Trusts law Flashcards
1
Q
What is the difference between legal title and equitable title in relation to a trust?
A
A full legal owner does not have equitable title because they do not need it. They have the full legal and beneficial interest in the property. In a transfer on trust, legal title is transferred to a third party trustee, and a new equitable interest is created for a beneficiary.
2
Q
What are the different categories of trusts?
A
Trusts can be categorized as express, resulting, or constructive. Express trusts are intentionally created, while resulting and constructive trusts arise by operation of law.
3
Q
How is an express trust different from resulting and constructive trusts?
A
An express trust is deliberately created, while resulting and constructive trusts arise by operation of law and are imposed by the courts.
4
Q
What are trusts created by operation of law?
A
Trusts created by operation of law are not intentionally created but instead are a response to particular circumstances which the law considers should give rise to a trust. There are three broad categories of trusts arising by operation of law: resulting trusts, constructive trusts, and statutory trusts.
5
Q
Who can be a beneficiary in a trust?
A
The beneficiary in a trust can either be a third party or the settlor.
6
Q
What are the requirements for creating an express trust?
A
To create a valid express trust, it is necessary to comply with the three certainties: certainty of intention, certainty of subject matter, and certainty of objects. Additionally, there may be further formalities depending on whether there is a self-declaration or a transfer on trust.
7
Q
How can a settlor create an express trust?
A
A settlor can create an express trust through a self-declaration of trust or a transfer on trust. In a self-declaration of trust, the settlor manifests an intention to hold one of their assets on trust for the beneficiary. In a transfer on trust, the settlor transfers property to a third party trustee with the intention that the trustee holds the property on trust for the beneficiary.
8
Q
What are the two types of resulting trusts?
A
Resulting trusts can be further subdivided into two key categories: automatic resulting trusts and presumed resulting trusts.
9
Q
What happens in a self-declaration of trust?
A
In a self-declaration of trust, the settlor remains the legal owner of the asset but is divested of their beneficial interest in it. The settlor becomes the trustee, holding legal title in a new capacity, while a new equitable interest is created for the beneficiary.
10
Q
How do automatic resulting trusts and presumed resulting trusts differ?
A
Automatic resulting trusts are default trusts that arise when a transfer on trust fails, either wholly or partly. Presumed resulting trusts arise when a person makes a gratuitous transfer of property to a third party, and equity raises a presumption that the property should be held on trust for the transferor.
11
Q
What happens in a transfer on trust?
A
In a transfer on trust, the settlor transfers property to a third party trustee with the intention that the trustee holds the property on trust for the beneficiary. The trustee becomes the legal owner of the property, and a new equitable interest is created for the beneficiary, who becomes the equitable and beneficial owner.
12
Q
What is the purpose of automatic resulting trusts?
A
Automatic resulting trusts ensure that the property returns to its original owner when it is otherwise unclear what should happen to it. They are a default trust that does not respond to the actual intention of the settlor.
13
Q
Under what circumstances do presumed resulting trusts arise?
A
Presumed resulting trusts arise when a person transfers their property to someone else, and equity presumes that they intended for the recipient to hold it on trust for them. This presumption can be rebutted by evidence that the transferor did not intend the property to be held on trust for them
14
Q
What are the different ways to categorize trusts?
A
Trusts can be categorized as lifetime or testamentary, fixed or discretionary. Lifetime trusts can be both fixed or discretionary, as can testamentary trusts. It is important to note that not all categories are mutually exclusive, and there can be overlap between different categories.
15
Q
How does a self-declaration of trust differ from a transfer on trust?
A
In a self-declaration of trust, the settlor remains the legal owner of the asset and becomes the trustee, while in a transfer on trust, the settlor transfers legal title to a third party trustee. Additionally, in a self-declaration of trust, a new equitable interest is created for the beneficiary, whereas in a transfer on trust, the trustee becomes the legal owner and a new equitable interest is created for the beneficiary.
16
Q
What is the purpose of constructive trusts?
A
Constructive trusts are imposed to correct unconscionability. They are more complex and varied in nature compared to resulting trusts.
17
Q
What are institutional constructive trusts?
A
Institutional constructive trusts are the orthodox form of constructive trust. They are automatically imposed in response to a trigger event that affects the conscience of a legal owner, preventing them from denying the beneficial interest of another person.
18
Q
What is the role of the settlor in a self-declaration of trust?
A
In a self-declaration of trust, the settlor manifests an intention to hold one of their assets on trust for the beneficiary. The settlor remains the legal owner of the asset but is divested of their beneficial interest in it.
19
Q
What are some examples of trigger events for institutional constructive trusts?
A
Some examples of trigger events for institutional constructive trusts include trusts imposed to prevent fraud, trusts imposed to perfect an imperfect gift or trust, trusts imposed to compel parties to perform a specifically-enforceable contract, and trusts imposed over profits made in breach of fiduciary duty.
20
Q
When are constructive trusts awarded as a remedy?
A
Constructive trusts can be awarded by a court as a remedy following misapplication of property in which the claimant can establish an equitable proprietary interest, or property representing the traceable proceeds of a breach of trust or fiduciary duty. This type of constructive trust is not imposed automatically but is the result of a claimant asserting their rights in the property and seeking to claim beneficial ownership of the property or a share of the property.
21
Q
What are the exceptions to the beneficiary principle in trusts?
A
Charitable trusts, which have charitable purposes as their objects and are in the public benefit, are exceptions to the beneficiary principle. There are also narrower exceptions known as non-charitable purpose trusts or private purpose trusts.
22
Q
What are common intention constructive trusts?
A
Common intention constructive trusts are used to resolve disputes as to beneficial ownership of land where there is no express trust declared over the property. They typically arise in cases where the land is occupied by unmarried couples as a family home or when both individuals are registered as legal owners of the land but there is a dispute about their shares in the land
23
Q
How does equity determine the equitable interests in common intention constructive trusts?
A
In common intention constructive trusts, the court assesses the common intention of the parties to determine their respective equitable interests in the land. This is done when there is no express trust declared over the property.
24
Q
What is the purpose of the Trusts Registration Service (TRS) in relation to trusts?
A
The Trusts Registration Service (TRS) is an online service operated by HMRC. It is used for the registration of express trusts that have incurred a tax liability in a given year. The trustees are responsible for registration and keeping the information held by the TRS up to date.
25
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?
The man’s relationship with the company is not fiduciary in nature: it is merely contractual.
The man is an agent for the company.
The man is a trustee for the company.
The man is a bailee for the company.
The man is a bailee, an agent and a trustee for the company.
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. 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.
26
Formalities for a trust created over land?
However, declarations of trust over land must comply with s 53(1)(b) of the Law of Property
Act (LPA) 1925. This requires that the declaration of trust must be ‘manifested and proved by
some writing signed by some person who is able to declare such trust’. This means that the
declaration of trust must be evidenced in writing signed by the settlor. If a declaration of trust
over land does not comply with this formality, the trust will be unenforceable
27
How can lifetime trusts be made?
For lifetime trusts, most declarations of trust can be made orally, although this is not advised
given that the trustees (and possibly the beneficiaries and the court in the case of any future
dispute) will want to refer back to that declaration over the duration of the trust.
28
What are the two different sets of perpetuity rules?
· The rule against remoteness of vesting.
· The rule against inalienability.
29
What is the rule against remoteness of vesting?
The rule against remoteness of vesting is a statutory rule which requires that a person (or charity) must obtain a vested interest in the trust property within a recognised ‘perpetuity period’. By s 5(1) Perpetuities and Accumulations Act 2009 this period is 125 years although it is possible for a trust instrument to limit the duration of the trust to a shorter period.
30
Rule against inalienability?
This rule provides that assets cannot be tied up on trust for longer than the common law perpetuity period of a specified life in being plus 21 years (or just 21 years if no life in being is specified).
31
Perpetuity rule for Non-charitable purpose trusts?
Rule against inalienability
32
Perpetuity rule for Trusts with beneficiaries or charitable purposes as objects?
Rule against remoteness of vesting
33
What are the 3 certainties?
Certainty of intention
Certainty of objects
Certainty of subject matter
34
Where can someone’s intention be ascertained from?
A person’s intention can be ascertained from their words (spoken or written) and conduct.
35
Is the word trust necessary for finding intention?
No
36
Is the word trust conclusive for finding intention?
No
37
By his valid will, the testator made the following dispositions:
‘1. I give £10,000 to my solicitor to be applied for the benefit of my mother.
I give £10,000 to my wife absolutely, confident that she will do right by our children.’
The executors of the testator’s will have paid £10,000 to his widow and £10,000 to his solicitor.
Which one of the following statements is correct?
The widow holds the money on trust for the testator’s children. The solicitor is the full legal owner of the money.
The solicitor holds the money on trust for the testator’s mother. The widow holds the money on trust for the testator’s children.
The solicitor and the widow are the equitable owners of the money.
The solicitor holds the money on trust for the testator’s mother. The widow is the full legal owner of the money.
The solicitor and the widow are the full legal owners of the money.
The solicitor holds the money on trust for the testator’s mother. The widow is the full legal owner of the money.
The testator has imposed a duty on the solicitor: the money is ‘to be’ applied for the testator’s mother. But the testator has not imposed a duty on the widow: the words ‘confident that she will’ are not imperative.
38
True or false: Certainty of intention requires the settlor to understand that they are creating a trust.
False
Revisit your materials on Paul v Constance. The settlor does not even need to know what a trust is as long as their intention is consistent with the intention to create a the relationship which is characteristic of a trust.
39
What are the requirements for certainty of subject matter?
First, it must be possible to identify the trust property (‘the trust property requirement’)
· Secondly, it must be possible to ascertain the beneficiary’s interest in the trust property (‘the beneficial entitlement requirement’)
40
True or false: Only land and chattels can be held on trust.
False
41
By his valid will, the testator (deceased) made the following disposition:
‘I give to my trustees my favourite car on trust for my daughter, and the sum credited to my current bank account on trust to give most of it to my daughter and the balance to my son.’
There is no available evidence of which car was the testator’s favourite.
Which one of the following statements best describes the effect of the disposition?
The trustees are entitled to full legal ownership of a car and of the sum credited to the testator’s bank account.
The testator has created a valid trust of the sum credited to his bank account but has not created a valid trust of a car.
The testator has not created a valid trust.
The testator has created a valid trust of his favourite car and of the sum credited to his bank account.
The testator has created a valid trust of his favourite car but has not created a valid trust of the sum credited to his bank account.
The testator has not created a valid trust.
The intended trust of the car is void because it is not possible to identify which car was the testator’s favourite. The intended trust of the sum credited to the bank account is void because it is not possible to identify the beneficiaries’ beneficial entitlements – ‘most’ is too vague.
42
Q
The owner of 20 ordinary shares in a private company and 20 bars of gold bullion orally declares herself a trustee of 10 of the shares and 10 of the bars for a beneficiary. She does not segregate or otherwise identify the 10 shares or the 10 bars which are to form the subject matter of the trust.
Which one of the following statements best describes the effect of the declaration?
Neither the shares nor the bars are subject to a trust.
There is a valid trust of 10 shares and 10 bars.
There is a valid trust of 10 shares and 20 bars.
There is a valid trust of 10 bars but no trust in respect of the shares.
There is a valid trust of 10 shares but no trust in respect of the bars.
There is a valid trust of 10 shares but no trust in respect of the bars.
A person can declare a trust of x shares out of a larger number of such shares without identifying which x shares are to form the subject matter of the trust, provided that they are all shares of the same type and in the same company: Hunter v Moss [1994] 1 WLR 452. However, there is not a trust of any of the bullion because a person cannot declare a trust of x physical items out of a larger number of such items without identifying the particular x items which are to form the subject matter of the trust: In re Goldcorp [1995] 1 AC 74.
43
What is the test for certainty of object for fixed trusts?
The test of certainty applying to fixed trusts is the complete list test (which requires conceptual and evidential certainty)
Under this test,
it must be possible to draw up a complete list of each and every beneficiary.
44
What is the test for certainty of objects for discretionary trusts?
The test of certainty applying to discretionary trusts and fiduciary powers is the is/is not test
In order to satisfy the test,
we need conceptual certainty – is the description of the class (amongst whom the trustees will
exercise their discretion) clear and objective? If the language used to describe the class is
unclear and lacks precision (ie the trustees cannot say with certainty what sort of person they
are looking for), then the trust will fail.
45
Could a discretionary trust fail for administrative unworkability?
Yes
46
By his valid will, the testator made the following disposition: ‘I give £10,000 to my trustees to be distributed between my children and my friends in such shares as my trustees shall determine.’ The executors of the testator’s will have paid £10,000 to the trustees.
Which one of the following describes the trustees’ position in relation to the £10,000?
The trustees may keep the money for their own benefit.
The trustees must distribute the money amongst the testator’s children.
The trustees must distribute the money amongst the testator’s friends.
The trustees hold the money on a resulting trust for the testator’s estate.
The trustees must distribute the money amongst the testator’s children and friends.
The trustees hold the money on a resulting trust for the testator’s estate.
The discretionary trust is void for uncertainty due to the inclusion of a conceptually uncertain term (‘friends’) in the description of the class of objects. As a result, the trustees hold the money on resulting trust for the testator’s estate.
47
By his valid will, the testator made the following disposition: ‘I give £10,000 to my trustees. £5,000 is to be distributed to my children, and £5,000 is to be distributed to British men, in such shares as my trustees shall determine.’ The executors of the testator’s will have paid £10,000 to the trustees.
Which one of the following describes the trustees’ position in relation to the £10,000?
The trustees hold £5,000 on discretionary trust for the testator’s children and £5,000 on resulting trust for the testator’s estate.
The trustees hold £5,000 on discretionary trust for the testator’s children. They may keep the other £5,000 for their own benefit.
The trustees hold £5,000 on discretionary trust for British men and £5,000 on resulting trust for the testator’s estate.
The trustees hold £5,000 on discretionary trust for the testator’s children and £5,000 on discretionary trust for British men.
The trustees hold £10,000 on resulting trust for the testator’s estate.
The trustees hold £5,000 on discretionary trust for the testator’s children and £5,000 on resulting trust for the testator’s estate.
The discretionary trust for the children is valid but the discretionary trust for British men is void for administrative unworkability, because the class of objects is too large. As a result, the trustees hold £5,000 on resulting trust for the testator’s estate.
48
True or false: Evidential uncertainty in connection with the objects of a trust is fatal to all types of trust.
False
Although evidential uncertainty is fatal to some trusts – e.g. fixed trusts involving equal distribution amongst the members of a class – it is not fatal to all trusts: Re Baden’s Deed Trusts (No 2) [1973] Ch 9.
49
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 statement best describes the effect of the woman’s declaration?
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.
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.
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.
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.
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 paintings.
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. 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.
50
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?
The niece is not entitled to either ring.
The niece is entitled to a ring chosen by the trustees.
The niece is entitled to the ring of her choice.
The niece is entitled to both rings.
The niece is entitled to a ring chosen by the court.
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.
51
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?
The trusts in clauses 1 and 2 are void.
The trustees can determine whether the trusts are valid or void.
The trust in clause 1 is valid but the trust in clause 2 is void.
The trusts in clauses 1 and 2 are valid.
The trust in clause 2 is valid but the trust in clause 1 is void.
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. However, 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.
52
A woman recently died. Her valid will contains the following clause:
‘I give £10,000 to my husband absolutely. I trust him to use it fairly vis-à-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?
The husband is the full legal owner of the money.
The husband holds the money on a discretionary trust for the children.
The clause is void and the husband receives nothing.
The husband holds the money on a fixed trust for the children.
The husband holds the money on a fixed trust for himself and the children.
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
53
Can the phrase “to distribute” create a trust?
Yes
54
What types of words are needed to create a trust?
Precatory words express a wish, hope or expectation. Such words do not create a trust. Instead it is likely that that person will be deemed to have made a gift.
Obligatory or mandatory wording must be used if the settlor is looking to create a trust.
(a) Iesha says to Janet, ‘I am giving you my wedding ring in the hope that you will look after
it for Katherine’. This does not impose a trust on Janet. There is no duty to look after the
ring for someone else, merely an expectation that Janet will do so. As a result, all that
Iesha is doing is gifting the ring to Janet, who becomes the absolute owner of the ring.
(b) Lionel says to Mark, ‘I give you my collection of Grayson Perry vases trusting that you
will give a vase to each of my children’. Notwithstanding that Lionel uses the word
‘trusting’, this imposes no trust on Mark. All that Lionel is doing is expressing a hope orexpectation that Mark will distribute vases to his children. This is precatory wording. As a
result, Lionel is taken to have gifted the vases to Mark, who takes those vases absolutely.
55
What is administrative unworkability?
A discretionary trust will be
administratively unworkable, and therefore invalid, if the class is so hopelessly wide as ‘not to
form anything like a class’
56
What are the formalities for express trusts of land?
Section 53(1)(b) is an evidential requirement only. The trust will be valid but unenforceable unless and until it is ‘manifested and proved’ in signed writing.
If the trust is never evidenced in signed writing, it will remain unenforceable, subject to anything rendering it unconscionable to deny the interest of the beneficiary (such as proprietary estoppel or the imposition of a constructive trust).
If a trustee receives land to hold on a trust which has not been evidenced in writing, and the settlor is unable or unwilling to provide this evidence, it would be prudent for the trustee to seek directions from the court as to their obligations.
57
True or false: Section 53(1)(b) LPA 1925 only applies to declarations of trusts of land.
True
58
What is the effect of failure to comply with section 53(1)(b) LPA 1925?
The trust is unenforceable
59
Which of the following trusts would be unenforceable?
A person sends their sibling a signed letter declaring that they now hold their house on trust for the sibling. The letter contains the terms of the trust.
A person orally declares that they are holding their house on trust for their sibling and then leaves their sibling a voicemail to confirm the terms of the trust
A person sends a signed letter to their friend to inform them that they will be transferring their house to the friend, to hold on trust for the person’s sibling. The letter contains the terms of the trust. The person then effects the legal transfer of the house.
A person orally declares themselves to be holding their house on trust for their sibling and then sends the sibling a signed letter to confirm the terms of the trust.
A person calls their friend to inform them that they will be transferring their house to the friend to hold on trust for the person’s sibling. After the legal transfer has been effected, the person sends a signed letter to the friend confirming the terms of the trust.
person orally declares that they are holding their house on trust for their sibling and then leaves their sibling a voicemail to confirm the terms of the trust
This trust does not satisfy the requirements of s53(1)(b) LPA 1925 as there is no signed, written evidence of the tr
60
Is constitution of trust necessary to make a transfer of trust binding?
Yes
61
Is constitution of trust necessary to make a self declaration of trust binding?
A self declaration of trust does not require any movement of the legal title as legal title to the property is already vested in the settlor. This means that the trust is automatically constituted when the trust is declared.
62
What is constitution of trust?
Constitution refers to the transfer of legal title from one party to another.
63
Failed constitution?
If trust property is not vested in the trustees, the trust is incompletely constituted and is therefore void.
If legal title is not transferred correctly then the disposition will fail. Under Milroy v Lord equity will not assist a volunteer, perfect an imperfect gift or treat a failed gift as a self declaration of trust.
64
Testamentary trust constitution?
If a trust is created in a will (a testamentary trust)then constitution will take place via the will. After the death of the testator, their personal representatives must obtain legal title to the testator’s estate.
65
What is an inter vivos trust?
A lifetime trust
66
Constitution for registered land?
Registered Land transfers must be made by deed under s52(1) LPA 1925 and registered with the Land Registry under s 27 LRA 2002. Legal title passes on registration of the new owner at the Land Registry
67
Constitution for shares?
Shares in a private company are transferred by the transferor signing a stock transfer form and sending it to the company. (It is also common for the company to require the share certificate or an indemnity in respect of the transferor’s ownership as part of this process.) Legal title passes when the transferee is registered in the company’s internal register of members.
68
Constitution for choses in action?
Choses in action (eg debts and money in a bank account) are transferred by notice in writing to the debtor or to the bank (see s 136 LPA 1925). Legal title passes once notice has been received.
69
Constitution for chattels?
Chattels (including physical cash) may be transferred either (i) by deed of gift or (ii) by delivery of the chattel with evidence of the transferor’s intention to transfer it (Re Cole 1964 CH 175).
70
Constitution for cheques?
Cheques (and other bills of exchange) in favour of the transferor may be transferred to a third party (i.e. someone other than the named payee) by the transferor endorsing the cheque by signing their name on the back according to the Bills of Exchange Act 1882.
71
What constitutes as an inter vivos gift?
To constitute an inter vivos gift, legal title must transfer from the donor to the donee.
72
A father writes to his daughter declaring himself to be holding his house on trust for his daughter. He signs the letter and sends it to his daughter.
Has this trust been validly constituted?
No. The transfer of beneficial ownership to the daughter must be registered with the land registry for the trust to be constituted.
No. In order to constitute a trust of land, the declaration of trust must be made by deed. Until this occurs, the trust is not constituted and so it is void.
Yes. In order to constitute a trust of land, the trust must be declared in writing and signed by the settlor. As the father has signed the letter, this means the trust has been constituted correctly.
Yes. As this is a self-declaration of trust there is no movement of legal title and so the trust is automatically constituted when it is declared by the father.
No. The trust has not been constituted because the letter has not yet been received by the daughter. Until she has signed evidence of the declaration of trust, the trust is void.
Yes. As this is a self-declaration of trust there is no movement of legal title and so the trust is automatically constituted when it is declared by the father.
The settlor is declaring himself a trustee and so legal title to the property is already vested in him and the trust is automatically constituted. Note the formality requirement of s53(1)(b) LPA 1925 which requires a declaration of a new trust of land to be evidenced in signed writing. This is also satisfied here.
73
A man wanted to gift shares to his brother. He completed a stock transfer form in favour of his brother intending to post it to him the next day. However, the man died unexpectedly that night. The man’s validly executed will leaves the shares to his sister.
Which of the following correctly explains what will happen to the shares?
Although the man intended to make a gift of the shares it was not fully constituted before his death and so the gift is imperfect. His sister will inherit the shares under the will.
The gift was constituted when the man completed the stock transfer form. The brother is the legal owner of the shares.
The gift was constituted when the man completed the stock transfer form but, as this has not been communicated to his brother, the gift is imperfect. His sister will inherit the shares.
The brother is the legal owner of the shares but holds them on trust for the sister.
The brother is the beneficial owner of the shares. Completion of the stock transfer form can be interpreted as a self-declaration of trust over the shares.
Although the man intended to make a gift of the shares it was not fully constituted before his death and so the gift is imperfect. His sister will inherit the shares under the will.
In order to transfer legal title, the man should have sent the signed stock transfer form and share certificate to the Company’s registrar under s1 of the Stock Transfer Act 1963. Legal title would pass on registration of the brother as shareholder. As this has not occurred, the gift is imperfect. Equity will not perfect an imperfect gift under the rule in Milroy v Lord or assist the brother as a volunteer.
74
What are the exceptions to the rule in Milroy v Lord?
Principle in Re Rose
2.The unconscionable principle
Fortuitous Vesting
Donationes Mortis Causa
75
When does Re Rose apply?
· Re Rose applies if (1) the correct method of transfer is used (2) the transferor has done everything in their power to effect the transfer and (3) the documentation ends up in the hands of the person/organisation capable of effecting the transfer.
76
How does Mascall v Mascall extend Re Rose
Mascall v Mascallextends the_Re Rose_ principle to registered land and says that the second limb of Re Rose is not necessary if the transferor has ‘put the matter beyond their control’ as this make would make a transfer irrevocable.
· If Re Rose or Mascall v Mascallapply the donor will hold the property on a constructive trust for the intended donee.
77
What is fortuitous vesting?
*Fortuitous vesting is also known as the rule in Strong v Bird and it operates where a gift is made to a donee who subsequently obtains legal title to it by becoming the donor’s personal representative.
78
When does fortuitous vesting operate?
*In order for the rule in Strong v Bird to operate there must be a continuing intention to make an immediate gift to the intended donee who becomes the executor/one of the executors under the donor’s will.
if the conditions in Strong v Bird (1874) LR 18
Eq 315 are satisfied:
(a) the settlor intended to create an immediate trust with a third party acting as trustee;
(b) that trust was not immediately created due to a failure to comply with a relevant
transfer rule;
(c) the settlor’s intention continued up to their death; and
(d) the intended trustee acquired legal title to the trust property by becoming the settlor’s
executor or administrator.
79
The unconscionable principle?
*Pennington v Waine appears to create an exception permitting perfection in cases where it would be ‘unconscionable’ to resile from the transfer.
80
Donationes mortis causa?
Donationes mortis causa are recognised in exceptional circumstances where a donor anticipates dying and wants to make a gift but does not have time to make a valid will.
81
When is a valid donatio mortis causa recognised?
A valid donatio mortis causa will be recognised where the donor is contemplating their imminent death, expresses the intention that the gift is conditional on their death and parts with dominion of the property.
82
A man tells his wife that he will transfer shares to her. He completes a stock transfer form and sends it with the share certificate to the company’s registrar. The man dies and the shares are still registered in his name.
Can the wife claim beneficial ownership of the shares?
No. Although she may have had a beneficial interest in the shares under Re Rose whilst the man is alive, this will not survive his death.
Yes. Pennington v Waine will apply in this situation. The man has promised his wife that he will transfer the shares and so it would be unconscionable to go back on this.
Yes. Milroy v Lord provides that equity will always treat a failed gift as a self-declaration of trust.
No. Legal title passes on registration of the shares into her name. As this has not occurred before the man’s death, equity cannot perfect this imperfect gift.
Yes. Re Rose is likely to perfect the imperfect gift.
Yes. Re Rose is likely to perfect the imperfect gift.
The correct method of transfer is used, the man has done everything in his power to effect the transfer and the documentation has ended up in the hands of the organisation capable of effecting the transfer i.e. the company’s registrar. Under Re Rose the wife will have a beneficial interest in the shares under a constructive trust and can force the transfer of legal title to her.
83
A woman wanted to give her house to her adult son. She completed a transfer deed and gave this to her solicitor who said he would finalise the gift on his return from holiday in two weeks’ time. The woman died the next day and in her validly executed will the house was left to her boyfriend.
Will the son be able to claim a beneficial interest in the house?
Yes. Milroy v Lord provides that equity will always treat a failed gift as a self-declaration of trust. The woman is treated as holding the house on trust for her boyfriend as soon as she expresses the intention to make a gift.
No, because the woman has used the wrong method of transfer.
No, the house will pass to her boyfriend. The Re Rose exception to Milroy v Lord will not apply because the woman has not put the matter beyond her own control.
Yes. The Re Rose exception to Milroy v Lord will apply because the woman has put the matter beyond her control.
Yes. The Re Rose exception to Milroy v Lord will apply because the woman completed the correct m
No, the house will pass to her boyfriend. The Re Rose exception to Milroy v Lord will not apply because the woman has not put the matter beyond her own control.
Re Rose will not apply because, whilst she used the correct method of transfer (a deed under s52(1) LPA 1925) this has not yet been sent to the land registry and so has not ended up in the hands of the person capable of effecting the transfer. Instead, the transfer documentation is with her own agent (her solicitor); an extension of herself. Therefore, she has not done all within her power to effect the transfer under Re Rose. Nor has she put the matter beyond her control as in Mascall v Mascall.
84
True or false: The rule in Re Rose can be used to perfect imperfect gifts but not to perfect imperfect trusts.
False
85
True or false: If a person dies after expressing an intention to make a gift but before delivering the asset to the donee, equity will perfect the imperfect gift as long as the donor did not change their mind before they died.
False
It is not sufficient that the donor’s intention remained unchanged before their death. The gift must either be conditional upon death and satisfy the requirements of a donatio mortis causa, or it must be intended to be immediate and satisfy the requirements of Strong v Bird.
86
A man wishes to give a five-acre paddock to his adult granddaughter to open a riding stable. The man’s solicitor completes the transfer documentation, but the man then dies unexpectedly before the granddaughter is registered as the owner. In the man’s validly executed will, his grandson is due to inherit the land. The granddaughter and her sister are appointed executors.
Can the granddaughter claim beneficial ownership of the land?
No. The rule in Strong v Bird will not apply because she is not the only executor.
Yes but she can only claim a beneficial share in half the land because there is another executor.
Yes, because her grandfather made the gift shortly before his death, meaning that it was a donatio mortis causa.
Yes, under the rule in Strong v Bird.
No, because she was not registered as the legal owner before the grandfather’s death.
Yes, under the rule in Strong v Bird.
The requirements for Strong v Bird are satisfied. There is a continuing intention to make an immediate gift and the intended donee is one of the executors of the donor’s will (Re Stewart).
87
A professional musician decided to give her prized cello to her niece on her retirement. She took her niece out to lunch to announce the news, promising that she would arrange delivery as she played her last concert later that month. The woman died in an accident later that day. Her validly executed will, in which her niece was named executor, left all her instruments to a youth orchestra.
Who owns the cello?
The cello will go to the youth orchestra under the cellist’s will. Strong v Bird will not apply as the cellist does not intend to make an immediate gift.
The cello will go to the youth orchestra because the cellist did not contemplate her immediate death when attempting to make the gift and so the rule in Strong v Bird will not apply.
The cello will go to the niece who will be able to claim it under the rule in Strong v Bird because the cellist’s intention remained unchanged at her death.
The cello will go to the niece who will be able to claim it under the rule in Strong v Bird because the cellist had a continuing and immediate intention to make a gift.
The cello will go to the youth orchestra under the cellist’s will. The rule in Strong v Bird will not app
The cello will go to the youth orchestra under the cellist’s will. Strong v Bird will not apply as the cellist does not intend to make an immediate gift.
Although there is continuing intention to make a gift (see Re Gonin) and the intended donee is the executor of the donor’s estate (Re Stewart), the cellist does not intend to make an immediate gift. The facts are analogous with Re Freeland. The cellist intends to give the cello in the future. As such, there is no intention to make an immediate gift of the cello and so this would prevent the operation of fortuitous vesting.
88
How to transfer legal title to third party trustee over land?
If land is part of the trust fund, in order to transfer legal title to a third party trustee, the
settlor must:
(a) execute a deed (LPA 1925, s 52). A deed is a document that satisfies s 1 of the Law of
Property (Miscellaneous Provisions) Act 1989, ie:
(i) the document is stated to be a deed or is stated to be signed as a deed; and
(ii) the person making the deed signs the document in the presence of a witness who
also signs it.
Where the land is registered (which most land now is), Form TR1 is used – this satisfies
the above definition; and
(b) give the executed deed either to the trustee (who will then pass it on to Land Registry) or
send it to Land Registry direct.
Land Registry will then register the trustee as the new legal owner.
Legal title is not transferred until all steps have been completed and the trustee is the new
registered proprietor of the land.
89
How can legal title for shares be transferred?
Legal title in company shares can be transferred either:
(a) within the CREST system – this only applies to certain shares in public quoted companies; or
(b) outside the CREST system – this applies to all other shares, especially shares in private
companies.
90
How to transfer shares outside of crest system?
Transferring shares outside the CREST system
For all other shares (especially in private companies – those companies whose names end
in ‘Ltd’ or ‘Limited’), paperwork is required. The owner of such shares will have a share
certificate as evidence of their ownership, and that ownership is confirmed by the name of the
owner being entered in the company’s register of members.
If private company shares are to be part of the trust fund, in order to transfer legal title to a
third party trustee, the settlor must:
(a) execute a stock transfer form – usually the settlor will execute the stock transfer form set
out in Sch 1 of the Stock Transfer Act 1963; and
(b) give the executed stock transfer form and relevant share certificate either to the trustee
(who will then pass it on to the relevant company) or send it to the company direct.
The company’s secretary will then register the trustee as the new shareholder (and therefore
the new legal owner) in the register of members.
Legal title is not transferred until all steps have been completed and the trustee is the new
registered shareholder.
91
How is transfer of legal title for money and chattels done?
Through delivery
92
The ‘every effort’ test?
Where the settlor did everything they could to transfer legal title, the transfer may be
regarded as complete in equity even though the transfer of legal title has not yet been
completed. In order to take the benefit of this exception it is often said that the settlor must
have passed the point of no return or put the property being transferred ‘beyond recall’. The
settlor must have completed all the steps they were required to take, ie the settlor took steps
to properly execute and send out all documents relating to the transfer of the property. All that
remains for the transfer to be completed is the act of a third party.
93
What is the beneficiary principle
a trust must have a beneficiary
94
Beneficiaries in a fixed trust?
The trustees of a fixed trust have no distributive discretion. Beneficial entitlement is determined by the settlor.
95
Successive interest trusts?
Successive interest trusts involve a series of interests in the same trust property. A common example is a life interest trust. The lifetime beneficiary (or “life tenant”) is entitled to the income during their lifetime, after which the remainder beneficiary (or “remainderman”) is entitled to the capital.
96
Trustees of a discretionary trust?
The trustees of a discretionary trust must exercise the power but have a distributive discretion. The objects are determined by the settlor but the trustees have the discretion to determine how to distribute amongst that class of objects.
97
Power of appointment?
The donee of a power of appointment has no obligation to exercise it (although if it is a fiduciary power they must periodically consider it). The objects are determined by the donor and the donee has the power to determine whether and how to distribute.
98
True or false: The trustees of a fixed trust have a distributive discretion.
False
99
True or false: The objects of a discretionary trust have proprietary rights in the trust property.
FALSE
The objects of a discretionary trust are only potential beneficiaries. They have no equitable interest in the trust property until the discretion is exercised in their favour
100
What is a vested interest?
A vested interest is a current right to property. Nothing more needs to happen for the beneficiary to become entitled to the property.
101
What is a contingent interest?
A contingent interest is conditional upon the occurrence of an uncertain future event. Contingent interests become vested if the condition is satisfied. The beneficiary has no entitlement unless and until the condition is satisfied.
102
What does vested in possession mean?
A beneficiary whose interest is ‘vested in possession’ has a current right to current enjoyment of the property.
103
What does vested in interest mean?
A beneficiary whose interest is ‘vested in interest’ has a current right to future enjoyment of the property.
104
What is the rule in Saunders v Vautier?
The basic principle in Saunders v Vautier is that a sole adult beneficiary of sound mind, with a vested interest in the trust property, is entitled to direct the trustee to transfer legal title to them, thereby bringing the trust to an end early.
· They could alternatively direct the trustees to transfer legal title to a third party.
105
Can the rule in Saunders v Vautier be exercised by trusts with multiple beneficiaries?
The rule in Saunders v Vautier can be exercised by trusts with multiple beneficiaries.
In a simple fixed trust, without successive interests, each beneficiary can sever their share of the capital without affecting the interests of others.
In the case of more complex trusts, where shares cannot be severed, Saunders v Vautier can only be exercised if all the beneficiaries are adults of sound mind who agree to collapse the trust. This includes beneficiaries with contingent interests and the objects of discretionary trusts.
106
Can Saunders v Vautier rights be exercised to interfere with the administration of the trust?
The beneficiaries cannot use Saunders v Vautier to interfere in the administration of the trust. They can either collapse the trust (and settle the property on a new trust if they choose to) or leave the trustees to carry out their obligations.
107
True or false: Only beneficiaries with vested interests in the trust property have Saunders v Vautier rights.
False
Although only beneficiaries with vested interests can exercise Saunders v Vautier alone, the rule can be exercised together by adult beneficiaries providing they all agree.
108
A trustee holds property on trust for A for life, remainder to B (age 18) and C (age 16). A, B and C (all of whom are of sound mind) wish to use the rule in Saunders v Vautier to collapse the trust and divide the property equally between them.
Which one of the following is correct:
A can exercise Saunders v Vautier immediately because their interest is vested in possession. B and C cannot exercise Saunders v Vautier until their interests vest in possession.
A cannot exercise Saunders v Vautier because they do not have a right to the capital. B and C must wait until A dies before they can collapse the trust.
A, B and C can collapse the trust and share the property equally now.
A and B can take their shares of the trust property now. C must wait until they reach the age of 18.
A, B and C cannot collapse the trust until C reaches the age of 18.
A, B and C cannot collapse the trust until C reaches the age of 18.
C is not yet an adult so cannot exercise Saunders v Vautier rights. Due to the nature of the trust, it is not possible to sever A and B’s shares.
109
Bare trust?
A trust for a sole, adult, mentally capable beneficiary that gives the beneficiary a vested
interest is called a ‘bare trust’. The beneficiary of a bare trust is often said to be ‘absolutely
entitled’.
110
The extended rule of Saunders v Vautier?
The beneficiaries can end the trust by calling for a transfer of trust property to themselves
or other trustees, so long as all the beneficiaries under the trust who could possibly become
entitled:
(a) are in existence and ascertained;
(b) are aged 18 years or over and have mental capacity; and
(c) agree to what is being proposed.
111
What are the exceptions to the beneficiary principle?
Charitable purpose trusts are recognised despite the absence of ascertainable beneficiaries because they are for the public benefit.
Non-charitable purpose trusts have been recognised as valid in specific, exceptional cases. These are known as the ‘Endacott’ exceptions.
112
What are the benefits of charitable status?
· No requirement to comply with the beneficiary principle
· More flexible rules on certainty of objects (i.e. certainty of purpose)
· No limit on their duration (i.e. they can exist in perpetuity)
· A rule known as the cy-près doctrine which allows the trust property to be applied for other charitable purposes even if the specific trust fails
· Tax benefits: These are outside the scope of the module but are a major practical advantage to having charitable status.
113
What are the requirements for a charitable trust?
To have charitable status a trust must:
Be for a charitable purpose
Satisfy a public benefit test
Be wholly and exclusively charitable
114
What are the rules on certainty of purpose for charitable trusts?
· It is sufficient that there is an intention to apply property for a charitable purpose.
· If there is uncertainty as to how this intention is to be carried out the trustees can direct that the property be applied for such charitable purposes as they select.
· For charitable purpose trusts the court will strive to resolve any uncertainty and hold the trust valid once it has established charitable intent.
· The Charity Commission or the court can provide a “scheme” to specify the charitable purposes the property should be applied to.
115
Which statement best describes the effect of a non-charitable purpose trust having an uncertain purpose?
The trustees can make an application to court for scheme of administration setting out how to administer the trust.
The trust is likely to be void.
The trustees can use their discretion to interpret the purpose as they see fit.
The court will strive to interpret the purpose as being sufficiently certain if it is possible to do so.
The trustees should carry out the elements of the purpose which are certain and disregard elements of the purpose which are uncertain
The trust is likely to be void.
116
Which statement is correct in relation to the perpetuity requirements applying to non-charitable purpose trusts?
Non-charitable purpose trusts are not subject to perpetuity restrictions provided the purpose falls within a recognised exception to the beneficiary principle.
Non-charitable purpose trusts are subject to the 21-year common law perpetuity period.
Non-charitable purpose trusts are subject to the 125-year common law perpetuity period.
Non-charitable purpose trusts are subject to the 25-year common law perpetuity period.
Non-charitable purpose trusts are subject to the 125-year perpetuity period under the Perpetuities and Accumulations Act 2009.
Non-charitable purpose trusts are subject to the 21-year common law perpetuity period.
117
Which of the following statements best describes the fundamental importance of the requirement for certainty in a non-charitable purpose trust?
The purpose must be so clearly defined that if the trustees surrendered their discretion the court could carry out the purpose.
The purpose must be so clearly defined that the beneficiaries can enforce the trust.
The purpose must be so clearly defined that the beneficiaries can understand the nature of their rights under the trust.
The purpose must be so clearly defined that the trustees can interpret the purpose in a reasonable way.
The purpose must be so clearly defined that the trust can be administered in accordance with the wishes of the testator.
The purpose must be so clearly defined that if the trustees surrendered their discretion the court could carry out the purpose.
118
What is required for a charitable purpose?
· falls within section 3(1); and
· is for the public benefit.
119
What is is s 3(1) for charitable purpose?
The prevention or relief of poverty
The advancement of education
The advancement of religion
The advancement of health or the saving of lives
The advancement of citizenship or community development
The advancement of the arts, culture, heritage or science
The advancement of amateur sport
The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
The advancement of environmental protection or improvement
The relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage
The advancement of animal welfare
The promotion of the efficiency of the armed forces of the Crown or of the efficiency of the police, fire and rescue services or ambulance services
120
What does poverty mean for The prevention or relief of poverty?
Poverty means “going short”
The purpose must not benefit the rich: Otherwise it will not be “wholly and exclusively charitable” - see Re Gwyon in which a trust for the provision of clothing to boys was void on the basis that it did not require the boys to be poor and so would benefit rich boys too.
Poverty can be inferred: For example, the provision of a soup kitchen was implicitly for the alleviation of poverty (Biscoe v Jackson). In contrast,, a trust to provides dwellings for the “working classes” was not charitable as “working class” did not indicate poor persons (Re Sanders’ WT).
Poverty can be temporary: The Charity Commission’s decision to grant charitable status to the AITC Foundation which provided relief for those who suffered as a result of the collapse of investment companies noted that “someone suffering a temporary period of financial__hardship due to a sudden change in circumstances might also__be eligible for assistance”.
121
The advancement of education?
The Charity Commission guidance also recognises that a wide range of organisations class as charitable under this heading, including:
* museums, galleries, libraries, scientific institutes
* pre-schools, playgroups, summer schools and homework clubs
* organisations supporting the work of educational establishments such as parent-teacher associations, teacher training organisations or exam boards
* organisations providing life skills training such as the Duke of Edinburgh award schemes, Scouts and Guides
122
The advancement of religion?
“religion” includes:
· a religion which involves belief in more than one god, and
· a religion which does not involve a belief in a god.
Charity Commission guidance consolidates further case law requirements describing a religious belief as follows:
· belief in a god (or gods) or goddess (or goddesses), or supreme being, or divine or transcendental being or entity or spiritual principle (“supreme being or entity”) which is the object or focus of the religion
· a relationship between the believer and the supreme being or entity by showing worship of, reverence for or veneration of the supreme being or entity
· a degree of cogency, cohesion, seriousness and importance
· an identifiable positive, beneficial, moral or ethical framework.
Trusts for the following purposes have also been found to fall within this head:
· Support of a religious order such as a monastery or convent (Re Banfield)
· Public masses celebrating the dead (Re Hetherington)
· The repair of churchyards or burial grounds (Re Douglas)
123
The advancement of health / saving of lives?
The Charity Commission takes a broad view of advancing health including complementary, alternative or holistic methods as well as conventional methods, though to be charitable there must be sufficient evidence for the claimed benefits of the method used (see Charity Commission Operational Guidance (OG) 304).
The relief of the sick has long been considered charitable. It can include, for example, the provision of hospitals (Re Resch’s Will Trust) or healthcare advice (British Pregnancy Advisory Service).
The saving of lives includes rescue services such as lifeboat associations, mountain rescue and cave rescue.
124
Citizenship / Community development?
Section 3(2)(c) provides that this head includes:
· rural and urban regeneration
· the promotion of civic responsibility, volunteering, the voluntary sector or the effectiveness or efficiency of charities.
As always, the purpose must be wholly and exclusively charitable. This was demonstrated in _IRC v Oldham Training and Enterprise Council_where an organisation was held not to be a charity because, in addition to providing vocational training for the unemployed, it also promoted trade, commerce and enterprise and provided advice to new businesses
125
Arts, culture, heritage or science?
Charity Commission guidance provides that to be charitable the art needs to be of “merit”, the assessment of which may require expert evidence.
Monuments can be charitable under this head if they are of cultural or historical importance. Monuments to private individuals are therefore unlikely to be charitable (but may be recognised as a non-charitable purpose trust).
Charity Commission guidance provides that “heritage” might be regarded as part of a country’s local or national history and traditions which are passed down through successive generations. It includes charities for the preservation of historic land and buildings and might also include activities concerned with preserving or maintaining a tradition (where the benefit to the public in preserving it can be shown).
126
The advancement of amateur sport?
Section 3(2)(d) of the Charities Act 2011 defines “sport” as sports or games which promote health by involving physical or mental skill or exertion.
127
The advancement of human rights?
Charity Commission guidance includes in its examples of the sorts of purposes falling within this head:
· raising awareness of human rights issues, relieving the victims and securing the enforcement of human rights laws; and
· the promotion of restorative justice and other forms of conflict resolution or reconciliation.
128
Environmental protection?
Section 3(1)(i) provides that this head includes both the protection and improvement of the environment.
Charities may need to produce independent expert evidence to show that the particular species, land or habitat to be conserved is worthy of conservation.
129
The relief of those in need?
This charitable purpose is for the relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage. Section 3(2) (e) provides that this includes relief given by the provision of accommodation or care.
The relief of those in need is a separate head of charity from the relief of poverty. It is therefore clear that a person does not need to be poor to be in need.
130
The advancement of animal welfare?
The purpose of the advancement of animal welfare includes providing for the welfare of particular types of animal (e.g. cats and kittens in Re Moss) as well as animals generally. It has also included improving methods for slaughtering animals (Re Wedgewood)
Trusts for the care of particular animals (e.g. the testator’s pet dog) are not included, although such trusts might exceptionally be upheld as non-charitable purpose trusts.
131
The efficiency of public services?
Section 3(1)(l) provides that this purpose relates to the efficiency of the armed forces, the police, fire and rescue services or ambulance services.
Case law has upheld a fund for the promotion of physical fitness (Re Gray) and for the provision of a library (Re Good) in respect of an army regiment as charitable.
In addition to the existing case law Charity Commission guidance suggests a series of examples of purposes which would be considered charitable under this head including:
· increasing technical knowledge of members of the services through the provision of educational resources, competitions and prizes;
· providing opportunities for services personnel to gain additional experience relevant to their jobs.
132
Wholly and exclusively charitable?
For a trust to have charitable status, its purposes must be wholly and exclusively charitable. In other words, all its purposes must be charitable.
133
What happens if a trust has a mix of charitable and non-charitable purposes?
· As a basic rule, the trust will be void unless the non-charitable purpose falls within a recognised category of non-charitable purpose trusts. If the trust fails, the property will return to the settlor on a resulting trust.
· If the non-charitable purpose can be construed as ‘incidental or subsidiary’ to the main, charitable purpose, the trust will remain effective (Latimer v IRC).
· If the charitable and non-charitable purposes can be separated, and a portion of the fund allocated to each, the court will ‘sever’ the trust and recognise the charitable part. This will only be possible if the trust language contemplates severance of the fund (Salusbury v Denton). This requires the amount allocated to each purpose to be quantifiable (Re Coxen).
134
True or false: A trust will only be charitable if the purpose of the trust falls strictly within a recognised charitable purpose.
False
There is provision for purposes which are analogous to or within the spirit of the statutory purposes to be charitable.
135
Which of the following would NOT be a charitable purpose?
The care of family pets.
The funding of a mountain rescue service.
The repair and maintenance of a churchyard
The provision of a homework club.
The preservation of an area of outstanding natural beauty.
The care of family pets.
The care of specific animals is not charitable, although the welfare of animals generally is a charitable purpose.
136
A testator intends to create a charitable trust to promote the work of an amateur artist who specialises in minimalistic modern art. Which of the following statements is correct?
The purpose may be charitable if the artist believes it is of artistic merit.
The purpose is charitable.
The purpose is not charitable.
The purpose may be charitable but expert evidence of artistic merit may be required.
The purpose will only be charitable if it can be shown that the art is of educational value.
The purpose may be charitable but expert evidence of artistic merit may be required.
The purpose may fall under the charitable purpose of the advancement of the arts. Charity Commission guidance provides that to be charitable the art needs to be of merit, and the assessment of this may require expert evidence.
137
Is there a presumption of public benefit for charitable trusts?
No
138
What are the requirements for the charitable purpose requirement for charitable trusts?
There are two elements to the public benefit requirement:
* whether there is an identifiable benefit; and
* what constitutes the public, or a section of the public.
139
How is identifiable benefit found?
Benefit is balanced against any detriment or harm arising from the purpose. The benefit must be capable of being identified and described even if it cannot be quantified or measured. If it is not obvious that the purpose is beneficial, the Charity Commission may require evidence.
140
How to satisfy the Public or section of the public test?
To satisfy the test:
* the possible beneficiaries must not be negligible in number; and
* the quality which distinguishes them from other members of the community must be a quality which does not depend on their relationship to a particular individual (Oppenheim v Tobacco Securities Trust Co Ltd).
141
Can charitable trusts focus on certain beneficiaries?
Charity Commission guidance provides that charities can choose to focus on certain beneficiaries provided that:
* they have proper reasons for doing so
* the poor are not excluded from benefit
* the people focused on are a sufficient section of the public for the charity’s purpose. What constitutes a section of the public is therefore related to the purpose of the charity.
142
What happens if a charitable trust fails?
Charitable trusts are therefore subject to the cy-près doctrine.
This provides that where a charitable purpose trust fails any surplus funds will be applied to another charitable purpose by way of a scheme established by the Charity Commission or court.
143
What are the grounds for which the original purpose of a charitable trust can be altered?
The original purpose has been fulfilled or cannot be carried out.
The original purpose may still be workable but does not provide a use for all the property available to the trust i.e. there are surplus funds.
The property from similar trusts is combined so as to be used more effectively.
The original purpose referred to an area or class of persons which is no longer relevant or suitable.
The purpose has:
· been adequately provided for by other means;
· ceased to be charitable in law; or
· ceased to provide a suitable and effective method of using the property.
144
An employer wishes to establish a sports club for its employees.
Is it possible to create a charitable trust for this purpose?
Yes. The advancement of amateur sport is a charitable purpose.
Yes, but only if there are no fees payable by the employees, to ensure that nobody is excluded due to inability to pay.
No. The employees of the company are a private class of individuals meaning the public benefit test would not be satisfied.
No. This is not a charitable purpose.
Yes, but only if the company has a large number of employees meaning that they are treated as a ‘section of the public
No. The employees of the company are a private class of individuals meaning the public benefit test would not be satisfied.
Correct. Although the advancement of amateur sport is a charitable purpose, the public benefit test would not be satisfied here because the class of individuals who can benefit has been limited by reference to a specific person i.e. the employer.
145
A testator has left £10,000 in their will for “the purpose of educating the poor”.
What is the effect of this provision?
The £10,000 is not held on a charitable trust because the purpose is uncertain.
The £10,000 is not held on a charitable trust because the class of potential objects is too wide.
The £10,000 will be held on a charitable trust. The trustees will have discretion as to how to achieve the testator’s intention.
The £10,000 is not held on a charitable trust because the purpose is not charitable.
The £10,000 will be applied cy-pres because the specific purpose is unclear but the testator has shown a general charitable intent
The £10,000 will be applied cy-pres because the specific purpose is unclear but the testator has shown a general charitable intent
The testator has shown a general charitable intent (as both the advancement of education and the relief of poverty are charitable purposes) but as they have failed to specify the method by which this purpose should be achieved, the cy-pres doctrine will apply.
146
What are the e Endacott [1960] Ch 232 exceptions?
These exceptions apply only when a trust is created in a will and were classified in the case of Re Endacott [1960] Ch 232. They are:
* Trusts for the maintenance of particular animals
* Trusts for the erection and maintenance of monuments and graves
* Trusts for the saying of private masses
147
Monuments and graves?
· A trust for the purpose of constructing or maintaining a monument could be charitable if it is of cultural or historical importance.
· However, monuments and graves in respect of private individuals will not be charitable.
· Nonetheless, trusts for the erection and maintenance of monuments and graves have been upheld as valid (provided they comply with certainty and perpetuity requirements).
148
Private masses?
· A trust for the purpose of conducting religious ceremonies may be charitable if it passes the public benefit test.
· However, a ceremony that takes place in private will not pass the public benefit test and will therefore not be charitable.
· Nonetheless, trusts for the saying of private masses have been upheld as valid (provided they comply with certainty and perpetuity requirements).
149
To be valid a non-charitable purpose trust must fall within a recognised exception to the beneficiary principle. What other two requirements must a testator check are satisfied?
That the purpose is sufficiently certain and the trust complies with perpetuity rules.
150
Which of the following is capable of being a valid purpose in relation to a non-charitable testamentary trust?
To maintain the lawn and gardens of my family home.
To look after my pet cat after my death.
To promote the objectives of my local neighbourhood sustainability project.
To fund an annual memorial lecture in my name.
To look after my pet cat after my death.
Looking after animals generally may be a charitable purpose. However, looking after specific animals falls within a recognised Endacott exception to the beneficiary principle such that it is capable of being a valid non-charitable purpose.
151
When do resulting trusts arise?
hey arise in three situations:
· Where a transfer on trust wholly or partially fails but the property has been transferred to the trustee
· Where a person gratuitously transfers property to another person
· Where a person pays all or part of the purchase price for an asset
152
What are automatic resulting trusts?
Automatic resulting trusts arise where there has been some sort of failure in the creation of a transfer on trust. They are effectively a default position which returns the beneficial interest to the settlor, giving them Saunders v Vautier rights and thus the ability to collapse the trust and either retain the property or re-attempt the intended express trust.
153
What are presumed resulting trusts?
Presumed resulting trusts arise in situations where a transfer is gratuitous and there is no evidence that the transferor intended the recipient to receive the property as a gift. They arise by way of a presumption that the transferor or contributor intended to create a trust. The presumption can be rebutted by evidence that the transferor or contributor’s actual intention is inconsistent with the creation of a trust.
154
True or false: The presumption of resulting trust can be rebutted
True
The presumption is rebutted by evidence that the transferor did not intend the recipient to hold the property on trust for them.
155
Which of the following will give rise to an automatic resulting trust?
An intended transfer on trust fails due to lack of constitution
An intended self-declaration of trust fails due to uncertainty of objects
An intended transfer on trust fails due to uncertainty of objects
An intended gift fails due to lack of constitution
An intended self-declaration of trust fails due to uncertainty of subject matter
An intended transfer on trust fails due to uncertainty of objects
156
A man purchases a piece of land which he intends to use for a new business venture. His boyfriend contributes 50% of the purchase price for the land but the man is registered as the sole legal owner of the land. The couple break up and the boyfriend claims that he is entitled to a share of the land. There is no express trust declared over the property and no evidence that the boyfriend intended a gift or a loan when contributing towards the land.
What is the most likely conclusion that a court will reach as to the legal and equitable ownership of the land?
The man holds the land for himself and his boyfriend as equitable tenants in common in equal shares.
The man is the sole legal and beneficial owner of the land.
The man holds the land for himself and his boyfriend as equitable joint tenants.
The man and his boyfriend are legal joint tenants and hold the land on trust for themselves as equitable tenants in common in equal shares.
The man and his boyfriend are legal joint tenants and hold the land on trust for themselves as equitable joint tenants.
The man holds the land for himself and his boyfriend as equitable tenants in common in equal shares.
This is the most likely conclusion. As there is no evidence to rebut the presumption of resulting trust, the man will hold the land on trust for himself and his boyfriend, with their shares reflecting their respective contributions to the land. They will therefore be equitable tenants in common and will each have a 50% share. This is different to joint tenancy, where they would both own 100% of the land.
157
Presumption of advancement?
In some voluntary transfer and purchase money cases, a different presumption applies. This is
known as the presumption of advancement (or presumption of gift). When the presumption of
advancement applies, there is no resulting trust and the transferor is presumed to be gifting
property to the transferee.
The presumption of advancement applies when equity regards the transferor as being under
a moral obligation to provide for the transferee (or, rather, regarded the transferor as being
under such an obligation back in the 19th century). It applies in cases of voluntary transfers
and provision of purchase money:
(a) from father to child (the child here can be either a minor or an adult);
(b) from person in loco parentis to child. A person in loco parentis is effectively a guardian
who has taken on the responsibility to provide financially for a child. This responsibility
generally finishes when the child reaches the age of 18 years;
(c) by husband to wife; and
(d) by fiancé (male) to fiancée (female), so long as the couple subsequently marry.
Note that the presumption of advancement does not apply if the roles are reversed. The
presumption of advancement does not apply if a wife voluntarily transfers property to
her husband or adult children voluntarily transfer property to their father. In both of these
situations, the presumption of resulting trust will apply, unless rebutted by contrary evidence.
158
Are formalities needed for resulting trusts?
Whilst you need written evidence of an express trust over land in order to comply with s 53(1)
(b) of the LPA 1925, the same is not true of an implied trust (such as a resulting trust). Section
53(2) of the LPA 1925 makes it clear that an implied trust can be created without any formality.
159
What trusts can be implied on marital homes?
· If there is no enforceable express trust, it is necessary to consider the law on common intention constructive trusts.
· Cases may involve sole legal ownership (in which the claimant seeks to establish an interest under a trust) or joint legal ownership (in which there is a dispute as to whether the parties are equitable joint tenants or have separate, distinct shares).
160
How are implied trusts on marital homes assessed?
the holistic approach in Stack v Dowden applies to determine whether (i) the equitable interest is different to the legal interest and, if so, (ii) how the parties’ respective interests should be quantified.
161
True or false: If legal title to a family home is held by cohabitees as joint tenants, it is presumed that they have 50/50 shares in equity.
False
The presumption is one of joint tenancy. Joint tenancy does not involve distinct shares. 50/50 would be a tenancy in common.
162
A couple are civil partners and have lived together for 10 years. They decide to dissolve their partnership and sell their family home which they own as legal joint tenants. There is no express trust over the home. They disagree over how the proceeds of sale should be divided between them and they take the case to court.
How will the court determine beneficial ownership of the family home?
The court has no discretion. They couple are legal joint tenants so they are presumed to be joint tenants in equity too. The court will sever the joint tenancy and award half shares.
They are presumed to be equitable joint tenants but this presumption may be rebutted by evidence of an alternative common intention. The court will determine their beneficial interests based on the whole course of conduct.
The court has a statutory discretion to determine their respective beneficial interests because they are civil partners.
The court will determine beneficial ownership based on the contributions each of them made to the acquisition of the home.
This is a common law marriage because of the length of the relationship. This gives the court discretion to determine their respective beneficial interests.
The court has a statutory discretion to determine their respective beneficial interests because they are civil partners.
On the dissolution of a civil partnership the court can exercise its’ discretion under the Civil Partnership Act 2004 to divide ownership of the property between the parties.
163
A married man purchases a flat to live in with his girlfriend. The man pays the deposit and purchases the flat in his sole name. The man is solely liable for the mortgage. He tells his girlfriend that he can’t put the flat in her name until he tells his wife about their affair, but he assures her that he is holding it on trust for them both and that she has a 50% share. In reliance on these statements, the woman pays all household expenses and contributes equally towards the mortgage repayments.
What claim would you advise the woman to make?
The woman should seek to establish an interest under an express trust.
The woman cannot make any claims because the man is married so the flat will be matrimonial property belonging to the man and his wife.
The woman should seek to establish an interest under a purchase money resulting trust.
The woman cannot make any claims because she did not contribute directly towards the acquisition of the flat.
The woman should seek to establish an interest under a common intention constructive trust.
The woman should seek to establish an interest under a common intention constructive trust.
This would be the best claim to make, based on the assurances made and the woman’s reliance on those assurance
164
What is the two step approach in joint legal ownership cases?
Two step process
Following on from Stack v Dowden, in Jones v Kernott [2011] UKSC 53 the Supreme Court confirmed the two step approach in joint legal ownership cases:
Step 1: Rebutting the presumption
Did the parties have a common intention to hold the property other than as joint tenants? And did the claimant act to their detriment in reliance on that common intention?
Step 2: Quantification
If the parties are not joint tenants, they must be tenants in common. But in what proportions?
165
What is required for sole legal ownership cases to establish beneficial interest?
*In sole legal ownership cases, an individual seeking to establish a beneficial interest will need to establish that they have acquired an interest under a common intention constructive trust. This requires proof of:
i. a common intention that they should have a beneficial interest and
ii. detrimental reliance upon that intention
166
What s being assessed to establish they are not beneficial joint tenants in joint legal ownership cases?
*In joint legal ownership cases, an individual seeking to establish that they are not beneficial joint tenants will need to rebut the presumption by establishing a common intention to that effect, coupled with qualifying detrimental reliance.
167
What factors are looked act when assessing “whole course of conduct”?
Lady Hale produced a non-exhaustive list of factors that may be taken into account when carrying out this exercise:
* Advice or discussions the parties had which may indicate their intention
* The reason legal title was registered in particular names
* The purpose for which the parties acquired the house
* The nature of the relationship
* Whether the parties have children
* How the house was financed
* How the parties arranged other finances and divided responsibility for household expenses
168
When is the whole;e course of conduct looked at?
In sole owner and joint legal title cases
169
What do the courts look at when assessing quantification?
*If an express intention as to quantification can be established, the court will give effect to that intention.
*If an express intention cannot be established, the court will attempt to infer an intention based on the conduct of the parties.
*As a last resort, if it is not possible to ascertain the actual intention of the parties as to quantification of their shares, the court will impute an intention for ‘fair shares’ based on all the ‘whole course of conduct’.
170
True or false: When a couple acquire property as legal joint tenants, it is only possible to rebut the presumption of joint tenancy if it can be proved that they had a different common intention when they purchased the property.
False - Jones v Kernott confirmed that intention could be ambulatory.
171
A cohabiting couple own a house as legal joint tenants. There is no declaration as to beneficial shares in the property. The woman pays the deposit money to purchase the house and a mortgage is taken out in their joint names which the woman pays. The man pays for all other expenses on the property. She wants to leave her partner and she seeks advice as she wants to claim a larger share given her contributions to the deposit and mortgage.
What is the best advice to the woman?
It is presumed that the property is owned as equitable joint tenants. The burden is on the woman to rebut this. It is a heavy burden and it is unlikely that unequal contributions will be enough to rebut the presumption.
It is presumed that the property is owned as equitable tenants in common in equal shares. The burden is on the woman to rebut this. It should be possible to rebut the presumption as it is clear from their conduct that the woman was intended to have a greater share in the property. Their interests will be quantified based on their respective contributions to the deposit and mortgage.
It is presumed that the parties share the beneficial ownership in proportion to their respective contributions. The onus will be on the man to rebut this presumption. It is unlikely that he will be able to do so.
The couple are joint tenants at law and in equity. If they had wanted to own in different shares, they should have declared themselves tenants in common and specified their shares in writing. There is no way to challenge this.
It is presumed that the property is owned as equitable joint tenants. The burden is on the woman to rebut this. It should be possible to rebut the presumption as it is clear from their conduct that the woman was intended to have a greater share in the property. Their interests will be quantified based on their respective contributions to the deposit and mortgage.
It is presumed that the property is owned as equitable joint tenants. The burden is on the woman to rebut this. It is a heavy burden and it is unlikely that unequal contributions will be enough to rebut the presumption.
The burden is on the party seeking to rebut the presumption to adduce evidence and Lady Hale in Stack v Dowden said that this was a “heavy burden” requiring “unusual facts”. Fowler v Barron indicates that unequal contributions alone are not enough to rebut the presumption of joint tenancy.
172
Which of the following provides the best evidence that joint legal owners of a family home do not also intend to be equitable joint tenants?
Only one party takes legal responsibility for the mortgage
Only one party contributes towards household expenditure, including mortgage repayments
One party moving out of the home and ceasing to contribute towards household expenditure
Rigid separation of finances
Express discussions as to beneficial ownership
Express discussions as to beneficial ownership
173
What should be considered when assessing common intention?
· When assessing common intention, statements should be about shared ownership not merely about shared occupation.
· Common intention to share ownership may be evidenced by the legal owner providing an excuse as to why their partner may not be jointly registered as the legal owner.
174
What words can indicate ownership?
Words indicating ownership
* “half yours” Hammond v Mitchell [1991]1 WLR 1127
* 50:50” (Clough v Killey [1996] 72 P&CR D22)
Insufficient for ownership
* “Family home” (Lloyds Bank v Rosset)
* “benefit…both of us” (James v Thomas [2007] EWCA Civ 121)
* “You will be looked after” (Thomson v Humphrey [2009] EWHC 3576 (Ch))
175
How should sole ownership cases be assessed?
· Under Stack v Dowden the starting point in all family homes cases is that equity follows the law.
· A sole legal owner is therefore the sole beneficial owner unless another person is able to establish an interest under a trust. In the absence of an express trust, they will need to demonstrate that a common intention constructive trust has arisen.
· The first step in establishing a common intention constructive trust requires proof of an actual common intention (express or inferred) to share ownership of the property. It is not possible to impute intention at this stage.
· It is also necessary to demonstrate detrimental reliance upon the common intention.
· At the quantification stage the search should still be for the actual intention of the parties but the court may impute an intention for fair shares as a last resort.
· The holistic approach from Stack v Dowden is used both when inferring intention (at the acquisition and quantification stages) and when imputing intention (at the quantification stage only).
176
What are examples of detrimental reliance?
Examples of detrimental reliance
Sufficient
In Eves v Eves (1975) heavy DIY was considered to amount to detrimental reliance.
Similarly in Clough v Killey (1996) renovations to the house counted.
In Grant v Edwards (1986) payment of substantial expenses (including payment of the mortgage) was conduct which the women would not otherwise have embarked upon without an interest in the home.
Not sufficient
In Lloyds Bank v Rosset (1991) decorating did not amount to detrimental reliance.
In Burns v Burns (1983) giving up work and to look after children was not enough.
In Thomson v Humphrey (2009) looking after the family and playing the “traditional wife” was not enough.
177
True or false: In the absence of evidence of an express common intention, it is possible for the court to impute a common intention for a person without a legal interest in the family home to have an equitable interest in that home.
False
Imputation is not permissible at the acquisition stage. It is only possible when quantifying the parties’ interests
178
A woman moved into her girlfriend’s flat, which was registered in the girlfriend’s sole name. The woman repainted the living room and bedroom and bought soft furnishings whilst her girlfriend was on a business trip. When the girlfriend returned home, she asked the woman why she had gone to all this trouble. The woman explained that the flat didn’t feel like “theirs” and her girlfriend reassured her saying “don’t be silly, you know this is your home too”. Two years later, their relationship became strained and her girlfriend asked her to leave the flat. The woman refused saying, “but you said this is my home too”.
Is the woman likely to have a beneficial interest in the flat?
No. The discussions were about ownership of the property but the woman has not detrimentally relied upon them.
Yes. The discussions were about ownership of the property and the woman has detrimentally relied on them by painting the living room and purchasing the soft furnishings.
No. The discussions were not about ownership of the property so even though the woman has detrimentally relied upon them she will not be able to establish a common intention constructive trust.
Yes. Although the discussions were not about ownership, a common intention can be inferred based on the whole course of conduct.
No. The discussions were not about ownership of the property, nor is there any evidence that the woman has detrimentally relied on them.
No. The discussions were not about ownership of the property, nor is there any evidence that the woman has detrimentally relied on them.
In order to establish express common intention the statements must be about shared ownership not merely occupation. Describing the property as the woman’s “home” is unlikely to be enough (see Lloyds Bank v Rosset). Even if it were, this is not followed by detrimental reliance as she has already repainted the rooms in the flat before the statement is made. Further, decoration and purchasing soft furnishings are unlikely to amount to detrimental reliance. It is also unlikely that these actions are enough to infer common intention as they will probably not have added any significant value to the property (see obiter of Lord Walker and Lady Hale in Stack v Dowden and the contrasting cases of James v Thomas and Aspden v Elvy).
179
An unmarried couple buy a weekend retreat in the countryside. The cottage is registered in the woman’s sole name, but the man contributes to the deposit and to the monthly mortgage payments. They split up and the woman changes the locks and says that the man has no rights to the property.
What is the best advice to the man?
The man should claim an interest under an express trust. He has the burden of proof but should be able to establish this based on his financial contributions.
The man should claim an interest under a common intention constructive trust. He has the burden of proof but common intention is likely to be inferred based on his financial contributions.
The man should claim an interest under a common intention constructive trust. There is a presumption of joint beneficial ownership because he has contributed to the deposit and mortgage. The woman has the burden of rebutting this presumption. She is unlikely to be able to do so.
The man should claim an interest under a common intention constructive trust. He has the burden of proof but common intention is likely to be imputed based on his financial contributions.
The man should claim an interest under a purchase money resulting trust because he has contributed to both the deposit and monthly mortgage payments. The woman has the burden of rebutting the presumption of resulting trust. She is unlikely to be able to do so.
The man should claim an interest under a common intention constructive trust. He has the burden of proof but common intention is likely to be inferred based on his financial contributions.
This is the best advice. The man needs to establish that he has acquired an interest but his direct financial contributions to both the deposit and to the monthly mortgage payments should mean that a common intention to share the property can be inferred from conduct.
180
What are the elements of a proprietary estoppel claim?
An assurance made to the claimant.
Reliance by the claimant on the assurance.
Detriment to the claimant in consequence of their reliance.
181
Assurance?
The assurance must be an assurance (a promise) that the claimant has or will acquire a right in property owned by the defendant
182
Reliance?
This means that there must be ‘a sufficient link’ between the defendant’s assurance and the claimant’s detrimental conduct: Wayling v Jones [1995] 2 FLR 1029; Gillett. This is effectively a causation requirement: Campbell v Griffin [2001] EWCA Civ 990. The assurance does not have to be the sole cause of the claimant’s detrimental conduct. It is sufficient if it is a cause of that conduct: Wayling.
183
Detriment?
In Gillett, the Court of Appeal considered this element at length. Robert Walker LJ said that:
· detriment is not a narrow or technical concept
· detriment ‘must be approached as part of a broad inquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances’
· countervailing benefits can be taken into account when assessing whether the claimant’s reliance was detrimental.
184
Remedy for proprietary estoppel?
he range of remedies which have been awarded includes orders directing a defendant to:
- Transfer ownership of property to the claimant;
- Hold property on trust for the claimant;
- Grant the claimant a property right over their property (eg an easement);
- Grant the claimant a personal right over their property (eg a licence);
- Pay a sum of money to the claimant.
185
Difference between joint tenants and tenants in common?
The equitable title may be held by the couple as joint tenants or tenants in common:
(a) Joint tenants are equally entitled to the family home. As a result, when one partner dies,
the other partner becomes entitled to the family home automatically.
(b) Tenants in common have distinct beneficial interests or shares in the family home. The
size of those shares can generally be in whatever proportion the couple wants – equal
or unequal. As tenants in common are not entitled to the entire family home – just their
defined share in the home – they are not entitled to the whole family home on the death
of their partner. Instead, when one partner dies, their beneficial interest in the home
passes under the terms of their will or under intestacy.
186
How are cohabitants treated differently from married couples?
(a) If the couple were married or in a civil partnership and subsequently divorce (or seek to
have a civil partnership dissolved), the family courts are given wide redistributive powers
under the Matrimonial Causes Act (MCA) 1973 to determine who gets what out of the
divorce. These wide powers can be used to quantify the beneficial interests in the family
home and apply whether or not the couple created an express trust over the home when
they purchased it.
(b) If the couple were not married, engaged or in a civil partnership (ie they were
cohabiting), then their affairs are governed by the ordinary principles of trusts law.
A common myth about people who cohabit is that their relationship amounts to ‘common
law marriage’ and that they therefore acquire the same rights as married couples after
a period of cohabitation. This is not the case – there is no statutory regime equivalent to
the MCA 1973 that applies to cohabitees. If they split up and want to sell the family home,
then their beneficial interests in that home (and therefore the amount of money they will
get on its sale) will be quantified using trusts.
187
How are resulting trusts for family homes assessed?
(a) Only contributions towards the purchase price count. The payment of ancillary
items – such as conveyancing fees, stamp duty or other bills – does not give rise to a
resulting trust.
(b) Only contributions made at the time of purchase count. A cash payment towards the
deposit (on exchange of contracts) or the completion price gives rise to a resulting trust.
However, generally speaking, most of the purchase price of a family home is funded by a
mortgage, which is repaid through subsequent monthly instalments. If the mortgage is not
in your name, but you nevertheless pay off that mortgage after the date of purchase, that
will not give rise to a resulting trust.
(c) Most importantly, a resulting trust only recognises monetary contributions. If a couple
agrees to divide their labour, with one partner (A) buying the house and the other partner
(B) looking after the children (for instance), a resulting trust would completely ignore B’s
non- financial contribution to the family.
188
What are the steps taken for houses where one partner is the registered proprietor?
There are two stages that must be followed in cases where the family home is solely owned:
*
Stage 1 – the common intention constructive trust must be established (where the home is
jointly owned, this is presumed); and
*
Stage 2 – the beneficial interests under the trust must be determined or quantified.
189
How is a common intention constructive trust found?
A claiming partner can only obtain an interest in the family home under a common intention
constructive trust if it can be shown that:
(a) there was a common intention between the partners that both were to have an interest;
and that
(b) the claiming partner acted to their detriment in reliance on that common intention.
There are two methods of establishing these elements:
(a) In method 1, the common intention is express + detrimental reliance.
(b) In method 2, the common intention is inferred from conduct + detrimental reliance.
190
What can a common intention constructive trust be inferred from?
(a) a direct contribution to the purchase price; or
(b) a significant contribution to mortgage payments falling due after the purchase.
191
How is proprietary estoppel found?
A
Stage 1: Establishing the equity
There are three key elements to establishing a claim in proprietary estoppel:
(a) Assurance
(b) Detriment
(c) Reliance
Stage 2 – the estoppel must be satisfied (remedies).
192
Assurance for proprietary estoppel?
(a) active – the legal owner tells the claiming party that they have or will have an interest in
land; or
(b) passive – there is conduct on the part of the claiming party that clearly suggests that they
think they have a right to property. The legal owner knows this (or must have known it) but
remains silent and fails to disabuse the claiming party of their belief.
193
How can the equity be satisfied for properietasry estoppel?
The remedies that the court can grant include:
(a) transfer of the legal ownership in land;
(b) grant of a lease;
(c) some right of occupancy (eg the right to live in a house rent- free for life);
(d) financial compensation; or
(e) a beneficial share in the home.
194
Accessory Liability requirements?
In Group Seven Ltd v Nasir [2019] EWCA Civ 614, para 29, the Court of Appeal said that ‘in order to find a person liable for dishonest assistance of a breach of trust, it is necessary to establish that:
(a) there was a trust in existence at the material time;
(b) the trustee committed a breach of that trust;
(c) the defendant assisted the trustee to commit that breach of trust; and
(d) the defendant’s assistance was dishonest.’
195
Can beneficiaries bring a claim against someone who assist the breach of the trust?
The beneficiaries of a trust can bring a personal claim against a person who dishonestly assists the trustee to commit a breach of trust
196
How can someone assist the breach of a trust?
The assistant’s conduct must make the planning, commission or obfuscation of the breach easier for the trustee
197
How dishonesty for accessory liability assessed?
When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. […] When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standard of ordinary decent people.
198
In breach of trust, a trustee misapplies £100,000 of the trust fund. A solicitor dishonestly helps the trustee to misapply the money and move it offshore. Later, an accountant dishonestly helps the trustee to falsify the trust accounts.
Which one of the following statements is correct?
Neither the accountant nor the solicitor is liable as a dishonest assistant.
Both the accountant and the solicitor are liable as dishonest assistants.
The accountant is liable as a dishonest assistant but the solicitor is not.
The solicitor is liable as a dishonest assistant but the accountant is not.
Beneficiaries can sue only trustees in connection with a breach of trust.
Both the accountant and the solicitor are liable as dishonest assistants.
Both the solicitor and the accountant assisted the trustee and did so dishonestly. It is irrelevant that the accountant assisted after the breach: it is sufficient that the accountant assisted the trustee to obfuscate the breach.
199
A company director commits a breach of fiduciary duty. The director is dishonestly assisted by an accountant. The breach causes the company a significant loss. The accountant makes a substantial profit as a result of the director’s breach.
Which one of the following statements is correct?
The accountant is liable for the profit if his participation in the breach was the real or effective cause of the profit.
The company can only sue the director in connection with the breach of fiduciary duty.
The accountant is liable for the profit if his participation in the breach was a ‘but for’ cause of the profit.
The company cannot sue the accountant for dishonest assistance because only trust beneficiaries can bring that type of claim.
The company can only recover losses in connection with the director’s breach of fiduciary duty.
The accountant is liable for the profit if his participation in the breach was the real or effective cause of the profit.
A dishonest assistant is only liable for profits if his participation in the breach was the real or effective cause of the profit: Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908.
200
What are the requirements for recipient liability?
There are four requirements for a knowing receipt claim:
1.A misapplication of trust property or property held in another fiduciary capacity.
2.Beneficial receipt by the defendant of the misapplied property or its traceable proceeds.
3.Persistence of the claimant’s equitable proprietary interest in the property received by the defendant.
4.Knowledge of circumstances on the part of the defendant which makes it unconscionable for them to retain the benefit of the receipt.
However, the third party will not be liable where they only become aware that they received
trust property after they have disposed of that property. - will be liable if they gain knowledge before or during
201
What is the test for knowledge for recipient liability?
dishonesty is not a requirement for a knowing receipt claim, and
‘[t]he recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.’
202
Baden scale?
1
actual knowledge
2
willfully shutting one’s eyes to the obvious
3
willfully and recklessly failing to make such inquiries as an honest and reasonable man would make
4knowledge of circumstances which would indicate the facts to an honest and reasonable man
5
knowledge of circumstances which would put an honest and reasonable man on inquiry
203
Bona fide purchaser for value without notice?
If the third party paid for the property and
had no idea that the property belonged to a trust, then the third party takes that property
free from any equitable interests. No proprietary claim can be sustained against the third
party in this scenario (as a result, this third party is often referred to as ‘equity’s darling’).
Note that a personal claim in knowing receipt would also fail against equity’s darling
because they would not have the requisite degree of knowledge at the time of purchase
to make any subsequent retention of the property unconscionable.
203
A trustee holds a painting on trust for a beneficiary. In breach of trust, the trustee gifts the painting to the owner of a private art gallery. The painting is delivered to the gallery by a courier hired by the trustee. The gallery owner and the courier are aware that the painting is misapplied trust property. The gallery owner sells the painting and dissipates the proceeds of sale.
Which one of the following statements describes the beneficiary’s rights?
The beneficiary can maintain a knowing receipt claim against the gallery owner but not against the courier.
The beneficiary can maintain a knowing receipt claim against the gallery owner and the courier.
The beneficiary can only sue the trustee for breach of trust.
The beneficiary can maintain a knowing receipt claim against the courier but not against the gallery owner.
The beneficiary cannot maintain a knowing receipt claim against the gallery owner or the courier.
The beneficiary can maintain a knowing receipt claim against the gallery owner but not against the courier.
Both the gallery owner and the courier possess knowledge sufficient for a knowing receipt claim. However, unlike the gallery owner, the courier’s receipt of the painting was ministerial only.
204
Wrongdoing recipient?
If the third party is an intermeddler or would have been guilty of
knowing receipt on the grounds that their conscience is affected, then the beneficiaries
can bring a proprietary claim against them to recover the property. As the third party is a
wrongdoer, the harsher tracing rules relevant to a trustee apply (‘everything is presumed
against a wrongdoer’).
205
Innocent volunteer?
If the third party has no knowledge or notice of the breach of trust and
provided no consideration for the transfer of property, then a proprietary claim can still
be brought, but the tracing rules are the kinder rules that are applied against innocent
parties.
206
Wrongdoing tracing rules?
(a) If the third party still holds trust property in its original form, the beneficiaries can assert a
proprietary claim against that property to recover it.
(b) If the third party has used trust property to buy something new, the beneficiaries can
assert a proprietary claim against that new property. This is a case of ‘clean substitution’
(see Chapter 13.4).
(c) If the third party has taken trust funds and mixed this with their own money to purchase
property in their own name, the beneficiaries can assert a proprietary claim against that
mixed asset. The beneficiaries can claim a proportionate share in the mixed asset or
assert an equitable lien over the mixed asset, depending on whether the mixed asset has
increased or decreased in value (see Chapter 13.5.1).
(d) If the third party has taken trust funds and paid this into their own bank account mixing
it with money of their own, before making various withdrawals from that bank account,
the beneficiaries will use the tracing rules of Re Hallett and Re Oatway to determine into
what forms of property they can trace (see Chapter 13.5.2).
207
Innocent tracing rules?
(a) If the third party still holds trust property in its original form, the beneficiaries can assert a
proprietary claim against that property to recover it.
(b) If the third party has used trust property to buy something new, the beneficiaries can
assert a proprietary claim against that new property. This is a case of ‘clean substitution’
(see Chapter 13.4).
(c) If the third party has taken trust funds and mixed this with their own money to purchase
property in their own name, the beneficiaries can assert a proprietary claim against
that mixed asset. The beneficiaries will claim a proportionate share in the mixed asset
whether that asset has increased or decreased in value (see Chapter 13.5.3).
(d) If the third party has taken trust funds and paid this into their own bank account mixing it
with money of their own, before making various withdrawals from that bank account, the
beneficiaries will use the tracing rules of Clayton’s Case and Barlow Clowes v Vaughan to
determine into what forms of property they can trace
However, when it comes to the mixing of monies in a bank account, the innocent volunteer
might be able to assert a defence against the beneficiaries’ proprietary claim. If an innocent
third party receives trust money and uses that money to improve buildings they already
own, then the beneficiary will not be able to trace any interest into that improvement. This is
because either:
(a) that improvement has not increased the value of the third party’s land, such that the trust
money has in essence been dissipated; or
(b) that improvement has increased the value of the third party’s land, but it would
be inequitable to force the innocent third party to sell their property to realise the
beneficiary’s proprietary interest. If the beneficiary is allowed to enforce a lien over the
innocent third party’s land, the sale of the land will enable the beneficiary to recover their
money but deprives the innocent third party of their land. Whilst the third party would get
the balance of the sale proceeds, this is probably cold comfort for someone who might
be thrown out on the street. Trying to enforce the beneficiary’s proprietary interest will
lead to an inequitable result, which defeats any proprietary claim. This is often referred to
as the Re Diplock defence (following the Court of Appeal’s judgment in Re Diplock [1948]
Ch 465 where it was first established).
208
What are the two key fiduciary duties?
· No-conflict: A fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principal.
· No-profit: A fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves or for a third party.
209
What is self-dealing?
Self-dealing is a specific type of conflict involving a trustee personally buying from or selling to the trust. Such a transaction is voidable.
210
What is fair-dealing?
Fair-dealing involves the trustee buying the beneficiary’s interest. It is voidable unless the trustee can prove they acted honestly and fairly, having made full disclosure to the beneficiary.
211
What happens if the fiduciary makes a profit from their position?
If they breach the no-profit rule, their profit will be stripped from them. Beneficiaries can elect for an account or profits or a constructive trust.
212
A trust has two trustees, A and B. The beneficiaries are minors. The trustees require legal advice on a tax issue which has arisen in relation to the trust. A is a partner at a law firm so B suggests that there is no need to obtain advice. A specialises in real estate and is not confident in providing tax advice so suggests instructing a tax partner at their firm.
What is the best advice to the trustees?
The trustees can obtain advice from A’s firm because the advice is being given by a different solicitor so there would be no breach of fiduciary duty.
The trustees can obtain advice from A’s firm if A reasonably believes that their colleague is the best person to provide advice on this matter.
The trustees can obtain advice from A’s colleague because A is not competent to advise on tax so it would be a breach of fiduciary duty to do so.
The trustees should obtain advice from a different firm because A has a personal interest in this firm so it would be a breach of fiduciary duty to instruct them.
The trustees should obtain fee quotations from several firms first. They can instruct A’s colleague if their fees are the lowest.
The trustees should obtain advice from a different firm because A has a personal interest in this firm so it would be a breach of fiduciary duty to instruct them.
213
Two trustees, A and B, hold a trust fund on trust for C, who is 12 years old. The trust fund includes a house which is currently unoccupied and not producing any rental income for the trust. A and B have decided to sell the house. A would like to buy it. The trust deed does not contain any provisions authorising trustees to purchase trust property.
Which of the following is the most appropriate advice to A?
A can buy the house if B agrees.
A can’t buy the house but they could incorporate a company and use the company to buy the house instead.
A can buy the house if C’s parents agree.
A can buy the house as long as they pay market value.
A cannot buy the house.
A cannot buy the house.
Buying the house would be self-dealing. It is not authorised by the trust deed and the beneficiary is a minor so cannot provide consent.
214
In which of the following circumstances is it permissible for a trustee to make a profit out of their role as trustee?
If the profit is either permitted by the terms of the trust or fully informed consent is provided by all the beneficiaries.
215
What are the rules on the maximum and minimum number of trustees?
There are no rules prescribing a minimum or maximum number of trustees but there is an exception for trusts of land, because legal title to land may only be held by a maximum of four persons. It is also necessary for such trusts to have a minimum of two trustees, in order to give good receipt.
216
How are replacement trustees appointed?
Instead, replacement trustees may be appointed in one of the following ways:
· Using any express powers to appoint trustees found in the trust instrument.
· Using statutory powers to appoint trustees.
· By the beneficiaries exercising their Saunders v Vautier rights.
· In the case of charitable trusts, by the Charity Commission.
· By the court.
There is also a general statutory power to appoint new trustees in s 36 Trustee Act 1925 (‘TA 1925’).
217
How can the general statutory power to appoint trustees be exercised?
· On the death of a trustee
· If a trustee is abroad for over a year
· If an appointed trustee is a minor or otherwise lacks capacity to act
· If a trustee wishes to retire, refuses to act or is unfit to act
This power may be exercised by the persons nominated in the trust instrument to appoint trustees or, if there are no such persons, by the surviving or continuing trustees. If all the trustees have died, the power is exercisable by the personal representatives of the last to die (s18(2) TA 1925).
218
How can beneficiaries exercise their Saunders v Vautier rights to replace trustees?
statutory power in s 19 Trusts of Land and Appointment of Trustees Act 1996 (‘TLATA’) which gives beneficiaries with Saunders v Vautier rights the power to direct the trustees to appoint a new trustee.
This power must be exercised in writing and cannot be exercised in cases where the trust instrument contains an express power to appoint trustees.
219
What does the court do when replacing a trustee?
When exercising its statutory power, the court will consider the following principles:
· The court should consider the wishes of the settlor or testator (if such wishes are expressed or evidenced in the trust instrument)
· The court should not appoint a trustee where there a dispute between the beneficiaries as to whether that person would be appropriate.
· The court should consider whether the appointment will promote or impede the trust administration. This means the court should take into account the views of the existing trustees, but must consider whether those views are reasonable.
220
How can a trustee be removed?
The trust instrument may contain rules dealing with removal of trustees.
The general statutory power to appoint trustees also effectively extends to removing trustees in the circumstances where it is considered necessary to replace them.
The court also has both statutory and common law powers to remove trustees.
The Charity Commission also has the power to remove charity trustees.
221
How do trustees retire?
Voluntary retirement
A trustee can voluntarily retire by deed where there are at least two people or one trust corporation to act as trustees and the co-trustees and any person with a power to appoint trustees consents: s 39(1) TA 1925.
Trustees who retire must also comply with the statutory requirements or they will remain in office. A trustee who retires from the trust should obtain a formal discharge of liability from the beneficiaries.
By direction of the beneficiaries
In addition to having a power under s 19 TLATA to appoint trustees, beneficiaries with Saunders v Vautier rights also have the power to compel a trustee to retire from the trust. The direction must be made in writing and requires the agreement of all beneficiaries.
As with voluntary retirement, the power can only be exercised if, after the retirement of the trustee, there will remain at least two trustees or one trust corporation.
222
True or false: Any person can be a trustee
False
A trustee must be an adult of sound mind
223
The sole trustee of a trust for a minor beneficiary has just died. The trust instrument contains no powers to appoint trustees.
Who has the power to appoint a replacement trustee?
The court only.
The settlor.
The trustee’s personal representatives only.
Nobody.
The trustee’s personal representatives and the court.
The trustee’s personal representatives and the court.
The trustee’s personal representatives can exercise the statutory power to appoint trustees. The court also has a statutory power to appoint a new trustee but is only likely to exercise it if the personal representatives cannot or will not exercise it.
224
A trust has two trustees, neither of which is a trust corporation. One of the trustees wishes to retire immediately.
Can they do so?
No, another trustee needs to be appointed before the trustee can retire.
Yes, as long as they obtain the consent of their co-trustee and any person with a power to appoint trustees.
Yes, as long as they obtain the consent of their co-trustee.
Yes, but only if directed to do so by the beneficiaries.
Yes, as long as they obtain the consent of any person with a power to appoint trustees.
No, another trustee needs to be appointed before the trustee can retire.
S39(1) TA 1925 gives trustees the power to retire but only if there would be at least two trustees or a trust corporation remaining. To exercise this power the trustees must also obtain the consent of their co-trustees and any person with a power to appoint trustees.
225
How can a trustee retire?
(1) The trust instrument may contain an
express power for trustees to retire but
this is unusual
(2) Section 39 of the TA 1925 allows a
trustee to retire without being replaced.
Conditions:
(a) there will be two trustees or a trust
corporation left
(b) the trustee retires by deed
(c) the other trustees consent by deed.
(3) Section 36(1) of the TA 1925
*
The retiring trustee must be replaced by the
appointment of a new trustee.
*
Who appoints the new trustee?
(a) the person nominated in the trust
instrument to exercise the s 36 power,
but if none
(b) the continuing trustee(s) (which includes
the retiring trustee if they are willing to
join in the appointment).
*
s 36 states that the appointment must be
in writing. Why is it advantageous to use a
deed? (See TA 1925, s 40)
Under s 40, a deed automatically vests the
trust property (apart from company shares
and some other limited forms of property) in
the continuing and new trustee.
226
How can trustees be removed/replaced?
(1) The trust instrument may contain an
express power to remove and/ or replace
trustees but this is unusual.
(2) Section 36(1) of the TA 1925
*
Grounds for replacing a trustee:
(a) the trustee is dead
(b) remains outside the UK for more
than 12 months
(c) desires to be discharged (retire)
(d) refuses to act (disclaims)
(e) is unfit to act
(f) is incapable of acting (eg mental
or physical incapacity)
(g) is a minor.
*
Who effects the replacement?
(a) the person nominated in the trust
instrument to exercise the s 36
power, but if none:
(b) the continuing trustee(s) including
a retiring trustee if they are willing
to join in the appointment;
(c) if all trustees have died, the PRs
of the last surviving trustee.
*
Section 36 states that the appointment
must be in writing. Why is it
advantageous to use a deed? (See TA
1925, s 40)
Under s 40, a deed automatically
vests the trust property (apart from
eg company shares) in the continuing
and new trustee.
(3) Section 41 of the TA 1925
*
Grounds? The court will replace a trustee if
it is expedient to do so and it is otherwise
inexpedient, difficult or impractical to
appoint without the court’s assistance.
*
The court makes the appointment
following an application by the trustees or
the beneficiaries.
*
The court will only replace a trustee if it
is not in the best interests of the trust for
them to continue. Mere dislike of a trustee
is generally insufficient.
(4) Section 19 of the TLATA 1996 allows
beneficiaries to serve a written direction on
a trustee or trustees to retire and appoint the
person (if any) specified in the direction.
*
s 19 does not apply if the trust instrument:
∘
excludes it, or
∘
the trust instrument nominates
someone to appoint new trustees.
*
s 19 applies only if the beneficiaries
are of full age and capacity and taken
together are absolutely entitled to the trust
property.
*
Following a valid written direction, the
trustee must retire by deed if:
(a) reasonable arrangements have been
made to protect their rights;
(b) after their retirement there will be two
trustees or a trust corporation left; and
(c) another person is appointed to
replace them or the continuing
trustees consent by deed to their
retirement.
227
Appointment of additional trustees?
(1) The trust instrument may contain an express
power to appoint new trustees but this is
unusual.
(2) Section 36(6) of the TA 1925
*
Who makes the appointment?
The person nominated in the trust
instrument or, if none, the continuing
trustee(s).
There can be no more than four trustees
once the additional appointments
are made.
*
s 36 states that the appointment must
be in writing. Why is it advantageous to
use a deed? (See TA 1925, s 40)
Automatic vesting of trust property
as above.
(3) Section 41 of the TA 1925
*
Grounds?
As above. The court will appoint a new
trustee if it is expedient to do so and
it is otherwise inexpedient, difficult
or impractical to appoint without the
court’s assistance.
The court makes the appointment
following an application by the trustees
or the beneficiaries.
(4) Section 19 of the TLATA 1996 allows
beneficiaries to serve a written direction
on the current trustees requiring the
appointment of an additional trustee.
For conditions see above.
228
What happens if a trustee dies?
If two or more trustees are appointed, they will hold legal title to trust property as joint tenants,
with the result that if one dies, the legal title will devolve to the surviving trustees (TA 1925,
s 18). If there is only one surviving trustee left, that trustee should be advised to appoint a
replacement trustee under s 36(1) of the TA 1925 to ensure the continuity of trust administration.
229
Appointment of an attorney?
If a trustee is concerned that they might not be able to perform their functions in running the
trust for a period of time, they should consider delegating those functions to a ‘deputy’ called
an attorney.
The delegation should be made by deed in the form prescribed under s 25 of the TA 1925.
The delegation can run for a period of up to 12 months. Written notice about the delegation
must be given to all other trustees and any other person with the power to appoint new
trustees within seven days of delegation.
The delegating trustee will be automatically liable for the acts or defaults of the attorney as if
they were the acts or defaults of the trustee.
As well as one trustee individually delegating their functions to an attorney, the trustees
collectively can delegate decisions on how best to invest trust property to an independent
financial adviser.
230
How do trustee’s powers operate?
Trustee powers are permissive: They determine what a trustee may do. They are acts which are authorised but not compulsory.
231
How do trustee’s duties work?
Trustee duties are mandatory: They determine what a trustee must do.
232
Where can you find the duties and powers of a trustee?
If the terms of the trust are contained in a written document (whether that’s a trust deed, will or something else) then that document - known as the ‘trust instrument’ is your first port of call. The trust instrument may well contain express provisions setting out the powers and duties of the trustees. It is also important to check whether it expressly excludes or modifies any default statutory rules.
The key statutes you need to be aware of for these purposes are:
Trustee Act 1925
Trustee Act 2000
233
What are administrative powers and duties?
Administrative powers and duties, which relate to the management of the trust property while it is held on trust; and
234
What are dispositive powers and duties?
Dispositive (or ‘distributive’) powers and duties, which relate to the distribution of trust property in accordance with its terms.
235
When do trustees breach the trust?
A trustee will breach the trust if they either act outside their powers or fail to comply with their duties.
236
True or false: Trustees must provide beneficiaries with reasons for the way they have exercised their powers.
False
237
A trustee holds a trust fund on trust for A for life, remainder to B and C in equal shares. The trustee is considering how to invest the trust fund.
What should the trustee be trying to achieve from their investment strategy?
Income and capital growth
Income only
Capital growth only
Income and capital growth
The trustee must attempt to strike a fair balance between the life tenant who is entitled to the income and the remaindermen who are entitled to the capital.
238
What should trustees do when exercising the general power of investment?
When exercising the general power of investment, trustees must:
* Consider the standard investment criteria set out in s 4 TA 2000
* Take advice in accordance with s 5 TA 2000
239
What should trustees consider when looking at the standard investment criteria?
Suitability (s4(3)(a)): Trustees must consider the suitability of the proposed investments. There are two key questions to consider:
* General suitability: Is the investment of a suitable kind?
* Specific suitability: Is the particular investment suitable?
Diversification (s4(3)(b)): Trustees must also consider the need for diversification of trust investments. The extent to which diversification is needed will depend on the size and nature of the particular trust.
240
Take advice in accordance with s 5 TA 2000?
‘Proper advice’ is defined in s 5(4) as being provided by a person ‘who is reasonably believed by the trustee to be qualified to give it’ by their ‘ability in and practical experience of financial and other matters relating to the proposed investment’.
There is an exception set out in s 5(3) which provides that trustees need not seek advice if they reasonably conclude that in all the circumstances it is unnecessary to do so. This will depend on the circumstances but might, for example, include situations where the cost of the advice outweighs the benefit of obtaining it or cases where the trustee has sufficient knowledge and expertise to make the decision without advice.
241
What is the statutory duty of care?
The statutory duty of care is found in s 1 TA 2000 and requires trustees to ‘exercise such care and skill as is reasonable in the circumstances’.
Section 1(1)(a) requires the assessment to take into account ‘any special knowledge or experience’ that a trustee has or holds themselves out as having.
Section1(1)(b) applies to professional trustees and requires the assessment to take into account the any ‘special knowledge or experience’ that it is reasonable to expect of a person acting in that capacity.
In other words, the standard of care is always higher for professional trustees, because they are being paid to provide a service.
It is also raised for lay trustees who may have been appointed on the basis of having (or purporting to have) particular skills that would make them desirable trustees.
242
What is the common law duty of care?
equires trustees to exercise the standard of diligence and care expected of an ordinary prudent business person.
243
Power to acquire land?
Section 8 TA 2000: Trustees have a statutory power to acquire freehold or leasehold land in the UK (but not overseas). This power may be exercised for investment purposes but also more widely (including for occupation by a beneficiary).
244
Power of delegation?
Section 11 TA 2000 provides trustees with broad powers of delegation. Although there are some functions which trustees cannot delegate (such as their distributive obligations) they are permitted to delegate their powers of investment and powers to acquire land.
Trustees cannot delegate their investment powers except by an agreement evidenced in writing (s 15TA 2000). This agreement should include a term ensuring compliance with a written ‘policy statement’ to be prepared by the trustees. The ‘policy statement’ should give guidance as to how the agent should exercise their functions ensuring they are in line with the best interests of the beneficiaries.
The agent to whom the function is delegated is bound by any restrictions on the exercise of its investment powers in the same way the trustee would be (s 13(1) TA 2000).
245
Why might a trustee wish to delegate their functions?
The trustee may be incapable of discharging their duties for a limited period.
The trustee lacks the expertise to discharge the particular responsibility and prefers to have an expert do this.
Trustees are required to comply with the statutory duty of care both with respect to selecting agents and entering into agreements with those agents.
246
A trustee of a life interest trust decides that they will invest £500,000 of trust money in a property for the life tenant to live in. The trustee decides to buy a property in the north of France, where the life tenant is currently living. The trust instrument does not contain any express provisions relating to the acquisition of land.
True or false: The trustee has acted in breach of trust.
True
The land is abroad and therefore is not an authorised investment. See section 8 Trustee Act 2000.
247
A trust fund is worth £500,000. It has two trustees, who are both property lawyers. The trustees decide to invest £50,000 of trust money in company shares. They discuss the matter together and decide to make the investment. The trust instrument does not contain any express provisions relating to investment.
Which ONE of the following best describes the position?
The trustees have not breached their statutory duties because they have a statutory power to invest in company shares.
The trustees have breached their statutory duties because they do not have the power to make this kind of investment.
The trustees have breached their statutory duties because they have not diversified their investments
The trustees have breached their statutory duties because they have not obtained proper advice with regards to the investment.
The trustees have breached their statutory duties because company shares are not a suitable investment for this trust fund.
The trustees have breached their statutory duties because they have not obtained proper advice with regards to the investment.
The trustees are required to take proper advice in accordance with section 5 Trustee Act 2000 unless they reasonably consider it unnecessary to do so in the circumstances. There is nothing in the fact pattern that suggests that this is an investment where it would not be necessary to take advice.
248
Which of the following powers are trustees permitted to delegate using their statutory powers of delegation?
Powers of investment and powers to acquire land
Powers of investment only
Powers of investment and powers to distribute trust property to beneficiaries
Powers to acquire land and powers to distribute trust property to beneficiaries
Powers to distribute property to trust beneficiaries only
Powers of investment and powers to acquire land
Trustees can delegate their powers of investment and powers to acquire land but cannot delegate their powers to distribute property to a beneficiary.
249
When do trustees distribute trust property?
There are three broad circumstances in which trustees distribute trust property:
· When they have an obligation to do so under the terms of the trust.
· When directed to do so by beneficiaries with Saunders v Vautier rights.
· In exercise of a dispositive power such as a power of appointment, maintenance or advancement.
250
How should trustees distribute trust property?
Trustees have a duty to distribute trust property in accordance with the trust terms.
251
When should trustees distribute capital?
· When the duty to distribute capital arises, the trustees must do as soon as possible.
· Trustees must also distribute the capital as soon as possible if directed to do so by beneficiaries in exercise of their Saunders v Vautier rights.
252
Dispositive duty in discretionary trusts?
· The trustees of discretionary trusts have a dispositive duty to exercise their discretion and distribute the trust property within a reasonable time.
253
Obligation to accumulate income?
· If the trustees have an obligation to accumulate the income, they must add it to the capital and distribute it with the capital when the obligation to do so arises.
254
Obligation to accumulate trust income?
· Trustees will sometimes have an obligation to accumulate the trust income and sometimes have an obligation to distribute the income as it arises.
· If the trustees have an obligation to distribute the income as it arises, they must do so as soon as possible.
255
True or false: Trustees do not need to make payments to beneficiaries until the beneficiaries make a request.
False
When beneficiaries have a right to income or capital under the terms of a trust, the trustees are under an obligation to make the payments to the beneficiaries as soon as possible. The trustees must not wait for the beneficiaries to demand the payment.
256
power of maintenance?
This gives them the power to pay income for the maintenance, education or benefit of a minor beneficiary. It applies both to beneficiaries with vested interest and contingent interests which carry the intermediate income. It does not apply in cases where someone else has a prior interest in the income, ie a successive interest trust.
257
True or false: The power of maintenance can only be exercised where a beneficiary has a vested interest in the trust capital.
False
The power of maintenance can also be exercised when a contingent interest carries the intermediate income
258
Power of advancement?
Power to pay capital to or for the benefit of a beneficiary before their interest vests in possession.
259
Power of maintenance?
Power to pay income for the benefit of a minor beneficiary before they reach the age of 18.
260
When can the power of maintenance be used?
Section 31 TA 1925 provides that the power can be used for the ‘maintenance, education or benefit’ of the minor beneficiary.
This gives the trustees a very broad discretion in respect of the trust income. Common uses might include:
· school fees or other training
· medical bills
· food, clothing and rent
· leisure and holidays
This is a non-exhaustive list.
261
Who is the income for the power of maintenance paid to?
It should be paid either to the child’s parent or legal guardian or directly to the provider of the goods or services that are being acquired on behalf of the beneficiary (eg the trustees could pay school fees directly to the school).
262
What should be considered when exercising the power of maintenance?
· The power of maintenance is a fiduciary power. The trustees must consciously consider the exercise of the power and, if they choose to exercise it, must act in good faith in the interests of the beneficiary.
· The income must be used for the primary benefit of the minor beneficiary, but it does not matter that it may indirectly benefit their parent or guardian (eg by reducing a cost that they would otherwise incur).
· It is an improper exercise of the power to unquestioningly pay it to the minor’s parent or guardian, assuming that they will use it for the minor’s benefit. See e.g. Wilson v Turner (1883) 22 Ch. D. 521
263
What income can the power of maintenance use?
The power of maintenance can be used in respect of both current income and accumulated income
264
When is the power of advancement available?
The statutory power of advancement:
· May be used by both adult and minor beneficiaries.
· Applies to both vested and contingent interests.
· Can be modified or excluded by the trust instrument: s 69(2) TA 1925.
265
How much capital can be paid through the power of advancement?
The trustees may use the power of advancement to pay up to 100% of a beneficiary’s prospective entitlement to the capital (even if they have a contingent interest).
266
To whom should the capital be paid through the power of advancement?
If the beneficiary is an adult, the trustees can pay it directly to them but must ensure that it has been used for the requested purpose. The trustees could instead use the capital to purchase an asset or services on the beneficiary’s behalf.
If the beneficiary is a minor, the trustees should not pay the capital directly to them as a minor cannot give good receipt. It should be paid either to the child’s parent or legal guardian or directly to the provider of the goods or services that are being acquired on behalf of the beneficiary (eg the trustees could use capital to purchase a car to be used by the beneficiary).
267
Do trustees need to check the money is being used for the correct purpose for the power of advancement?
If paid to the beneficiary (or their parent or guardian) the trustees must check that the payment has been used for the correct purpose.
If it is not being used for the correct purpose they should pay the money to a third party
268
For the power of advancement, when applicable, would you need consent from beneficiaries with prior interest?
Consent of beneficiary with prior interest
Because the exercise of the power may prejudice other beneficiaries, the power may only be exercised with the written consent of beneficiaries with a prior interest (but note that the consent of a beneficiary with a subsequent interest, such as the recipient of a gift-over, is not required).
269
Trustees hold £50,000 on trust for A for life, remainder to B and C in equal shares if they survive A. B (age 17) has asked the trustees for £25,000 to buy equipment to start a business. The trustees agree that this would benefit B but A (age 40) and C (age 21) do not consent.
Why should the trustees refuse B’s request?
because B is a minor.
because A does not consent.
because B has asked for too much money.
because B has a contingent interest.
because C does not consent.
because A does not consent.
A has a prior interest to B so the power of advancement cannot be exercised without A’s written consent
270
What docs are beneficiaries entitled to see?
Beneficiaries are entitled to see the following documents:
(a) the trust document or will that created the trust;
(b) the trust accounts; and
(c) a schedule of trust investments or other documents that show how trust property is
invested.
271
When can a trustee acquire a leasehold in land?
(a) as an investment;
(b) for occupation by a beneficiary; or
(c) for any other reason.
272
What must trustees have regard to when purchasing or reviewing investments?
the ‘standard
investment criteria’.
(a) The investments must be suitable for the trust.
(b) There is a need for diversification (insofar as is appropriate to the circumstances of the
trust). We have already seen that it is important to purchase different types of investments
where possible so as to minimise the chances of an investor losing all their money on one
investment or one type of investment.
273
What are trustees’ non-statutory duties for investments?
(a) Trustees must act impartially between beneficiaries. In their choice of investments,
trustees must strike a fair balance between the needs of all the beneficiaries, for instance
a life tenant (who wants income) and a remainder beneficiary (who wants capital
appreciation). Allowing one beneficiary the use of trust property without compensation for
another beneficiary would also breach this duty.
(b) Trustees must secure the best return for the beneficiaries. This does not necessarily mean
that the trustees must secure the highest return as that might entail accepting too much
risk for the trust.
274
When may trustees taken ethical concerns into account for investments?
(i) if an investment in an ethical concern is likely to yield as good a return as an
investment that is more morally dubious, the trustees can invest in the ethical concern;
(ii) if the trust is charitable, the trustees can properly refuse to invest in things that might
be at odds with the charitable purposes of the trust and that might alienate the
charity’s supporters; and
(iii) the settlor can set out in the declaration of trust that trustees should not invest in
specific sectors that the settlor considered to be unethical.
275
What processes should trustees comply with when delegating investments?
What processes should trustees comply with when delegating investments?
A
(a) They must retain the investment agent by written agreement.
(b) They must prepare a written statement (known as the ‘policy statement’) that gives
guidance as to how the agent should exercise their asset management functions in the
best interests of the trust.
The trustees must exercise reasonable care and skill in putting the policy statement
together.
(c) The written agreement under which the agent is retained must include a term to the effect
that the agent will secure compliance with the policy statement.
(d) The agent must comply with the same statutory and non- statutory investment duties that
would otherwise apply to the trustees.
(e) The trustees must regularly review the arrangements under which the agent is acting and
how those arrangements are working. That might include considering whether to revise or
update the policy statement, or assessing whether the agent is complying with the policy
statement and bringing the retainer to an end if they believe the agent is not.
(f) Importantly, the trustees must select a suitably qualified person to whom their asset
management functions will be delegated. That selection must be made with reasonable
care and skill.
276
When can trustees keep personal profits?
Trustees can keep personal profits if:
(a) this is authorised by the declaration of trust;
(b) all the beneficiaries are aged 18 years or over, know the full facts and consent; or
(c) this is authorised by a court order or by statutory provision.
277
Competition with the trust?
Where the trust includes a business, the trustee must not set up their own business in
competition. If they do so, they will be liable to account for any profits made by their
competing business. If the beneficiaries become aware that the trustee is planning to set up a
competing business, they can obtain an injunction to prevent this from happening.
278
Remuneration of trustees?
Trustees cannot demand payment for their services from trust funds unless authorised by:
(a) Express provision in the trust deed. Trustees can charge fees if there is a clause
authorising remuneration in the declaration of trust. It is relatively common for trust deeds
and wills to contain such clauses. They are often referred to as ‘charging clauses’.
(b) The beneficiaries consenting. If the beneficiaries are all 18 years or above, they can
agree to pay the trustees remuneration. However, the agreement must be fair and the
trustees must make full disclosure of all relevant facts, otherwise the beneficiaries can set
aside the agreement at a future date.
(c) Court order. The court should order remuneration if it is in the interests of the beneficiaries
because, for instance, the trust needs the skill of the trustee in question and their fees are
not excessive compared with those of other professionals.
(d) The TA 2000. Save where the trust deed makes any provision about remuneration:
(i) a trust corporation, or
(ii) a trustee who acts in a professional capacity and who is not a sole trustee, and
where the other trustees have agreed in writing,
is entitled to receive reasonable remuneration. A trustee acts in a professional capacity
if they act in the course of a profession or business that consists of or includes the
provision of services in connection with the management or administration of trusts.
What is reasonable to charge will depend on the individual facts of each case. That will
include considering the nature of the services to be provided, the size of the trust and the
attributes of the trustee who is seeking to charge.
279
Use of information or opportunity?
A trustee is liable to account for any profits they receive where they received that profit by
exploiting an opportunity that belonged to the trust. Likewise, a trustee who makes use of
confidential information for their own personal gain when they only became aware of the
information due to their trusteeship will have to account for any profits they receive. This is the
case whether or not the trust could have taken advantage of the opportunity or was interested
in the information.
280
When can a trustee keep their personal profit?
Authorisation as a defence. If the trustee secures a personal profit from their position as
trustee, they will only be allowed to keep that personal profit if (a) the trust deed allows
this, (b) the beneficiaries consent (the trustee must secure the consent of all beneficiaries,
who must be 18 years or over and fully informed of the material facts) or (c) the court or
statute authorises this.
281
When can trustees breach the trust?
Acting outside their powers (e.g. by distributing trust property to someone other than a beneficiary or making an unauthorised investment).
Failing to act in accordance with their duties (e.g. by falling below the standard of care expected of them when making an authorised investment or failing to properly monitor investments of the trust fund)
282
What Qs should be asked when assessing breach of trust?
Did the trustee(s) act in accordance with their powers?
If so, did they comply with their trustee duties?
If the answer to either of the above questions is ‘no’ there has been a breach of trust and it is necessary to go on and consider the following issues:
283
Can a trustee be liable for a breach that occurred before they were appointed?
A trustee will not be liable for a breach of trust which took place before the trustee was appointed (see Re Strahan (1856) 8 De GM & G 291).
On appointment, if a trustee discovers that a breach of trust occurred, they should commence proceedings in order to recover from the former trustee.
Failure to take such action may result in the new trustee becoming liable for their own breach of trust.
284
Can trustees be liable for breaches that occur after they retire?
A trustee will continue to be liable for any breaches committed during the time that they acted as a trustee, even after they have retired.
A trustee will only be liable for breaches of trust that occur after they retire in two cases:
Where the trustee retired to facilitate the breach; or
The trustee parts with trust property in retiring without due regard, so loss is suffered when the property is transferred to the new trustees (see Head v Gould [1989] 2 Ch 250, 272).
285
Are trustees personally liable for their breaches?
Trustees are personally liable for their own breaches but it will be rare for some trustees to be liable while others are not. Where multiple trustees are found to have breached the trust, they will be jointly and severally liable.
286
How can trustees limit liability?
· Trustee liability may be excluded by an exemption clause in the trust instrument. Alternatively, trustees may wish to obtain indemnity insurance. Trustees may also be fully or partly absolved of liability if there has been beneficiary consent or acquiescence.
If there is no exemption clause, trustees may seek to rely on s 61 Trustee Act 1925 (TA 1925). This gives the court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust’.
287
What is Acquiescence ?
Acquiescence involves the beneficiary being passive (knowing that there has been a breach but failing to take action against the trustee) while consent requires a positive act of authorisation.
288
What happens if the beneficiary may have encouraged the breach?
In cases involving the written consent or instigation of the beneficiary, it can also affect the interest of that beneficiary. Under s 62 Trustee Act 1925 (TA 1925) the court has the discretion to ‘impound’ the beneficiary’s interest under the trust in order to satisfy the claims of the other beneficiaries, meaning compensation will be paid out of their share of the fund. The court will only do this where it is considered ‘just’ to do so, which will usually be in cases where the beneficiary has actively encouraged the breach.
289
What remedies can beneficiaries get for breach of trust?
If the trustee has misapplied trust property, the beneficiaries may seek to recover the property itself (or its traceable proceeds). This element does not focus on proprietary claims but, broadly, a beneficiary may decide to make such a claim where the trustee is insolvent and/or where the substitute property has increased in value.
If it is not possible or desirable to recover the trust property, the beneficiaries will instead seek compensation to reflect the loss of the asset.
Similarly, if a breach of trust has resulted in a loss in the value of the trust fund, the beneficiaries may seek compensation.
If a breach does not result in a loss, there may be no substantive remedy although it is possible, in serious cases, that the beneficiaries will wish to have the trustee removed from office.
290
when is the loss to the trust assessed?
This loss is assessed at the date of the trial, rather than the date of breach.
291
Can trustees offset the losses caused by breach of trust?
In general, trustees are not permitted to set off the losses caused by a breach of trust against profits they have made on other investments or transactions.
However, it is possible to offset losses against profits where they arise from the same transaction or course of dealing.
This is well illustrated by Bartlett v Barclays Bank Trust Co Limited [1980] Ch 515 which we considered earlier. In Bartlett, the trustees had a majority shareholding in a company but failed to properly supervise it. The company made two investments in property, one of which was profitable but the other made a large loss. The trustees could offset the profit against the loss as they arose from the same breach (i.e. the failure to monitor the company’s speculative investments).
292
What should happen once liability is established?
· Once liability is established, it is necessary to assess the loss to the trust fund. If trust property has been misapplied, trustees must restore it. If a breach has resulted in a loss in value, trustees are personally liable to compensate the trust fund for this loss.
293
Ten years ago, a trustee used money from a trust fund to purchase a house for themselves. The beneficiary has only just discovered the breach.
True or false: The beneficiary cannot recover the trust property because the limitation period has expired
False
This would be a proprietary claim (for the trust property itself), rather than a personal one and therefore would not be subject to the limitation rules. This may also be considered a fraudulent act.
294
A trust has three trustees. One of the trustees is a solicitor, another a doctor and the third is an accountant.
The solicitor is a director of the company in which the trust has a significant shareholding. The solicitor has not attended board meetings for some time and, as a result, was unaware of a number of poor business decisions which were made by the board. The value of the company shares has decreased significantly as a result of these decisions.
The company accounts have been circulated to the three trustees on an annual basis. It has been very clear from the accounts that the company has been in financial difficulties for several years and that the share value has been decreasing year on year. The trustees have not taken any action to try and improve the position of the company or sell the shares.
Which of the trustees is likely to be found liable for breach of trust?
None of the trustees
Only the solicitor and accountant
Only the solicitor
Only the accountant
All three trustees
All three trustees
This is the most likely outcome. All the trustees have failed to properly monitor the investment in the company shares. Although the solicitor may appear more culpable than the others (and the accountant could be expected to have a better understanding of the accounts) none of them has exercised the requisite standard of care and skill in respect of this investment. All had access to the accounts and should have reviewed them.
295
A trustee holds a fund on trust for A for life, remainder to B (18) and C(12). A wants the trustee to purchase land in Spain for A to live in. The trust instrument does not give the trustee the power to acquire land overseas.
Which of the following represents the best advice to the trustee?
The trustee can purchase the land in Spain as long as they obtain proper advice and are confident it is a suitable acquisition which is in the interests of all the beneficiaries. Although purchasing the land is unauthorised, the trustee should not worry about this as they will only be liable to compensate the trust fund if the breach causes a loss.
The trustee can purchase the land in Spain as long as they obtain the fully informed consent of A and B. C’s consent is not needed because they are a minor.
The trustee should not purchase the land in Spain. It is not permitted by the terms of the trust and obtaining A’s consent is insufficient to prevent the trustee being liable for breach of trust.
The trustee can purchase the land in Spain as they have A’s consent. B and C’s consent are not needed because their interests have not yet vested in possession.
The trustee can purchase the land in Spain as long as they obtain the fully informed consent of all three beneficiaries.
The trustee should not purchase the land in Spain. It is not permitted by the terms of the trust and obtaining A’s consent is insufficient to prevent the trustee being liable for breach of trust.
This is an unauthorised investment and would require the fully informed consent of all beneficiaries. C cannot consent.
296
How may a trustee avoid liability?
Trustees may avoid or mitigate liability for breach of trust in the following ways:
· Ensuring the trust instrument contains an ouster of exemption clause.
· Taking out insurance.
· Seeking court directions before taking action that might result in liability.
· Making a s 48 AJA 1985 application to rely on legal advice.
· Surrendering their discretion to the court (in exceptional cases).
· Relying on the fully informed consent of beneficiaries.
· Establishing a defence of beneficiary instigation or acquiescence.
· Relying on the equitable defence of laches
· Seeking equitable relief under s61 TA 1925.
· Making a claim against a third party adviser.
· Making a claim for a contribution from a co-trustee or third party.
· Taking specific protective action in respect of missing or unidentified beneficiaries (covered in a separate element).
297
ouster clause?
removes a trustee duty altogether
298
exemption clause?
removes trustee liability for breach of duty
299
In which of the following circumstances might it be appropriate for trustees to surrender their discretion to the court?
When the trustees cannot obtain beneficiary consent to a proposed course of action because some or all of the beneficiaries are under 18.
When the trustees are deadlocked over the exercise of a duty.
When the trustees are unsure of how to interpret a trust term.
When the trustees are deadlocked over the exercise of a duty.
Surrender of discretion is an exceptional course of action and can only be sought in relation to a specific problem which requires addressing, such as where the trustees have an obligation to exercise a discretion but do not agree as to how to exercise it.
300
Seeking court directions?
If the trustees are unsure of their obligations or wish to ensure that their plans for distributing the trust property will not expose them to a claim for breach of trust, the safest thing to do is seek directions from the court.
301
Section 48 AJA 1985 application?
section 48 Administration of Justice Act 1985 (‘AJA 1985’) allows the trustees to take the following actions:
Step 1: Seek a written legal opinion from a person satisfying s71 Courts and Legal Services Act 1990 (usually a barrister or solicitor with 10 years of experience); and
Step 2: Apply for High Court authorisation to rely on that legal opinion.
302
Surrendering discretion to the court?
In cases where the trustees are deadlocked, or where they are precluded from acting due to a conflict of interest, they may surrender their discretion to the court. Unlike simply seeking directions from the court (which provide guidance as to a lawful course of action) this course of action involves the court making the decision for them.
This is an exceptional course of action and can only be sought in relation to a specific problem which requires addressing. The trustees cannot simply give up all their powers and obligations and leave the court to administer the trust on an ongoing basis.
303
Seeking consent from beneficiaries?
The trustees will only obtain full protection if they obtain fully informed consent from all the beneficiaries:
· It is essential that the beneficiaries are given full information to enable them to provide consent. If the trustees withhold important information about their intended actions, they will not be able to rely on the consent obtained.
· If consent is only obtained from some beneficiaries, the trustees will have a partial defence to breach of trust against claims by those beneficiaries but not against the other beneficiaries.
304
What actions are available to trustees after they have breached the trust?
· Beneficiary instigation / consent / acquiescence.
· Statutory limitation rules / defence of laches.
· Statutory relief under 61 TA 1925.
· Civil Liability Contribution Act 1978.
305
Instigation, consent and acquiescence?
Trustees will also have a defence against beneficiaries who instigate or request the breach. Again, this will only provide a partial defence if there are other beneficiaries who did not.
Finally, even if the beneficiaries did not consent to the breach before it was carried out, they may subsequently affirm the action of the trustees. A trustee who has committed a breach may therefore have a defence of acquiescence against beneficiaries who have indicated (by their words or actions) after a breach that they consent to the action taken.
306
Impounding a beneficiary’s interest?
Where a beneficiary instigates or requests a breach, the trustees will only have a defence against that particular beneficiary but they may also be able to impound the beneficiary’s interest. This means using some or all of the instigating beneficiary’s share of the trust fund to indemnify the trustees against a claim by the other beneficiaries.
The court has discretion to impound a beneficiary’s interest in such circumstances under s 62 TA 1925.
The statutory power to impound beneficial interests also applies to cases where the beneficiary has consented to the breach but only where the consent was provided in writing.
The courts also have a common law discretion to impound a beneficial interest in cases of consent. The common law discretion does not require the consent to be in writing but does require the beneficiary to have benefitted from the breach.
307
Statutory limitation?
Under s21(1)(a) Limitation Act 1980 the limitation period for bringing a claim for breach of trust is six years from the breach. However, this only applies to claims by beneficiaries with interests vested in possession. For beneficiaries with future interests, the limitation period only starts to run when their interest vests in possession.
The limitation period does not apply to fraudulent breaches or proprietary claims against the trustee (i.e. claims to recover trust property or its traceable proceeds from trustee).
If a trustee is also a beneficiary, and receives an unfairly large distribution from the trust, only the excess can be recovered after the normal six year period (unless the trustee acted dishonestly or unreasonably in making the distribution, in which case it may be possible to make a claim for the full amount of the payment).
308
Equitable defence of laches?
In cases where the statutory limitation period has not yet expired, trustees may still be able to rely on an equitable doctrine known as ‘laches’ to argue that a beneficiary has waited too long to bring a claim.
Whether a defence of laches will be successful is highly fact-specific. It requires the trustees to demonstrate that the beneficiary knew of a breach but has delayed their claim unacceptably, making it unconscionable for the beneficiary to assert their beneficial interest.
309
Section 61 TA 1925?
This gives the court discretion to excuse a trustee in circumstances where the trustee ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust’.
The trustees bear the burden of establishing the three requirements ie:
· Honesty.
· Reasonableness.
· They ought ‘fairly’ to be excused.
The court then has a wide discretion to consider all the circumstances of the case. The court will not use s 61 lightly, as it may deny the beneficiaries a remedy
310
Claims against third parties for trustee liability?
Trustees who find themselves potentially liable for breach of trust might also consider the possibility of taking action against third parties. In particular, we have already considered the situation in which the trustees have acted in reliance upon advice from a professional such as a lawyer or a financial adviser. If that advice was negligent, the trustees should consider making a claim against the adviser in their capacity as trustee.
311
Full indemnity?
In very rare cases, the court may even award a contribution amounting to a full indemnity (s2(2)). This is likely only in cases where:
· A particular trustee is morally culpable for the breach, such as cases where the trustee has misappropriated trust property for their own benefit.
· A trustee is also a beneficiary.
· A trustee acts as solicitor to the trust and the breach is committed in reliance on their advice.
The court will not necessarily grant an indemnity in such circumstances, as demonstrated by comparing the following cases involving solicitor trustees.
312
Practical steps after breach has occurred?
· Check the trust instrument for an exemption clause.
· Consider whether any of the following may provide a full or partial defence:
· Reliance on court directions.
· Instigation / consent / acquiescence.
· Statutory limitation rules / laches.
· Statutory relief under 61 TA 1925.
· If there is likely to be a successful claim, check for relevant insurance (and inform the insurer of the claim) or an indemnity from other beneficiaries.
· Identify whether there are any potential claims against third parties (such as financial or legal advisers to the trustees who may have given negligent advice).
· If a trustee is required to pay equitable compensation, consider Civil Liability Contribution Act 1978 claims against co-trustees or third parties.
313
What options are available for trustees in instances where there are missing or unknown beneficiaries?
· Benjamin Orders
· Section 27 Trustee Act 1925 (‘TA 1925’) notice
· Retaining a fund
· Payment into court
· Missing beneficiary insurance
· Obtaining an indemnity from beneficiaries
314
Benjamin Order?
This is a court order permitting the trustees to distribute on the basis of a particular assumption, which will depend on the circumstances of the particular case.
This is useful in the situation where the trustees know of the existence of a beneficiary but are unable to locate them. A Benjamin Order can be granted allowing the trustees to distribute the trust fund on the basis that the missing beneficiary is presumed dead.
Before an order is awarded the trustees must make full enquiries to attempt to establish the true position and demonstrate there is no reasonable prospect of knowing the true position without disproportionate expense.
The order relieves the trustees from personal liability if they distribute the trust property but the assumption turns out to be incorrect.
However, a disappointed beneficiary or creditor can make a claim against other beneficiaries to whom the property had been distributed.
315
s 27 TA1925 notice?
To prevent liability to unidentified beneficiaries, the trustees may publish a notice of their intention to distribute to known beneficiaries two months after the advertisement. This puts unknown beneficiaries on notice that they must identify themselves to the trustees. After the two month notice period, the trustees may distribute to known beneficiaries and will have no personal liability to the unknown beneficiaries.
The notice must be placed in (i) the London Gazette, (ii) a newspaper circulating in the area in which any land held on trust is situated, and (iii) any other newspaper which is appropriate (for example, if the deceased owned a business the relevant trade paper may be an appropriate place to advertise).
316
Retained funds?
for the trustees to retain a fund setting aside trust assets in order to be able to discharge liabilities if missing beneficiaries come forward after distribution.
This is useful in cases where the trustees are able to identify all beneficiaries but cannot locate all of them.
Retaining a fund is also an option in cases where the trustees remain unsure as to whether they have identified all potential beneficiaries. They may choose to distribute to the known beneficiaries but hold some money back in case other beneficiaries come forward in future
317
Payment into court: s 63 TA 1925?
n circumstances where trustees can establish genuine doubt as to the location of beneficiaries is to distribute to those beneficiaries they can find and pay the remaining funds into court: s 63 TA 1925.
This gives the court legal control over the funds and effectively allows the trustees to retire. This is likely to be a more attractive option to the trustees than retaining a fund, because it means that they do not have open-ended administrative duties in respect of the trust fund.
However, from the court’s perspective this course of action is a last resort which should only be taken if all realistic options for tracing the beneficiaries have failed. It is not an easy route for trustees to free themselves from their obligations.
318
Missing beneficiary insurance?
Possible in the case of unknown and missing beneficiaries. Doesn’t protect against claim but trustee should be able to recover f
319
Indemnity from beneficiaries?
Possible in the case of unknown and missing beneficiaries. Doesn’t protect against claim for breach of trust but trustee can try to recover from indemnifying beneficiary.
320
True or false: Missing beneficiary insurance prevents beneficiaries from making a claim against the trustees.
False
Insurance does not prevent personal liability for breach of trust but should enable the trustees to recover from the insurer.
321
Limitation period for personal claims against trustees?
A personal claim for breach of trust is subject to a six- year limitation period; s 21 of the
Limitation Act 1980. This period usually starts to run from the date of breach. However, as
against a minor, time only starts to run when they reach the age of 18 years; and as against
remainder beneficiaries, time only starts to run when their interest falls into possession
The six- year period does not run against trustees who have committed a fraudulent breach
of trust.
322
Equitable indemnity?
A trustee who is sued for breach of trust can recover a full indemnity from a co- trustee who:
(a) acted fraudulently when the others acted in good faith; or
(b) is a solicitor who exercised such a controlling influence that the other trustees blindly
followed the solicitor’s advice; or
(c) has benefited personally from the breach; or
(d) is also a beneficiary and benefited from the breach (in which case, the indemnity is
limited to the value of their equitable interest, which will be impounded to meet the
claim).
323
Contribution?
Pursuant to s 1 of the Civil Liability (Contribution) Act 1978, the court can also order a co-
trustee to make a contribution that is just and equitable having regard to the extent of that
co- trustee’s responsibility for the loss. That contribution can be anything up to 100% of the
compensation ordered. In deciding how to exercise its discretion, the court will primarily
reflect on the blameworthiness of the co- trustees.
324
What are the traceable proceeds of trust property?
When a trustee misapplies trust property, the beneficiaries have a number of potential options available to them. Broadly, they may be able to:
· Sue the trustee for breach of trust.
· Sue a third party who has assisted the breach of trust.
· Make a claim against the misapplied property or its traceable proceeds.
· Sue a third party who knowingly received the traceable proceeds of the breach.
325
What is following?
is the process of ‘following the same asset as it moves from hand to hand’: Foskett. It is the process for locating misapplied trust property. Thus, if T misapplies £1,000 (cash) of the trust fund and gifts it to X, and X gifts it to Y, the beneficiaries can follow the £1,000 from T to X and then to Y.
326
What is tracing?
Tracing is the process of ‘identifying a new asset as the substitute for the old’: Foskett. Generally, one asset is the traceable proceed of another if there is ‘a series of direct substitutions’ between them: Relfo Ltd (in liquidation) v Varsani [2014] EWCA Civ 360.
327
What is claiming?
· Claiming is the assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds: Foskett.
328
When can a beneficiary make claims for a property interest for tracing/equitable remedies?
A beneficiary may wish to make claims in respect of:
· the misapplied trust property
· assets purchased exclusively with misapplied trust money (or its traceable proceeds)
· assets purchased with a mixed fund
· assets which have been improved or maintained using misapplied trust money or its traceable proceeds
329
When may a beneficiary make a claim for tracing?
· The beneficiary claims beneficial ownership of the asset itself: This will only be possible in the simple case where the asset is acquired exclusively with the traceable proceeds of the breach.
· The beneficiary claims a share of the asset: This may be possible in cases where the asset has been acquired using a mixed fund.
· The beneficiary claims an equitable lien over the asset: This may be possible in both types of case. Generally a beneficiary will want to do this where the asset has decreased in value, meaning that claiming the asset would result in a loss. It effectively turns their personal claim for breach of trust into a secured claim.
· Subrogation: This is a claim that can be made where misapplied trust funds (or their traceable proceeds) are used to pay off a debt. It allows the beneficiary to step into the shoes of the creditor, treating the beneficiary as if they had loaned the money. This is particularly useful in the case of a secured debt.
330
True or false: Only trust beneficiaries can utilise the equitable tracing and claiming rules.
False
The equitable tracing and claiming rules can be utilised by persons other than trust beneficiaries; for example, the beneficiaries of a deceased person’s estate and companies.
331
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 trustee money and money belonging to an innocent third party
An asset purchased with a mixture of misapplied trust 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
An asset purchased with a mixture of misapplied trust money and the trustee’s own money
An asset purchased with a mixture of trustee money and money belonging to an innocent third party
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.
332
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?
The beneficiary can trace the £1,000 from the bank account into the computer and make a personal claim against the trustee’s sister.
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.
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.
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.
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.
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.
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.
333
The Hallett model?
When a trustee takes out money from a mixed account which is full of there money and the misapplied trust money - the money that is not withdrawn is the money from the trust
334
The Oatway model?
If the last amount of money withdrawn from a mixed account (containing the trustee’s money and the misapplied trust money) is dissipated - it is assumed the money was the trustee’s
Basic rule: Where a trustee makes withdrawals from a wrongful mixture, some of which (or their traceable proceeds) are dissipated, the beneficiary can treat the dissipation as the trustee’s money and attribute the identifiable funds (or traceable proceeds) to the trust, regardless of the order in which the withdrawals are made.
335
The Shalson model?
Basic rule: Where a trustee makes withdrawals from a wrongful mixture, some of which (or their traceable proceeds) are dissipated, the beneficiary can treat the dissipation as the trustee’s money and attribute the identifiable funds (or traceable proceeds) to the trust, regardless of the order in which the withdrawals are made.
Cherry picking: In cases where withdrawals from a wrongful mixture result in the identification of multiple assets into which a beneficiary could potentially trace:
· In cases where the only contest is between the beneficiary and the trustee, the beneficiary can attribute the most profitable applications of the mixed fund to the trust money.
· In other cases (e.g. cases in which the beneficiary is competing with the unsecured creditors of a bankrupt trustee) the basic rule still applies (i.e. the beneficiary can attribute any part of the mixed fund which is dissipated to the trustee) but the beneficiary cannot attribute the most profitable applications of the fund to the misapplied trust money.
336
Tracing: withdrawals from innocent mixtures?
The general rule applying to withdrawals from an innocent mixture is that withdrawals are attributed rateably to the contributors to the mixture: Re Diplock.
This general rule does not apply to withdrawals from an innocent mixture in a current bank account
337
Innocent mixtures in current accounts?
If the withdrawal is made from a current account, the rule in Clayton’s case applies unless it would be unfair, in which case either the pari passu ex post facto method or a rolling charge should be used instead.
338
rule in Clayton’s case?
· T misapplies £1,000 of trust fund A and pays it into a current bank account (‘the account’)
· T misapplies £1,000 of trust fund B and pays it into the account
· T withdraws £1,000 from the account and uses it to purchase shares
· T misapplies £1,000 of trust fund C and pays it into the account
· T withdraws £1,000 from the account and dissipates it
· £1,000 is still credited to the account
·
If Clayton’s Case is applied, the shares are the traceable proceeds of fund A because fund A was paid into the account first and the shares were purchased with the first £1,000 withdrawn. The second £1,000 withdrawn from the account (and dissipated) is attributable to fund B. And the sum credited to the account is the traceable proceed of fund C.
339
The pari passu ex post facto method?
This involves identifying the amounts contributed to the account by each individual contributor attributing all the withdrawals from the account fractionally to all the contributors, regardless of the order in which the payments were made. This method is called the ‘ex post facto’ method because it is static. It involves a single calculation after the event.
340
The rolling charge method?
Each individual withdrawal is attributed fractionally to the contributors to the account immediately before the withdrawal: the fraction attributed to any specific contributor being equivalent to their fractional contribution to the account immediately before the withdrawal. This is called the ‘rolling charge’ method because it is dynamic. It requires the contributors’ fractional contributions to be recalculated every time a sum is credited to the account. The order in which the payments were made can therefore affect the amounts attributed to individuals.
341
Proprietory claims in mixed funds?
Where an asset is purchased exclusively with trust money (or its traceable proceed) the beneficiary can choose between (Foskett):
Asserting beneficial ownership of the asset itself.Making a personal claim against the trustee for breach of trust and enforcing an equitable lien on the asset. (In other words, the beneficiary becomes a secured creditor.)
The beneficiary will normally exercise the option in the most advantageous way. If the traceable proceeds have increased in value, it will usually be preferable to claim them. If they have decreased in value, it will usually be preferable to make the personal claim.
342
Claims: Wrongful mixtures?
Similarly, where an asset is purchased with misapplied trust money (or its traceable proceeds) and the trustee’s money the beneficiary can choose between:
Claiming a proportionate share of the asset.
Enforcing a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.
The rationale is that, since the trustee is a wrongdoer, their interest must be subordinated to the beneficiaries’ interest: the trustee cannot claim their interest in the asset until the beneficiaries’ claim has been satisfied in full.
Where beneficiaries claim a proportionate share of an asset which has increased in value, they capture a corresponding proportion of the increase.
343
Claims: Innocent mixtures?
Where an asset is purchased with misapplied trust money (or its traceable proceed) and money derived from one or more innocent third parties, the beneficiaries can only claim a proportionate share of the asset: Diplock.
344
What happens if the misapplied trust money is dissipated by the payment of a secured debt?
Where misapplied trust money (or its traceable proceed) is dissipated by the payment of a secured debt, the beneficiaries can be ‘subrogated’ to the rights of the creditor.
345
What happens if there are no identifiable assets?
If there are no identifiable assets at the end of the tracing process, no proprietary remedies will be available.
346
Is a proprietary claim the only claim beneficiaries can claim for misapplied trust property?
Beneficiaries do not have to make a proprietary claim even in cases where they are available. They can still elect to simply sue the trustee and make a personal claim.
347
True or false: Proprietary claims can be made against any person who receives misapplied trust property
False
Proprietary claims cannot be made against a purchaser for value without notice of the trust. The beneficiary can trace into the sale proceeds but has no recourse against the purchaser.
348
In breach of trust, a trustee misappropriates £15,000 of the trust fund.
The trustee uses £5,000 to purchase shares, £5,000 to purchase a car, and £5,000 to purchase a painting.
The trustee sells the shares and dissipates the proceeds of sale: The purchaser does not have any knowledge of the trust.
The trustee gifts the car to his son: The son does not have any knowledge of the trust.
Which one of the following statements describes the beneficiary’s rights?
The beneficiary can make a proprietary claim to the shares and the car but not to the painting.
The beneficiary can make a proprietary claim to the car and the painting but not to the shares.
The beneficiary can make a proprietary claim to the car, the painting and the shares.
The beneficiary can make a proprietary claim to the painting but not to the shares or the car.
The beneficiary cannot make any proprietary claims.
The beneficiary can make a proprietary claim to the car and the painting but not to the shares.
Generally, a beneficiary can make a proprietary claim against assets acquired exclusively with trust money or its traceable proceeds. However, a beneficiary cannot make any claim against a purchaser of a legal interest who does not have knowledge of the trust. Thus, the purchaser of the shares can successfully defend the beneficiary’s proprietary claim.
349
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 only claim available to the beneficiary is a personal claim against the trustee for £10,000.
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 beneficiary may elect between an ownership claim to the shares and 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 security claim to the shares.
The beneficiary may elect between an ownership claim to the shares and a security claim to the shares.
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.
350
True or false: Trustees are not vicariously, or automatically, liable for the defaults of their co- trustees.
True
351
Defences available for trustee who is facing a personal claim for
breach of trust?
The following defences might be available to a trustee who is facing a personal claim for
breach of trust:
(a) an exemption clause in the trust deed;
(b) knowledge and consent of the beneficiaries;
(c) s 61 of the TA 1925; or
(d) limitation and laches.
352
Trustee holds substitute property?
(a) to take the substitute property. The beneficiaries should take this option where the
substitute property has increased in value; or
(b) to sue the trustee for compensation for the loss to the trust and take a charge (or
‘equitable lien’) over the property for the amount that the trust has lost. The beneficiaries
should take this option where the substitute property has decreased in value
353
Clean substitution.?
If a trustee has taken trust money and used that money to buy an asset
in their own name, that asset will belong to the trust
354
Mixed asset?
If a trustee has taken trust money and used that money together with some
of their own money to buy an asset, the beneficiaries can choose to assert either a
proportionate share in the asset (especially helpful where the asset has gone up in value)
or an equitable lien over the asset (especially helpful where the asset has gone down in
value). If a trustee has taken trust money from two separate trusts and uses that mixed
fund to buy an asset, the beneficiaries of each trust can assert a proportionate share in
the asset (whether the asset has gone up or down in value).
355
Withdrawals through a mixed bank account?
If a trustee pays trust money into their
own bank account and mixes that money with their own money before making various
withdrawals, the beneficiaries can use various different tracing rules (Re Hallett and Re
Oatway) to identify what belongs to the trust. Under these rules, everything is presumed
against the trustee and the beneficiaries can generally identify the more valuable items of
property remaining as trust property. If a trustee pays money from two separate trusts into
a bank account before making various withdrawals, the beneficiaries must use different
tracing rules (Clayton’s Case and Barlow Clowes v Vaughan) to identify what belongs to
each trust. Under these rules, the courts try to apply a ‘rough and ready’ justice to both
sets of innocent claimants.
