Trusts:
The two principal features of a standard trust:
i. An equitable duty to hold or apply property for the benefit of a person or persons (or in limited
circumstances, for a purpose), e.g. a duty to pay the income from an asset to B.
ii. The person(s) for whose benefit the property is to be applied has (have) an equitable proprietary interest in
the property. This is due to the fact a trust is the product of the Court of Chancery which administers equity
or the equitable jurisdiction rather than a product of the common law courts which administer law.
Legal property rights (such as ownership of a ‘thing’) can be enforced against third parties and do not have
restrictions on them.
Equitable property rights are vulnerable to something known as ‘Equity’s Darling’. If property is obtained through
this, then the equitable rights of those prior to the acquisition are extinguished. Equity’s Darling is someone who
acquires the legal title to the relevant property for value, for example by buying it, and who does not know that
other have equitable interests in that property.
Trusts split the legal and equitable title of property – if 10 shares are held on trust by A for B, A holds the legal title,
but B holds the equitable title.
Trusts can have both trustees and sub-trustees – example is stocks, where investors will request brokers buy stocks
for them in XYZ plc. The broker will need to request a registered member of CREST (a body that is authorised to buy
shares will be a member) who will hold the shares on trust for the broker. The CREST member is the trustee, and has
the legal title to the shares. The broker is the sub-trustee, and has the equitable title to the shares. The investor has
the equitable and beneficial title to the shares. They are the beneficiary.
Where a ‘trustee’ can use the funds freely as if they were their own, a trust will not be in place. Similarly, if there is
no ‘distinguishable’ trust property, then there will not be a trust.
- Case example – trustee was required to keep 3% of the sale proceeds back to be held on trust at a later date.
This was set up in a contract. The contract stipulated the money being retained would be placed into a
separate bank account. The man did keep the money back, but did not separate the money into a different
account. The man then went insolvent. The ‘beneficiary’ asked to court to enforce the trust and have the
money returned to them (as to avoid it being eaten by creditors) but the court held no trust was in place –
the fact the funds were not separated meant there was no discernible trust property. However, he could be
sued for breach of contract, but that would only place the beneficiary as an unsecured creditor.
Express Trusts:
- Trusts which arise because of a person’s intention to create one.
- Facilitative in nature, like contracts.
, - CONTRASTED WITH TRUSTS ARISING BY OPERATION OF LAW – E.G. RESULTING AND CONSTRUCTIVE.
Parties to an express trust:
- Settlor – person who creates the trust. The intention of this person is the basis of the trust
- Trustee – The person who administers the trust. In standard trusts, this person will be the legal owner of the
trust property, so that they can administer it.
- Beneficiary or beneficiaries – the person who benefits from the trust, the person to whom the trust duty is
owed. This is the person who has the equitable proprietary interest in the trust.
It is possible for one person to hold more than one position – i.e. one person is both settlor and trustee. Can be all
three - “I declare I will hold the shares on trust for you and me”. However, CANNOT be sole trustee and sole
beneficiary as this would involve an individual owing a duty to himself.
Example:
If B agrees to sell his land to C by a valid, specifically enforceable contract, C acquires an equitable interest in the
land. B now holds the land on trust for C. Clearly, B did not intend to create a trust of his land, merely agreed to sell
his land to C. As there was no intention to create a trust, then the trust created IS NOT EXPRESS. This would be a
constructive trust.
Methods of creating an express trust:
1. Trusts Inter vivos
i. Transfer on trust – e.g. Settlor transfers the property to the trustee, for them to tranfer to the beneficiary
after a period of X years.
ii. Self-declaration of trust – e.g. Settlor declares that they will hold the property on trust for B for X years. This
foregoes the need for a separate trustee.
2. Testamentary trusts – take effect after the death of the settlor. Can only be created by Will.
Formalities required for the creation of an express trust:
Requirements for ALL express trusts:
1. Three certainties – Certainty of intention (must intend to create a trust), certainty of subject matter (what
property is part of the trust), certainty of object (it must be certain who the beneficiaries are)
2. A beneficiary or beneficiaries (or permitted purpose)
3. Compliance with the applicable perpetuity rule
Additional requirements for inter vivos trusts:
- If a transfer of trust, ‘constitution’ of the trust
- If a trust of land, compliance with the LPA 1925 s53(1)(b)
Additional requirements for testamentary trusts:
- A valid will
The Three Certainties:
Certainty of intention:
- The settlor must intend to assume or impose the relevant duty.
- Intention is ascertained by settlor’s words and conduct, objectively viewed. Private thoughts cannot
constitute as intention.
o Judged on conduct – if someone manifest an intention to impose or assume the duty of a trust, they
intend to create a trust – even if they do not know such a thing exists. It matters not if they
(subjectively) do not intend to create a trust.
, o When in writing, the words in such a document are given their natural and ordinary meaning, taking
into account the context of the document, common sense and the facts which were known to the
author of the document when it was created.
o Simply using the word ‘trust’ does not automatically make one, if the obligation they describe is not
one where a trust would operate.
- Case law has ruled a ‘desire’ carries no obligation – i.e. saying in a will you ‘desire’ X to do something with
the money given will not give rise to a trust.
- Intention can be supported / evidenced by the earmarking or separation of assets to be used in a trust but
this is not always the case. Case law has shown the repeated use of ‘this money is as much your as it is mine’
between the legal owner of a bank account and their partner was enough to indicate that the bank account
was actually held as beneficial joint owners. The depositing and withdrawing of funds for joint purposes was
also a key factor. Also, the legal owner of the bank account was unfamiliar with the concept of a trust, so the
fact he did not use such language did not detract from the intention.
Example 1 - ‘...invest this money and pay the income to X for ten years and then transfer the capital to Y’
- The language is imperative and comprises and instruction – certainty of intention is present.
Example 2 - ‘... I hope, and I’m confident, that you will use this money for your sons.’
- No evidence of intention. The language does not impose a duty or comprise an instruction. Certainty of
intention is NOT present.
Certainty of subject matter:
There are two limbs to the certainty of subject matter:
1. The trust property must be identified or be ascertainable.
2. The entitlement of the beneficiaries must be identified or be ascertainable.
a. Boyce v Boyce – Settlor made a trust of two cars to be held on trust for two sons. Settlor had the
power to determine which car should be held on trust for son 1, and which for son 2. Settlor died
before making a decision. Trust deemed void. (Could have been avoided if there was a provision for
what should happen if he should die).
b. NOTE – a trust to pay someone ‘a reasonable income’ has been deemed valid by the court as an
‘objective yardstick’.
Example 1 (property) - By his will, a testator instructs his trustees to hold his favourite painting on trust for his
daughter. The testator owned many paintings and there is no evidence as to which one was his favourite.
Example 2 (beneficial entitlement) - a settlor transfers investments to his trustees and instructs them to pay a ‘fair’
income to his eldest daughter and the balance to his youngest daughter. No certainty on how much each beneficiary
is entitled to.
The rules in Hunter v Moss:
Different rules depending on if the trust property is chattels versus shares:
- X owns 10 gold bars, each of equal weight. X declares that he is holding 5 of those bars on trust for A, but he
does not segregate the bars he is holding on trust or otherwise identify which are to be held on trust. The
courts have held that in cases relating to chattels, the settlor must segregate or identify the items held on
trust, otherwise the trust will fail on certainty of subject matter. If X declared a fractional interest, i.e. 50% of
the 10 gold bars, then this would not fail – all 10 bars would be the trust property, and the beneficiary would
have a 50% interest in each bar.
- Y owns 10 shares of the same class in Z LTD. Y declares that he is holding 5 of those shares on trust for B, but
he does not identify the 5 shares that are held on trust. The courts have held that with shares, it is not
necessary for the settlor to identify the shares that are being held on trust, and that if they do not do so,
, nevertheless the trust is valid (Hunter v Moss did not clarify which shares are held on trust). Later cases after
Hunter v Moss held that the trust is valid as the settlor holds all the shares on trust, and the beneficiary is
entitled to a fractional interest in each one of the shares.
Fixed / Discretionary trusts & Powers (fiduciary or personal)
- Fixed trusts: Distribution to beneficiaries determined by settlor (fixed)
- Discretionary: Distribution amongst the objects (beneficiaries) determined by trustees. (Objects can compel
trustees to exercise their discretion and distribute the trust, but this does not necessarily mean it will be
distributed to them.)
- Powers (fiduciary or personal): Distribution amongst objects determined by the ‘donee’ of power. Main
difference between discretionary trust and power is that the donee of power is not required to exercise their
power if they do not choose to do so. E.g. settlor instructs the trustees to pay the income of shares to his
widow for her lifetime and after her death to distribute the capital amongst such charitable organisations
and in such shares as his widow shall determine during her lifetime and in the absence of any such
determination, to the RSPCA. In this example, the widow has the power to choose which charities the
income goes to after her death, however if she does not exercise the power, there is a default provision. This
highlights that it is common for different kinds of trusts and powers to be combined. This is a fixed trust with
a personal power.
o To differentiate if it is a power or discretionary trust, look for the language used – Must / May is a
key one.
i. A power is fiduciary if it is given to a person or persons in that capacity as a fiduciary – i.e. it is given to them
in their capacity as a trustee. A donee of fiduciary power cannot ignore their power and must periodically
consider whether to exercise it.
ii. A power is personal if it is given to them in their personal capacity. The donee of a personal power can
ignore it and not exercise it.
Certainty of object:
Types of uncertainty:
i. Conceptual (language) and;
ii. Evidential (fact).
For fixed trusts:
- Specified individuals: ascertainability – must be able to be ascertained. Usually OK as they are typically
named by the settlor. E.g. of this - ‘... the residuary of my estate to my cousin John’ - if he has two cousins
named John, trust will fail under ascertainability.
o Where there is a trust with a life interest and a remainder-person, lack of certainty for the latter or
former will not prevent the whole trust failing, only that part that is uncertain. E.g. ‘my house on
trust for my wife for life, remainder to my favourite daughter’ - this trust will fail in part, but the life
interest of the wife will not be extinguished.
The two principal features of a standard trust:
i. An equitable duty to hold or apply property for the benefit of a person or persons (or in limited
circumstances, for a purpose), e.g. a duty to pay the income from an asset to B.
ii. The person(s) for whose benefit the property is to be applied has (have) an equitable proprietary interest in
the property. This is due to the fact a trust is the product of the Court of Chancery which administers equity
or the equitable jurisdiction rather than a product of the common law courts which administer law.
Legal property rights (such as ownership of a ‘thing’) can be enforced against third parties and do not have
restrictions on them.
Equitable property rights are vulnerable to something known as ‘Equity’s Darling’. If property is obtained through
this, then the equitable rights of those prior to the acquisition are extinguished. Equity’s Darling is someone who
acquires the legal title to the relevant property for value, for example by buying it, and who does not know that
other have equitable interests in that property.
Trusts split the legal and equitable title of property – if 10 shares are held on trust by A for B, A holds the legal title,
but B holds the equitable title.
Trusts can have both trustees and sub-trustees – example is stocks, where investors will request brokers buy stocks
for them in XYZ plc. The broker will need to request a registered member of CREST (a body that is authorised to buy
shares will be a member) who will hold the shares on trust for the broker. The CREST member is the trustee, and has
the legal title to the shares. The broker is the sub-trustee, and has the equitable title to the shares. The investor has
the equitable and beneficial title to the shares. They are the beneficiary.
Where a ‘trustee’ can use the funds freely as if they were their own, a trust will not be in place. Similarly, if there is
no ‘distinguishable’ trust property, then there will not be a trust.
- Case example – trustee was required to keep 3% of the sale proceeds back to be held on trust at a later date.
This was set up in a contract. The contract stipulated the money being retained would be placed into a
separate bank account. The man did keep the money back, but did not separate the money into a different
account. The man then went insolvent. The ‘beneficiary’ asked to court to enforce the trust and have the
money returned to them (as to avoid it being eaten by creditors) but the court held no trust was in place –
the fact the funds were not separated meant there was no discernible trust property. However, he could be
sued for breach of contract, but that would only place the beneficiary as an unsecured creditor.
Express Trusts:
- Trusts which arise because of a person’s intention to create one.
- Facilitative in nature, like contracts.
, - CONTRASTED WITH TRUSTS ARISING BY OPERATION OF LAW – E.G. RESULTING AND CONSTRUCTIVE.
Parties to an express trust:
- Settlor – person who creates the trust. The intention of this person is the basis of the trust
- Trustee – The person who administers the trust. In standard trusts, this person will be the legal owner of the
trust property, so that they can administer it.
- Beneficiary or beneficiaries – the person who benefits from the trust, the person to whom the trust duty is
owed. This is the person who has the equitable proprietary interest in the trust.
It is possible for one person to hold more than one position – i.e. one person is both settlor and trustee. Can be all
three - “I declare I will hold the shares on trust for you and me”. However, CANNOT be sole trustee and sole
beneficiary as this would involve an individual owing a duty to himself.
Example:
If B agrees to sell his land to C by a valid, specifically enforceable contract, C acquires an equitable interest in the
land. B now holds the land on trust for C. Clearly, B did not intend to create a trust of his land, merely agreed to sell
his land to C. As there was no intention to create a trust, then the trust created IS NOT EXPRESS. This would be a
constructive trust.
Methods of creating an express trust:
1. Trusts Inter vivos
i. Transfer on trust – e.g. Settlor transfers the property to the trustee, for them to tranfer to the beneficiary
after a period of X years.
ii. Self-declaration of trust – e.g. Settlor declares that they will hold the property on trust for B for X years. This
foregoes the need for a separate trustee.
2. Testamentary trusts – take effect after the death of the settlor. Can only be created by Will.
Formalities required for the creation of an express trust:
Requirements for ALL express trusts:
1. Three certainties – Certainty of intention (must intend to create a trust), certainty of subject matter (what
property is part of the trust), certainty of object (it must be certain who the beneficiaries are)
2. A beneficiary or beneficiaries (or permitted purpose)
3. Compliance with the applicable perpetuity rule
Additional requirements for inter vivos trusts:
- If a transfer of trust, ‘constitution’ of the trust
- If a trust of land, compliance with the LPA 1925 s53(1)(b)
Additional requirements for testamentary trusts:
- A valid will
The Three Certainties:
Certainty of intention:
- The settlor must intend to assume or impose the relevant duty.
- Intention is ascertained by settlor’s words and conduct, objectively viewed. Private thoughts cannot
constitute as intention.
o Judged on conduct – if someone manifest an intention to impose or assume the duty of a trust, they
intend to create a trust – even if they do not know such a thing exists. It matters not if they
(subjectively) do not intend to create a trust.
, o When in writing, the words in such a document are given their natural and ordinary meaning, taking
into account the context of the document, common sense and the facts which were known to the
author of the document when it was created.
o Simply using the word ‘trust’ does not automatically make one, if the obligation they describe is not
one where a trust would operate.
- Case law has ruled a ‘desire’ carries no obligation – i.e. saying in a will you ‘desire’ X to do something with
the money given will not give rise to a trust.
- Intention can be supported / evidenced by the earmarking or separation of assets to be used in a trust but
this is not always the case. Case law has shown the repeated use of ‘this money is as much your as it is mine’
between the legal owner of a bank account and their partner was enough to indicate that the bank account
was actually held as beneficial joint owners. The depositing and withdrawing of funds for joint purposes was
also a key factor. Also, the legal owner of the bank account was unfamiliar with the concept of a trust, so the
fact he did not use such language did not detract from the intention.
Example 1 - ‘...invest this money and pay the income to X for ten years and then transfer the capital to Y’
- The language is imperative and comprises and instruction – certainty of intention is present.
Example 2 - ‘... I hope, and I’m confident, that you will use this money for your sons.’
- No evidence of intention. The language does not impose a duty or comprise an instruction. Certainty of
intention is NOT present.
Certainty of subject matter:
There are two limbs to the certainty of subject matter:
1. The trust property must be identified or be ascertainable.
2. The entitlement of the beneficiaries must be identified or be ascertainable.
a. Boyce v Boyce – Settlor made a trust of two cars to be held on trust for two sons. Settlor had the
power to determine which car should be held on trust for son 1, and which for son 2. Settlor died
before making a decision. Trust deemed void. (Could have been avoided if there was a provision for
what should happen if he should die).
b. NOTE – a trust to pay someone ‘a reasonable income’ has been deemed valid by the court as an
‘objective yardstick’.
Example 1 (property) - By his will, a testator instructs his trustees to hold his favourite painting on trust for his
daughter. The testator owned many paintings and there is no evidence as to which one was his favourite.
Example 2 (beneficial entitlement) - a settlor transfers investments to his trustees and instructs them to pay a ‘fair’
income to his eldest daughter and the balance to his youngest daughter. No certainty on how much each beneficiary
is entitled to.
The rules in Hunter v Moss:
Different rules depending on if the trust property is chattels versus shares:
- X owns 10 gold bars, each of equal weight. X declares that he is holding 5 of those bars on trust for A, but he
does not segregate the bars he is holding on trust or otherwise identify which are to be held on trust. The
courts have held that in cases relating to chattels, the settlor must segregate or identify the items held on
trust, otherwise the trust will fail on certainty of subject matter. If X declared a fractional interest, i.e. 50% of
the 10 gold bars, then this would not fail – all 10 bars would be the trust property, and the beneficiary would
have a 50% interest in each bar.
- Y owns 10 shares of the same class in Z LTD. Y declares that he is holding 5 of those shares on trust for B, but
he does not identify the 5 shares that are held on trust. The courts have held that with shares, it is not
necessary for the settlor to identify the shares that are being held on trust, and that if they do not do so,
, nevertheless the trust is valid (Hunter v Moss did not clarify which shares are held on trust). Later cases after
Hunter v Moss held that the trust is valid as the settlor holds all the shares on trust, and the beneficiary is
entitled to a fractional interest in each one of the shares.
Fixed / Discretionary trusts & Powers (fiduciary or personal)
- Fixed trusts: Distribution to beneficiaries determined by settlor (fixed)
- Discretionary: Distribution amongst the objects (beneficiaries) determined by trustees. (Objects can compel
trustees to exercise their discretion and distribute the trust, but this does not necessarily mean it will be
distributed to them.)
- Powers (fiduciary or personal): Distribution amongst objects determined by the ‘donee’ of power. Main
difference between discretionary trust and power is that the donee of power is not required to exercise their
power if they do not choose to do so. E.g. settlor instructs the trustees to pay the income of shares to his
widow for her lifetime and after her death to distribute the capital amongst such charitable organisations
and in such shares as his widow shall determine during her lifetime and in the absence of any such
determination, to the RSPCA. In this example, the widow has the power to choose which charities the
income goes to after her death, however if she does not exercise the power, there is a default provision. This
highlights that it is common for different kinds of trusts and powers to be combined. This is a fixed trust with
a personal power.
o To differentiate if it is a power or discretionary trust, look for the language used – Must / May is a
key one.
i. A power is fiduciary if it is given to a person or persons in that capacity as a fiduciary – i.e. it is given to them
in their capacity as a trustee. A donee of fiduciary power cannot ignore their power and must periodically
consider whether to exercise it.
ii. A power is personal if it is given to them in their personal capacity. The donee of a personal power can
ignore it and not exercise it.
Certainty of object:
Types of uncertainty:
i. Conceptual (language) and;
ii. Evidential (fact).
For fixed trusts:
- Specified individuals: ascertainability – must be able to be ascertained. Usually OK as they are typically
named by the settlor. E.g. of this - ‘... the residuary of my estate to my cousin John’ - if he has two cousins
named John, trust will fail under ascertainability.
o Where there is a trust with a life interest and a remainder-person, lack of certainty for the latter or
former will not prevent the whole trust failing, only that part that is uncertain. E.g. ‘my house on
trust for my wife for life, remainder to my favourite daughter’ - this trust will fail in part, but the life
interest of the wife will not be extinguished.
