Trusts Law Flashcards
Outline the key features of a trust arrangement?
A trustee holds property for the benefit of another. It involves;
- A duty imposed on a trustee(s)
- To deal with property over which they have control
- For the benefit of beneficiaries who can enforce the duty.
What is an express trust and what makes it enforceable?
A trust that the settlor expressly intends to create. To be enforceable, the settlor must;
- make a valid declaration of trust
- put assets in the trust.
Once these steps are complete, the trust is said to be ‘constituted’, and the settlor cannot change their mind.
What should a valid declaration of trust do?
- Identify the trustees
- Identify the individual property that is to be held in trust
- Identify the beneficiaries (by name or description)
- Identify the powers and duties that the trustees have in running the trust and administering trust property.
N.B. Settlor drops out of the picture after this point.
When can trusts be created?
During the settlor’s lifetime - requires the settlor to make a valid declaration of trust and ensure that the property is put into trust and transferred to the trustee.
On their death in their will - testator/testatrix must make a valid declaration of trust in a will and direct that title to trust property goes to the trustee.
How do trusts allow property ownership to be split up?
Legal title goes to the trustee and equitable title goes to the beneficiary.
N.B. Beneficiaries carry all the benefits of trust property without managing it, with a personal right to enforce trustee duties and seek compensation for breach of trust.
What are some of the general trustee duties?
- To observe the terms of the trust deed
- To act impartially between beneficiaries
- To provide information
- To act unanimously unless trust deed says otherwise
- To distribute assets carefully.
Explain how trusts are more versatile than gifts?
They ensure property is controlled and managed by a trustee, who is under a duty to maintain, and potentially increase the property value on trust for the benefit of beneficiaries.
Trustees will make decisions in the best interests of beneficiaries who are too young or unwell to make such decisions alone.
Trusts can put conditions on beneficiary entitlement and drip-feed money early if needed.
What is the difference between a fixed interest trust and a discretionary trust?
Under a fixed interest trust, the trustees have no discretion as to how the trust property is to be distributed between the beneficiaries. The settlor has stipulated once and for all who the beneficiaries are and the proportions in which they will share the trust property.
Under a discretionary trust, the trustees have discretion as to the amounts any person may receive and/or whether particular people receive anything at all.
When are discretionary trusts most likely to be useful?
In situations when it will be a while before anyone will benefit from the trust fund. The trust allows the trustees to respond to changes in circumstances when the time comes for the distribution of trust property.
What happens if a declaration of trust is silent on the shares that beneficiaries will take?
It is presumed that they will share equally.
What are the 5 requirements for a valid declaration of trust?
1) Certainty of intention
2) Certainty of subject-matter
3) Certainty of object
4) Compliance with the beneficiary principle (be for the benefit of individuals)
5) Compliance with the perpetuity rules
What is required for certainty of intention?
The settlor must have used words (no requirement to use the word ‘trust’ but must be obligatory/mandatory) or actions that impose a duty on someone to act as a trustee and hold property for the benefit of someone else.
What if there is no certainty of intention?
If someone transfers property to another using precatory wording, it is likely that the person will be deemed to have made a gift.
If someone transfers property to another and there is no evidence of what they intended, the law relies on various presumptions as to what the correct legal result should be.
What is required for certainty of subject-matter?
1) The trust property must be described with certainty, and
2) The settlor must define the beneficiaries’ interests with certainty (e.g. ‘generous amounts’ does not suffice)
Explain how trust property can be described with certainty, especially where collection of items involved?
- Trust property must be identifiable.
- The thing held on trust must be ‘property’ currently owned.
- Residue of my estate is certain, bulk of estate is not.
- Can create a trust over part of a collection of items (e.g. 50/950 shares in Hunter v Moss) so long as the items in that collection are all identical (only true for intangibles, not tangibles e.g. wine bottles).
- For tangibles, important to physically separate intended trust property from other property.
What if there is no certainty of subject-matter?
If the settlor intended to create a trust with themselves as trustee but there is no certainty of trust property, no trust is created and the settlor will remain the outright owner.
If the settlor transfers property to a 3rd party and declares that that person shall be a trustee over ‘some of it’ and that a gift is intended over the rest, then no trust is created. The 3rd party will take the entire property absolutely, free from any trust.
If the settlor has appointed a trustee and intended to create a trust for the benefit of individuals but does not specify the interests that those individuals will take, the trustee shall hold the trust fund for the benefit of the settlor under a ‘resulting trust’
What is required for certainty of objects?
The beneficiaries to be identified with sufficient certainty so that the trustees know who to distribute property to, to ensure they do not breach trust.
No problems when named individually, but difficulties when described as a class.
What is the certainty of objects test for fixed interest trusts?
Complete list test. It must be possible to draw up a complete list of each and every beneficiary. Here, we need;
- Conceptual certainty - the trustees must have sufficient criteria to know what type of person to look for or the trust will fail.
- Evidential certainty - we need sufficient evidence to identify all the beneficiaries who will benefit under the fixed interest trust.
What is the certainty of objects test for discretionary trusts?
Given individual test - can it be said with certainty whether any given individual is or is not a member of the class of objects?
For the test to be satisfied, we need;
- Conceptual certainty
- Administrative workability (trust invalid if the class is too large in number - Q of fact but depends on the size of the class compared to the size of the trust fund)
- Capriciousness (trust invalid if capricious - no rational reason for the trust).
What if there is no certainty of objects? (or in the case of a discretionary trust, the trust is administratively unworkable or capricious).
There will be a resulting trust in favour of the settlor.
Explain the rule against perpetuity?
To be a valid trust, the beneficial interests under the trust must vest - i.e. become unconditional within the relevant perpetuity period of 125 years for trusts > April 2010.
What are the formalities that a valid declaration of trust over land must comply with under s53(1)(b) LPA 1925?
- Be evidenced in writing and signed by the person able to declare the trust in the joint presence of two witnesses.
- N.B. A signed letter containing trust terms will suffice.
- N.B. Over email, if a trustee declares the terms of an express trust over land and types their name at the end, the typing constitutes a signature.
- N.B. Declaration of trust over other property can be done orally so long as subsequently confirmed in writing.
What are the 3 common ways to constitute an express trust?
1) Settlor declares themselves to be trustee by making a valid declaration of trust (easy and constituted).
2) Settlor declares themselves and 3rd parties to be trustees
3) Settlor appoints 3rd party to be trustee (steps must be taken to put legal title to the trust property in the hands of the trustee - differs based on type of property).
How does the settlor constitute an express lifetime trust in shares?
If shares are within CREST system (public-listed companies);
- Shares recorded electronically, can be done instantaneously without the need for paperwork.
If shares are outside CREST system (all other shares in private companies);
- Settlor must execute a stock transfer form and give completed stock transfer form and relevant share certificate to the trustees to pass to company or company direct.
- Company secretary will then register the trustee as new shareholder (and thus new legal owner) in the register of members.
At what point is legal title transferred (shares/land)?
When all steps are complete and the trustee is the new registered shareholder/proprietor of the land.
How does the settlor constitute an express lifetime trust in land?
- Executing a deed where the land is registered (TR1), and giving these either to the trustee to pass to Land Registry or to Land Registry direct.
- Land Registry will register the trustee as the new legal owner.
How does the settlor constitute an express lifetime trust in money?
Cash from settlor to trustee - legal title passes with delivery.
Bank transfer from settlor to trustee - legal title passes once monies arrived in trustees account.
Cheque - legal title passes once the cheque has cleared. If the settlor dies before then, the cheque can no longer be cashed.
How does the settlor constitute an express lifetime trust in chattels?
Legal title passes by physical delivery of the asset to the trustee or by deed.
What is ‘equity will not assist a volunteer’?
The transfer rules cannot be bent or overlooked to constitute a trust. If the settlor does not follow the relevant transfer rules to the property that was going to be held on trust, there will be no trust as equity cannot assist a volunteer (beneficiary).
What are the exceptions to the maxim that ‘equity will not assist a volunteer’?
In the below, equity will get involved and help to create an enforceable trust.
1) The ‘every-effort’ test - if the settlor has done everything required to transfer legal title in land/shares and no longer holds transfer documents, but the transfer is incomplete due to 3rd party, equity may consider the transfer complete. (E.g. registration by 3rd party pending at the settlor’s death).
2) The rule in Strong v Bird - if the settlor has intended to create an immediate trust with a third party acting as trustee, but failed to transfer legal title during their lifetime, the trust can be constituted if the intended trustee becomes the settlor’s executor/administrator, provided the settlor’s intention persisted until death (nothing on the facts to suggest that X changed their mind before death).
What must be done where settlor declares themselves and third party to be trustees?
Steps must be taken to transfer legal title from their sole name into the joint names of the settlor and the other trustees, complying with the relevant transfer rules.
Why is it important to understand the nature of any beneficial interest under a trust?
To be able to advise;
a) whether the beneficiary’s interest is unconditional or conditional and liable to fail if the condition is not satisfied.
b) when the beneficiary will be able to call for trust property.
c) to what the beneficiary is entitled.
What interest does a beneficiary with an interest in capital have?
Absolute interest.
What interest does a beneficiary with an interest in the income only have?
Limited interest.
What 3 interests can there be under a fixed-interest trust?
1) Vested - B has a vested interest if B exists and does not have to satisfy any conditions imposed before becoming entitled to the trust property (unconditional interest).
2) Contingent - Conditional on the happening of a future event that may not happen, or B does not exist yet. Once the condition is satisfied, the beneficial interest vests in them and they have a vested interest.
3) Successive - Trusts can be used to distribute property over successive generations. Usually involves separating capital from income.
What happens if a beneficiary with a vested interest dies before the trust property is paid over to them?
The trust property will belong to the beneficiary’s estate; i.e. will pass as part of the beneficiary’s property under their will or intestacy.
What happens if a beneficiary is a minor?
The trustees will hold the property on trust for the beneficiary until they reach 18; only once they do so can the transfer of property to them discharge the trustees from the trust (‘good receipt’).
Once a beneficiary turns 18, the trust does not automatically end. Beneficiary must request that the trust property be transferred to them and until that happens, the trustees will hold property on a ‘bare trust’.
What happens if a beneficiary dies before the happening of the stipulated event?
Their interest will go back to the settlor unless the settlor has provided that the beneficial interest should pass to someone else.
What different interests may be created within successive interests when separating capital from income?
Life interest; being able to enjoy trust income now (during lifetime).
‘Remainder to my son A’ = vested interest in trust capital, remainderman who must wait until the other person’s life interest expires.
N.B. If the remainderman dies before other person, their interest in remainder would NOT fail; trust property would pass to his estate on the other person’s death and pass via will/intestacy.
Prior to the distribution of trust property in discretionary trusts, how are the individual membrs of the class referred to?
As ‘objects’ of the trust as opposed to beneficiaries. If an individual object (e.g. out of 4 children) is selected by a trustee, at that point they usually have a vested right in that part of the trust property that the trustee has decided to transfer to them.
What is the rule in Saunders v Vautier?
It is logical that a sole adult beneficiary with a vested interest can require that trust property be conveyed to them by the trustees, thereby bringing the trust to an end.
However, this principle has been extended to include trusts with more than 1 beneficiary; 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;
- Are in existence and ascertained.
- Are aged 18+ and have mental capacity.
- Agree to what is being proposed.
What are the general rules for creating purpose trusts (settlor wanting trust to carry out a purpose or advance a cause)?
Must follow same general rules;
- Settlor must make a valid declaration of trust and property must be put into the trust.
- Certainty of intention
- Certainty of object
- Certainty of subject-matter.
- Beneficiary principle*
- Perpetuities*
- Formalities (if trust property contains land).
Why does the beneficiary principle pose a problem for purpose trusts?
There is no individual who can go to court and enforce the trust as purpose trusts are not directly for individuals.
General rule - purpose trusts are void.
Why does the rule against perpetuities pose a problem for purpose trusts?
If the purpose trust is not charitable, it will be void if it locks capital away for a period of more than 21 years (rule against inalienability of capital).
Therefore, non-charitable purpose trusts are void for offending the rule unless either;
- The trust states that is it to last for no more than 21 years (worded in trust deeds as ‘for as long as the law allows’), or
- The trustees may spend all the trust capital on the purpose and thereby end the trust at any time.
Is this purpose trust void ‘I give £40,000 to my Trustees so that they may use the income to maintain the changing rooms at Bees Tennis Club’?
Yes - capital will be locked away, offends the rule against inalienability of capital.
List the key features of Charitable trusts?
Exempt from the beneficiary principle and the rule against inalienability of capital.
Commission decide whether the trust satisfies the conditions set out in the 2011 Charities Act;
a) The trust must be for a charitable purpose.
b) The trust must have sufficient public benefit.
c) The trust must be exclusively charitable.
List some examples of charitable purposes (satisfying requirement a)?
- The prevention or relief from poverty; could include trusts to help the unemployed, build hostels for asylum seekers.
- The advancement of education; could include provision of scholarships, payment of teachers, building educational facilities, published research.
- The advancement of religion; could include maintaining places of worship, paying for future services, and distributing religious publications.
What are the 2 aspects to requirement b) the trust must have sufficient public benefit?
1) The trust purpose must have an identifiable benefit or benefits.
– must be clear and relate to the purposes of the charity.
2) The benefit must accrue to the public or a sufficiently large section of the public.
– no problem when benefits of a trust are offered to the whole public (e.g. trust to maintain a museum open to all), but less clear-cut if the benefits only offered to a restricted group.
How is the ‘sufficiently large section of the public’ requirement satisfied for each of the 3 main charitable purposes?
Prevention or relief of poverty;
– Trust to relieve poverty amongst named individuals is not charitable.
– Trust to relieve poverty amongst a class of individuals is charitable.
Advancement of religion;
– Public benefit only present if the place of worship is open to all (even if only a small number attend) or members of religion mix with the public.
– Contemplative religious orders that are closed off from the outside world are not charitable.
Advancement of education;
– People who might benefit from these must not be numerically negligible but need to satisfy below test too;
– ‘Personal nexus’ test - people linked by a personal nexus are not a sufficient section of the public (e.g. family and employment link).
– ‘Class within a class’ test - class of people to benefit from a charitable purpose can be limited, so long as the limits are legitimate, proportionate, rational, or justifiable and not arbitrary.
– Charitable trusts must not exclude the poor.
List some key features of requirement c) The trust must be exclusively charitable?
A trust must not have any political purpose but can engage in political activities as a means of achieving charitable purpose.
If charging fees, profits must be ploughed back into the trust instead of paid to owners of the institution.
Any political purpose (campaigning to change the law, govt policy) must be ancilliary.
What are the 2 valid non-charitable purpose trusts that are exceptions to the general rule?
1) Re Denley trust
2) Trusts of imperfect obligation
List the key features of a Re Denley trust?
The purpose of the trust must be sufficiently clear and give rise to a sufficiently tangible benefit.
The persons who stand to benefit from the carrying out of the purpose must be ascertainable (class of persons description must be conceptually certain), and
The trust must be limited to 21 years, or trustees able to spend all the trust capital on the purpose and bring trust to an end.
When will trusts of imperfect obligation apply?
In limited cases e.g. trusts to care for specific animals and trusts to maintain graves/tombs.
As the trust lacks a human beneficiary, it offends the beneficiary principle but these trusts are held to be valid but unenforceable (no one can compel trustees to spend money in the way set out in the trust).
