Creation of a trust

What determines whether a trust has been validly created?

Validity depends on the method of creation, the type of trust and the nature of the property involved.

Why is certainty essential when creating a trust?

Trustees must know what duties they must perform, beneficiaries must know what rights they possess and the court must be able to enforce the arrangement.

What are the three certainties required for an express trust?

Certainty of intention, certainty of subject matter and certainty of objects.

What is certainty of intention?

A clear objective intention by the settlor to create a trust rather than a gift, loan or another legal arrangement.

What intention is required to create a trust?

An intention to impose or assume the characteristic duty of holding or applying property for a beneficiary or permitted purpose.

Must the settlor intend to create a legally binding obligation?

The settlor must intend a binding obligation rather than merely expressing a moral hope, wish or expectation.

What did Re Oldfield establish about precatory wording?

Re Oldfield held that a testator’s expression of a “desire” that her daughters provide for her son created only a moral expectation and not a trust.

What is the test for certainty of intention?

The court applies an objective test based on the settlor’s words, conduct and surrounding context.

What forms may words showing an intention to create a trust take?

They may be spoken or written, including wording in contracts and wills.

How do courts interpret words said to create a trust?

They consider their natural and ordinary meaning, the document as a whole, facts known or assumed by its author and common sense.

Must the word “trust” be used to create a trust?

Technical trust language is unnecessary if the rights and duties objectively created amount to a trust.

Does use of the word “trust” conclusively establish a trust?

The label is not conclusive because the court examines the substantive rights and obligations created.

How may conduct demonstrate certainty of intention?

Conduct such as managing property for another, recognising shared ownership or treating assets as belonging beneficially to someone else may demonstrate intention.

How does segregation of assets relate to certainty of intention?

Placing assets in a separate earmarked account is strong evidence of a trust, although it is neither essential nor conclusive.

What contextual evidence may indicate an intention to create a trust?

Repeated statements of shared ownership, conduct consistent with joint benefit and the parties’ social and personal circumstances.

What did Paul v Constance establish about trust language?

Paul v Constance held that no technical wording is required where words and conduct objectively demonstrate an intention to share beneficial ownership.

What facts demonstrated a trust in Paul v Constance?

Dennis repeatedly told Doreen that the money was as much hers as his, used the account for joint purposes and took steps to ensure she could access it.

Did Dennis’s lack of knowledge about trust law prevent a trust in Paul v Constance?

His legal sophistication was irrelevant because the objective meaning of his words and conduct showed an intention to create a trust.

Is a settlor’s subjective understanding that they are creating a trust relevant?

The question is what their words and conduct objectively mean, not whether they understood the legal label.

How can uncertainty of subject matter or objects affect certainty of intention?

Extreme vagueness about the property or beneficiaries may indicate that no binding trust obligation was intended.

What did Mussoorie Bank Ltd v Raynor establish?

Mussoorie Bank Ltd v Raynor found no trust where a testator left property to his wife “feeling confident” she would act justly to the children because the property and interests were too uncertain.

What did Lyell v Kennedy establish about conduct and segregation?

Lyell v Kennedy held that rent collected for another and paid into a separate account was held on trust despite the absence of express trust wording.

What combination of facts supported the trust in Lyell v Kennedy?

Segregation of the money and conduct consistent with fiduciary responsibility.

What did Re Kayford Ltd establish?

Re Kayford Ltd held that customer payments placed in a separate “customers’ trust deposit account” were held on trust for the customers.

Why was a trust found in Re Kayford Ltd?

The company intended to preserve the customers’ beneficial ownership, and a trust was the obvious mechanism for doing so.

What did Re Lehman Brothers International (Europe) establish about commercial intention?

Re Lehman Brothers International (Europe) held that intention may be implied from the commercial context and the purpose of the contractual arrangement read as a whole.

Why were post-administration receipts held on trust in Re Lehman Brothers?

Treating clients as unsecured creditors after Lehman ceased normal business would have defeated the commercial purpose of the contractual creditor clause.

What did Modelboard Ltd v Outer Box Ltd establish about commercial labels?

Modelboard Ltd v Outer Box Ltd held that describing sale proceeds as held on trust did not create a trust where the commercial substance was a security interest.

Why was no trust found in Modelboard Ltd v Outer Box Ltd?

The buyer could use the goods, the seller’s interest extended only to payment of the price and a trust would unrealistically give the seller the buyer’s profits.

What did Don King Productions Inc v Warren establish?

Don King Productions Inc v Warren held that an ineffective assignment of personal service contracts could take effect as a trust where the parties clearly intended a partnership to enjoy their benefit.

Can a transaction described as something other than a trust nevertheless create a trust?

It may take effect as a trust where its substance generates the characteristic duty to hold property for another.

What is certainty of subject matter?

It must be possible to identify both the property held on trust and the beneficial interest each beneficiary has in it.

What are the two elements of certainty of subject matter?

Certainty of the trust property and certainty of the beneficiaries’ entitlements.

What is the trust-property requirement?

The property subject to the trust must be identifiable.

Why is identifying trust property usually straightforward after transfer to trustees?

The trust property is ordinarily whatever assets were transferred to them.

What is the beneficial-entitlement requirement?

It must be possible to ascertain the share or interest each beneficiary has in the trust property.

What is the distinction between tangible and intangible property?

Tangible property is physical, such as wine, diamonds or gold, while intangible property includes shares, debts and intellectual property.

What is fungible property?

Property whose individual units are identical and interchangeable, such as ordinary shares of the same class.

What is non-fungible property?

Property whose individual units are unique or potentially different in value, such as diamonds.

How can vague descriptions make trust property uncertain?

A description may fail to identify how much or which property is subject to the trust.

What did Palmer v Simmonds establish about vague quantities?

Palmer v Simmonds held that a trust of the “bulk” of a residuary estate failed because “bulk” did not identify a definite amount.

What did Wilkinson v North establish about “net assets”?

Wilkinson v North held that a company’s “net assets” were an abstract calculation rather than specific identifiable trust property.

Can a fractional interest in an identified bulk be certain?

A trust of a percentage of an identified fund is generally certain because the beneficiary receives a proportionate interest in the whole.

Why is “20% of my 100 shares” generally certain?

It creates a proportionate beneficial interest in the entire identified shareholding without requiring identification of particular shares.

Why may “20 of my 100 items” be uncertain?

It may be impossible to identify which particular items are subject to the trust.

Can a trust of a specified number of identical intangible assets be valid without segregation?

Identical fungible intangible assets, such as shares of the same class, may be held on trust without identifying particular units.

What did Hunter v Moss establish?

Hunter v Moss upheld a trust of 50 out of 950 identical ordinary shares without requiring identification of the particular 50 shares.

Why was the subject matter sufficiently certain in Hunter v Moss?

The shares were intangible, fungible and genuinely identical.

Can tangible assets be held on trust as an unidentified number from a larger bulk?

Tangible property must ordinarily be appropriated, segregated or otherwise specifically identified.

What principle arose from Re London Wine?

Re London Wine established that there is no trust of tangible items forming part of a bulk unless the particular items have been allocated.

What were the facts of Re London Wine?

Customers bought wine and were described as beneficial owners, but no specific bottles were allocated to them.

Why did the trusts fail in Re London Wine?

There was no identifiable property because no particular bottles had been appropriated to any customer.

What did Re Goldcorp establish?

Re Goldcorp held that no trust arose over unallocated gold bullion because no specific bullion had been identified for the customers.

How did Re Lehman Brothers reconcile Hunter v Moss with the bulk-property cases?

It treated the beneficiary as having a proportionate co-ownership interest in the whole fund of identical shares rather than ownership of particular units.

Is declaring a trust of 100 out of 1,000 shares necessarily identical to declaring a trust of one-tenth of the whole holding?

The notes identify this as a conceptual tension because the former appears to refer to particular units while the latter expressly creates a fractional interest.

What happens if the trust property is certain but the beneficiaries’ shares are not?

The trust fails if it is impossible to determine each beneficiary’s entitlement.

What did Boyce v Boyce establish about uncertain beneficial entitlement?

Boyce v Boyce held that a trust failed where one beneficiary was to choose between two properties but died before choosing, leaving no way to determine the division.

How could the trust in Boyce v Boyce have avoided failure?

It could have included a fallback mechanism, such as allowing the trustee to decide if the original chooser could not.

What did Re Golay’s Will Trusts establish?

Re Golay’s Will Trusts upheld a direction to pay a “reasonable income” because reasonableness could be determined by an objective standard.

Can flexible language satisfy certainty of subject matter?

Flexible wording can be valid where a court can apply an objective yardstick to make it certain.

What is certainty of objects?

It must be possible to identify the beneficiaries of the trust or, for a purpose trust, the permitted purpose.

What is conceptual certainty?

The words defining the class of objects must have a clear and legally intelligible meaning.

What is evidential certainty?

There must be sufficient evidence to determine whether particular people fall within the defined class.

Does the test for certainty of objects differ between fixed and discretionary trusts?

Fixed trusts require a complete list, while discretionary trusts use the less demanding is-or-is-not test.

Why do fixed trusts require greater certainty of objects?

The trustees must identify every beneficiary and distribute the property according to the settlor’s fixed directions.

What happens if the intended beneficiary of a fixed trust cannot be identified?

The trust fails for uncertainty of objects.

Can identified beneficiaries of a fixed trust still take where other potential beneficiaries are uncertain?

They may take if their own entitlement does not depend on establishing the entitlements of the uncertain beneficiaries.

What is the complete-list test?

It must be possible to identify every member of the class of beneficiaries.

Which case established the complete-list test for fixed trusts?

IRC v Broadway Cottages Trust.

What forms of certainty are required to satisfy the complete-list test?

Both conceptual and evidential certainty.

What test applies to certainty of objects for a discretionary trust?

The is-or-is-not, or postulant, test.

What does the is-or-is-not test require?

It must be possible to say with certainty whether any given person is or is not within the class of potential beneficiaries.

Which case established the modern certainty test for discretionary trusts?

McPhail v Doulton.

Why did McPhail v Doulton adopt a less demanding test for discretionary trusts?

Trustees choose among the class rather than distributing to every member, so a complete list is unnecessary.

What duty do trustees of a discretionary trust have regarding the class?

They must make a survey of the class appropriate to the nature and breadth of the trust.

Must trustees of a very broad discretionary trust consider every possible beneficiary individually?

The broader the class, the less likely it is that trustees must consider every member individually.

Is “employees of a company” conceptually certain?

The expression has an established legal meaning, although the trust should clarify whether it includes past or future employees.

Is “children of an individual” conceptually certain?

It has an established legal meaning, although the settlor may need to clarify the treatment of adopted or stepchildren.

Is a discretionary class of “friends” conceptually certain?

“Friends” is generally too uncertain because it lacks a sufficiently definite legal meaning.

Is a discretionary class of “relatives” conceptually certain?

Re Baden’s Deed Trusts (No 2) treated “relatives” as sufficiently conceptually certain.

How did Sachs and Megaw LJJ define “relatives” in Re Baden’s Deed Trusts (No 2)?

They treated relatives as people able to trace descent from a common ancestor.

How did Stamp LJ define “relatives” in Re Baden’s Deed Trusts (No 2)?

He interpreted the term as meaning next of kin.

Was there a single majority approach to evidential certainty in Re Baden’s Deed Trusts (No 2)?

The judges adopted different approaches, so there was no single majority rule.

What was Sachs LJ’s approach to evidential certainty?

A claimant must prove to the trustees’ satisfaction that they fall within the conceptually certain class, otherwise they are treated as outside it.

What was Stamp LJ’s approach to evidential certainty?

The trust fails if there is any person about whom it is impossible to determine whether they fall inside or outside the class.

What was Megaw LJ’s approach to evidential certainty?

The trust is sufficiently certain if a substantial number of people undoubtedly fall within the class.

How might a claimant prove membership of a class of descendants?

Through documentary evidence showing that they are a child, grandchild or great-grandchild of the relevant person.

How might a claimant prove membership of a class of employees?

Through company records, payslips or other employment evidence.

What is administrative unworkability?

A discretionary trust fails where its class is so broad that the trustees cannot sensibly administer it.

What is an example of an administratively unworkable class?

A discretionary trust for all inhabitants of West Yorkshire.

What certainty test applies to a power of appointment?

The objects need only satisfy the is-or-is-not test.

Why must the objects of a power of appointment be certain?

Improper appointments can be challenged where the donee selects someone outside the permitted class.

Does the size of the class invalidate a fiduciary power of appointment?

A power may have an extremely broad class because the donee is not obliged to exercise it or survey every potential object.

What did Re Beatty establish about powers of appointment?

Re Beatty upheld a fiduciary power to appoint property to anyone in the world.

What is the consequence of uncertainty in an inter vivos self-declaration where legal title has not moved?

Beneficial ownership remains unchanged unless all three certainties are satisfied.

What presumption may arise where legal title is gratuitously transferred but no intention to make a gift is shown?

A presumption of resulting trust in favour of the transferor.

How may the presumption of resulting trust be rebutted?

By evidence showing that the transferor intended an outright gift.

What happens if the presumption of resulting trust is not rebutted?

The recipient holds the property on resulting trust for the original owner.

What happens where intention is certain and property is transferred to a trustee but subject matter or objects are uncertain?

The intended express trust fails and the property returns to the settlor under an automatic resulting trust.

What is the general consequence of failing one of the three certainties in an inter vivos arrangement?

A resulting trust for the settlor is likely unless the evidence instead establishes an intended gift.