Trusts Law Flashcards
What are express trusts?
An express trust is created to either benefit individuals or achieve a purpose.
What are implied trusts?
Arise through there has been no express intention to create a trust. They come into existence as a matter of law.
Two types of implied trust:
1) Resulting trust
2) Constructive trust
What is a resulting trust?
Type of implied trust.
Implied in situatrions where it is presumed the settlor intended a trust
What is a constructive trust?
A type of implied trust.
Imposed where the court feels it would be unconscionable to deny another person an interest in the property.
What are the two ways a trust may come into effect?
Inter-vivos - during the settlors lifetime
Testementary trust - on death as set out in their will
What are the three certainties of intention?
1) Certainty of intention
2) Certainty of Subject Matter
3) Certainty of objects
What is meant by Certainty of Intention?
It must be clear that the person making the declaration intended to create a trust (although the use of the word ‘trust’ is not essential). Failure to do so will mean the recipient of the property will take the property as a gift.
What are precatory words?
Express as a hope, wish, or moral obligation and usually indicates a gift was intended (not a trust).
What are imperative words?
Express a command and indicate a trust or power is intended. The words impose a duty on someone to act as a trustee and hold property for someone else.
What is meant by Certainty of Subject Matter?
It must be clear 1) what property is being held on trust; and 2) what the individual interest of the beneficiaries are.
What are important points to remember regarding the description of property within the context of certainty of subject matter?
Vague or general descriptions of a trust property will render the trust void such as ‘the bulk of the estate’.
With tangible property, the physical separation of the trust property is required, (e.g. boxes of wine should be separated from other boxes), with intangible property, no separation is required (e.g. shares in a company).
What are important points to remember regarding the Beneficiary’s Interest within the context of Certainty of Subject Matter?
The beneficial interests must be clear, meaning that the beneficiary’s share under the trust must be allocated in some way when the trust is established. If there is a method of allocation of a beneficiary’s share, and this becomes unworkable, the trust will fail even though the trust property is identifiable. Note that the trust must be over existing property. Future property does not constitute property.
What is meant by Certainty of Objects?
It must be clear who the beneficiaries of the trust are. The test is different for fixed and discretionary trust.
What is the test that must be met to satisfy Certainty of Objects in a fixed trust?
The beneficiaries are specified in the trust instrument or it must be possible to draw up a complete list of every beneficiary (the ‘complete list test’)
What is the test that must be met to satisfy Certainty of Objects in a discretionary trust?
The trustee is given discretion to select who amongst a class of beneficiaries will benefit. Here the ‘individual ascertainability test’ applies which states that you need 1) conceptual certainty 2) evidential certainty, and 3) administrative workability.
What is meant by conceptual certainty?
Where the class of beneficiary is not susceptible to legal definition, it fails i.e. ‘my friends’
What is meant by evidential certainty?
Where obtaining obtaining evidence or whereabouts of beneficiaries is impractical
What is meant by administrative workability?
Where the definition of beneficiaries is so wide it is administratively unworkable, it fails.
What is the Beneficiary Principle and Perpetuities?
To be a valid trust, these further requirements must also be met:
1) Beneficiary principle - a trust must be for the benefit of individuals
2) Rule against perpetuities - the beneficial interest under the trust must vest (i.e. become uncomditional) within 125 years.
What are the formalities required to create testementary trusts? and what happens if it fails?
1) Declaration of trust
2) Transfer of title
If a testementary trust fails the equitable interest will revert to the residuary beneficiary under the terms of the Will.
What is required to create an inter vivos trusts? and what happens if it fails?
1) Declaration of trust
2) Transfer of title
If an inter vivos trust fails, the equitable interest will result back to the settlor if they are still alive.
What are the formalities for an inter vivos trust when dealing with property other than land?
Governed by s.53, LPA 1925 - other than three certainties, no additional formalities are required.
What are the formalities for an inter vivos trust when dealing with land/ an interest in land?
Governed by s.53, LPA 1925
Must comply with s.53(1)(b)- requires evidence of the trust in writing signed by the settlor. Failure to comply makes the trust unenforceable by beneficiary (not void).
What are the formalities for an inter vivos trust when dealing with an Existing Trust Interest (e.g. beneficiary transferring interest under a trust, or directing a trustee to transfer a beneficiary’s interest)?
Must comply with s.53(1)(c) - disposition must be in writing and signed by the person disposing of the interest. Applies to all personal property and land. Failure to comply makes the transfer void (not unenforcable). Disposition itself must be made in writing not merely supported by documentary evidence.
What are the three ways that a property owner can benefit another with his property?
1) Outright gift
2) A transfer of legal title to a third person (i.e. trustee) to hold on trust for the benefit of another; or
3) Declare that the aboslute owner now holds the property on trust for another
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with land?
s.52 LPA 1925 requires a deed of conveyance to transfer legal title to land. In the case of registered land, the transfer only becomes complete on its registration at the Land Registry (s.27 Land Regiatration Act 2002).
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Shares?
Legal title to shares in a private company is transferred traditionally by executing a share transfer form, handing over the share certificate and registering the new owner in the company’s shareholder register. It is upon registration of the new shareholders that the transfer is complete.
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Chattels?
Title to chattels is transferred by either deed of gift or by physical delivery of the item to the recipient coupled with the intention to effect a transfer. Delivery includes parting with control over the articles e.g. a key to the jewellery box or to a car.
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Cheques?
Legal title to a cheque passes on endorsement by the transferor and delivery of the cheque to the third party. This is not possible if thje cheque ia crossed ‘account payee only’.
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Money?
A valid transfer of money merely requires delivery.
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Copyright?
Writing is necessary for the transfer of copyright.
What is the proper legal manner for a settlor to transfer property to a trustee when dealing with Existing Equitable Interests?
In order to transfer an existing equitable interest to another, the assignment must be in writing and signed by the signor or his agent s.53(1)(c) LPA 1925
What are the exceptions to the rule that equity will not assist a volunteer?
1) The Every Effort Rule (Re Rose)
2) Unconsionability (Pennington v Waine)
3) Fortuitous Vesting (Strong v Bird)
What is a fixed interest trust?
Where the beneficiaries and their shares are fixed by the settlor. The trustee has no discretion as to who gets what.
What is a discretionary trust?
The settlor gives the trustee the discretion to select who, from a given class of persons, will receive the trust property in what shares. No beneficiary under a discretionary trust has any property rights until the trustee exercises his discretion. All the beneficiary has is an expectation.
What is the beneficial entitlement in relation to vested interests?
The beneficiary has a present right over the trust property i.e. unconditional. A vested interest is owned by the beneficiary. If the beneficiary dies, the interest will pass to their estate.
What is the beneficial entitlement in relation to contingent interests?
A contingent interest is conditional. If the beneficiary dies before the condition is met, the interest will revert back to the settlor. If tyhe conditionis met, the interest vests in the beneficiary.
What is the rule in Saunders v Vautier?
Bens can use this rule to end a trust and take the trust property
All bens must be:
1) Entitled to the trust property
2) Agree to ending the trust
3) Adults
Limitations on the rule
1) The threat to end the trust cannot be used to force trustees to invest the trust funds in accordance with their instructions; or
2) All beneficiaries must give their consent. If beneficiaries are not adults, do not exist yet, or cannot legally consent i.e. mental capacity then the rule will not apply.
What are the requirements for a non-charitable purpose trust?
Trusts generally need a human beneficiary, but there are some exceptions:
1) Monuments i.e. erection and upkeep of graves
2) Animals i.e. pets
3) Masses i.e. holding private masses in a church
4) Re Denley Trusts - where a trust identifies people who will benefit from a particular purpose i.e. an ascertainable class of people, the people identified have standing to enforce the trust.
The trust needs to ensure the beneficial interest under the trust must vest (become unconditional) within 21 years or the trustees must be able to spend the trust fund on the specified purpose in one go, thereby bringing the trust to an end.
What are the requirements for a charitable trust?
Must be created for:
1) a recognised charitable purpose as defined in s.3(1), Charities Act 2011;
2) for the public benefit (the trust purpose must have identifiable benefits and accrue to the public or a sufficiently large nsection of the public); and
3) for exclusively charitable purposes (the trust must not have a political purpose and any fees or profits must be invested in the trust and not paid to individuals).
How do resulting trusts arise?
1) There has been a failure to validly create a trust i.e. failed formalities (automatic resulting trust) or
2) property is voluntarily transferred to another or purchased in the name of another (presumed resulting trust)
What are automatic resulting trusts?
The trustee will hold the property on trust for the settlor (or his estate) or donor in the following circumstances:
1) uncertainty of objects i.e. failure to specify the beneficiaries
2) failure of contingency i.e. where condition stipulated is not met by the beneficiary
3) failure to dispose of the whole beneficial interest i.e. beneficial entitlement is given to A for life, but fails to specify the remainderman thus reverting to the settlor.
4) surplus funds after a valid purpose trust has completed its purpose ie. after completiuon of the task, or the end of the perpetuity period, the money will return back to the settlor; or
5) money is given for a specific pupose which can no longer be carried out e.g. if the purpose can no longer be fulfilled, the money will be held on resulting trust for the donor.
What are Presumed Resulting Trusts?
Arises in the following circumstances:
1) the voluntary conveyance of a property to another i.e. transfer of property whereby the recipient does not provide valuable consideration in return; or
2) the purchase of property in the name of another i.e. whereby a person provides money to buy a property (in full or in part) but is not identified as the legal owner.
What is the presumption of advancement?
The presumption of a resulting trust may be reversed by the presumption of advancement. This presumption appplies in these relationships:
i.e. husband to wife (not wife to husband or husband to mistress);
Father to child (but not mother to child or child to father) person in loco parentis to child; and fiance (male) to fiance (female) providing they marry.
What is a constructive trust?
A constructive trust is imposed by the court on the legal owner of an asset to prevent that person asserting beneficial ownership of the asset in bad conscience to the prejudice of the true beneficial owner.
How is a common intention constructive trust established?
Two step process to establish a common intention constructive trust:
Step One
It must be shown that, there was a common intention between the parties that both were to have an interest (either expressly (such as oral agreement) or inferred (through conduct such as direct contribution to purchase price or significant contribution to mortgage after purchase); AND The claiming partner acted to their detriment in reliance on the express common intention or inferred common intention. If an express intention then financial contibutions qualify as detrimental reliance, housekeeping and childcare MAY qualify.
Step Two
The beneficial interest must be quantified - unless otherwise agreed between the parties, the court will aware what is considered fair having regard to the whole course of dealings between the parties in relation to the property and taking into account financial and non-financial factors.
What are the requirements to establish proprietary estoppel?
1) Assurance - this can be a representation or encouragement, either active or passive, that creates an expectation the party would have an interest in the property.
2) Detriment - the party acted to their detriment such as spending money on the property, giving up work, working without or for little pay, or looking after someone who is ill;
3) Reliance - reliance of the party on the assurance made.
How is recipient liability (knowing receipt) established?
A stranger may become personally liable on the basis of ‘knowing reciept’ of trust property that has been misapplied or transferred in breach of trust. Dishonesty is not required.
1) Disposal - a disposal of assets in breach of trust or fiduciary duty;
2) Reciept - the receipt of assets by the defendant for his own use and benefit which are traceable as representing assets of the claimant; and
3) Knowledge - knowledge on the part of the defendant that the assets he received are traceable to a breach of trust or fiduciary duty. For the claim to be successful, the recipient state of knowledge must be such as to make it ‘unconsionable’ for him to retain the benefit of the receipt.
How is accessory liability (dishonest assistance) established?
1) Existence of a Trust
2) A breach of trust
3) Assistance in the breach of trust
4) Dishonesty i) Objective element - a defendant will only be held to be dishonest if his actions are seen to be dishonest by the standards of an ordinary reasonable person; and
ii) the defendant realised by those standards that he was dishonest.
Remedies for breach of trust?
1) A Personal Claim - a claim against the trustee or fiduciary personally; it is not based on the recipient having the property in his possession; or
2) A Proprietary Claim - a claim based on the defendant having the property, its proceeds or its replacement in his possession and being required to return it. A constructive trust will be imposed on the property.
When is there a duty not to profit from fiduciary position?
Trustees cannot retain any unorthorised profits such as secret/incidental profits, bribes, commissions, or use of confidential information to make an unorthorised profit generated by their connection to the trust.
Any profits made by exploiting trust property are held by the trustee on constructive trust for the beneficiary of the existing trust.
What are the rules surrounding a trustees duty not to purchase trust property - Self Dealing Rule?
Where the trustee buys trust property. The purchase of trust property by a trustee is voidable by any beneficiary since it reflects the possibility that the trustee might not give the best price obtainable and gives rise to a conflict between the trustee’s self-interest and his duty to the trust.
What are the rules surrounding a trustees duty not to purchase trust property - Fair Dealing Rule?
Where the trustee buys out the equitable interest of the beneficiary. A trustee’s purchase of the beneficiary’s equitable interest in property will not be voidable if the trustee acts honestly, has not taken advantage of his position, makes full disclosure to the beneficiaries and pays a fair price.
What are the rules surrounding fiduciaries and their duty not to put themselves in a position where there is a conflict?
The core fiduciary duty is loyalty. A trustee must not allow their own self-interest to conflict with the interests of their principal otherwise they will be held to account.
Paid Employment - A trustee must not use their position to gain paid employment, if directorship is acquired because of their position as a trustee, they will be accountable to the trust for any fee or salary. - this is not the case if they were a director before they were a trustee.
Trustees must not compete with the trust - if it contains a business as part of its assets.
What are the rules surrounding the appointment of a trustee?
Trustees are appointed by settlor or testator
Must be adults of sound mind or corporations
Trusts of peronalty can have a single trustee
Trusts of land should have a minimum of two human trustees (but not more than four) or a trust corporation, to overreach any beneficial interests;
S36.6 Trustee Act allows for the appoointment of additional trustees (no more than 4) once appointment is made
S41 Trustee Act allows the court to appoint an additional trustee where it is impractical or inexpedient for others to act without the court’s involvement
S19 Trusts of Land and Appointment of Trustee Act provides that beneficiaries can serve written direction on a trustee to appoint a trustee of their choosing (no more than 4) once appointment is made.
What are the rules surrounding the removal of a trustee?
Trustees may be removed expressly by power in the trust document
s.36.1 Trustee Act provides grounds for replacing trustee (death, outside UK for more than 12 months, retires, refuses to act, unfit, uncapable of acting, or a minor);
S41 Trustee Act - provides the court may replace a trustee where it is impractical or inexpedient for others to act without the court’s involvement;
S19 Trusts Land and Appointment of Trustees Act- benefifciaries can serve a written direction on a trustee to remove a trustee and replace with one of their own choosing; and
the court may exercise its jurisdiction to remove a trustee for the welfare of the beneficiaries.
What are the rules surrounding the retirement of a trustee?
Where the trust document contains an express power for trustees to retire;
S39.1 Trustee Act - allows a trustee to retire without being replaced provided there will be two trustees or a corporation left;
S36.1 Trustee Act - provides the grounds for replacing a trustee who retires;
S19 Trusts of Land and Appointment of Trustees Act - beneficiaries can serve a written direction on a trustee to retire.
What is a trustees duty to invest?, and what are their powers in relation to investment?
Trustee Act 2000 - sets out default provisions for trustee investments which can be altered or excluded by the trust instrument
Trustees must have regard to the ‘standard investment criteria’ when selecting assets for the trust;
Apply the suitability of investments test, consider diversification when choosing investments and obtain proper advice from someone reasonably qualified;
trustees have a duty to invest the trust property in order to generate income for the life tenant and preserve the capital for the remainderman (where applicable);
Trustees must therefore consider not only the need to provide an income for the life tenants, but also how to preserve and increase capital for the remainderman;
Trustees have a duty to act even-handedly towards different classes of beneficiary; and
Trustees can appoint qualified agentys to carry out asset management functions.
What are the statutory powers of maintenance for trustees?
Trustees may (not obliged to) use income from their interest to provide for the maintenance of a minor beneficiary;
Trusts created after October 2014, s.31 Trustees Act - trustees may apply part or all of the income for the ‘maintenance, education, or benefit’ of a minor beneficiary (trusts prior to this date, the standard is just what is reasonable in the circumstances).
Payments should be amde to the minor’s parent, guardian, or benefit provider i.e. school. S31 cannot be used if another beneficiary has prior interest to the income.
If the beneficiary is over 18, then trustees are under a duty to pay the trust income to the beneficiary as it arises.
What are the statutory powers of advancement for trustees?
Trustees, in their discretion, may advance a beneficiaries’ entitlement to the capital before it vests. Includes beneficiaries with a vested interest, contingent interest or remainder interest in the trust property. Beneficiaries cannot compel advancement of capital;
For trusts created before October 2014, only half of the beneficiary’s share can be advanced, trusts created after October 2014, their entire interest can be advanced;
Any advancements will be deducted from the beneficiary’s final share. An advance is not permitted if there is prior interest on the capital by another beneficiary (unless they consent).
What are examples of a breach of trust?
Making or retaining inappropriate investments
Making a payment from the trust fund to the wrong person
Failure to obtain proper advice
Misappropriating funds
Failure to recover debts
When are trustees liable for breach of trust?
If a trustee commits a breach of trust, he is liable to the trust for any loss incurred or personal gain
Are current trustees liable for breaches committed by predecessors?
No, nevertheless, the trustee should sort out any irregularities discovered when taking office, including obtaining any satisfaction from the previous trustee.
Is a trustee liable for breaches upon retirement?
Yes, remains liable for breaches that occured during his stewardship. Trustee is not liable for breaches committed by his successors unless his retirement occured so that a breach could be committed or to avoid his becoming involved with it.
Is a trustee liable for breaches by his co-trustees?
Trustee is liable for his own breaches, but as a general rule is not liable for breaches committed by his co-trustees. However, liability can arise when the trustee himself is at fault for allowing another trustee to commit a breach.
What happens where more than two trustees are liable for a breach of trust?
They are jointly and severally liable for a breach of trust, therefore, any one of the trustees may be sued for the full amount.
What must a trustee do following a breach?
Make good the loss to the trust estate. If there is no loss, the trustee is accountable for any profit made by breach of trust. The rule is not to punish the trustee, but compensate the beneficiaries. The trustees may be required to:
1) Account for any unlawful profit
2) Compensate for any loss suffered by the trust
3) Restore property due to the trust i.e. specific property, or its equivalent, or its monetary value to the trust fund
Can a trustee offset losses and profits as a result of breach?
No, unless the breaches form part of the same transaction.
What protection is offered to the trustee when a beneficiary was involved in the breach?
if a beneficiary instigated, requested, concurred in or consented to a breach of trust, the beneficiary will not generally be allowed to sue and may have to relieve trustees of liability either partially or wholly.
Trustee or other beneficiaries should be indemnified out of the interest of a beneficiary who instigated or requested such a breach or consented to a breach and actually benefitted from it.
What is section 62 of Trustee Act 1925?
The court can impound the interest of the beneficiary if the beneficiary instigated or requested the breach or consented in writing to the breach but there is no requirement of actual or intended benefit to the beneficiary.
What is section 61 Trustee Act 1925?
The courts may relieve a trustee who has acted ‘honestly’ and ‘reasonably’ and ‘ough fairly to be excused’. As long as these three requirements are met the award of relief is in the discretion of the court.
How does an exoneration clause work?
A trust instrument will commonly restrict the liability of a trustee by way of an exoneration clause. Such clauses offer protection for the trustee whilst reducing the protection otherwise afforded to the beneficiary. There can be no exclusion of liability from fraud or international wrong doing.
What is the limitation period in relation to breach of trust?
Limitation Act 1980 provides a 6 year limitation period within which claims for breach of trust must be brought from the date of the breach.
For a beneficiary with a postponed interest, the 6 year period will not commence until his interest falls into possession.
In the case of a minor beneficiary, s.28 Limitation Act 1980 provides that the 6 year periodf will not commence until the beneficiary has attained majority.
What are the equitable remedies for breach of trust?
-Specific Performance
-Injunctions
-Rescission
-Rectification
-Account
What is the remedy of ‘specific performance’ for breach of trust?
Where the court compels the defendant to perform his original obligation under the contract. The obligation must be unique such as a contract to fulfil the sale of a particular parcel of land. Specific performance would not be awarded where it would require constant court supervision.
What is the remedy of ‘injunctions’ for breach of trust?
Three types:
1) Prohibitive injunctions - prevent the defendant from doing something
2) Mandatory injunctions - compel the defendant to do something
3) Quia Timet Injunctions - where the harm has not happened, but it is feared/threatened. It is an interim injunction and the following must be satisfied:
- There is a serious question to be tried
- damages are inadequate
- the balance of convienience requires the grant of an injunction without doing injustice to one side or the other.
What is the remedy of ‘rescission’ for breach of trust?
Aims to restore both parties to their original positions. It may be barred where:
1) an innocent third party will be adversely affected by the remedy;
2) there has been a delay;
3) there has been an affirmation of the contract (when it could have been rescinded) ; or
4) it is impossible to return both parties to where they were.
What is the remedy of ‘rectification’ for breach of trust?
Allows a legal document that does not reflect the true agreement of the parties to be properly amended. The court needs:
1) clear evidence of the parties true intention;
2) the flaw in the document so that it did not reflect the true intention;
3) specific intention to achieve something different from what had been done;
4) an issue capable of being contested even though all relevant parties consented to the rectification.
What is the remedy of ‘account’ for breach of trust?
This remedy will requirew the fiduciary to repay unauthortised profits, bribes etc, from a breach of confidence.
Following the breach of trust, the claimant will have to choose between which remedies?
1) A Personal Claim - a claim against the trustee or fiduciary personally; it is not based on the recipient having the property in their possession; or
2) An Equitable Proprietary Claim - a claim based on the defendant having the property, its proceeds or its replacement in his possession and being required to return it.
What are the advantages of bringing a proprietary claim (provided the property is still in the hands of the trustee)?
1) if the trustee or recipient has become bankrupt the beneficiary takes priority over the other creditors;
2) any increase in value of the property taken by the trustee is recoverable; and
3) there are no time limits to bringing a proprietary claim.
The trustee may have taken trust property and changed it, or mixed it with their own, how do beneficiaries identify the new property belonging to the trust?
1) Tracing Where a Substitution of Asset - if the taken money has been used to buy an asset, the asset will belong to the trust;
2) Tracing Where a Mixed Asset - if the taken trust money has been used with some of the trustee’s own money to buy an asset, the beneficiaries can either take a proportionate share in the asset, or take a lien over the asset; or
3) Tracing through a Mixed Bank Account - in this case, the thrust money has been mixed with the trustee’s own money, and then purchased assets or been generally spent. The beneficiaries can bring a proprietary claim against the assets purchased with the mixed monies but not for the money generally dissipated.
