Trust 1-5

Question 1

A woman recently died. Her valid will contains the following clauses:

‘1. I give £10,000 to my trustees to be distributed amongst my children in such shares as my trustees shall determine.

I give £10,000 to my trustees to pay an ample sum to my brother.’
Which statement best describes the status of the trusts in clauses 1 and 2?

Answer 1

**A. the trust in clause 1 is valid but the trust in clause 2 is void. **

Certainty of subject matter comprises two requirements.
The second requirement is the beneficial entitlement requirement: it must be possible to ascertain the nature and extent of the beneficiary’s interest in the trust property.
In relation to clause 1, it is possible to ascertain the extent of each beneficiary’s interest by reference to the trustees’ determination.
In relation to clause 2, it is not possible to ascertain the extent of each beneficiary’s interest because ‘ample sum’ is an uncertain measure. (How much is an ‘ample sum’?)
As a result, the trust in clause 2 is void for uncertainty of subject matter.

Question 2

A woman declares a trust of three of her five paintings, and 100 of her 200 ordinary shares in a private company, in favour of a man. The woman does not segregate or otherwise identify the three paintings or the 100 shares to be held on trust.

Which best describes the effect of the woman’s declaration?

1. The woman holds 100 shares on trust for the beneficiary. She remains the full legal owner of the other 100 shares. she holds the paintings on a resulting trust for herself.
2. The woman does not hold any shares or paintings on trust for the man. She remains the full legal owner of all the shares and all the paintings.
3. the woman holds 100 shares and three paintings on trust for the man, she remains the full legal owner of the other 100 shares and two paintings.
4. The woman holds three paintings on trust for the man. She remains the full legal owner of the other two paintings and all the shares.

Answer 2

3. The woman holds 100 shares on trust for the man. She remains the full legal owner of the other 100 shares and all the paintings.

**Certainty of subject matter **comprises two requirements.
1. The first requirement is the trust property requirement: it must be possible to identify the trust property.
- The woman has failed to identify the three paintings to be held on trust and, as a result, it is not possible to identify the trust property.

By contrast, the woman’s failure to identify the 100 shares to be held on trust is not fatal because a person can declare a valid trust of x of their (x+y) shares of the same type in the same company without identifying the x shares to be held on trust.

Question 3

A woman recently died. Her valid will contains the following clause:
‘I give £10,00 to my husband absolutely, I trust him to use it fairly vis-a-vis our children
The executor of the woman’s will has paid £10,000 to her husband.

Which statement best describes the husband’s position in relation to the £10,000?

1. The husband is the full legal owner of the money.
2. The husband holds the money on a fixed trust for himself and the children.
3. The husband holds the money on a fixed trust for the children.
4. the husband holds the money on a discretionary trust for the children.
5. the clause is void and the husband receives nothing.

Answer 3

1. The husband is the full legal owner of the money.

The £10,000 is given to the husband ‘absolutely,’ which is consistent with a gift.

The words ‘I trust him to’ are not sufficiently imperative to impose a duty (a trust) in relation to the money.
This is supported by the fact that the content of any supposed duty – the ‘fair’ use of the money – is entirely vague.

Question 4

A company transfers possession of its goods, but not its title to them, to a man. The company and the man agree that the man will try to sell the goods on behalf of the company and that he will return to the company any goods that he is unable to sell. They also agree that the man will pay the proceeds from any sales into a separate bank account and that he will transfer the sum credited to that account to the company at the end of each week. The man sells some of the goods. He pays the proceeds of sale into a separate bank account.

Which statement best describes the man’s relationship with the company?

1. The man is a bailee, an agent and a trustee for the company.
2. the main is a trustee for the company
3. the man’s relationship with the company is not fiduciary in nature: it is merely contractual.
4. the man is a bailee for the company.
5. The man is an agent for the company.

Answer 4

1. The man is a bailee, an agent and a trustee for the company.

The man has possession of (but not title to) the company’s goods. This creates the relation of bailor and bailee. ( items sent to someone for a purpose)

The man is authorised to sell goods on behalf of the company.
This creates the relation of principal and agent.
The man has paid the proceeds of sales into a separate bank account, which he must transfer to the company. This creates the relation of trustee and beneficiary.

Question 5

A testator’s validly executed will contains the following clause:

“My trustees shall hold my engagement ring and my wedding ring on trust until my daughter reaches the age of 21. She may then choose one of the rings for herself. After my daughter makes her choice, my trustees shall give the other ring to my niece.”

The testator’s daughter dies before reaching the age of 21. The niece is still alive.

Which one of the following statements is the best advice to the trustees as to the niece’s entitlement to a ring under the testator’s will?

1. The niece is entitled to the ring of her choice.
2. The niece is entitled to a ring chosen by the court.
3. The niece is entitled to both rings.
4. The niece is entitled to a ring chosen by the trustees.
5. The niece is not entitled to either ring.

Answer 5

5. The niece is not entitled to either ring

The intended trust fails for uncertainty of subject matter, specifically beneficial entitlement as in the case of Boyce v Boyce. There was a mechanism for determining beneficial entitlement but that mechanism can no longer be used because the daughter died without making her choice

Question 6

A settlement contains a discretionary trust and a fiduciary power. The objects of the discretionary trust are ‘all children living in the United Kingdom.’ The objects of the fiduciary power are ‘all adults living in the United Kingdom.’

Which statement best describes the status of the trust and the power?

1. The trust is valid but the power is void.
2. the power is valid but the trust is void.
3. the trust and the power are valid.
4. the trustees can determine whether the trust and the power are valid.
5. The trust and power are void.

Answer 6

2. the power is valid but the trust is void.

The discretionary trust has millions of objects: it is administratively unworkable and void. By contrast, the number of objects of a fiduciary power does not affect the validity of the power.

Question 7

By the terms of a trust the trustee is instructed to pay the trust income to a man during his lifetime and, after the man’s death, to transfer the trust capital to a woman if she reaches the age of 25. The man is alive. The woman is aged 21.

Which statement best describes the nature of the man’s and the woman’s rights?

1. The man and the women have interests in remainder.
2. the and the women together have the right to terminate the trust.
3. the man and the women have interest in possession.
4. The man has interest in possession and the women has a contingent interest in remainder.
5. the man and the woman have contingent interest.

Answer 7

4. The man has an interest in possession and the woman has a contingent interest in remainder.

The man has an immediate right to income. The woman’s interest is contingent because she is only entitled to the capital if she reaches the age of 25. Her interest is in remainder because she is only entitled to the capital after the man dies.

Question 8

A woman is the trustee of two trusts, Trust A and Trust B. The beneficiaries of Trust A are all capable adults with vested interests. Trust B has adult and child beneficiaries.

Which statement best describes the beneficiaries’ rights?

1. the beneficiaries of Trust A and Trust B can terminate their respective trusts.
2. the beneficiaries of Trust A can terminate their trust. The beneficiaries of Trust B can terminate their trust but only if the trustee agrees.
3. The beneficiaries of Trust B can terminate their trust. The beneficiaries of Trust A cannot terminate their trust.
4. The beneficiaries of Trust A and Trust B cannot terminate their respective trusts.
5. The beneficiaries of Trust A can terminate their trust.

Answer 8

** 5. The beneficiaries of Trust A can terminate their trust. The beneficiaries of Trust B cannot terminate their trust.**

Beneficiaries can agree to terminate a trust if they are all capable adults who exhaust all possible claims to the trust property. The beneficiaries of Trust A satisfy these conditions but the beneficiaries of Trust B do not.

Question 9

A woman recently died. Her valid will contains the following clauses:

‘1. I give £10,000 to my trustees to distribute in equal shares amongst my biological children.

I give £10,000 to my trustees to distribute in equal shares amongst persons who have a moral claim on me.’
Which statement best describes the status of the trusts in clauses 1 and 2?

1. The trust in clauses 1 and 2 are void.
2. the trustees can determine whether the trust are valid or void.
3. Trust in clause 1 is valid but the trust in clause 2 is void.
4. The trust in clause 1 is void but the trust in clause 2 is valid.
5. the trust in clauses 1 and 2 are valid.

Answer 9

3. Trust in clause 1 is valid but the trust in clause 2 is void.

Where a trust involves equal distribution among the members of a class, it must be possible to compile a complete list of the members of the class. Since the class in clause 2 – ‘persons who have a moral claim’ on the deceased – is conceptually uncertain, it is not possible to identify the members of the class. As a result, the trust in clause 2 is void for uncertainty of objects.

Question 10

A woman recently died. By her valid will she gave £500,000 to trustees to hold on trust for her husband for life with remainder to such of their children and in such shares as her husband may select during his lifetime or by his will and, in default of selection, to such of their children who are living on the date of her husband’s death.

Which statement best describes the husband’s position?

1. His rights will be determined by the trustees.
2. He is entitled to the trust income during his lifetime and has a power in relation to the trust capital.
3. He has a power in relation to the trust capital.
4. he is entitled to the trust income during his lifetime.
5. He has a duty to appoint the trust capital.

Answer 10

2. He is entitled to the trust income during his lifetime and has a power in relation to the trust capital.

The trustees hold the property on trust for the widower ‘for life’. This means that he is entitled to the trust income during his lifetime. Further, the husband ‘may’ select how the capital should be appointed to the children. This is permissive rather than imperative: it is a power.

Question 11

Which of the following most accurately correctly describes the statutory powers of trustees to purchase land?

1. Trustees may purchase land in the UK but only for occupation by a beneficiary.
2. Trustees may purchases land in the UK or overseas, whether as an investment or for any other purpose, including occupation by a beneficiary.
3. Trustees may purchase in the UK, whether as an investment or for any other purpose, including occupation by a beneficiary.
4. Trustees may purchase land in the UK but only has

Answer 11

Trustees may purchase land in the UK, whether as an investment or for any other purpose, including occupation by a beneficiary.

Section 3 Trustee Act 2000 gives trustees a wide power to invest in any property, but in the case of land this must be read in conjunction with section 8 which provides that trustees may only acquire land in the UK. This land may be purchased as an investment, for occupation by a beneficiary or for any other reason.

Question 12

A solicitor trustee and a lay trustee held a majority shareholding in a company on trust. The solicitor trustee was elected to the board of directors but did not attend board meetings and was unaware that the company was being mismanaged. The shares have halved in value since they were acquired by the trustees.

As a result of the failure to supervise and safeguard the trust investment a breach of the trustee duty of care and skill has occurred.

Which of the following most accurately describes the liability of the trustees?

1. Only the solicitor trustee will be liable, because they are acting in a professional capacity.
2. The trustees will be jointly and severally liable. However, the lay trustee should apply for an indemnity because of the solicitor trustee’s overbearing influence.
3. The trustees will be jointly and severally liable, although it may be possible for the lay trustee to apply to apportion greater liability to the solicitor trustee.
4. The trustees will be jointly and severally liable. There is no defence available to either trustee because the trust was a majority shareholder.
5. Only the solicitor trustee will be liable, because they were the trustee elected to the board of directors.

Answer 12

The trustees will be jointly and severally liable, although it may be possible for the lay trustee to apply to apportion greater liability to the solicitor trustee.

Correct
As the trust has a majority shareholding the trustees were under a common law duty to supervise and safeguard the investment (see e.g. Bartlett v Barclays Bank). Where a breach of duty occurs, the trustees are jointly and severally liable even though one of the trustees is not directly involved and even though one of the trustees is not acting in a professional capacity. While acting as a lay trustee will not absolve a trustee of their liability, it may be possible for the lay trustee to apportion greater liability to the professional trustee under s 1 Civil Liabilities (Contribution) Act 1978, although it is not possible on the facts to know whether this would be successful or not

Question 13

Lay trustees decided to invest in a company having read positive reviews in the press. The company share price was increasing rapidly so they invested immediately without seeking further advice.

Six months later the company was publicly criticised for having breached data protection regulations on numerous occasions, and as a result the share price plummeted.

Have the trustees acted in breach of their investment obligations under the Trustee Act 2000?

1. Yes, because they did not first seek the consent of the beneficiaries.
2. No, because it is reasonable to rely upon advice in the press.
3. No, because the events which caused the loss were not in the public domain at the time the trustees made the investment decision.
4. No, because the trustees are not acting in a professional capacity.
5. Yes, by relying on the press reports and not seeking any other advice.

Answer 13

Yes, by relying on the press reports and not seeking any other advice.

Correct
The trustees are under an obligation to take proper advice and it is unlikely that this has been satisfied by reliance on press reviews (s 5 of the Trustee Act 2000).

Question 14

You are advising the two trustees of a discretionary trust in relation to the following events, each of which was a breach of duty by the trustee resulting in loss to the trust fund:

Trustee A made a transfer from the trust bank account to settle an invoice received by the trust.
- Trustee A later discovered that the recipient account details were entered incorrectly, the funds have been paid to an overseas bank in error and it may not be possible to recover this money.
- Trustee B withdrew £2,000 from the trust bank account and used this to repay outstanding gambling debts.

The trust instrument contains an exemption clause which absolves the trustees from all liability for loss to the trust fund as a result of any breach.

Who may rely on the trustee exemption clause?

1. Trustee A only.
2. Both trustees, provided a majority of the beneficiaries agree.
3. Neither trustee.
4. Both trustees, provided they each agree the other should be absolved
5. Trustee B only.

Answer 14

1. Trustee A only

Following Armitage v Nurse, an exemption clause which exonerates a trustee from liability can be enforced in respect of any breach other than a fraudulent or dishonest breach of trust.
Trustee A was negligent but was not dishonest. Trustee B has stolen from the trust which is an act of dishonesty and therefore Trustee B cannot claim the benefit of the exemption clause, irrespective of how widely it is drafted.

Question 15

You are advising the trustees of a discretionary trust. The trustees want to appoint an investment manager to make financial decisions on their behalf in relation to the trust fund. One of the beneficiaries of the trust (‘B’) is an experienced and well-respected financial adviser and has specialist tax knowledge.

The trustees would like to appoint B to act as investment manager for the trust. The trustees believe B will be highly motivated to perform well and she may also be able to offer her services to the trust at a reduced rate.

The trustees would also like B to decide when distributions should be paid to the beneficiaries to ensure this is done in the most tax efficient manner.

The trust instrument does not contain any express powers relating to the appointment of agents or delegation of trustee functions.

Which of the following is correct?

1. The trustees may not appoint B to make either investment or distribution decisions
2. The trustees may appoint B to make distribution decisions only.
3. The trustees may appoint B to make investment decisions only.
4. The trustees may appoint B to make both investment and distribution decisions.
5. The trustees may not delegate either investment or distribution decisions to anyone because the trust instrument does not expressly permit this.

Answer 15

The trustees will be jointly and severally liable, although it may be possible for the lay trustee to apply to apportion greater liability to the solicitor trustee.

Correct
The Trustee Act 2000 does permit the delegation of investment decisions but not decisions relating to distribution of the trust fund. However, the trustees may not delegate to one of the trust beneficiaries.

Question 16

A trustee transfers £20,000 from a trust bank account into a business account in the trustee’s sole name.

The trustee’s spouse manages the finances of this business and is surprised to see this large deposit as they are aware the business is struggling. The spouse checks the account details and realises the money was transferred from the trust account.

The trustee’s spouse asks the trustee why they have received money from the trust account but is told to ‘stop asking stupid questions’. The spouse chooses not to enquire further and uses the money in the account to pay creditors of the business. The trust account is now completely empty and the trustee is bankrupt.

Advise the trustee’s spouse as to any personal liability they may have to the beneficiaries of the trust.

1. The spouse is likely to be personally liable for dishonestly assisting the breach of trust.
2. The spouse will not be personally liable to the beneficiaries as they have not personally received any of the money from the trust fund.

The spouse is likely to be personally liable for breach of fiduciary duty.

The spouse cannot be personally liable to the beneficiaries because they do not know that there has been a breach of trust.

The spouse is likely to be personally liable for knowing receipt.

Answer 16

The spouse is likely to be personally liable for dishonestly assisting the breach of trust.

The spouse has assisted in a breach of trust by paying out the funds to the trustee’s creditors. They are likely to satisfy the objective test for “dishonesty” in Royal Brunei Airlines v Tan (an honest person in possession of the same facts would have considered their actions to be dishonest) because they choose not to pursue further enquiries.

Question 17

A solicitor working in the commercial property team of a law firm is advising a company, acting by its directors. The company is the trustee of a trust. The company has instructed a firm of estate agents to identify a suitable property as a trust investment. The estate agents have identified a property which the company will purchase with a mortgage provided by a bank.

In relation to this transaction, which of the following parties does not owe any fiduciary duties to any of the others?

1. The directors
2. The estate agents
3. The company
4. The mortgagee bank
5. The solicitor

Answer 17

The mortgagee bank

The mortgagee bank (lender) does not owe any fiduciary duties to the company (borrower). The parties have entered a commercial agreement and there is no reason to suppose any fiduciary relationship exists.

Question 18

A woman is the trustee of a family trust, the assets of which include a majority shareholding in a company. The terms of the trust instrument expressly permit the trustees to use the shareholding to appoint themselves as directors of the company (although it is silent regarding the payment of any associated remuneration). The woman is appointed as a director of the company and is paid an annual salary of £45,000.

Which of the following best describes the woman’s position in relation to the salary?

The woman can keep the salary unless the beneficiaries of the trust object. If they object, the beneficiaries are entitled to seek an account of profits.

The woman cannot keep the salary. If she does, the beneficiaries may seek an account of profits.

The woman cannot keep the salary. If she does, the beneficiaries may elect between a constructive trust or account of profits.

The woman can keep the salary because her position as director of the company is separate from her role as a trustee.

The woman can keep the salary because it is paid as remuneration for her work as the director of the company.

Answer 18

The woman cannot keep the salary. If she does, the beneficiaries may elect between a constructive trust or account of profits.

The woman has only been appointed as a director as a result of her position as trustee and keeping the salary would be a breach of the no profit rule. Following FHR European v Cedar Capital Partners the remedy for breach of the no profit rule is the proprietary remedy of a constructive trust.

Question 19

A trust fund is held for two adult beneficiaries, A and B. B wants to raise money to start their own business. B has no significant assets other than their interest under the trust which they would like to sell. One of the trustees is interested in buying B’s interest.

Which of the following would be the most appropriate advice for the trustee?

1. The proposed sale would be fair-dealing and therefore voidable unless the trustee obtains the informed consent of both beneficiaries.
2. The proposed sale would be self-dealing and therefore void unless the trustee obtains the informed consent of both beneficiaries.
3. The proposed sale would be self-dealing and therefore voidable unless the trustee obtains the informed consent of both beneficiaries.
4. The proposed sale would be fair-dealing. The trustee should ensure that B gets independent advice on the sale and that the interest is independently valued.
5. The proposed sale would be self-dealing. The trustee should therefore not proceed.

Answer 19

The proposed sale would be fair-dealing. The trustee should ensure that B gets independent advice on the sale and that the interest is independently valued.

The proposed sale is an example of fair dealing. The trustee may purchase the equitable interest of a beneficiary if they can prove they acted fairly, there was no undue influence, they gave full value and the beneficiary was fully informed. These can be demonstrated by the practical steps suggested.

Question 20

A flat owned by a family trust has increased in value since it was acquired by the trustees. Following professional advice, the trustees decide to sell the flat and re-invest the proceeds.

One of the trustees (‘T’) wants to purchase the flat and obtains three independent valuations. The trustees sell the flat to T for the average of the three valuations (the ‘Sale’).

Which one of the following best describes the Sale?

1. The Sale is self-dealing and voidable. It does not matter how much T pays.

2.The Sale is not self-dealing because T paid a fair price for the flat.

3.The Sale is self-dealing and voidable because T did not pay a price equal to the highest valuation.

4. The Sale is self-dealing but is not voidable because professional advice was obtained.
5. The Sale is self-dealing but is not voidable because a fair price was paid.

Answer 20

The Sale is self-dealing and voidable. It does not matter how much T pays.

Correct
The Sale is self-dealing and is therefore voidable regardless of whether a fair price has been paid. T should have sought the consent of the beneficiaries before entering into the Sale.]

Question 21

A trust includes several valuable vintage sports cars. In breach of trust the trustee gives one of the sports cars to her girlfriend. The girlfriend is confused as the trustee has recently been complaining about how short of money she is. When the girlfriend asked where the car came from the trustee replies that this is a “perk of the job” and that “what you don’t know, won’t hurt you”. The girlfriend knew that the trust contained vintage cars but decided to ask no further questions and took the car out for a drive. She crashed the car and it is now worthless.

Which one of the following statements best describes the girlfriend’s liability to the beneficiaries?

1. The girlfriend had knowledge making it unconscionable for her to retain the car. The beneficiaries can make a personal claim against her for knowing receipt.
2. The girlfriend had knowledge making it unconscionable for her to retain the car but is not liable for knowing receipt because the car is now worthless.
3. The girlfriend is an innocent volunteer so is not personally liable to the beneficiaries.
4. The girlfriend is an innocent volunteer so the beneficiaries can make a personal claim against her for knowing receipt.
5. The girlfriend is an innocent volunteer but is not liable for knowing receipt because the car is now worthless.

Answer 21

1. The girlfriend had knowledge making it unconscionable for her to retain the car. The beneficiaries can make a personal claim against her for knowing receipt.

The girlfriend beneficially received the car. She has knowledge which would indicate the facts to a reasonable person and arguably ought to have made further enquiries. She is therefore likely to be liable for knowing receipt.

Question 22

In breach of trust, a trustee misappropriates £10,000 of the trust fund. They use £5,000 of the money to pay off the mortgage debt they incurred when they purchased their house. They use the other £5,000 to pay a debt they incurred when they purchased their car. They purchased the house and the car five years before their appointment as a trustee.

Which statement best describes the beneficiary’s rights?

1. The beneficiary can trace into the car.
2. The beneficiary can trace into the house and the car.
3. The beneficiary only has a personal claim against the trustee.
4. The beneficiary can trace into the house.
5. The beneficiary can be subrogated to the rights of the mortgagee

Answer 22

The beneficiary can be subrogated to the rights of the mortgagee.

Correct
The beneficiary can assume (by subrogation) the rights of the mortgagee immediately before the receipt of the £5,000. Thus, the beneficiary can recover £5,000 from the trustee and, if the trustee is unable to pay, can enforce the mortgage.

Question 23

In breach of trust, a trustee misappropriates £5,000 of the trust fund. The trustee uses the trust money and £5,000 of their own money to purchase a painting for £10,000. The seller of the painting does not know that the buyer is a trustee or that they have misapplied the trust fund. The seller still has the £10,000 they were paid for the painting.

Which statement best describes the beneficiary’s rights?

1. The beneficiary can assert a lien over the painting.
2. The beneficiary can claim the misapplied trust money from the seller of the painting.
3. The beneficiary can only make a personal claim against the trustee.
4. The beneficiary can claim a proportionate share of the painting.
5. The beneficiary can claim a proportionate share of the painting or assert a lien over it.

Answer 23

The beneficiary can claim a proportionate share of the painting or assert a lien over it.

Correct
Where a trustee uses misapplied trust money and their own money to purchase an asset, the beneficiary can elect between a proportionate ownership claim or a security claim.

Question 24

A person is the trustee of two trusts, Trust A and Trust B. In breach of trust they misappropriate £5,000 from each trust. They use the £10,000 to purchase a painting. The seller of the painting does not know that the buyer is a trustee or that they have misapplied trust funds. The painting is currently worth £8,000. The seller still has the £10,000 they were paid for the painting.

Which statement best describes the beneficiaries’ rights?

1. The beneficiary of Trust B can assert a lien over the painting to secure payment of £5,000.
2. The beneficiary of Trust A can assert a lien over the painting to secure payment of £5,000.
3. The beneficiaries of Trust A and Trust B can claim a proportionate share of the painting.
4. The beneficiaries of Trust A and Trust B can only make personal claims against the trustee.
5. The beneficiaries of Trust A and Trust B can claim the £10,000 from the seller of the painting.

Answer 24

The beneficiaries of Trust A and Trust B can claim a proportionate share of the painting.

Where an asset is purchased with money misapplied from two or more trusts, the beneficiaries of the respective trusts can claim a proportionate share of the asset.

Question 25

In breach of trust, a trustee misappropriates £5,000 of the trust fund. The trustee pays the money into their personal current account (‘the Account’) which already contains £10,000 of the trustee’s own money. The trustee withdraws £5,000 from the Account and dissipates it. The trustee then withdraws £5,000 from the Account and uses it to purchase shares. Finally, they withdraw £5,000 from the Account and use it to purchase a painting.

The shares are currently worth £15,000 and the painting is currently worth £20,000. The trustee is bankrupt.

Which statement best describes the beneficiary’s position?

1. The beneficiary cannot trace into any asset.
2. The beneficiary can only make a personal claim against the trustee.
3. The beneficiary can trace into the shares.
4. The beneficiary can trace into the shares and the painting.
5. The beneficiary can trace into the painting.

Answer 25

The beneficiary can trace into the shares.
Correct
The trustee mixed misapplied trust money with their own money. The trustee is bankrupt and, as a result, the beneficiary is competing with the trustee’s unsecured creditors. In these circumstances the beneficiary can attribute any part of the mixed fund which was dissipated to the trustee. But the beneficiary cannot attribute the misapplied trust money to the most profitable applications of the mixed fund.

Question 26

A trustee withdraws £1,000 from the trust bank account and gives it to their sister. The sister uses the cash to buy a computer from a friend. Neither the sister nor the friend knows about the breach of trust. The friend still has the £1,000 cash.

Which of the following is the most accurate description of the following, tracing and claiming process?

1. The beneficiary can follow the £1,000 from the bank account into the hands of the trustee’s sister, then trace into the computer and make a personal claim against the sister.
2. The beneficiary can trace the £1,000 from the bank account into the hands of the trustee’s sister and then trace again into the computer and make a proprietary claim over the computer.
3. The beneficiary can follow the £1,000 cash into the hands of the trustee’s sister, then trace into the computer and make a proprietary claim over the computer.
4. The beneficiary can trace the £1,000 from the bank account into the computer and make a personal claim against the trustee’s sister.
5. The beneficiary can follow the £1,000 from the bank account into the hands of the trustee’s sister and then continue to follow it into the hands of the friend, then make a proprietary claim against the £1,000 cash.

Answer 26

The beneficiary can follow the £1,000 cash into the hands of the trustee’s sister, then trace into the computer and make a proprietary claim over the computer.

Correct
The beneficiary is able to follow the £1,000 cash into the hands of the trustee’s sister and trace into the substitute (i.e. the computer). The friend is a purchaser for value without notice of the trust so has a defence against proprietary claims. The sister does not have such a claim as she has not given value.

Question 27

Which of the following is not an asset over which a beneficiary may be able to make a claim?

An asset purchased with a mixture of misapplied trust money and the trustee’s own money

An asset purchased with a mixture of misapplied trust money and money belonging to an innocent third party

An asset purchased with a mixture of trustee money and money belonging to an innocent third party

An asset purchased exclusively with the traceable proceeds of misapplied trust money

An asset purchased exclusively with misapplied trust money

Answer 27

An asset purchased with a mixture of trustee money and money belonging to an innocent third party

Correct
The beneficiary has no right to make a proprietary claim over assets which do not represent the traceable proceeds of a breach of trust (or fiduciary duty)? All the other options involve the use of misapplied trust money, over which the Re Diplock conditions for tracing are satisfied.

Question 28

A trustee takes £1,200 from a trust fund and pays it into their personal account, which already contains £600. The next day, the trustee withdraws £1,200 from the account and uses it to buy shares in a company. The trustee then withdraws £600 from the account and dissipates it.

Which of the following represents the best advice to the beneficiary?

1. The money withdrawn from the account can all be treated as trust money but only if there are no competing creditors, meaning the trustee spent £1,200 on the shares and dissipated their own £600. If there are competing creditors, the first £600 withdrawn from the account must be treated as the trustee’s own money, meaning the trustee spent £600 of their own money and £600 of trust money on the shares (and then dissipated £600 of trust money).
2. The first £600 withdrawn from the account must be treated as the trustee’s own money, meaning the trustee spent £600 of their own money and £600 of trust money on the shares. The trustee then dissipated £600 of trust money.
3. The money in the account is shared rateably between the trustee and beneficiary. The trustee is treated as spending £400 of their own money and £800 of trust money on the shares. The money which was dissipated is attributed in the same proportions, meaning £200 of the dissipated money is trustee money and £400 is trust money.
4. The money in the account is shared equally between the trustee and beneficiary. The trustee is treated as spending £600 of their own money and £600 of trust money on the shares. The money which was dissipated is attributed in the same proportions, meaning £300 of the money in the account is trustee money and £300 is trust money.
5. The money withdrawn from the account can all be treated as trust money, meaning the trustee spent £1,200 on the shares and dissipated their own £600.

Answer 28

The money withdrawn from the account can all be treated as trust money, meaning the trustee spent £1,200 on the shares and dissipated their own £600.

Correct
This is a wrongful mixture, part of which has been dissipated. The basic rule (in Hallett and Oatway) is that the trustee is treated as dissipating their own money and using the beneficiary’s money to acquire a traceable asset. Cherry picking does not come into play here because there is a straight choice between the beneficiary’s money being used to acquire an asset or being dissipated. This falls squarely within the basic rule.

Question 29

A trustee takes £600 from Trust A and pays the money into their personal current account (which was previously empty). The next day, the trustee takes £1,200 from Trust B and pays it into the same account. The next day, the trustee withdraws £1,200 from the account and uses it to buy shares in a company. The trustee dissipates the remaining £600 in the account.

What is the most likely way in which the withdrawals from the account will be attributed to the beneficiaries of the two trusts?

The trustee should be treated as withdrawing the money from Trust B before Trust A. The shares were bought exclusively with money from Trust B. Trust A’s money was all dissipated.

The trustee should be treated as withdrawing the money from Trust A before Trust B. The first £600 withdrawn from the account is Trust A’s money. The remainder of the £600 withdrawal comes from Trust B.

The withdrawals from the account should be shared equally by the beneficiaries. The trustee should be treated as spending £600 from Trust A and £600 from Trust B on the shares.

The withdrawals from the account should be shared rateably by the beneficiaries. The trustee should be treated as spending £400 from Trust A and £800 from Trust B on the shares.

Answer 29

The withdrawals from the account should be shared rateably by the beneficiaries. The trustee should be treated as spending £400 from Trust A and £800 from Trust B on the shares.

Correct
Although this is a current account, the rule in Clayton’s case is easily disapplied in cases of unfairness. Applying the rule in this case would mean that the beneficiaries of Trust A can trace all their money into the shares and the beneficiaries of Trust B could only trace half their money into the shares, with the remaining half being dissipated. This feels very unfair given the order in which the payments were made, so it would make sense to apply the pari passu ex post facto rule or rolling charge instead. (In these circumstances, both produce the same result.)

Question 30

In breach of trust, a trustee misappropriates £10,000 of the trust fund. He uses the money to purchase shares in a company.

Which one of the following statements describes the beneficiary’s rights?

The beneficiary can make a personal claim against the trustee for £10,000 or a proprietary claim to the shares, as the trustee determines.

The only claim available to the beneficiary is a security claim to the shares.

The only claim available to the beneficiary is a proprietary ownership claim to the shares.

The only claim available to the beneficiary is a personal claim against the trustee for £10,000.

The beneficiary may elect between an ownership claim to the shares and a security claim to the shares.

Question 31

In breach of trust, a trustee misappropriates £10,000 of the trust fund. He uses the money to purchase shares in a company.

Which one of the following statements describes the beneficiary’s rights?

1. The only claim available to the beneficiary is a security claim to the shares.
2. The only claim available to the beneficiary is a personal claim against the trustee for £10,000.
3. The only claim available to the beneficiary is a proprietary ownership claim to the shares.
4. The beneficiary may elect between an ownership claim to the shares and a security claim to the shares.

5.The beneficiary can make a personal claim against the trustee for £10,000 or a proprietary claim to the shares, as the trustee determines.

Answer 31

The beneficiary may elect between an ownership claim to the shares and a security claim to the shares.

Correct
When a trustee misapplies trust money and uses it to purchase an asset, the beneficiaries can bring: (a) a personal claim against the trustee for the misapplied money, or (b) a personal claim against the trustee for the misapplied money coupled with a proprietary security claim to the asset, or (c) a proprietary ownership claim to the asset: Foskett v McKeown [2001] 1 AC 102.