23

What is the difference between fixed and discretionary trusts?

Answer 23

How much discretion the trustee has in how the property is distributed.

Question 24

What does ‘powers of appointment’ mean and how does it differ from discretionary trusts?

Answer 24

With POA, the trustee is given the choice as to how much, if any, of the property is given out to the named objects, so the property might not be distributed at all. Whilst with discretionary trusts, the discretion relates to how property is distributed.

Question 25

What does fixed power of appointment mean?

Answer 25

Trustee has the discretion as to whether to give out property to named objects, but if he decides to do so, he must do so in pre-determined proportions.

Question 26

What if the language of the settlor is ambiguous?

Answer 26

It is up to the court to determine what he determined.

Question 27

What happened in Burrough v Philcox (1840)?

Answer 27

Settlor’s intention was unclear: settlor gave property to his children, directing them to allocate it as they saw fit between his nephews or nieces or their children. The children died. Court concluded that nephews and nieces should receive it in equal shares. So court interpreted first as (1) discretionary power of appointment; then (2) a fixed trust.

Question 28

What are the two most important features of proprietary rights?

Answer 28

(1) So long as they endure, they can be enforced against third parties.
(2) They give priority should the person currently in possession of the property become insolvent.

Question 29

How did common law originally grant rights to beneficiary’s?

Answer 29

If the trustee misapplied property by giving it away to a third party in breach of the trust terms, then the beneficiary could only bring a claim against the trustee, and had no such claim against the beneficiary.

Question 30

How did equity, over time, extend protection to beneficiary’s?

Answer 30

1) Allowed beneficiaries to claim against third parties who received property knowing that it was derived as a breach of trust.
2) Then allowed claims against third parties who were entirely blameless but had provided no value.
3) Where the trustee was declared bankrupt, the beneficiary’s interest bound the trustee in bankruptcy.

Question 31

In what way can beneficiary’s rights be seen as neither personal nor proprietary?

Answer 31

Persistent rights attach to a right, and, as such, is, in principle, assertable against all those who receive that right. So, in this case, a right to or against the trustee’s right.

Question 32

What evidence is there to suggest that beneficiary’s rights may be persistent rights?

Answer 32

Beneficiary can’t sue when property is stolen from burglars, only demand that trustees sue.

But, until a beneficiary exercises their Saunders v Vautier right, they typically have no right to possession of the trust assets. So not obvious why we should expect them to have a claim against those who have stolen from the trustee.

Question 33

What does Shell UK Ltd v Total UK Ltd (2010)

Answer 33

When the current approach to suing disadvantages the beneficiary, the courts have shown a willingness to allow them to sue and recover damages in their own name. This would reflect the view that the beneficiary does indeed have a proprietary right.

Question 34

Are the trustees under an obligation to invest trust property in a certain way?

Answer 34

They must take these decisions with a view of maximising the beneficiary’s gains. Any gains made go to the beneficiary rather than the trustee.

Question 35

What is the difference between legal and beneficial title?

Answer 35

Legal title is an entitlement to determine how the property be used and applied.

Whereas equitable title is an entitlement to the benefits derived from the use and application of that property.

Question 36

Does the beneficiary of a discretionary trust have equitable title?

Answer 36

Difficult to view any individual beneficiary as having an interest in the property before any distribution is made.

Has no more of a right against the trustee that he be considered when the trustee comes to exercising discretion (Gartside v IRC (1968)).

We can however view the objects as a group holding equitable beneficial title (although this was rejected by Lord Reid in Gartside).

Question 37

What is the difference between beneficial titles and equitable titles?

Answer 37

In a sub-trust, a beneficiary has declared a trust on his own equitable interest, and hence a new separate equitable beneficial title arises for the new (sub-) beneficiary. Hence whilst both parties may have equitable title, only the latter has beneficial title because he is the one who is ultimately entitled to the benefits derived from the property.

Question 38

What is the rule in Saunders v Vautier (1841)?

Answer 38

Where a beneficiary, who is of full age (now 18) and of sound mind, has an absolute interest in (at least some part of) the trust property, he may call on the trustee to transfer legal title to that property to him, so bringing the trust to an end.

Question 39

When can the Saunders rule not be applied?

Answer 39

When there is more than one beneficiary, and when exercising such a right would have an adverse impact on other beneficiaries: Stephenson v Barclays Bank Trust Co Ltd (1975).

But beneficiaries can group together and collectively apply the rule (Re Smith (1928)).

If two or more persons together are absolutely entitled co-owners, the rule applies to each of them separately, provided that the property is not of such a nature that the severance of one share will harm the remainder.

Question 40

Why are the courts happy to justify the Saunders rule?

Answer 40

The law has a preference for property to be owned outright rather than held on trust.

This can also be seen to reflect the rule that a trustee’s fiduciary duty is to act in the beneficiaries’ best interests.

Question 41

What is the bona fide purchase rule?

Answer 41

Equitable proprietary interests will bind only those who either: 1) knew or should have known that the claimant has an interest in the relevant property. 2) Gave nothing in return for receiving that property.

These are bona fide purchasers for value without notice.

If this applies to you, anyone who takes property from you in the future will be protected.

Hence, the rule extinguishes equitable title.

Question 42

How does Matthews (2006) describe the importance of the Saunders rule?

Answer 42

1) Exemplifies the idea of beneficial ownership of the property.
2) Also reflects a fundamental rule of English private trust law: the trust must be for the benefit of the persons rather than for purposes.