Topic 2 - Express Trusts

Question 1

What is a trust?

Answer 1

o Trust = legal arrangement where one party (trustee) holds property for a beneficiary
o Settlor = person creating this arrangement – may also be the trustee
o Trust separates legal and equitable (beneficial) title
o Trustee holds legal title but does not benefit from it.
o Beneficiaries have equitable property right despite not having legal title

Question 2

Methods of constituting a trust

Answer 2

1. A makes an outright gift of property to B
2. A declares her/himself trustee of the property, to hold on trust for B
3. A transfers the property to C as trustee, to hold on trust for B (declaration still required)

Question 3

Formalities of express trusts

Answer 3

o Law of Property Act 1925, s53
o Signed writing required

Question 4

Constitution of express trusts (1)

Answer 4

o A transfer is required
o Milroy v Lord

Question 5

Constitution of express trusts - method 2

Answer 5

o For method 2, where the settlor and trustee are the same, there must be a declaration of trust

o Jones v lock
 Handed cheque to baby and said he would give baby a lot more with it
 Took cheque away from baby to put in safe – later father died
 Did not meet formalities for it to be a gift
 Court said keeping cheque safe on behalf of son could not be a trust – what he said was not a declaration of trust, but instead words of gift
 ‘we will not construe a trust out of a failed gift’

o Paul v Constance
 C separated from wife but not divorced
 C put money in account in own name- died without will
 Wife got money since no will
 Often said to new girlfriend ‘This money is as much yours as mine’ and treated account as a joint account
 Court decided that what was intended amounts to a trust – all words and acts suggest C was trustee ands C and new girlfriend were beneficiaries
 Wife got Mr C’s half when he died and girlfriend got her half

o Richards v Delbridge
 D tried to make gift in favour of grandson of his business – creates memo stating this
 Delivers lease of land and memo to grandson’s mother
 Formalities for transferring lease in land – must be done by deed and delivered – this did not happen so failed gift
 Was it a trust? - D did not constitute himself a trustee, this was not what he intended – court will not construe a trust out of a failed gift

Question 6

Constituting an express trust - method 3

Answer 6

o For method 3 (where settlor and trustee are different) there must also be a transfer of property to the trustee

o Choithram v Pagarani
 Donor made money running supermarkets in Africa and middle-east.
 Was dying so wanted to set up a charitable foundation.
 Executed a trustee to set up the foundation. Said orally ‘I am going to give my entire estate to the foundation’.
 He died before actually transferring the property.
 He had not made a will. Family tried to get the money.
 Transfer is required from TCP (deceased man) to him and the other two trustees. (settlor to trustee)
 Adopted benevolent interpretation of TCP’s words – made it a type 3 transfer

Question 7

What are the three certainties?

Answer 7

o Knight v Knight
1. Certainty of Intention
2. Certainty of Subject Matter
3. Certainty of Objects

Question 8

Why do we need the three certainties?

Answer 8

o A trustee must obey the terms of the trust - personal liability for breach
o Unfair on trustee to be faced with difficulties or impossibilities in managing the trust given this liability
o Court can step in as last resort if the trustee does not perform – court needs to know what it is doing too

Question 9

What is Certainty of intention?

Answer 9

o This is the SETTLOR’S intention, expressed though the ACTS AND WORDS of the settlor as interpreted OBJECTIVELY

Question 10

Certainty of intention - magic words

Answer 10

 Do not have to use words ‘I declare a trust’ – court look at substance, not specific phrase
 Re Kayford
* Kept customers payments on trusts – brought asset shielding so if went bust, customers would get their money back
* Repurposed existing bank account as if it was a customer’s trust account – did not use word trust but used it as a trust account
* Went bust – creditors tried to take money on trust account
* Court said it was obvious that they were tyring to create a trust regardless of whether called a trust or not
 Tito v Waddell
* Colonial gov promised to hold royalties of mining operation on ‘trust’ for former owners of the land
* Clear that despite calling it a trust, they did not intend for it to be a trust

Question 11

Certainty of intention - precatory/imperative words

Answer 11

 Precatory words – things that are not imperative but express wishes
 Imperative – ‘On trust for’, ‘I declare’ etc
 Precatory words were once accepted by courts as sufficient, but now the courts require imperative words

 Lambe v Eames
* Gave widow his estate in will to be at her disposal ‘anyway she may think best’ for benefit of herself and family
* Widow passed on part of estate to one of his illegitimate sons
* Legitimate offspring were upset about this and appealed saying gift was not the widow’s to deal with however she wanted, it was for legitimate family to inherit
* CofA said the widow did not go beyond her authority as she dealt with the land in any way she thought nest – this was a gift of a trust

 Re Adams and Kensington Vestry
* Husband died leaving everything to wife ‘in full confidence she will do what is right as to the disposal to his children either in her lifetime or when she deceased’.
* She tried selling land, but could she sell the land she inherited from him?
* Yes if it was a gift, but no if it was a trust as it would have to go to children to inherit - CofA said it was an intention to gift.

 Re Diggles
* Testator of will expressed desire that her friend would have £25 for life from her estate
* This was a precatory instruction – so called trustee can decide if he wants to give money to friend or not as it was a gift to trustee not a trust
* Court took stricter approach as will not declare a trust if there are precatory words

Question 12

Certainty of intention - substance of the intention

Answer 12

 Comiskey v Bowring Hanbury
* Complex and included some precatory words, but as a whole it was imperative

 Re Steele’s WT
* Lawyer went to old book of precedent pre-dating Lambe v Eaves
* Set up trust using precatory words as looked at old precedent – this meant there was no trust

Question 13

Certainty of intention - sham, fraud and skulduggery

Answer 13

 No certainty of intention if it is a sham
 Midland Bank v Wyatt
* D set up textile company.
* When borrow money commercially they insist you give guarantees - if business fails the husband’s personal assets would be taken.
* He set up a trust giving wife and daughters all value in family home. Therefore if went bankrupt, the property was not available to the creditors as it was wife and children’s’.
* Husband’s business went bankrupt – at trial it turned out that husband never actually intended to turn over family home to wife and children – it was just a sham and no real intention to create a trust – look to wider circumstances

Question 14

Certainty of subject matter - identifying the property

Answer 14

o Identifying the property – trustee needs to know what to manage

 Palmer v Simmonds
* Instructions to hold bulk of estate on trust
* Bulk of is not legal term and is imprecise so court said the trust was not valid
 Re Kolb’s
* Residue of estate left to trustees – this is a legal term as it means what is left.
* But uncertainty as to what to do with residue. Suggested that they reinvest in blue chip shares – shares of a certain quality – but how much quality? This is imprecise.
* Trustees did not have to carry out instruction to reinvest as had no certainty of subject matter
 Re Golay’s WT
* Beneficiary of trust was to ‘enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties’ – problem as there is more than one flat so which one is meant?
* Also what is reasonable income? Court said this did have certainty of subject matter – reasonable is a technical legal term as it meant objectively reasonable – is this really convincing? Seems to be very generous approach by the court

Question 15

Certainty of subject matter - identifying the respective shares

Answer 15

 Burrough v Philcox
* Testator left property with the instruction that it goes to nephews and nieces to whom and with which proportions went to survivor and children.
* Testator dies, first child dies, second child dies without giving direction as to how money to be appointed.
* Judges have two options – is this invalid? Or is trust valid but how much do we give to which nieces and nephews. Court went for second option and shared property to all nieces and nephews equally.

 Boyce v Boyce
* Testator devised two houses to wife on trust with further instructions that in her will she has to convey one house to daughter Maria and other house to daughter charlotte.
* Testator dies and wife dies, then Maria dies without deciding which house she wanted.
* What does Charlotte get? – court said she gets nothing as gift failed – Maria sabotaged it by not deciding which house was hers or charlotte’s – harsh determination by court

 Re Knapton
* Left one house to each of nephews and nieces, one to NH, one to FK, one to sister and one to brother. Which houses were to who?
* Court decided that court would manage trust as a lottery if the nieces and nephews could not agree – court much more lenient and will strive to uphold a trust where possible

Question 16

Certainty of objects - conceptual certainty

Answer 16

 The precision of language used by the settlor to define the classes of person whom he intends to benefit
 E.g. Parent, graduate, relative

Question 17

Certainty of objects - evidential certainty

Answer 17

 Extent to which the evidence available in a particular case enables specific persons to be identified as members of those classes – and so beneficiaries
 E.g. is X a parent, graduate, relative on the evidence

Question 18

Certainty of objects - fixed trusts

Answer 18

 No discretion – Complete conceptual AND evidential certainty required

 IRC v Broadway Cottages (confirmed in OT Computers v First National Tricity Finance)
* A ‘complete list’ of beneficiaries is required

 Re Gulbenkian’s Settlements
* What are ‘friends’ – hard to determine

 Re Sayer
* Problem was evidential certainty – Sayer ran sweet shops so did not keep employees very long – high staff turnover
* Record of ex-employees was incomplete – while ex-employees is conceptually certain, evidential certainty was not there

 Re Saxone
* The records were not so bad to make the instructions of the trust unable to be complied with – courts must be satisfied that there is a probability that the list is certain

 What happens if someone is missing from the list?
1. Trustee Act 1925 s.27 – Advertise uncertainty and wait for missing beneficiary to turn up. If they do not turn up, you can then distribute between remaining beneficiaries
2. Benjamin Order – Court will see evidence that you have made adequate efforts to find missing beneficiary and if still cannot find, court will allow you to distribute between remaining beneficiaries
3. Insurance – Should still insure in case missing beneficiary tries to claim their share later

Question 19

Certainty of objects - discretionary trusts

Answer 19

 All relevant property must be appointed, but otherwise trustee has discretion as to how
 When there are hundreds of beneficiaries, there is no need for a complete list

 McPhail v Doulton, Re Baden’s Deed Trusts (No.1)
* Wanted to set up beneficial fund of staff, their relatives and dependants.
* Relatives is conceptually uncertain, list of past employees? Dependant is uncertain. Litigation focused mainly on relatives – how would you create a complete list as do not know where to stop on tree of relatives – pretended this was not a trust but a power.
* Attacked the trust saying test should be for complete list – trustees said this was ridiculous and there should be a more relaxed test.
* Reason for having complete list – court must be able to administer the trust if trustees can’t or won’t.
* HofL adopted individual ascertainability test (in or out test) – look at definition of class e.g. relatives and say if a particular potential beneficiary comes to trustees and claims they are a beneficiary, only need to be able to decide if that particular person fits the class – it is case by case basis. This eliminates problem of having to find every relative etc and renumerate them.

 Re Baden’s Deed Trusts (No.2)
* Disagreement on how individual ascertainability should be applied
* Sachs LJ – if don’t know if they fit in the class, treat them as if they don’t fit – enough to prove that X is in the class, do not need to prove X is not in the class
* Megaw LJ – Agreed but added a substantial number of objects was needed
* Stamp LJ – Need to positively prove whether postulant is in or out of the class

 Curing uncertainty via delegation

• Re Wynn
   Uncertainty could not be cured by allowing the trustee to have a wide clause
   Let trustees do whatever they liked. Trust is not valid for two reason – 1. having complete discretion to do anything invalidates the trust as it makes it more like a gift. 2. the trustees have so much latitude, the supervision of the court would have been ousted
• Re Coxen
   Testator left house to trustees and wife had life interest in this – live until she died - Shall cease if she ceased to permanently reside there, and her interest ends.
   When do you cease to reside somewhere? – is it sudden or gradual? This was sufficiently certain that this was a valid trust – was not too uncertain
• Re Tuck’s ST
   Income provided so long as he be of Jewish faith and living with ‘an approved wife’
   The trust was not void as it could be determined by an appropriate rabbi

Question 20

Certainty of objects - fiduciary powers

Answer 20

 The power does not have to be exercised but the trustee must CONSIDER exercising it
 Look for a gift over – alternative destination for the property
 Re Gulbenkian’s Settlements
 Re Gestetner’s Settlements
 Same test as for discretionary trusts

Question 21

Certainty of objects - series of gifts subject to a condition precedent

Answer 21

 Fixed sums that trustee MUST appoint to beneficiaries in the class defined by the condition precedent
 Re Allen
* Condition that B ‘shall be a member of the Church of England and an adherent to the doctrine of that Church’
 Re Barlow
* ‘Friends’ and ‘family’
* Friends is conceptually uncertain but it does not matter that class of objects is undefined – all that matters is that one person fitted the class
 TEST: Can one say with certainty that some person would clearly be a member of the class

Question 22

Duty to survey the field

Answer 22

o How to properly apply the discretion – trustee needs to know not only if trust is valid but also how to run it

o FIXED TRUST
o Complete List Required – defines what trustee must do

o DISCRETIONARY TRUST
o McPhail v Doulton, Re Baden’s Deed Trusts (No.1)
 [The trustee] would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications.

o Re Baden’s Deed Trusts (No.2)
 Stamp LJ: ‘A comprehensive range of inquiry is called for’
 Sachs LJ: ‘Assessing in a business like way ‘the size of the problem’ is what the trustees are called to do

o Re Hay’s ST
 [W]hat is needed is an appreciation of the width of the field, and thus whether a selection is to be made merely from a dozen or, instead, from thousands or millions

o FIDUCIARY POWERS
o Re Gestetner’s Settlement
 There is no obligation on the trustees to do more than consider the merits of such persons of the specified class
 Two options: give it to beneficiary or give it to gift over

Question 23

Administrative unworkability

Answer 23

o Related to duty to survey the field – can the trustee actually make this work?
o Re Gulbenkian’s Settlements
o Would the cost of administering the trust outweigh the benefits it would provide?
o Ex p West Yorkshire Metropolitan County Council
o Trust set up for all inhabitants of county – court said it was administratively unworkable and trust invalid

Question 24

Capriciousness

Answer 24

o Law will not permit execution of trusts that do not have a decent purpose
o Brown v Burdett
o Testator devised a trust and instructions were to block up most of rooms for 20 years before final transfer. Court said the condition was capricious and trust would not apply – the wishes were ridiculous
o Re Hay’s ST
o A trust to ‘benefit all the residents of Greater London’ would not be capricious if the settlor was a former chairman of the Greater London Council

Question 25

Perpetuities

Answer 25

o Wealth should not be tied up for a long period of time – dead person cannot control where their money goes from the grave (Dead Hand Rationale)
o Perpetuities and Accumulations Act 2009

Question 26

The beneficiary principle

Answer 26

o Trusts are for people, not purposes – there must be a beneficiary