Trusts Flashcards
Settlor = person creating the trust
Express trusts
Settlor intends to create and declares so expressly
Types:
1. Private
a. Inter vivos trusts (lifetime trusts)
b. Testamatory trust
- Charitable
Types of express private trusts
- Fixed
- Discretionary
- Purpose
Implied trusts
Settlor does not expressly state a clear intention to create a trust but equity implies the intention to create a trust in order to achieve a fair result
Types:
1. Resulting
2. Constructive
Express private trusts - three certainties
- Intention - intention of settlor to create the trust must be clear and certain
- Subject matter - must be certain
- Objects - must be certain - clear who beneficiaries are
Certainty of intention
- Settlor must clearly show they intend to place trustee under binding obligation
- Shown by words or conduct
Settlor cannot create a trust in property they plan to acquire - they must own the property or an interest in the property at time of creation of trust
Settlor must intend that trust takes effect immediately
Certainty of subject matter
Must be clear what property is subject to trust
A description of a fractional share of an intangible asset like company shares shows a certainty of subject matter.
Descriptions like “the bulk of my property” and “one of my houses in London” are not sufficiently certain.
There is no certainty of subject matter in an interest that the settlor does not yet have, such as the expectation of inheriting under a will.
Fixed trusts
Trustee has no discretion as to how the trust property is to be shared among beneficiaries
Fixed trusts: test for certainty of objects
Complete list test - trust will fail if complete list of beneficiaries can’t be drawn up e.g. best friends = trust fails
Conceptual and evidential certainty required
Not being able to find a specific beneficiary will not cause trust to fail - apply to court for order to distribute funds despite being unable to locate beneficiary
Discretionary trusts
Trustee has discretion on how to share out the trust property amongst an identifiable group of beneficiaries
Discretionary trust: test for certainty of object
Given postulant test - it must be possible to say with certainty whether or not a given individual is a member of the group or class that may benefit
Conceptual certainty required
Evidential certainty not required
A discretionary trust will fail if the proposed class of objects is so large it makes it administratively unworkable
If a trust fails for lack of certainty of objects, the law implies a resulting trust over property in question in favour of the settlor or settlor’s successors i.e goes back to settlor o whoever inherited settlor’s property
Beneficiary principle
Trust must have ascertainable human beneficiaries
A valid express trust requires at least one trustee otherwise trust will fail
A testamentary trust will not fail for lack of trustee. If there is only one trustee who dies the court can appoint a new trustee so the trust continues
Who can be a trustee?
Anyone who has capacity to hold property for their own benefit
Minors cannot be trustees
There is generally no minimum or maximum number of trustees for a valid trust
EXCEPTION: trust of land - at least two but no more than four trustees
Rules against perpetuity
Prevents settlor from making trusts that will last for a very long period of time
Two rules:
1. Remoteness of vesting rule:
- Applies to contingent interests (interest which are conditional on a future event)
- Interest must vest within perpetuity period of 125 years
2. Inalienability rule:
- Applies to express trusts for non-charitable purpose trusts
- Trust limited to 21 years or life in being plus 21 years
Criteria for valid express inter vivos trust
- Three certainties satisfied
- Appropriate trustees selected
- No breach of perpetuity rules
- Trust validly created
Creation of inter vivos trusts
- Settlor can declare themselves trustee (through words or conduct) and is instantly and validly created
Exception: trust of land must be in writing
- Trust with another as trustee - two requirements for trust to be valid:
a. Settlor must transfer property to trustee (constituting the trust - transferring legal title to property to trustees)
b. Settlor must make valid declaration of trust (through words or conduct with exception of land which must be in writing)
Constituting the trust
Transferring legal title to property to trustees
Methods of transfer:
1. Land: transfer document needed which must be delivered to trustees
2. Chattels: simply handed over
Equity will not assist a volunteer (beneficiary)
If the trust is invalid it will simply fail, equity will not step in and fix this as the beneficiary is receiving a gift and has not paid for the assets in question
Exceptions:
1. Every effort test: imperfect trust still valid if settlor did everything to transfer property and put property outside settlor’s control
- Donatio mortis causa (gift by reasons of death): gift made in contemplation of imminent death
- Fortuitous vesting rule/rule in Strong v Bird: settlor dies before trust is properly constituted but intended trustee is settlor’s personal representative and so trust treated as validly constituted BUT will not apply if clear settlor changed their mind about the gift before their death
- Proprietary estoppel: gift valid when beneficiary relied on assurance to their detriment
Testamentary trusts - requirements
- Valid will
- Three certainties (intention, subject and object)
- Perpetuity rules satisfied
- No transfer requirement at time of creation
General rule for testamentary trusts is that all terms of the trust must appear in the will
Exceptions:
1. Secret trust: trust not revealed in will
2. Half secret trust: trust revealed in will but beneficiary not identified
Secret trusts
- Beneficiary must prove terms of trust by clear and convincing evidence
- Timing of communication to trustee irrelevant
- Trust fails if trustee fails to accept it or did not know about it until after settlor’s death
Half secret trusts
- Communication of beneficairy’s identity must be made to trustee on or before will execution
- Will cannot refer to future communication e.g. testator will tell trustee of full details of half secret trust at a later date
If a half secret trust fails the law will imply a resulting trust.
Fixed trusts
Specific interest of each beneficiary is clealry defined
Vested interest
No conditions attached to interest
Contingent interest
Condition attached to interest
Limited interest
No right to trust capital (benficairy)
For example: lifetime interest
Absolute interest
Right to capital and income (beneficiary)
Lifetime interest
Beneficiary can only claim income generated from trust assets during their lifetime e.g. from shares
Beneficial entitlement: discretionary trusts
Trustee has discretion
No potential beneficiary can take enforcement action to insist on receiving a share of the assets or income BUT anyone who falls within the potential class of beneficiaries can take action against the trustee for any breach of trust
Mixed trust
Includes fixed and discretionary aspects
Rule in Saunders v Vautier
Beneficiaries can terminate trust if they:
- Together have absolute interest
- Are adults of sound mind
Rule cannot be relied upon if one or more of beneficiaries is a minor
Applies to fixed and discretionary trusts
Implied trusts
No intention to create a trust has been expressly stated BUT equity steps in to imply a trust in order to achieve a fair outcome
Implied trusts: resulting trusts
Implied by law based on the presumed intention of settlor where they haven’t expressed an intention to create a trust
An equitable interest is created in trust property that goes back to settlor if settlor is still alive
When resulting trusts arise
- Voluntary transfer or purchase in name of another
a. Unexplained gifts of property to others
b. Property purchased in name of one person but some or all of price paid by another
- Money must be used to purchase property
- Money must be provided at or before time title vests in trustee
- Claimant has burden of proving they paid towards purchase price - Failure to exhaust beneficial interest under express trust
When a person provides the purchase money for property but the legal title is transferred to another person, the general presumption is that the other person holds the legal title on resulting trust for the purchaser
Presumption of advancement
A presumption arises that the person making the voluntary transfer or providing the purchase money intended to make a gift to the other party (no presumption of resulting trust)
When does this apply?
1. Husband/finance to wife/fianacee (doesn’t apply in reverse)
2. Father to child
3. Person in loco parentis (someone who has taken on parental responsibilities of a person) tor recipient, includes transfers from mother to child when she has sole responsibility of child as a single parent
Presumption of advancement can be rebutted by the transferor or provider of purchase money by providing clear evidence they didn’t intend to make a gift
Evidence to rebut presumptions
- Surrounding circumstances
- Acts or declarations made before or at the time of transfer
Resulting trust arising on failure of express trust
A resulting trust will be implied when a half secret trust fails for lack of communication
Law implies a resulting trust in two situations
- Voluntary transfer and money cases
- Failure of express trust
Legal title in both names
- Legal title held as joint tenants
- Own property equally
- Equitable interest can be held as joint tenants (right of survivorship) or tenants in common (no right of survivorship)
Express declaration of trust
State whether equitable interest in property is held as tenants in common or as joint tenants
If tenants in common it will state the specific share the tenants hold in the property
Express declaration of trust is conclusive
No express declaration - presumption equitable interest held as joint tenants BUT rebubttable by proof parties intended otherwise
Factors considered by court when deciding whether to rebut presumption of equitable interest held as joint tenants when there is no declaration of trust
- Purpose property was purchased
- Nature of relationship between parties
- How parties paid bills and other costs relating to property
Legal title in one name
Express declaration of trust to recognise additional owners of property
- In writing and signed
- Can be done at point of purchase or subsequently
A valid express declaration is generally conclusive it can be overridden here fraud, mistake or undue influence can be proved
Ways to claim equitable interest (where there is no express declaration of trust)
- Proprietary estoppel
- Common intention constructive trust
Proprietary estoppe: requirements
- Assurance
- Reliance on assurance
- Detriment
Common intention constructive trust (implied trust): requirements
- Common intention
a. Express common intention
- Discussions between parties
- Intention must relate to ownership
b. Inferred common intention
- Look at parties’ actions e.g. direct financial contribution to property - Reliance to claimant’s detriment (easy to establish if significant financial contribution but minor actions such as redocrating will be insufficient)
If all satisfied then a common intention constructive trust will arise
Final matter will be for Court to determine the size of each individual’s interest tint he property
Express trust: purpose trusts - two types:
- Trusts for public or charitable purposes
- Trusts for private purposes (non-charitable purpose trusts)
Charitable trusts: how they differ from private express trusts?
- Usual rule of certainty of objects doesn’t apply - no requirement to have ascertainable human beneficiaries - trusts for abstract purposes e.g. advancement of education can be valid
- Cy-pres doctorine
- Rules aginst purporting (which limit duration of private trusts) do not apply - charitable trusts can continue forever
Charitable trusts: requirements
- Charitable purpose:
- Prevention or relief of poverty
- Advancement of education, religion, health, citizenship, arts, culture, heritage, science, amateur sports, human rights, environmental protection, animal welfare - Public benefit: identifiable benefit to public or section of public - exception: relief of poverty
- Exclusively charitable
Attorney general enforces charitable trusts on behalf of the public
Charitable trusts can be perpetual (last forever)
Remoteness of vesting: charitbale trusts must vest within the perpetuities period of 80 years BUT a subsequent gift from one charity to another charity can happen at any time in the future (charity to charity exemption)
Cy-pres doctorine
If a trusts charitable purposes are impossible or impractical to carry out the court can apply the trust property to a different but similar trust purpose allowing society to still benefit from settlor’s chratibale intention
Applies differently to initial and subsequent failures of gift
Cy-pres doctrine: initial failure of gift
- Doctrine only applies if the general charitable intention of testator can be shown
- Court unlikely to find general charitable intent where the gift is only toa specific named charity BUT if the named charity never existed it will be easier for the court to find the required general charitable intent
- If more than one gift to charity it will be easier to find a general charitable gift
Cy-pres doctrine: subsequent failure of gift
- No general charitable intention needs to be shown
Cy-pres doctorine: key to look at the date of the charity closure
a. If before testator’s death = initial closure
b. If after testator’s death = subsequent failure
Purpose trust: non-charitable
- Not generally valid under the beneficiary principle
- Beneficiary principle: trust must have ascertaineble human beneficiaries who can enforce it
- EXCEPTIONS: Denley trusts and honorary trusts - maintenance of animals. saying of private masses, eretion of monuments and graves
Non-charitable purpose trusts: Denely trusts
- Underlying human beneficiaries can enforce trust
- Appear to be for a private purpose BUT there is an underlying human beneficiary who can enforce the trust
Types of honorary trusts
- Maintenance of animals
- Saying of private masses
- Maintenance of graves
Trust is valid
No beneficiary can enforce trust
Trust relies of honour of trustee to carry out the trust
If trustee of honorary estate fails of refuses to carry out their obligations a resulting trust will be implied for the benefit of the settlor or settlors estate if settlor has died
Perpetuity period applies:
- 21 years
- Human life in being plus 21 years
- If the trust can last for longer than this it will fail from the start
Appointment of trustees
- Usually appointed by settlor in trust document
- IF NOT court may appoint trustee
- To be appointed a trustee must know about appointment and accept it
There is no obligation to accept trusteeship and can be refused for any reason BUT cannot partially accept
Trusts of land require two to four trustees
Once trust is created the settlor can only appoint additional trustees if this is expressly provided for in trust document BUT if not then the relevant statutory rules will have to be followed for appointment of further trustees
Once trust has been created settlor cannot increase the number of trustees to more than four
Order of who has power to replace trustee
- Person named in trust document
- Continuing trustees
- Personal representative of last trustee
- Court
If the continuing trustees undertake the appointment of the replacement trustee, any retiring trustee should be a party to the appointment UNLESS that trustee was removed agsint their will
Appointment of replacement trustee should be made in writing and a deed will commonly be used
Unless a breach has been committed the beneficairies generally don’t have the power to control the trustees EXCEPT in limited circumstances
When beneficiaries can appoint trustees
- No one nomianted in trust document
- Beneficiaries
a. Are of full age
b. Have capacity
c. Are absolutely entitled to trust property
d. Agree unanimously
If these conditions are met the beneficiaries can give a written instruction to the current trustees, ordering one or more to retire and to appoint the trustees that haven been chosen by the beneficiaries
Court has power to appoint additional or replacement trustees inc certain circumstances if it practical to do so or impractical to remove or replace a trustee without court assistance e.g. deadlock
Retirement without replacement
Two conditions must be fulfilled:
1. Consent (in form of deed) of co-trustees and any person and any person entitled to appoint new trustees under the trust document
2. At least two trustees or trust corporation must be in office
When can a trustee be removed without their consent
- Unanimously by beneficiaries
- Unfit to act e.g. breach of trust or declared bankrupt
- Incapacble of acting (illness or mental incapacity)
Trustees’ duties
- Duty not to profit:
a. From directors fees
b. Information or opportunities gained as trustee
c. May not charge for their services but there are EXCEPTIONS:
- Charging clause
- Professional trustee
- Trust corporation
- Beneficiaries consent
- Court authorisation
Self-dealing
Duty not to purchase trust property
EXCEPTION: allowed in extreme circumstances
A beneficiary may purchase a beneficial interest in a trust BUT to be valid the price paid must be fair, all material facts must be disclosed to beneficiary and there must be no abuse of position by trustee
Further duties of trustees
- Owe equitable duties
- Must deal appropriately with trust property, knowing what trust property there is, take control of it and take steps to preserve it
- Must ensure title to trust property is held appropriately and is kept separate from trustee’s personal assets - Must observe terms of trust
- Owe a duty of care to act with appropriate care and skill
- Statutory duty of care: exercise skill and care as is reasonable in all circumstances, any special skill the trustee has will be taken into account e..g accountant
- Traditional duty care: act with prudence of ordinary person of business acting in relation to their own affairs - applies when trustees are dealing with powers of maintenance and advancement
- Duty to act jointly if more than one trustee - make decisions unanimously but majority decisions are permissible if authorised by trust document or the court
- Must act personally and cannot delegate their role but they can delegate purely administrative functions to an agent e.g. preparing tax returns etc.
- Power of attorney for up to 12 months
Further duties of trustees
- Owe equitable duties
- Must deal appropriately with trust property, knowing what trust property there is, take control of it and take steps to preserve it
- Must ensure title to trust property is held appropriately and is kept separate from trustee’s personal assets - Must observe terms of trust
- Owe a duty of care to act with appropriate care and skill
- Statutory duty of care: exercise skill and care as is reasonable in all circumstances, any special skill the trustee has will be taken into account e..g accountant
- Traditional duty care: act with prudence of ordinary person of business acting in relation to their own affairs - applies when trustees are dealing with powers of maintenance and advancement
- Duty to act jointly if more than one trustee - make decisions unanimously but majority decisions are permissible if authorised by trust document or the court
- Must act personally and cannot delegate their role but they can delegate purely administrative functions to an agent e.g. preparing tax returns etc.
- Duty to take possession of trust property and must ensure in joint possession and control (trustees liable if property left in control of one trustee and is misappropriated by them)
- Duty to keep accounts and records and to disclose to beneficiaries if required
- Duty to act impartially in relation to all beneficiaries
- Duty of confidentiality
- Duty to invest trust fund to generate income
One trustee can delegate their entire tole to someone else using power of attorney for up to 12 months (trustee still remains liable during this time)
Duty to invest: authorised investments
- Trustees have general power of investment
- Trustees can acquire freehold or leasehold land in UK for occupation for beneficiary or any other use
- Purchase of land doesn’t need to be income producing
Any of these statutory provisions can be extended or restricted by the trust document
Duty to invest: proper advice
Advice of person trustees reasonably believe to be qualified to give it
Advisor doesn’t need to be a qualified financial advisor sufficient that they have suitable knowledge and experience
EXCEPTION: trustees need not seek advice if they conclude that advice is unnecessary or inappropriate
Duty to invest: trustees have a duty to keep investments under review
Duty to invest: trustees must act with such skill and are as is reasonable ion all the circumstances when making investments - must act as prudent business person
Duty to invest: trustees can delegate choice of investment to an investment manager - must be a written policy statement for investment manger to follow
Trustees not liable if they comply with all investment requirements and investments fail to perform well
Power of maintenance and advancement
Used at discretion of trustees to allow beneficiary to benefit from funds within the trust
Income = money generated by trust proeprty
Capital = assets forming trust property
Power of maintenance
Applies to trust income
Can be paid to minors BUT this only applies when child beneficiary has interest in income
Can be used for maintenance, education or benefit as trustees see fit
Income cannot be paid to minor it must be paid directly for its use or to their parent/guardian who will then pay e.g. tuition fees
A beneficiary has no right to income until they are 18
Power of maintenance: when beneficiary turns 18
Power of maintenance ends
Beneficiary can claim income as of right
Settlor may vary power of maintenance
Trustees have full discretion to decide on the amount paid out under the power of maintenance
Power of advancement
Applies to trust capital
Early release of trust assets to beneficiaries
Beneficiary must have interest in trust capital
Rules for power of advancement
- Amount must not exceed entitlement
- Advances must be factored into final distribution
- Consent of person with prior interest required
- Power applies to beneficiaries of all ages but if under 18 must be paid directly for the purpose as they cannot give a valid receipt
- No upper limit for amount that can be advanced
Control of trustees by beneficiaries
- Beneficiaries may compl trustees to complete duties
- Beneficiaries cannot challenge trustees’ exercise of discretion unless irrational
- Right to inspect trust documents
- Right to appoint new trustees or end trust
Requirements to appoint trustees or end trust
- Over 18
- Have capacity
- Absolutely entitled to entire equitable interest
- Unanimous agreement
Breach of trust
- Did the trustee carry out an act that was authorised?
- Did the trustee act with a proper standard of care?
Liability of trustees: personal claim against trustees
- Trustees must pay own money
- Beneficiaries must prove losses resulted from breach
A loss from one breach cannot be offset by a gain arising from a different breach
If more than one trustee is liable, liability is joint and several
Defences to liability
- Consent of beneficiaries
- Limitation period (6 years)
- No limitation period in an action for fraud
- No limitation period for an action to recover trust property from trustee - Exclusion clause BUT cannot exclude lability for fraud
- Court concludes trustee acted honestly and reasonably and ought fairly to be excused
Where two or more trustees are liable, liability is joint and several. Any one of the trustees can be sued for the full laiblity
Court can make an order for how liability is to be shared between trustees. If any trustee pays more than their apportioned shared to beneficiary, the other trustees must pay their apportioned share to the trustee who has paid out excessively
The Court may order one trustee to indemnify the others so that one trustee must fully reimburse the other trustees e.g. ifone trustee is already to blame for the breach
Beneficiaries brining a personla claim against a trust must prove loss i.e. the loss resulted from the trustees breach
Proprietary claim
Trustee required to return property to trust
Particularly useful if trustee holds trust property after a breach of trust and is insolvent
Proprietary claims: tracing
Process of identifying trust property in hands of trustees
Proprietary claims and tracing: trust property not mixed
- Claim back property (even if increased in value)
OR - Clam charge over asset
Proprietary claims and tracing: trust property mixed
- Claim proportionate share (even if increased in value)
OR - Claim charge over asset
Proprietary claims and tracing: trust funds mixed with trustee’s funds
- Claim charge over amount from trust
- Trustee treated as withdrawing own money first
but exception if trustee used funds to purchase assets and there are insufficient funds in bank account to fully repay beneficiaries - beneficiaries can claim a charge over asset even though they were bought first - Limitation: beneficiaries are unable to claim rights over trustee’s own money paid into bank account
Proprietary claims and tracing: assets purchased from mixed funds of two trusts
Beneficiaries of two trusts share assets proportionally
- Current account: first in, first out rule applies. First money into account is treated as first money to leave.
- Rule can be disapplied by court if it would be contrary to express intentions of the parties or if it would cause an injustice
- Court can apply proportionate solution - Savings account: proportionate solution
Liability of third parties
- If trustee in breach has insufficient funds to satisfy personal claim against them
- Trust property passed on to third party and then increased in value
Liability of third parties: bona fide purchaser
- Paid for property in good faith and without notice of trust
- Beneficiaries have no claim
Liability of third parties: innocent volunteer recipient
- Received trust property without paying but with no knowledge of breach of trust
- No personal claim possible against third party
- Proprietary claim allowed to recover property using tracing
Liability of third parties: knowing recipient
- Received trust property with knowledge of breach of trust
- Personla claim allowed
- Proprietary claim allowed using tracing
Liability of third parties: dishonest accessory
- Facilitated breach of trust dishonestly either actively or passively
- Personally liable as if trustee
