Equity and trusts
Master sheet - SBAQ
Unit 1
Question 1
Which ONE of the following scenarios creates a trust?
A. A singer signs a contract with a nightclub. The singer agrees to
perform from 8pm until midnight on Friday and Saturday nights for
the next month.
B. W died recently. Their will contained the following provision:
"I give £50,000 to Paul and leave it to his good judgement whether
he gives part of it to Rachel"
C. X also died recently. Their will contained the following clause:
"I give £100,000 to Jessica and she is to use this money to pay for
Kevin to attend the sixth form at The Grange Academy."
Kevin is 16 and will be starting in the sixth form next September.
D. Y wrote a letter which contained the following clause:
“I am giving £10,000 to Laura to hold on trust for herself.”
Feedback
Sorry, that is not correct. The answer is C where the £100,00 is to be held
by Jessica but used for the benefit of Kevin.
Scenario (A) did not create a trust because trusts can exist only over
property and the singer held no property which could be the subject of a
trust. Scenario (B) did not create a trust because no binding obligation
was imposed on Paul to give any part of the £50,000 to Rachel. Scenario
(D) did not create a trust because the legal and equitable interests in the
£10,000 both belonged to Laura. A trust exists when the legal and
equitable interests are owned by different people or separate groups of
people.
Question 2
Is this statement TRUE or FALSE?
Last week, a father declared that he was going to hold his shares in
Betabuild plc on trust for his daughter until she should attain 25. As a
result, the father became the trustee, and the daughter became the
beneficiary of the shares. As trustee, the father continued to be the
absolute owner of the shares but owed a duty to apply all profits and
benefits for his daughter
,True
False
Feedback
Sorry, that is not correct. The statement is false. A trustee is not an
absolute owner. Absolute ownership means outright ownership of the
property in question. Where a trust exists, the trustee holds the legal title
to the property, but the equitable interest belongs to the beneficiary.
Question 3
A year after creating the trust in Question 2, the father saw that the value
of Betabuild shares was particularly high and thought that it would be a
good idea to sell them and re-invest the money.
Who would be the correct person to sell the shares?
a. The father, in his capacity as trustee.
b. The daughter, as beneficiary.
c. Nobody can sell the shares.
d. The father and the daughter must both be parties to any sale.
Correct, well done. The answer is A.
As the owner of the legal title to the shares, the father would be able to
sell them. The daughter’s equitable interest would transfer to the sale
proceeds and, subsequently, to any replacement property purchased. B is
not correct because Amy could sell no more than the equitable interest
which she owns, and the question referred to selling "the shares" meaning
the legal and equitable interests. C is not correct because trust assets can
be sold at any time by the trustee as legal owner (and the sale proceeds
reinvested). D is not correct because only the trustee as legal owner
needs to be a party to any sale of the shares.
Question 4
Two years ago, Xavier created a trust for his children. He appointed Sam,
Tania and Victor to be the trustees. Six months ago, Sam was declared
bankrupt and last month, Victor died.
Which ONE of the following statements is CORRECT?
a. On Victor’s death, part of the trust property will pass to his heirs
under his will or intestacy.
b. The trust must come to an end as one of the appointed trustees has
died
c. On Sam’s bankruptcy, her creditors will be able to claim the trust
property for it to be shared among her creditors.
d. The beneficiaries’ interest in the trust property means that it will still
be held on trust for them by Tania and Sam, notwithstanding Victor's
death.
,Feedback
Correct, well done. The answer is D. The beneficiaries’ proprietary interest
in the trust property means it is still held on trust for them by trustees,
notwithstanding Victor’s death and Sam’s bankruptcy. A is not correct
because on Victor’s death, the trust property does not pass to his heirs
under his will or intestacy. Even though Victor has a part interest in the
legal title, this is merely an administrative interest. In equity, the trust
property belongs to the beneficiaries of the trust. Trustees are joint
tenants. Therefore, the trust property would have automatically passed by
survivorship to the other two trustees. They will continue to act as
trustees or can appoint another trustee to replace Victor, so option (B) is
not correct. On Sam’s bankruptcy, the trust property would not have been
shared among her creditors even though she was a part-owner of the
legal title. The trust property was not hers beneficially, so (C) is not
correct.
Question 5
Susan created a trust two years ago. She appointed Wayne as the sole
trustee, asking him to hold £100,000 on trust for her two children, Emma
and William. Last month, Susan discovered that Wayne has spent some of
the trust fund buying a car for himself.
Is the following statement TRUE or FALSE?
Susan, as the settlor of the trust, can sue Wayne for the breach of his duty
to the trust.
a. True
b. False
Feedback
Correct, well done. The statement is false. Wayne has clearly committed a
breach of his duty to the trust; even though he has the legal title to the
trust fund, he can only use it for the benefit of the beneficiaries. Buying
the car has caused the trust to lose value and he can be made liable for
that loss of value and can be sued for this breach. However, it is the
beneficiaries, Emma and William, who can bring any action against him
rather than Susan. Settlors lose control over trusts after they have been
created (unless they appoint themselves to be trustees or reserve powers
in the declaration of trust).
Question 6
John’s will created a trust of £100,000 for George if he attains 21. When
John died, George was aged 19. Sadly, George died before his 21st
birthday.
Will the £100,000 be paid to George’s estate?
a. Yes
b. No
, Feedback
Sorry, that's not the right answer. The answer is no. George’s interest was
contingent on his attaining 21. This contingent interest failed when he
died before attaining 21; he was not entitled to anything and so there was
nothing to pass to his estate. The £100,000 will pass on resulting trust
back to the John’s estate to the residuary beneficiaries under the will.
Question 7
Susan's will contains the following trust:
"I give £100,000 to my trustees to hold on trust for my husband, Ben for
life remainder to my children, Nicholas and Jane."
Susan is alive.
Is the following statement TRUE or FALSE?
Ben, Nicholas, and Jane have vested interests.
a. True
b. False
Feedback
That’s not right. The statement is false. None of the beneficiaries have
vested interests (or any interests at all) because a will has no effect until
the testator dies. In the meantime, the testator can revoke or change his
will, or the prospective beneficiaries’ interests may fail because, for
example, the beneficiaries might predecease the testator.
Question 8
Harriet's (validly executed) will contains the following gifts:
Clause 3 "I give £1,000 to Paul."
Clause 4 "I give the residue of my estate after payment of all debts
and legacies to Jenny'".
Which ONE of the following statements is CORRECT?
a. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into Paul's estate. If the gift to Jenny
fails to have effect, the residue will pass on Jenny's intestacy.
b. If Paul's legacy fails to have effect because Paul predeceases Harriet
the £1,000 will pass into residue. If the residuary gift fails because
Jenny predeceases Harriet, the residue will pass to Jenny's estate.
c. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into residue. If the residuary gift fails
because Jenny predeceases Harriet, the residue will pass to Harriet's
next of kin on her intestacy.
d. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into residue. If the residuary gift fails
Master sheet - SBAQ
Unit 1
Question 1
Which ONE of the following scenarios creates a trust?
A. A singer signs a contract with a nightclub. The singer agrees to
perform from 8pm until midnight on Friday and Saturday nights for
the next month.
B. W died recently. Their will contained the following provision:
"I give £50,000 to Paul and leave it to his good judgement whether
he gives part of it to Rachel"
C. X also died recently. Their will contained the following clause:
"I give £100,000 to Jessica and she is to use this money to pay for
Kevin to attend the sixth form at The Grange Academy."
Kevin is 16 and will be starting in the sixth form next September.
D. Y wrote a letter which contained the following clause:
“I am giving £10,000 to Laura to hold on trust for herself.”
Feedback
Sorry, that is not correct. The answer is C where the £100,00 is to be held
by Jessica but used for the benefit of Kevin.
Scenario (A) did not create a trust because trusts can exist only over
property and the singer held no property which could be the subject of a
trust. Scenario (B) did not create a trust because no binding obligation
was imposed on Paul to give any part of the £50,000 to Rachel. Scenario
(D) did not create a trust because the legal and equitable interests in the
£10,000 both belonged to Laura. A trust exists when the legal and
equitable interests are owned by different people or separate groups of
people.
Question 2
Is this statement TRUE or FALSE?
Last week, a father declared that he was going to hold his shares in
Betabuild plc on trust for his daughter until she should attain 25. As a
result, the father became the trustee, and the daughter became the
beneficiary of the shares. As trustee, the father continued to be the
absolute owner of the shares but owed a duty to apply all profits and
benefits for his daughter
,True
False
Feedback
Sorry, that is not correct. The statement is false. A trustee is not an
absolute owner. Absolute ownership means outright ownership of the
property in question. Where a trust exists, the trustee holds the legal title
to the property, but the equitable interest belongs to the beneficiary.
Question 3
A year after creating the trust in Question 2, the father saw that the value
of Betabuild shares was particularly high and thought that it would be a
good idea to sell them and re-invest the money.
Who would be the correct person to sell the shares?
a. The father, in his capacity as trustee.
b. The daughter, as beneficiary.
c. Nobody can sell the shares.
d. The father and the daughter must both be parties to any sale.
Correct, well done. The answer is A.
As the owner of the legal title to the shares, the father would be able to
sell them. The daughter’s equitable interest would transfer to the sale
proceeds and, subsequently, to any replacement property purchased. B is
not correct because Amy could sell no more than the equitable interest
which she owns, and the question referred to selling "the shares" meaning
the legal and equitable interests. C is not correct because trust assets can
be sold at any time by the trustee as legal owner (and the sale proceeds
reinvested). D is not correct because only the trustee as legal owner
needs to be a party to any sale of the shares.
Question 4
Two years ago, Xavier created a trust for his children. He appointed Sam,
Tania and Victor to be the trustees. Six months ago, Sam was declared
bankrupt and last month, Victor died.
Which ONE of the following statements is CORRECT?
a. On Victor’s death, part of the trust property will pass to his heirs
under his will or intestacy.
b. The trust must come to an end as one of the appointed trustees has
died
c. On Sam’s bankruptcy, her creditors will be able to claim the trust
property for it to be shared among her creditors.
d. The beneficiaries’ interest in the trust property means that it will still
be held on trust for them by Tania and Sam, notwithstanding Victor's
death.
,Feedback
Correct, well done. The answer is D. The beneficiaries’ proprietary interest
in the trust property means it is still held on trust for them by trustees,
notwithstanding Victor’s death and Sam’s bankruptcy. A is not correct
because on Victor’s death, the trust property does not pass to his heirs
under his will or intestacy. Even though Victor has a part interest in the
legal title, this is merely an administrative interest. In equity, the trust
property belongs to the beneficiaries of the trust. Trustees are joint
tenants. Therefore, the trust property would have automatically passed by
survivorship to the other two trustees. They will continue to act as
trustees or can appoint another trustee to replace Victor, so option (B) is
not correct. On Sam’s bankruptcy, the trust property would not have been
shared among her creditors even though she was a part-owner of the
legal title. The trust property was not hers beneficially, so (C) is not
correct.
Question 5
Susan created a trust two years ago. She appointed Wayne as the sole
trustee, asking him to hold £100,000 on trust for her two children, Emma
and William. Last month, Susan discovered that Wayne has spent some of
the trust fund buying a car for himself.
Is the following statement TRUE or FALSE?
Susan, as the settlor of the trust, can sue Wayne for the breach of his duty
to the trust.
a. True
b. False
Feedback
Correct, well done. The statement is false. Wayne has clearly committed a
breach of his duty to the trust; even though he has the legal title to the
trust fund, he can only use it for the benefit of the beneficiaries. Buying
the car has caused the trust to lose value and he can be made liable for
that loss of value and can be sued for this breach. However, it is the
beneficiaries, Emma and William, who can bring any action against him
rather than Susan. Settlors lose control over trusts after they have been
created (unless they appoint themselves to be trustees or reserve powers
in the declaration of trust).
Question 6
John’s will created a trust of £100,000 for George if he attains 21. When
John died, George was aged 19. Sadly, George died before his 21st
birthday.
Will the £100,000 be paid to George’s estate?
a. Yes
b. No
, Feedback
Sorry, that's not the right answer. The answer is no. George’s interest was
contingent on his attaining 21. This contingent interest failed when he
died before attaining 21; he was not entitled to anything and so there was
nothing to pass to his estate. The £100,000 will pass on resulting trust
back to the John’s estate to the residuary beneficiaries under the will.
Question 7
Susan's will contains the following trust:
"I give £100,000 to my trustees to hold on trust for my husband, Ben for
life remainder to my children, Nicholas and Jane."
Susan is alive.
Is the following statement TRUE or FALSE?
Ben, Nicholas, and Jane have vested interests.
a. True
b. False
Feedback
That’s not right. The statement is false. None of the beneficiaries have
vested interests (or any interests at all) because a will has no effect until
the testator dies. In the meantime, the testator can revoke or change his
will, or the prospective beneficiaries’ interests may fail because, for
example, the beneficiaries might predecease the testator.
Question 8
Harriet's (validly executed) will contains the following gifts:
Clause 3 "I give £1,000 to Paul."
Clause 4 "I give the residue of my estate after payment of all debts
and legacies to Jenny'".
Which ONE of the following statements is CORRECT?
a. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into Paul's estate. If the gift to Jenny
fails to have effect, the residue will pass on Jenny's intestacy.
b. If Paul's legacy fails to have effect because Paul predeceases Harriet
the £1,000 will pass into residue. If the residuary gift fails because
Jenny predeceases Harriet, the residue will pass to Jenny's estate.
c. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into residue. If the residuary gift fails
because Jenny predeceases Harriet, the residue will pass to Harriet's
next of kin on her intestacy.
d. If Paul's legacy fails to have effect because Paul predeceases
Harriet, the £1,000 will pass into residue. If the residuary gift fails
