UNIT 1: INTRODUCTION TO TRUSTS AND THE NATURE OF
BENEFICIAL INTERESTS
KEY ROLES:
Settlor Creates the trust.
Trustee Holds the property for the benefit of another. Not absolute owner: Legal
interest.
Must deal with trust property in accordance with terms of the trust -
Guardian Trust & Executors Company of New Zealand v Public Trustee of
NZ [1942]
Must do their best with the trust, eg invest it sensibly so it brings a
reasonable return.
Beneficiary Person for whom the property is being held. Equitable interest.
Two rights:
1. Personal right to enforce trustee’s duties and to seek an account of
or compensation for any breaches.
2. Proprietary right: ownership in trust property itself.
Rights are enforceable against trustee. Equitable interest can be sold or
given away.
Beneficiary cannot recover trust property from a bona fide purchaser of the
legal title for valuable consideration without notice (equity’s darling).
Express notice
Constructive notice: knowledge they would have had if they made the
enquiries a reasonable purchaser would have made (ie in suspicious
circumstances).
Imputed notice: purchaser is deemed to have knowledge even if they
are not personally aware of it, because their agent (eg solicitor)
possessed that knowledge.
In this situation, beneficiary can claim damages.
,CREATION OF TRUSTS
Express Can be created in two different ways:
Trusts
1. In settlor’s lifetime:
Settlor declares themselves trustee by making a declaration of trust.
Settlor transfers property to trustees on trust.
2. By will:
Testator creates trust in their will which only takes effect when they die –
beneficiaries have no interest until then. Executors are usually initial
trustees. May be:
Specific gift to be held on trust.
Residuary gift on trust (ie remainder of property)
If a beneficiary dies before the testator, the trust lapses. A lapsed specific
trust falls into the residue; a lapsed residuary trust passes under the
intestacy rules to testator’s next of kin.
TYPES:
1. Fixed trusts
a. On trust for X for life remainder to Y:
Creates successive interests.
Trustee only pays trust income to X during their lifetime (life tenant,
eg interest, dividends.
When X dies, trust property (trust capital) transfers to Y and trust
comes to end.
Also referred to as interest in possession trust (IIP): beneficiary has
immediate possession of a right to enjoyment of trust property or right to
income from the property - Pearson v IRC [1980] STC 318 (HL).
b. On trust for A if A attains 21, but if A dies before then, for B
Contingent trust.
c. On trust for Z - where Z is an infant or cannot manage their
affairs for other reason
Where it is inappropriate to give large gift.
d. On trust for C - where C is an adult with full mental capacity
Bare trust: unusual as trustees must handle trust property as the
beneficiary dictates. Common in investment world.
2. Discretionary trusts
Trustees have discretion to amounts beneficiaries receive, eg left to
children and one child has greater financial need.
No individual has an equitable interest until trustees exercise their
discretion in that individual’s favour.
Implied 1. Resulting trusts
Trusts Implied in certain circumstances (presumed intention).
Property results back to original owner.
, 2. Constructive trusts
Unconscionable to deny interest.
For example: house in Graham’s name. Sarah contributes to deposit and
mortgage. Graham holds the legal title on a constructive trust for himself
and Sarah in equity.
ENDING THE TRUST:
Saunders v Vautier [1841] rule: a sole adult beneficiary of sound mind with vested interest in
trust property can end trust by asking trustees to hand whole trust fund over to them.
For a group, the trust can be terminated if all beneficiaries exist, are ascertainable, 18+,
mentally competent and agree.
Arguable that objects under discretionary trust can also end under Saunders v Vautier – Re
Smith [1928].
Objects do not have equitable interest until trustees exercise their discretion in objects’
favour. The objects have the right to require the proper administration of the trust but
have no proprietary interest.
TYPES OF BENEFICIAL INTEREST
Vested vs Vested: beneficiary exists and does not have to satisfy any conditions
Contingent imposed by the terms of the trust before becoming entitled as of right
to trust property.
Contingent: right to that interest is conditional upon the happening of
some future event, eg age, that may not happen, or if the beneficiary
is not yet in existence.
However, courts do not look favourably on testator imposing age
too far in future. Beneficiaries are felt to have certain rights to their
own financial independence and autonomy as young adults -
Wright v Gater [2011]
In possession In possession: enjoy interest immediately.
vs in
remainder In remainder: have to wait until some other beneficiary’s right of use
and enjoyment expires. Interest is said to be ‘postponed.’
Absolute vs Limited: only income generated by investing the capital held in trust.
limited
Absolute interest in capital of trust, or in both income and capital.
TRUSTS IN CONTEXT
Buying a home: implied trust or can use trust to define interests in jointly purchased
property.
Charities
Clubs & Associations
Pensions – monitored by Pensions Act 1995.
Collective investment schemes – monitored by Financial Services and Markets Act 2000.
Insolvency
, When individual is bankrupt/company goes into liquidation, their property is divided
among creditors in priority order. Ordinary unsecured creditors appear at bottom.
If item put on trust until payment (eg machine supplied), can immediately recover
property and need not take place in queue of creditors.
Business
Westdeutsche Landesbank v Islington LBC [1996]: conscience of legal owner formed
basis of all trusts. In particular, such a (constructive) trust can be imposed by the law
where the legal owner is guilty of unconscionable conduct → uncertainty in commercial
context.
Target Holdings v Redferns [1995]: Caution applying family trust principles in
commerce.
EQUITABLE REMEDIES
Only remedy available under common law is compensatory damage. Equity recognises that in
certain circumstances, a remedy of damages or compensation is insufficient.
Injunctions Prohibitory = restrains party from doing a particular act.
Mandatory = compels party to do a particular act.
Awarded on either an interim or final basis. Interim is awarded
prior/during proceedings to maintain status quo while matter being
decided, eg search order, or freezing order.
Specific Compel defendant to comply with terms of a contract.
performance Will generally not order for contracts for personal services so requiring
a person to work for the claimant.
May be possible to obtain an order preventing the defendant from
working for someone else by way of injunction - Lumley v Wagner
[1851].
Rectification Court will agree to order the correction of an executed written document
which does not accurately reflect what the parties intended - must be
error in document, not to nature of or an error in the transaction itself.
Mistake can be common or unilateral.
Claimant seeking rectification has to evidence both the parties' actual
intention and that the executed document does not accurately reflect
that.
Recission Possible at common law - will void contract. However, circumstances
giving rise to recission in equity are wider:
Where there is a mistake as to the ‘legal character or nature of a
transaction or as to some matter of facts or law which is basic to the
transaction’ - Pitt v Holt [2013].
Where one party exerted undue influence over the other in
negotiations and there has been a lack of free will. The undue
influence can be presumed in certain close relationships; in other
cases, the influence must be proved.
Where there has been a misrepresentation, whether fraudulent or
innocent.
Where there has been unconscionable conduct by one party in the
negotiation process (ie taking advantage of the weak position of the
other and the agreement is oppressive and exploitative).
BENEFICIAL INTERESTS
KEY ROLES:
Settlor Creates the trust.
Trustee Holds the property for the benefit of another. Not absolute owner: Legal
interest.
Must deal with trust property in accordance with terms of the trust -
Guardian Trust & Executors Company of New Zealand v Public Trustee of
NZ [1942]
Must do their best with the trust, eg invest it sensibly so it brings a
reasonable return.
Beneficiary Person for whom the property is being held. Equitable interest.
Two rights:
1. Personal right to enforce trustee’s duties and to seek an account of
or compensation for any breaches.
2. Proprietary right: ownership in trust property itself.
Rights are enforceable against trustee. Equitable interest can be sold or
given away.
Beneficiary cannot recover trust property from a bona fide purchaser of the
legal title for valuable consideration without notice (equity’s darling).
Express notice
Constructive notice: knowledge they would have had if they made the
enquiries a reasonable purchaser would have made (ie in suspicious
circumstances).
Imputed notice: purchaser is deemed to have knowledge even if they
are not personally aware of it, because their agent (eg solicitor)
possessed that knowledge.
In this situation, beneficiary can claim damages.
,CREATION OF TRUSTS
Express Can be created in two different ways:
Trusts
1. In settlor’s lifetime:
Settlor declares themselves trustee by making a declaration of trust.
Settlor transfers property to trustees on trust.
2. By will:
Testator creates trust in their will which only takes effect when they die –
beneficiaries have no interest until then. Executors are usually initial
trustees. May be:
Specific gift to be held on trust.
Residuary gift on trust (ie remainder of property)
If a beneficiary dies before the testator, the trust lapses. A lapsed specific
trust falls into the residue; a lapsed residuary trust passes under the
intestacy rules to testator’s next of kin.
TYPES:
1. Fixed trusts
a. On trust for X for life remainder to Y:
Creates successive interests.
Trustee only pays trust income to X during their lifetime (life tenant,
eg interest, dividends.
When X dies, trust property (trust capital) transfers to Y and trust
comes to end.
Also referred to as interest in possession trust (IIP): beneficiary has
immediate possession of a right to enjoyment of trust property or right to
income from the property - Pearson v IRC [1980] STC 318 (HL).
b. On trust for A if A attains 21, but if A dies before then, for B
Contingent trust.
c. On trust for Z - where Z is an infant or cannot manage their
affairs for other reason
Where it is inappropriate to give large gift.
d. On trust for C - where C is an adult with full mental capacity
Bare trust: unusual as trustees must handle trust property as the
beneficiary dictates. Common in investment world.
2. Discretionary trusts
Trustees have discretion to amounts beneficiaries receive, eg left to
children and one child has greater financial need.
No individual has an equitable interest until trustees exercise their
discretion in that individual’s favour.
Implied 1. Resulting trusts
Trusts Implied in certain circumstances (presumed intention).
Property results back to original owner.
, 2. Constructive trusts
Unconscionable to deny interest.
For example: house in Graham’s name. Sarah contributes to deposit and
mortgage. Graham holds the legal title on a constructive trust for himself
and Sarah in equity.
ENDING THE TRUST:
Saunders v Vautier [1841] rule: a sole adult beneficiary of sound mind with vested interest in
trust property can end trust by asking trustees to hand whole trust fund over to them.
For a group, the trust can be terminated if all beneficiaries exist, are ascertainable, 18+,
mentally competent and agree.
Arguable that objects under discretionary trust can also end under Saunders v Vautier – Re
Smith [1928].
Objects do not have equitable interest until trustees exercise their discretion in objects’
favour. The objects have the right to require the proper administration of the trust but
have no proprietary interest.
TYPES OF BENEFICIAL INTEREST
Vested vs Vested: beneficiary exists and does not have to satisfy any conditions
Contingent imposed by the terms of the trust before becoming entitled as of right
to trust property.
Contingent: right to that interest is conditional upon the happening of
some future event, eg age, that may not happen, or if the beneficiary
is not yet in existence.
However, courts do not look favourably on testator imposing age
too far in future. Beneficiaries are felt to have certain rights to their
own financial independence and autonomy as young adults -
Wright v Gater [2011]
In possession In possession: enjoy interest immediately.
vs in
remainder In remainder: have to wait until some other beneficiary’s right of use
and enjoyment expires. Interest is said to be ‘postponed.’
Absolute vs Limited: only income generated by investing the capital held in trust.
limited
Absolute interest in capital of trust, or in both income and capital.
TRUSTS IN CONTEXT
Buying a home: implied trust or can use trust to define interests in jointly purchased
property.
Charities
Clubs & Associations
Pensions – monitored by Pensions Act 1995.
Collective investment schemes – monitored by Financial Services and Markets Act 2000.
Insolvency
, When individual is bankrupt/company goes into liquidation, their property is divided
among creditors in priority order. Ordinary unsecured creditors appear at bottom.
If item put on trust until payment (eg machine supplied), can immediately recover
property and need not take place in queue of creditors.
Business
Westdeutsche Landesbank v Islington LBC [1996]: conscience of legal owner formed
basis of all trusts. In particular, such a (constructive) trust can be imposed by the law
where the legal owner is guilty of unconscionable conduct → uncertainty in commercial
context.
Target Holdings v Redferns [1995]: Caution applying family trust principles in
commerce.
EQUITABLE REMEDIES
Only remedy available under common law is compensatory damage. Equity recognises that in
certain circumstances, a remedy of damages or compensation is insufficient.
Injunctions Prohibitory = restrains party from doing a particular act.
Mandatory = compels party to do a particular act.
Awarded on either an interim or final basis. Interim is awarded
prior/during proceedings to maintain status quo while matter being
decided, eg search order, or freezing order.
Specific Compel defendant to comply with terms of a contract.
performance Will generally not order for contracts for personal services so requiring
a person to work for the claimant.
May be possible to obtain an order preventing the defendant from
working for someone else by way of injunction - Lumley v Wagner
[1851].
Rectification Court will agree to order the correction of an executed written document
which does not accurately reflect what the parties intended - must be
error in document, not to nature of or an error in the transaction itself.
Mistake can be common or unilateral.
Claimant seeking rectification has to evidence both the parties' actual
intention and that the executed document does not accurately reflect
that.
Recission Possible at common law - will void contract. However, circumstances
giving rise to recission in equity are wider:
Where there is a mistake as to the ‘legal character or nature of a
transaction or as to some matter of facts or law which is basic to the
transaction’ - Pitt v Holt [2013].
Where one party exerted undue influence over the other in
negotiations and there has been a lack of free will. The undue
influence can be presumed in certain close relationships; in other
cases, the influence must be proved.
Where there has been a misrepresentation, whether fraudulent or
innocent.
Where there has been unconscionable conduct by one party in the
negotiation process (ie taking advantage of the weak position of the
other and the agreement is oppressive and exploitative).
