Trusts Flashcards
What are the 5 principal characteristics of a trust?
- Trust property
- A trustee
- A duty
- Objects
- An equitable proprietary interest
What are 2 qualities of a beneficiary?
-Rights correlative to trustee’s duties and can enforce those duties
-An equitable proprietary interest in the trust property
A beneficiary has equitable proprietary interest in trust property. What does this allow them to do?
-Enforce interest against everyone except equity’s darling (i.e., 3rd party buys asset with due consideration + did not know that it was on trust)
-Claim an interest in the traceable proceeds of trust property
What is the difference between a contract and a trust?
-Result of agreement between parties (which owe obligations to each other) vs no need for agreement between parties (obligations from T to B)
What is the difference between debtor-creditor relationships and trusts?
-Debt does not relate to specific assets/funds vs duty relating to specific property
-Personal right to repayment vs equitable proprietary interest
-A bank is not a trustee of money deposited by its customers
What is the difference between agency and trusts?
-Agent can commit a principle to a contract with a 3rd party vs a trustee cannot commit B to contract with a 3rd party
(Note: both are s.t. fiduciary duties)
What is the difference between bailment and trusts?
-Subject matter: tangible personal property vs anything
-Bailor is not legal owner
What is the difference between administration of estates and trusts?
-Time: as quickly as possible vs potentially many years
-Interests of rights: personal right against executor relating to proper administration of estate vs B has equitable proprietary interest
What are the 2 methods of creating an express trust?
-Self declaration of trust
-Transfer on trust
When is constitution required?
Transfer on trust: transfer legal title to trustee
What is required for all express trusts (x3)? What is additional required for inter vivos express trusts (x2) and testamentary express trusts (x1)?
All:
1. Certainties
2. Beneficiaries / permitted purpose
3. Compliance with applicable perpetuity rule
Inter vivos express trust:
-Transfer on trust: constitution
-Trust of land: manifested and provided by some writing signed by some person who can declare such trust or by his will
Testamentary express trust:
-s9 Wills Act
What is required (in general) for an enforceable trust of land? What is the exception?
- Written +
- Signed by someone who can declare trust (usually settlor; arguably trustee) or declared by will (i.e., satisfies s9)
Exception: resulting, constructive and statutory trusts?
What happens if s53(1)(b) (regarding formalities for declaring trust of land) is not complied with?
Trust is unenforceable (not void): B cannot enforce their rights (note: once enforceable, Bs can enforce their rights in respect of period between declaration and satisfaction)
How does the rule in Saunders v Vautier work for multiple beneficiaries?
- Adult Bs (with full mental capacity) who exhaust all possible claims on a trust fund can collectively terminate the trust
- Where Bs exhaust all possible claims on part of a trust fund, they can terminate the trust in relation to that part (e.g., fixed trust in equal shares)
(Note: look for gift-over)
Can beneficiaries with contingent interests exercise S v V rights?
Yes, if they act together with all other persons who share the beneficial interest in the property, incl. objects of any gift-over
What are the 3 certainties?
- Intention
- Subject matter
- Objects
What is the requisite intention for certainty of intention?
Intention to assume duty to hold or apply property for beneficiaries
Certainty of intention: how can intention be ascertained? What are some relevant factors?
- Words: imperative; word ‘trust’ is not determinative
- Conduct: segregate funds in a separate bank account which has been earmarked for particular person/purpose; treat sole bank account as joint
What approach is taken to ascertain intention?
Objective approach: if they manifest an intention to impose/ assume the duty which is characteristic of a trust, they intend to create a trust (irrelevant that they do not actually (i.e., subjectively) intend to create a trust or are unaware that they even exist)
What are the 2 requirements for certainty of subject matter?
- Trust property requirement
- Beneficial entitlement requirement
What are the 2 main problems with the trust property requirement?
- Identifying subject matter by description: cannot create trust of ‘bulk’ or ‘net assets’
- Identifying subject matter out of a larger mass
Are fractional interests acceptable for the trust property requirement?
Yes, if wider mass of assets has been clearly identified
Which is the only combination of tangible & fungible that will produce valid trust property?
Intangible & fungible (e.g., trust over same type of shares)
What are examples of void trusts where subject matter is identified as a specific number of a larger mass?
Tangible & fungible: 20 out of 100 bottles of wine; 1 out of 5 1kg bars of gold
Tangible & non-fungible: trust over diamonds
How is the beneficial entitlement requirement assessed?
Must be possible to ascertain nature and extent of B’s interest in the trust property
Objective test: e.g., ‘reasonable income’ is an ‘objective yardstick’
What test is used to determine certainty of objects for a fixed trust where there are multiple beneficiaries?
Complete list test: must be possible to draw up a complete list of all beneficiaries
1. Conceptual certainty (defining the objects e.g., class)
2. Evidential certainty (whether person meets that definition)
What happens if identifiable beneficiaries have a beneficial entitlement which is not dependent upon entitlement of uncertain beneficiaries?
Identifiable Bs can still take their interest: does not fail completely (e.g., trust to settlor’s wife for life, remainder to their ‘favourite daughter’)
How is certainty of objects assessed for discretionary trusts and powers of appointment? What extra factor needs to be considered for discretionary trusts?
Is/is not test:
1. Conceptual certainty is required: need to be able to define trust objects (e.g., employees, children and relatives are all conceptually certain)
2. Evidential certainty: some uncertainty allowed - for C to prove to trustees’ satisfaction that they are with the class; need 1 person to fit requirement
Administrative unworkability
What is meant by administrative unworkability?
Administrative unworkability: void if class of beneficiaries is so hopelessly wide as not to form anything like a class (e.g., residents of Greater London or West Yorkshire)
What are the 2 requirements of a Quistclose trust?
- Money is paid for a purpose (instead of at recipient’s free disposal)
- Mutual intention that money could only be applied for the purpose and not at free disposal of borrower
What is constitution?
The transfer of legal title from one party to another
What do constitution rules apply to?
- A transfer on trust (and NOT self-declaration of trust): requires legal title in property to be vested in trustees
- Gift: requires transfer of legal title from donor to donee
How does constitution take place for a testamentary trust?
Via the will: after testator’s death, PRs must obtain legal title to testator’s estate, and then ensure that legal title is transferred
How should legal title of registered land be transferred correctly?
- By deed
- Registered with Land Registry
How should legal title of shares in a private company be transferred correctly?
- Transferor signs stock transfer form
- Stock transfer form sent to company
How is legal title of a chose in action transferred correctly?
Notice in writing to debtor/ bank
How is legal title of chattels transferred correctly?
- Deed of gift; or
- Delivery of chattel with evidence of transferor’s intention to transfer it
How is legal title of cheques in favour of transferor transferred correctly?
Transferred to a 3rd party by transferor endorsing the cheque by signing their name on the back
What happens if disponer fails to comply with formalities?
Gift/trust was imperfect –> need to consider whether equity has perfected it. If it does not, trust is void (and potentially on resulting trust)
What are the 4 exceptions to the general rule that equity does not perfect an imperfect gift/trust?
a. Re Rose
b. Unconscionability principle
c. Strong v Bird: fortuitous vesting
d. DMC
What is required to perfect an imperfect gift/trust using Re Rose?
(i) Transferor completes transfer form in correct form
(ii) Transferor gives completed transfer form and any supporting doc(s) to transferee or 3rd party (NOT agent) who can perfect the transfer (‘beyond their control’)
What is required to perfect an imperfect gift/trust under the unconscionability principle?
Circumstances would make it unconscionable for donor to change their mind e.g.
-Made gift in own free will
-Told transferee about gift and that transferee need take no further action
-Transferee believes gift is there
-Transferor intends to transfer
What is required to perfect an imperfect gift/trust using fortuitous vesting (3 elements)
i. Donor intended to make an immediate gift (relates to existing, not future property)
ii. Donor’s intention to make gift continued until their death (i.e., does not change mind)
iii. Donee appointed PR of donor’s estate
What is required to perfect an imperfect gift/trust using DMC (3 elements)?
i. Donor contemplates their death in the future from an identified and (believed) imminent cause
ii. Gift is conditional on their death (i.e., donor intends gift to be fully effective only if they die, and to be revocable until then)
iii. Donor gives donee dominion (control) over subject matter of gift: hands it, or something representing title (not just possession), to donee
What is required for donor to part ‘dominion’ of property for chattels and (constructively) houses
-Chattels: delivery (with intention)
-Houses (via constructive delivery): title deeds via keys to steel box which contained the deeds (keys to house were insufficient)
What can donee do if all requirements of a valid DMC are present?
Request that the donor’s PRs then complete transfer of legal title to them
How does perpetuity work for charitable trusts?
Can last indefinitely:
-Property held on charitable trust: must vest in the charity within 125 years
-Capital which vests in charitable trust: will continue to be held, and can be used for these purposes unless the property runs out
What is the cy-pres doctrine?
Allows trust property to be applied for other charitable purposes even if the specific trust fails
How is certainty of purpose assessed for charitable trusts?
Sufficient that there is intention to apply property for a charitable purpose (much more flexible than private trusts): if there is uncertainty as to how this intention is to be carried out, trustees can direct that the property be applied for such charitable purposes as they select
What are the 12 charitable heads?
- Provision/relief of poverty
- Advancement of education
- Advancement of religion
- Advancement of health or the saving of lives
- Advancement of citizenship or community development
- Advancement of the arts, culture, heritage or science
- Advancement of amateur sport
- Advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- Advancement of environmental protection / improvement
- Relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage
- Advancement of animal welfare
- Promotion of efficiency of armed forces, police, fire or ambulance services
What are the 3 requirements of a charitable purpose trust?
- For a charitable purpose
- Wholly and exclusively charitable
- Satisfy a public benefit test
What is required to satisfy a public benefit test?
a. Identifiable public benefit
b. (Sufficient section of) the public
What is considered when determining whether there is an identifiable public benefit? (x2)
- Balance benefit against any detriment/harm arising from purpose
- Benefit must be capable of being identified and described even if it cannot be quantified/measured
What test is used to determine whether a charitable trust is for the benefit of (a sufficient section of) the public? (2 parts)
i. Not numerically negligible
ii. Not defined by a personal nexus (i.e., not defined by dependency on relationship to a particular individual)
When is the rule relaxed for the public benefit test?
Prevention or relief of poverty: can have pools of beneficiaries where there is a personal connection to the settlor + restrict to smaller geographical area
However: purpose must still be for benefit of a particular description of poor persons, not to the benefit of particular poor persons
Can charities charge for services?
-Yes (and can even make a profit if this is reasonable and necessary to carry out charity’s aims)
-Limitation: opportunity to benefit must not be unreasonably restricted
Can charities pursue political objectives?
No: cannot have a political purpose (although can use political means to achieve a non-political objective)
What is required for the charitable head of ‘the prevention or relief of poverty’?
-‘Going short’ (does not mean destitution
-Must not benefit the rich
-Can be inferred
What is unique about ‘prevention or relief of poverty’ head?
Can go to a specific individual
What could be counted within the ‘advancement of education’ charitable head?
-Educational value (to research)
-Directed to lead to something which will pass into the store of educational material
-Improves sum of communicable knowledge
-Support of learning
-Ancillary organisations
What is required for the charitable head ‘the advancement of religion’ (2 steps)
- It is a religion
- The trust positively ‘advances’ the religion i.e., promotes it, spreads its message, take some positive steps to sustain and increase religious belief
What is required for charitable head of ‘arts, culture, heritage or science’
Arts: of ‘merit’ (may need expert evidence)
Monuments: of cultural/ historical importance
Heritage: part of country’s local/ national history and traditions
What cannot happen for charitable head ‘the advancement of human rights’
Stray into political objectives (e.g., seeking to procure changes to the law)
What does the charitable head ‘the advancement of animal welfare’ include?
-Providing for welfare of particular types of animal)
-Improving slaughtering methods
(Excludes care of particular animals)
What happens if a trust has a mixture of charitable and non-charitable purposes? What is the basic rule and what are the 2 exceptions?
Basic rule: void (–> returns to seller on resulting trust), unless non-charitable purpose falls within a recognised category of non-charitable purpose trust
Exception 1: non-charitable bit is ‘incidental or subsidiary’
Exception 2: can separate and allocate separate funds
Cy-pres doctrine: what is the difference between initial and subsequent failure?
Initial failure: property cannot be applied to the specific purpose from the beginning
Subsequent failure: property has been given to charity
When can trust property be applied cy-pres? Why does the distinction between initial and subsequent failure matter here?
Initial failure: intention to give effect to a general mode of charity (and NOT if there is a specific intention to benefit a particular object - this would normally go on resulting trust)
Subsequent failure (given impossible to go back on resulting trust)
What are the 5 requirements for a valid non-charitable purpose trust?
- Fall within an Endacott exception
- Sufficiently certain (i.e., purpose must be certain): stricter than charitable purpose trusts
- Comply with perpetuity rules: rule against inalienability
- Testamentary only: trust is created in a will
(5. Dependent on willing trustee to carry out terms of trust: not required for trust to be valid)
What are the Endacott exceptions?
- Trust for maintenance of particular animals
- Trust for erection and maintenance of monuments and graves
- Trust for the saying or private mass
What is the perpetuity rule for non-charitable purpose trusts?
Rule against inalienability: 21 years (+ life in being)
Applied strictly (no ‘wait and see’ rule) –> should always include express perpetuity clause (21 years, and only start running at death of a named person), otherwise void for perpetuity
What happens if there is no willing trustee to carry out terms of trust?
Testator’s residuary legatees (who would otherwise receive the property) can sue to enforce the undertaking and prevent a misapplication of the fund
When does the rule against remoteness of vesting apply?
People or charities as objects
What is the rule against remoteness of vesting?
A person (or charity) must obtained a vested interest in trust property within 125 years
Any interest under a trust which does not vest within the statutory perpetuity period is void (resulting trust for settlor or their estate)
What is the ‘wait and see’ rule regarding rule against remoteness of vesting?
Trust can subsist until it becomes apparent that the interest cannot vest within the perpetuity period - anything done before this will remain valid
What is the class closing rule regarding the rule against remoteness of vesting?
Can save a trust by excluding objects who might otherwise cause the trust to fail because their interest would vest outside the perpetuity period
Perpetuity: what happens if a trustee holds property on trust for A (aged 2) for life, the remainder to be divided equally between A’s children and grandchildren?
-A the date the trust is created, only A has a vested interest in the trust property (and only in the income)
-When A dies, any of their children/ grandchildren who have already been born will have vested interests; however, there may be grandchildren yet to be born
-Fixed trust in equal shares –> trustee cannot divide the property between objects until they are all ascertainable
-Close closing rules will apply: limits class of beneficiaries to A’s children and grandchildren, if any, who are alive at the end of the perpetuity period
When does an automatic resulting trust arise?
There has been some sort of failure in the creation of a transfer on trust: transfer on trust wholly/ partially fails, but the property has been transferred to the trustee
What is the effect of an automatic resulting trust?
Effectively, returns beneficial interest to the settlor, giving them S v V rights and thus the ability to collapse the trust and (1) retain the property or (2) re-attempt the intended express trust
What are 5 examples of resulting trusts arising (3 for initial failure; 2 for subsequent failure)
Initial failure: property has been transferred to B, intending to hold on trust, but fails for uncertainty of objects, subject matter or beneficiary principle
Subsequent failure:
-Some trust property has still not vested in B after 125-year statutory perpetuity period
-Purpose of a non-charitable trust can no longer be carried out, but there are funds remaining
What are some examples of a resulting trust NOT arising?
-Fails due to lack of constitution
-Self-declaration / testamentary trust which fails for uncertainty of objects/subject matter: will have no effect / void
What happens if property is left to an individual in a will, and it is concluded that there is insufficient certainty as to whether they are intended to be a trustee?
Gift to that individual
What are the 2 ways in which presumed resulting trusts (purchase money resulting trusts) can arise?
- Gratuitous transfer + no evidence that transferor intended recipient to receive the property as a gift (presumption can be rebutted by evidence that transferor/ contributor’s actual intention is inconsistent with creation of trust)
- Person pays all/part of purchase price for a new asset and no evidence that the transferor intended recipient to receive property as gift (or B provided consideration)
What happens if A purchases shares and has them registered in B’s name?
B will hold the shares on resulting trust for A unless it can be shown that this was not A’s intention
What happens if A and B each contribute 1/2 of purchase price for land and B is registered as sole legal owner; no evidence that A intends a gift to B; no express trust is declared
B holds the land on trust for A and B as TiCs in equal shares
A contributes 70% and B contributes 30% of purchase price; they are registered as joint legal owners; they do not discuss how the property should be shared and no express trust is declared
A and B hold the land as legal JTs on trust for A and B as equitable TiCs - A has a 70% equitable share and B a 30% equitable share
If there are joint legal owners of a house, how is the equitable interest presumed to be held (without an enforceable express trust)?
Equitable JTs
Joint legal owners (of family house): how can C rebut the presumption?
i. C establishes that the parties had a common intention that their interests should be other than joint (express/inferred intention only)
ii. C demonstrates that they acted to their detriment in reliance on their common intention
Can intention be imputed to determine whether C establishes that the parties had common intention that their interests should be other than joint?
No: can only have expressed or inferred intention
Joint legal owners: is it easy to rebut presumption of equitable joint tenancy?
No: heavy burden requiring unusual facts to adduce relevant evidence to rebut presumption
Joint legal owners: what factors are considered when analysing the whole course of conduct with regard to establishing common intention of interests being other than joint? (i.e., Stack factors)
-Advice/discussions the parties had which may indicate their intention
-Purpose for which the parties acquired the house
-Nature of relationship
-Children?
-How house was financed
-How parties arranged other finances and divided responsibility for household expenses
CICT: if C rebuts the presumption, what are the 3 ways in which the size of C’s share of the equitable interest is determined?
- Expressed common intention as to respective shares
- In absence of (1), is the court able to infer their common intention as to their shares?
- In absence of (1) or (2), court will impute an intention for ‘fair shares’ based on the whole course of conduct
What is presumed where there is a sole legal owner?
Legal owner is sole beneficial owner?
Sole legal owners: what are the 2 requirements for C to overcome the presumption
Step 1: can C rebut the presumption i.e., can C establish an equitable interest in the property?
Step 2: if C establishes an equitable interest in the property, what is the size of C’s share?
Sole legal owners: what are the 2 requirements for C to rebut the presumption that legal owner is sole beneficial owner?
i. C establishes that the parties had a common intention as to shared ownership
ii. C relied on the common intention to their detriment
Sole legal owner: what could express common intention look like?
- Statement about shared ownership (vs occupation) (e.g., ‘half yours’)
- Legal owner provides an excuse as to why partner may not be jointly registered as legal owner may evidence common intention to share ownership
Sole legal owner: how may common intention be inferred?
Consider ‘whole course of dealings’ e.g.
-Contribution to household
-Working without pay
-Indirect financial contributions: substantial improvements to property + give up job
Sole legal owner: what is sufficient for relying on common intention to their detriment?
-Heavy DIY
-House renovations
-Payments of substantial expenses, which would not have been done without interest in home
(However: decorating, giving up work and looking after children, and looking after family are insufficient)
What is proprietary estoppel?
Equitable doctrine which enables a person to informally acquire property (or personal) rights (i.e., modify the parties’ strict legal rights)
What are the 2 ways in which proprietary estoppel claims typically arise?
- Acquiescence case: A mistakenly believes that they have a right in land which is owned by B
- Assurance case: B assures A that they have or will acquire a right in relation to B’s property
What are some examples of remedies for successful proprietary estoppel claims?
-Transfer ownership of property to C
-Hold property on trust for C
-Grant C a property/personal right over their property
-Pay a sum of money to C
What is the difference between proprietary estoppel and constructive trusts?
PE: typically consists of asserting an equitable claim against conscience of ‘true’ owner - satisfied by min award needed to do justice (which may just be monetary)
CICT: identifies true beneficial owner(s) and the size of their beneficial interest
What are the 4 main elements of a proprietary estoppel claim?
- An assurance made to C
- C relied on the assurance (‘sufficient link’ between D’s assurance and C’s detrimental conduct)
- Detriment to C in consequence of their reliance on D’s assurance
- Unconscionability
PE: what will the assurance made to C look like? Examples of sufficient and insufficient assurances?
A promise that C has or will acquire a right in property owned by D
Sufficient: will grant C an easement over their land
Insufficient: C will always be financially secure
PE: does an assurance need to be explicit?
No: can be inferred from indirect statement (but must be clear enough)
PE: in what sense must an assurance be ‘clear enough’?
Court must ascertain how D’s words would have been reasonably understood by C in the context in which they were spoken
PE: when is it presumed that C relied on the assurance?
F makes an assurance to C and C acts in a manner which is detrimental
Where presumption applies, D must prove that C did not rely on the assurance
PE: what are some examples of detriment?
-Expenditure
-Provision of services for free / less than their market value
-Subordination to D
-Passing up opportunities to better themselves or live a better life
-Moving into D’s home –> giving up own rented home that they fitted out
PE: what is meant by unconscionability? How is it established?
C demonstrates that it would be unconscionable for D to dishonour their assurance (objective value judgment)
How many trustees are required for a trust of land?
2-4 (need at least 2 to give good receipt)
What are the 5 ways in which a replacement trustee can be replaced?
- Express powers in TI
- Statutory power (s26)
- By Bs exercising S v V rights
- Court
- Charity Commission
When can s36 TA (statutory powers to appoint trustees) be exercised?
-On trustee’s death
-If trustee is abroad >1 year
-Appointed trustee is a minor / lacks capacity
-Trustee wishes to retire, refuses to act or is unfit to act
Who can appoint replacement trustees under s36?
- Persons nominated in TI to appoint trustees
- If no one in (1), surviving / continuing trustees
- If no one in (1) or (2) (i.e., all trustees have died): PRs of last to die
When can additional trustees be appointed under s36(6) TA? Who may appoint
-Currently max 3 trustees; can only increase to max 4 total
-In writing
-Who can appoint? Person nominated by TI to appoint; otherwise, current trustee(s)
When can S v V rights NOT be used to appoint trustees?
TI contains express power to appoint trustees
What is required for Bs to appoint new trustees using S v V rights? (s19 TLATA)
In writing
When will the court exercise its statutory power to appoint new trustees? What core principle will it use?
Core principle: equity will not allow a trust to fail for want of a trustee
-Wishes of settlor/testator
-Whether appointment will promote/ impede trust administration
-Should NOT appoint where there is a dispute between Bs as to whether they would be appropriate
What are the 3 ways in which trustees may be removed?
- TI powers
- General statutory power to remove and replace (s36)
- Court’s statutory power to remove and replace (s41)
- Inherent jurisdiction of the court
When can the court exercise its power to replace trustee? (3 scenarios)
Trustee:
-Is bankrupt
-Lacks capacity
-Is a company which is in liquidation or has been dissolved
When will court use its inherent jurisdiction to remove trustees?
It is not appropriate for trustee to remain in office (e.g., they act dishonestly; fails to exercise distributive powers/duties correctly)
What are the 2 ways in which a trustee may retire?
- Voluntary retirement
- Retirement by direction of Bs
When can trustees voluntarily retire (x2)? What formality is involved
By deed
- Once trustee has retired, >=2 trustees or 1 trust corporation remains
- Co-trustees and any person with a power to appoint trustees consents
What should trustees do upon retirement?
Obtain a formal discharge of liability from Bs
When can Bs compel trustees to retire using S v V rights?
-In writing
-All beneficiaries agree
-Post-retirement, there will be >=2 trustees or 1 trust corporation
-TI does not nominate a person to appoint new trustees
What are the 4 steps to consider for breach of trustee duty?
- Breach
- Liability: did breach cause any loss?
- Defences
- Apportionment
Are trustee powers/duties permissive or mandatory?
Powers: permissive
Duties: mandatory
What are the 2 main types of trustee powers and duties?
- Administrative: management of trust property while held on trust
- Dispositive/distributive: distribution of trust property to Bs or other objects in accordance with its terms
What are the 3 main administrative powers? What are 2 additional powers?
-General power of investment
-Consider standard investment criteria
-Obtain and consider ‘proper advice’
-Power to acquire land
-Power of delegation
What is the general power of investment? What must trustees consider when exercising GPI?
Trustee may make any investment that they could make if absolutely entitled to trust’s assets
Trustees must:
-Consider SIC
-Take advice in accordance with s5
-Act in accordance with general DOC
When does the standard investment criteria apply to trustees?
-When deciding whether to make an investment
-Regularly review investments with reference to SIC and decide whether they ought to be varied
What are the 2 key components to SIC?
a. Suitability (general/specific)
b. Diversification
What does it mean for trustees to act in Bs’ ‘best interests’
-Generally, best financial interests
-Balance interest of all (current & future) Bs
-Trustees’ personal views are irrelevant
When must trustees obtain and consider ‘proper advice’? What is the exception to this?
- Before exercising their powers of investment
- When reviewing their investments
Exception: trustees reasonably conclude that in all circumstances it is unnecessary to seek advice (e.g., CBA)
What constitutes ‘proper advice’?
By a person who is reasonably believed by the trustee to be qualified to give it by their ability and practical experience of financial and other matters relating to the proposed investment
What does trustees’ power to acquire land constitute?
Acquire freehold/leasehold land in UK, for investment purposes or more widely
Which functions can trustees delegate? Which powers can they not delegate?
Can: powers of investment and acquire land
Cannot: distributive obligations
What is required of a trustee to delegate?
- Agreement evidenced in writing
- Comply with DOC re selecting agents, entering into agreements with agents, reviewing/ removing agents
- Ensure that an appropriate agent is selected, arrangement is reviewed regularly, the need to exercise power of intervention where appropriate
What happens if trustees fail to comply with their duties when exercising the power of delegation?
VL for any loss caused by the agent acting negligently
Can trustee delegate to anyone?
No: cannot delegate to beneficiary, even if also a trustee
What is required of statutory DOC? How does this differ for professional trustees?
Exercise care and skill which is reasonable in the circumstances, considering any special knowledge or experience that a trustee has or holds themselves out as having
For professional trustees: consider any special knowledge/ experience that is reasonable to expect of a person acting in that capacity
Trusteeship is a joint office. What does this mean?
Often, >1 trustee will be liable for breach of trust (although they may be liable for breach in different ways) - jointly and severally liable
When may a trustee become liable for breach that occurred before being appointed as trustee?
On appointment, trustee discovers a breach has occurred and fails to commence proceedings to recover from former trustee
If a trustee has retired, when are they liable for breaches?
- Liable for any breaches committed during time they acted as trustee
- Liable for breaches committed after retirement if (1) trustee retired to facilitate breach or (2) trustee parts with trust property in retiring without due regard
Breach: when is loss assessed?
At the date of trial, not the ate of breach
What are the 2 steps for the modern approach to losses?
Step 1: would a reasonably prudent trustee have done anything differently to trustee in breach?
Step 2: if ‘yes’, what is the difference (if any), during the period, between (i) fund’s actual performance and (ii) hypothetical performance of the fund if it had been invested by prudent trustees
How is loss calculated using the traditional approach?
Amount of compensation payable: difference between
i. Current value of unauthorised investment and
ii. Current value of authorised investment or proceeds of sale of the authorised investment
What remedy can be awarded if breach of trust has resulted in a loss in value of trust fund?
May be no substantive remedy; however, in serious cases, beneficiaries may wish to remove trustee from office
When can trustees offset losses caused by breach of trust against profits they’ve made?
Losses/profits arise from the same transaction or course of dealings
What is the statutory power of maintenance?
Gives trustees the power to pay income (incl. any previous accumulated income) for maintenance, education or benefit of a minor beneficiary
Who does the statutory power of maintenance apply to?
Minor Bs who have:
-Vested (future) interests
-Contingent interests which carry the intermediate income
What are 2 key restrictions of the statutory power of maintenance?
- Does not apply where someone else has a prior interest in the income (e.g., a successive interest trust)
- Can be excluded/modified by an express term in TI
Why is the statutory power of maintenance irrelevant for adult Bs?
Duty to pay income as it arises
To whom should income be paid under statutory power of maintenance?
- Child’s parent/guardian
- Directly to provider of g/s being acquired on B’s behalf
What is the statutory power of advancement?
Gives trustees the power to pay capital for the advancement of a B whose interest has not yet vested in possession
Who does the statutory power of advancement apply to?
-Adult and minor beneficiaries
-Vested, future interests
-Contingent interests
Can statutory power of advancement be used where another B has a prior interest (e.g., by remainderman with life interest’s consent?)
Yes, if written consent from beneficiaries in existence and of full age
Can statutory power of advancement and maintenance be excluded by express term of TI?
Yes
Are trustees obliged to distribute capital/income if a request is made to use their power of advancement/ maintenance?
No: dispositive discretion, not a duty
Statutory power of advancement: what could be included as ‘advancement’
-Broader than just education, career and marriage
-Any use which will improve B’s material situation (e.g. avoid IHT)
-Improve B’s moral well-being by giving money for charitable purposes (if B would have otherwise used their own resources for such purposes)
What are the 2 ways in which payment can be brought into account?
a. Proportionate share of overall trust value
b. Strict monetary value
How is a non-standard fiduciary relationship determined?
Person:
-Undertakes and is entrusted with the authority to mange the property/ affairs of another person and to make discretionary decisions on behalf of the other
-Undertakes a responsibility to provide advice in a context where that person has a substantial degree of power over the other person’s decision-making
What are the 2 main duties of a fiduciary?
a. No conflict duty: must not put themselves in a position where their person interests conflict with their duties to their principle (i.e. unauthorised profit by reason of position)
b. No profit duty: fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves or for a 3rd party (actual/potential conflict between duty and interest)
What remedies are available for breaches of fiduciary duty?
(a) Profits:
-Account of profits (personal claim)
-Constructive trust (proprietary claim)
(b) Losses: equitable compensation (personal claim)
What are the 3 ways in which the no conflict rule is broken?
a. Self-dealing: trustee purchases assets from, or sells assets to, the trust
b. Fair-dealing: trustee directly transacts with B to buy their beneficial interest under the trust
c. Conflict between principals: fiduciary’s duties to one principal conflicts with their duties to another principal
What happens if there is a breach of the self-dealing or fair-dealing rule and there are no defences?
Transaction is voidable: B may seek rescission
How can trustees avoid breach of the no-conflict rule? What additional defence is available for the fair-dealing rule?
All: trustees obtain Bs’ consent
Fair-dealing: trustee can demonstrate
a. Made full disclosure to B
b. Acted honestly and fairly
c. Did not take advantage to B (e.g., paid full value)
A, the trustee, wants to buy a house for occupation by their beneficiary, B; A is an estate agent, instructed by C to sell their house; A thinks that the house would be perfect for B. Why is this a breach of a fiduciary duty?
Conflict between principals: clear and distinct conflict between A’s duties to B and C - lowest vs highest possible price
Breach of no conflict rule: what can / should Bs do if breach causes loss / profit to principal?
Loss: sue fiduciary personally for breach of fiduciary duty - fiduciary would be liable to compensate principal
Profit: may not require a remedy, although they may wish to end fiduciary relationship; if it also results in profit to fiduciary, principal can recover profit from fiduciary
What are the 4 types of breaches under the ‘no profit’ rule?
a. Direct profit: fiduciary directly uses principal’s property to make a personal profit
b. Indirect profit: fiduciary indirectly profits from their role as a fiduciary
c. Exploiting opportunities: fiduciary exploits opportunity which has come to them as a result of their fiduciary position
d. Bribes and secret commissions: fiduciary receives a bribe/ secret commission (from 3rd party) to influence the way in which they perform their role as fiduciary
A solicitor holds client money, pending the completion of a property transaction, in an interest-bearing account. Why could this be a breach of fiduciary duty?
Breach of no profit rule for solicitor to retain the interest: income has been made directly out of P’s property –> belongs to P
Trust holds shares in a company; a trustee is appointed as a director to better monitor that company; directorship comes with an entitlement to remuneration. What fiduciary duty could be breached here?
Trustee has taken on directorship in capacity as trustee –> receive renumeration in capacity as trustee –> must pay it to trust fund instead of accepting it personally
What are 3 limitations of the indirect profit rule regarding trustee benefitting from directors’ renumeration?
- Only applies where trustee has obtained the director position as a result of being a trustee (i.e., does not apply if independently appointed)
2 s.t. anything in TI which allows trustees to retain renumeration - Trustee could seek Bs’ fully informed consent
When does the exploiting opportunities rule arise?
Arises regardless of whether P would (or even could) have exploited that opportunity if the fiduciary had not done so
What are the 2 main defences for the breach of no-profit rule?
- Trust terms authorise trustee to make a profit
- If profit is unauthorised, trustees obtained fully informed consent of all beneficiaries
What is the consequence of a breach of no-profit rule where there are no valid defences?
Fiduciary stripped of their profit
Remedies:
(i) Account of profits: personal claim - trustees must pay P an amount equivalent to the profit they have made
(ii) Constructive trust: proprietary claim - profit made by fiduciary is held on constructive trust for P
Breach of no-profit rule: what are the 2 advantages of imposing a constructive trust as a remedy?
a. Protects P against insolvency of fiduciary (ranking)
b. Allows P to trace into any subsequent profits made by fiduciary
What are the 4 elements required for a successful accessory liability claim?
a. Trust/fiduciary relationship
b. Breach of trust/fiduciary relationship
c. Assistance: D assisted trustee to commit breach of trust
d. Dishonesty: D’s assistance was dishonest
(Essential elements = BAD)
Accessory liability: what would be sufficient for D to do?
-Assist fiduciary/trustee to plan, commit or cover up breach (more than minimal; makes commission/ concealment of breach easier; could occur after initial breach)
-Procure/instigate breach
Accessory liability: can D avoid liability by proving that trustee/fiduciary would have committed the breach even if D had not assisted them?
No
Accessory liability: what is the relevant test for dishonesty?
i. Subjective knowledge: state of D’s knowledge/belief as to the facts
ii. Objective standard: (dis)honest according to standard of ordinary decent people (given subjective knowledge e.g., dishonest according to a NQ solicitor)
Accessory liability: what are 2 examples of things that honest people do NOT do?
-(Assist others) to misappropriate/ misapply other people’s property
-Deliberately remove assts of insolvent company so as to defeat the just claim of a creditor
Accessory liability: what must C show for D to be liable for the loss / profit occasioned/acquired due to their participation in the breach?
-Loss: (1) conduct assisted breach and (2) but for the breach, loss would not have happened
-Profit: D’s participation was the real/effective cause of profits (‘but for’ is not appropriate)
Accessory liability: when will court NOT grant a remedy re assistant’s profits?
It would be disproportionate in relation to the form and extent of assistant’s wrongdoing
What are the 4 elements of a knowing receipt claim?
- Misapplication of trust property or property held in another fiduciary capacity
- Beneficial receipt by D of the misapplied property or its traceable proceeds
- Persistence of C’s equitable proprietary interest in the property received by D
- D has knowledge of the circumstances which make it unconscionable for them to retain the benefit of the receipt
‘MR PU’
Is a knowing receipt claim a personal or proprietary claim?
Personal claim against a recipient of the misapplied trust property or its traceable proceeds (i.e., for loss or profit)
Why is a knowing receipt claim a fault-based claim?
D is only liable if they had requisite degree of knowledge
Knowing receipt: what does ‘beneficial receipt’ mean? What are 2 examples where there is no beneficial receipt?
Receipt by D should be for his own benefit or in his own right
Insufficient:
-Receipt in a ministerial capacity
-Money paid to a bank to be credited to an account which is in credit (vs overdraft)
Knowing receipt: when will the requirement for persistence of C’s equitable proprietary interest in the property received by D fail?
Transfer of the misapplied trust property (or its traceable proceeds) to D operates to extinguish C’s proprietary interest in that property (e.g., overreaching)
Knowing receipt: what are the 5 types of knowledge in the Baden scale? Which are automatically unconscionable, and which are conditionally unconscionable?
Unconscionable:
1. Actual knowledge
2. Wilfully shutting one’s eyes to the obvious
3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make
Conditionally unconscionable:
4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man
5. Knowledge of circumstance which would put an honest and reasonable man on enquiry
Knowing receipt: for (4) and (5) in the Baden scale (i.e., the ‘knowledge of circumstances’…), when will this be unconscionable?
On the facts D knew, a reasonable person would have:
(a) Appreciated the transfer was probably in breach of trust; or
(b) Made inquiries/sought advice which would have revealed the probability of breach
Knowing receipt: what are 2 situations in which D would not commit knowing receipt, despite elements 1-3 being satisfied?
- D disposes/dissipates the property before they acquire requisite knowledge
- As soon as D acquires requisite knowledge, they restore the property to the trust
What are the 3 ways in which trustees can be protected from the outset?
- Exemption clause in TI: limits/excludes trustee liability for particular sorts of breach
- Ouster clause in TI: entirely remove a duty that trustees would otherwise have
- Trustee indemnity (or ‘liability’) insurance against personal liability for breach of trust
Protection of trustees: what is the difference between an exemption clause and ouster clause?
-Exemption: duty still exists, but trustees are protected from personal liability if breached
-Ouster: entirely removes a duty that trustee would otherwise have
What is a limitation of an exemption clause?
Cannot be used where breach is fraudulent and/or trustee has acted dishonestly
What is a limitation of trustee indemnity insurance?
Cannot protect trustees for fraudulent breaches of trust (but can protect against negligent breaches)
What are 4 ways in which trustees can protect themselves during administration when they are uncertain as to their powers/ duties?
- Seek court directions: not liable, even if there is a subsequent claim from B
- s48 AJA application: rely on Council’s opinion
- Surrender their discretion to the court
- Obtain Bs’ fully informed consent
How can a trustee submit a s48 application? (2 steps)
Step 1. Seek written legal order from a barrister or solicitor with 10 years experience
Step 2. Apply for HC authorisation to rely on that legal opinion
When is it suitable for trustees to surrender their discretion to the court?
Trustees are deadlocked or precluded from acting due to COI
Benjamin order: does it protect from unknown and/or missing Bs, and what is required?
Missing
Trustees must:
1. Make full enquiries to attempt to establish true position; and
2. Demonstrate that there is no reasonable prospect of knowing the true position without disproportionate expense
s27 TA: does it protect from unknown and/or missing Bs, and what is required?
Unknown
Trustees publish a notice (in London Gazette, a newspaper circulating in the area in which any land held on trust is situated, and any other appropriate newspaper) of their intention to distribute to known beneficiaries 2 months after the ad
Retained fund: does it protect from unknown and/or missing Bs, and what is required?
Protects trustees and other Bs from missing Bs (and potentially unknown Bs, although risky - difficult to quantify)
Trustees retain a fund setting aside trust assets in order to be able to discharge liabilities if missing Bs come forward after distribution
Payment into court: does it protect from unknown and/or missing Bs, and what is required?
Missing (protects trustees and other Bs)
Gives court legal control over the funds
Missing beneficiary insurance: does it protect from unknown and/or missing Bs, and what is required?
Both (note: doesn’t protect against claim, but trustee should be able to recover from insurer)
Insurance to guard against risk of missing/ unknown Bs emerging after fund has been distributed
Indemnity from Bs: does it protect from unknown and/or missing Bs, and what is required?
Both (doesn’t protect against claim, but can try to recover from indemnifying B)
B promises to reimburse trustees if trustees are successful sued by other Bs later
What are the 5 ways of protecting trustees after breach?
- Instigation, consent and acquiescence
- Statutory limitation: 6 years from breach
- s61: ‘acted honestly and reasonably, and ought fairly be excused’
- Claims against 3rd party professional advisor (relied upon negligent advice)
- Claims for a contribution from co-trustee/3rd party
What is required to protect trustees via instigation, consent and acquiescence?
Trustees can show that:
1. They obtained fully informed consent of adult Bs (requires positive act of authorisation / instigation); or
2. Adult Bs acquiesced (i.e., know of breach, but don’t take an action against trustee)
When can court ‘impound’ a beneficiary’s interest under a trust to satisfy claims of other Bs?
‘Just’ to do so, usually where B actively encouraged breach (compensation will be paid out of their share of the fund)
Beneficiaries can bring claims up to 6 years from breach. What are 2 qualifications and 2 exception of this?
Qualifications:
-Bs’ interests are vested in possession (for Bs with future interests, limitation period starts when their intention vests in possession)
-If trustee is also B, and receives an unfairly large distribution from trust, only the excess can be recovered after the normal 6-year period
Exception: fraudulent breaches or proprietary claims against trustee
What is the equitable defence of lachs?
Where statutory period has not yet expired, trustees may argue that B has waited too long to bring a claim if trustees can demonstrate that B knew of a breach but has delayed their claim unacceptably –> unconscionable for B to assert beneficial interest
Claims for a contribution from a co-trustee: what does the court have discretion to do?
- Require 1 party to make a ‘just and equitable’ contribution to the other (reflect differing levels of culpability)
- Award full indemnity (rare): benefitted from breach, solely responsible, or solicitor
When can C use the equitable following, tracing and claiming rules? (2 conditions)
- C had a right of property recognised by equity in the asset which they seek to follow and/or trace
- The asset was held by a person who was in a fiduciary relationship with C
What is following?
The process of locating misapplied trust property (e.g., T misapplies £1,000 (cash) of trust fund and gifts it to X, and X gifts it to Y; beneficiaries can follow the £1,000 from T to X and then to Y)
What is tracing?
The process of identifying a new asset as the substitute for the old (e.g., T misapplies £1,000 (cash) of a trust fund and uses the cash to purchase shares for £1,000 - B can trace into the shares and then make a proprietary claim in respect of them)
What is claiming?
Assertion of a personal/ proprietary right in relation to misapplied trust property or its traceable proceeds
What is the principal defence to an equitable proprietary claim?
Purchaser is of a legal interest without notice of the trust
When can B claim beneficial ownership of an asset itself?
ONLY if asset is acquired exclusively with the traceable proceeds of the breach
When can B claim a share of the asset?
Potentially, where asset has been acquired using a mixed fund
When can B claim an equitable lien over the asset?
Wrongful mixtures
Maintaining/improving trustee’s property
When can subrogation be used?
Misapplied trust funds (or their traceable proceeds) are used to pay off a debt
What are the 3 different models for tracing when part of a mixed fund is used in connection with a particular transaction?
- Hallett: preserve trust money in the account
- Oatway: if there is a choice between a traceable asset and dissipation, trustee should be treated as protecting the trust fund and dissipating their own
- Shalson: where cherry picking would prejudicially affect 3rd parties, B can attribute any part of the mixed fund which is dissipated to trustee, but cannot attribute the most profitable applications of the fund to the misapplied trust money
What is the general rule regarding withdrawals from innocent mixtures? What is the exception?
General rule: withdrawals are attributed rateably to the contributors to the mixture
Exception: withdrawals from an innocent mixture in a current bank account
Withdrawals from an innocent mixture in a current bank account: what method is the default, what are the 2 alternatives, and which method (in reality) is generally used?
‘1st in, 1st out’ rule. This is disapplied where application would be
a. Contrary to the intentions of the parties who contributed to the mixture
b. Impracticable
c. Unfair
Alternative 1: pari passu ex post facto method
Alternative 2: rolling charge method
In principal, should use rolling charge 1st; however, no examples of rolling charge being used - pari passu should be used if rolling charge is too complex/expensive
What is the pari passu ex post facto method?
Method: identify amounts contributed to the account by each individual contributor; attribute all withdrawals from the account fractionally to all contributors, regardless of the order in which the payments were made
Static: involves a single calculation after the event
What is the rolling charge method?
Method: attribute each individual withdrawal fractionally to the contributors to the account immediately before the withdrawal
Dynamic: requires contributors’ fractional contributions to be recalculated every time a sum is credited to the account
What are unmixed funds? What claim can Bs make?
Unmixed fund: asset purchased exclusively with misapplied trust money (or its traceable proceeds)
B can choose between:
1. Asserting beneficial ownership of asset itself (use if increased in value)
2. Equitable lien to secure personal claim (use if decreased in value)
What are wrongful mixtures? What claim can Bs make?
Wrongful mixtures: assets purchased with misapplied trust money (or its traceable proceeds) and trustee’s money
B can choose between:
1. Claiming a proportionate share of the asset (if increased in value)
2. Enforcing a lien to secure personal claim (if decreased in value)
What is an innocent mixture? What claims can B make?
Innocent mixture: assets purchased with misapplied trust money (or its traceable proceeds) and money derived from innocent 3rd party(s)
B can only claim a proportionate share of asset
What are wrongful and innocent mixtures? What claims can B make?
Wrongful and innocent mixtures: mixture of trustee funds and funds from >1 innocent party
Same rule as ‘innocent mixtures’ i.e., can only share a proportionate share of the asset
What claim can B make if trustees maintain/improve their own property?
- A proportionate share of the asset if it increases by reason of the maintenance/improvement (i.e., assert a right over the %age increase in house value)
- An equitable lien on the asset to secure repayment of trust money used to maintain it (if repairs do not increase its value)
What can Bs do if misapplied trust money is used to maintain/improve an innocent 3rd party’s property?
Cannot assert any claim to the asset: at max (and unusually), an equitable lien to secure repayment of trust money expended
The adult niece of a deceased testator visits a solicitor for advice on the following clause of the testator’s valid will:
‘I give one hundred thousand pounds on trust for such of my nieces and nephews as shall survive me and in such shares as my trustees shall in their absolute discretion determine.’
Which of the following best describes the niece’s rights under this clause?
The niece can compel the trustees to exercise their discretion and make a selection as to who will receive funds from the trust
What is the difference between vested in interest and vested in possession?
In possession: immediate right to the income/capital
Vested in interest: cannot enjoy immediately (e.g., remainderman where there are no conditions imposed)
