Equity and Trusts Notes
Introduction to Equity and Trusts
Historical Background of Equity:
‘Equity’: Includes trusts, but also covers equitable remedies such as injunctions, dealings
with land and mortgages, administration of deceased persons etc.
Equity grew alongside the common law, supplementing it as and when particular facts
required it.
Trusts:
‘Trust’: ‘A trust is the relationship which arises wherever a person called the trustee is
compelled in equity to hold property… for the benefit of some persons, or for some object
permitted by law, in such a way that the real benefit of the property accrues, not to the
trustee, but to the beneficiaries or other objects of the trust.’ Keeting and Sheridan.
Trusts can only exist over property.
When settlors create trusts, they define the benefit the beneficiaries are to receive from the
property. The settlors can give the beneficiaries specific benefits without giving them
outright ownership.
Trustees have the legal title/interest in the property, whilst the beneficiaries have the
equitable interest (beneficial interest). Beneficiaries get the benefits indirectly by enforcing
the trust obligation against the trustee.
Trustees face rigorous duties, which require them to dispose of the trust in accordance with
the terms of the trust – Ensuring that the beneficiaries get the benefit the settlor intended.
They owe a duty to invest the trust property so that it brings in a reasonable return, and
must avoid speculative investments.
‘Equitable Interest’: Gives the beneficiaries two rights: personal and proprietary.
Beneficiaries have a personal right to enforce the trustees’ duties and to seek compensation
for any breaches. The proprietary right is an ownership interest in the property itself.
Proprietary rights have twofold significance:
- It can be enforced not only against the trustee, but also against successors in title (If
trustee dies, the trust will not pass on to heirs, it will be held in trust for the original
beneficiaries – Also applicable if trustee goes bankrupt, trusts will not be shared out
between creditors);
, - The proprietary nature of the beneficiary’s interest means that it is itself an item of
property which can be sold or given away.
Types of Trust:
Fixed Trusts: The terms of the trust define the share of the trust property which the
beneficiary will receive. Types of fixed trusts include:
- ‘On trust for X for life remainder to Y’: Trustees pay only the trust income to X
during their lifetime. When X dies, the trustees will transfer the property itself to Y –
Where the trust will end. X = Life Tennant (life interest), Y = Remainderman
(remainder interest). (Trust with Successive Interests)
- ‘On trust for A if he attains 21 but if he dies before then, for B’: A gets property
when 21, unless he dies before, meaning B will get the trust property.
- ‘On trust for Z where Z is an infant or cannot manage his affair for some other
reason’: On circumstances would not be appropriate to transfer property. Property
managed by trustees for benefit of Z.
- ‘On trust for C where C is an adult with full mental capacity’/ ‘bare trust’: Trust can
end at any time by the beneficiary demanding that the trustee transfer legal title so
that they become the outright owner (Saunders v Vautier).
Discretionary Trusts: Gives the trustees a discretion as to the amounts any beneficiary may
receive and/or whether particular beneficiaries receive anything at all. No individual has an
equitable interest under a discretionary trust until the trustees exercise their discretion in
his favour. Until such persons are allocated an interest by trustees, they are called ‘objects’
rather than beneficiaries. (Beneficiaries (multiple) = class). Settlor can leave a letter of
wishes to trustees to give direction and thinking behind trust (not legally binding).
Purpose Trust: No delegated person as a beneficiary e.g. A trust where property goes to a
charity.
Beneficial Interests:
Vested and Contingent Interests:
Interest is unconditional if vested, and is not unconditional if contingent.
A contingent interest can be conditional upon the happening of some future event that may
or may not happen, or if the beneficiary is not yet in existence. If the condition is satisfied,
the beneficiary’s interest then becomes vested. If the condition is not satisfied, the
beneficiary never becomes entitled to the trust property and their interest fails – In this
event, the settlor usually provides for this by making a substitutional gift. If there is a failure
to make this substitutional gift, the trust property will be returned to the settlor – A
resulting trust for settlor.
, Interests in Possession and Interests in Remainder:
If in ‘possession’, the beneficiary will benefit now. If in ‘remainder’, the beneficiary will
benefit later. Is in possession if there is no other person entitled to an interest before them.
Absolute and Limited Interests:
Absolute interests are capital, whilst a limited interest is income only.
An interest in income only will normally be limited in duration, e.g. for the duration of that
beneficiary’s life.
Changing Nature of Beneficial Interests:
‘Absolutely Entitled’: If beneficiary’s interest is vested, in possession and not limited in
enjoyment. At this point, a sole adult beneficiary can bring the trust to an end by requesting
the trustees to hand the whole trust fund over to him/other trustees (Saunder v Vautier).
‘Bare Trusts’ see the rule extended to include trusts with more than one beneficiary. The
beneficiaries can end the trust by calling for a transfer of trust property to themselves or
other trustees if all the beneficiaries under the trust who could possibly become entitled:
(a) Are in existence and ascertained (between them, they are absolutely entitled to the
trust fund – no other person has a POTENTIAL interest in the fund);
(b) Are 18 or more and of sound mind; and
(c) They all agree.
Creation of Trusts:
Express Trusts:
An express trust may be created in one of two ways:
(a) Settlor declares self a trustee: Owner declares that he holds the asset for the benefit
of someone else. Settlor cannot make himself the sole trustee holding on trust for
the settlor alone.
(b) Settlor transfers property to trustees on trust: Settlor does not retain the legal title
to the asset, but transfers to a trustee for designated beneficiaries (constituting the
trust). Must tell trustee to hold on trust, state beneficiaries and shares and terms on
which they are to benefit (declaring the trust).
Settlors can create trusts in their wills – Settlor is then called a ‘testator’.
Introduction to Equity and Trusts
Historical Background of Equity:
‘Equity’: Includes trusts, but also covers equitable remedies such as injunctions, dealings
with land and mortgages, administration of deceased persons etc.
Equity grew alongside the common law, supplementing it as and when particular facts
required it.
Trusts:
‘Trust’: ‘A trust is the relationship which arises wherever a person called the trustee is
compelled in equity to hold property… for the benefit of some persons, or for some object
permitted by law, in such a way that the real benefit of the property accrues, not to the
trustee, but to the beneficiaries or other objects of the trust.’ Keeting and Sheridan.
Trusts can only exist over property.
When settlors create trusts, they define the benefit the beneficiaries are to receive from the
property. The settlors can give the beneficiaries specific benefits without giving them
outright ownership.
Trustees have the legal title/interest in the property, whilst the beneficiaries have the
equitable interest (beneficial interest). Beneficiaries get the benefits indirectly by enforcing
the trust obligation against the trustee.
Trustees face rigorous duties, which require them to dispose of the trust in accordance with
the terms of the trust – Ensuring that the beneficiaries get the benefit the settlor intended.
They owe a duty to invest the trust property so that it brings in a reasonable return, and
must avoid speculative investments.
‘Equitable Interest’: Gives the beneficiaries two rights: personal and proprietary.
Beneficiaries have a personal right to enforce the trustees’ duties and to seek compensation
for any breaches. The proprietary right is an ownership interest in the property itself.
Proprietary rights have twofold significance:
- It can be enforced not only against the trustee, but also against successors in title (If
trustee dies, the trust will not pass on to heirs, it will be held in trust for the original
beneficiaries – Also applicable if trustee goes bankrupt, trusts will not be shared out
between creditors);
, - The proprietary nature of the beneficiary’s interest means that it is itself an item of
property which can be sold or given away.
Types of Trust:
Fixed Trusts: The terms of the trust define the share of the trust property which the
beneficiary will receive. Types of fixed trusts include:
- ‘On trust for X for life remainder to Y’: Trustees pay only the trust income to X
during their lifetime. When X dies, the trustees will transfer the property itself to Y –
Where the trust will end. X = Life Tennant (life interest), Y = Remainderman
(remainder interest). (Trust with Successive Interests)
- ‘On trust for A if he attains 21 but if he dies before then, for B’: A gets property
when 21, unless he dies before, meaning B will get the trust property.
- ‘On trust for Z where Z is an infant or cannot manage his affair for some other
reason’: On circumstances would not be appropriate to transfer property. Property
managed by trustees for benefit of Z.
- ‘On trust for C where C is an adult with full mental capacity’/ ‘bare trust’: Trust can
end at any time by the beneficiary demanding that the trustee transfer legal title so
that they become the outright owner (Saunders v Vautier).
Discretionary Trusts: Gives the trustees a discretion as to the amounts any beneficiary may
receive and/or whether particular beneficiaries receive anything at all. No individual has an
equitable interest under a discretionary trust until the trustees exercise their discretion in
his favour. Until such persons are allocated an interest by trustees, they are called ‘objects’
rather than beneficiaries. (Beneficiaries (multiple) = class). Settlor can leave a letter of
wishes to trustees to give direction and thinking behind trust (not legally binding).
Purpose Trust: No delegated person as a beneficiary e.g. A trust where property goes to a
charity.
Beneficial Interests:
Vested and Contingent Interests:
Interest is unconditional if vested, and is not unconditional if contingent.
A contingent interest can be conditional upon the happening of some future event that may
or may not happen, or if the beneficiary is not yet in existence. If the condition is satisfied,
the beneficiary’s interest then becomes vested. If the condition is not satisfied, the
beneficiary never becomes entitled to the trust property and their interest fails – In this
event, the settlor usually provides for this by making a substitutional gift. If there is a failure
to make this substitutional gift, the trust property will be returned to the settlor – A
resulting trust for settlor.
, Interests in Possession and Interests in Remainder:
If in ‘possession’, the beneficiary will benefit now. If in ‘remainder’, the beneficiary will
benefit later. Is in possession if there is no other person entitled to an interest before them.
Absolute and Limited Interests:
Absolute interests are capital, whilst a limited interest is income only.
An interest in income only will normally be limited in duration, e.g. for the duration of that
beneficiary’s life.
Changing Nature of Beneficial Interests:
‘Absolutely Entitled’: If beneficiary’s interest is vested, in possession and not limited in
enjoyment. At this point, a sole adult beneficiary can bring the trust to an end by requesting
the trustees to hand the whole trust fund over to him/other trustees (Saunder v Vautier).
‘Bare Trusts’ see the rule extended to include trusts with more than one beneficiary. The
beneficiaries can end the trust by calling for a transfer of trust property to themselves or
other trustees if all the beneficiaries under the trust who could possibly become entitled:
(a) Are in existence and ascertained (between them, they are absolutely entitled to the
trust fund – no other person has a POTENTIAL interest in the fund);
(b) Are 18 or more and of sound mind; and
(c) They all agree.
Creation of Trusts:
Express Trusts:
An express trust may be created in one of two ways:
(a) Settlor declares self a trustee: Owner declares that he holds the asset for the benefit
of someone else. Settlor cannot make himself the sole trustee holding on trust for
the settlor alone.
(b) Settlor transfers property to trustees on trust: Settlor does not retain the legal title
to the asset, but transfers to a trustee for designated beneficiaries (constituting the
trust). Must tell trustee to hold on trust, state beneficiaries and shares and terms on
which they are to benefit (declaring the trust).
Settlors can create trusts in their wills – Settlor is then called a ‘testator’.
