You have recently started a new job as senior trust manager at Umbrella Trustees Ltd (“Umbrella”) and your director has asked you to review a serious complaint relating to The Clarking Trust, which has a substantial investment portfolio currently valued at £2.2m. The settlor, Bob James, is demanding that the trust funds are repaid to him, claiming that the trust was not properly constituted at creation. He claims that it was only set up to shield his assets from an acrimonious divorce which is now settled, so th e funds must be returned immediately. You are asked to review the file and draft a report for the Board. The report should discuss the factors required to establish a valid trust for Bob and analyse the circumstances in which a trust is void or can be voided. Your report should also evaluate the specific criteria to be met if the trust is to be legitimately unwound without a breach of trust law occurring. (25 marks)

what legal capacity must a settlor have to create a valid trust?

the settlor must:

• legally own the assets

• have mental capacity

• not be a minor

without capacity, the trust may be void or voidable

why is the legal title important in trust creation?

trustees must receive proper legal ownership of trust assets; otherwise the trust may fail or create a resulting trust

what does “fully constituted trust'“ mean?

a trust where:

• trust documentation is completed

• assets are transferred to trustees

• trustees obtain legal control/title

is intention alone enough to create a valid trust?

no, assets must also be properly transferred to trustees

what are the three certainties required for a valid trust?

1. certainty of intent

2. certainty of subject

3. certainty of objects

what is the certainty of intent?

clear evidence that the settlor intended to created the trust

what is certainty of subject?

trust assets must be clearly identifiable

what is certainty of object?

beneficiaries must be identifiable or ascertainable

what happens if one of the three certainties is missing?

the trust is usually void

what is a void trust?

a trust that is invalid from the beginning and legally unenforceable

can a void trust later become valid?

no

give examples of circumstances making a trust void

• missing certainties

• illegal purpose

• immoral/public policy issues

• exceeding perpetuity period

• assets from illegal sources

what is a voidable trust?

a trust that is initially valid but can later be set aside by the court

what are the four main grounds for voiding a trust?

1. fraud

2. duress

3. undue influence

4. mistake

what is fraud in relation to trusts?

creating a trust to defeat creditors, avoid family claims, or hide assets improperly

what is duress in trust law?

when a settlor is forced or pressured into creating a trust

what is undue influence?

excessive pressure from a trusted person causing the settlor to create the trust

in which relationships can undue influence arise?

• family relationships

• adviser/client

• doctor/patient

• religious adviser/disciple

what is mistake in trust law?

a serious misunderstanding about:

• the legal effect of the trust

OR

• an important fact relating to try transaction

what is the difference between a void and voidable trust?

void = never legally valid

voidable = valid until set aside by the court

what is a resulting trust?

when trust property returns beneficially to the settlor because the trust fails or assets were not properly transferred

when may a resulting trust arise?

• failed trust

• incomplete transfer of assets

• invalid trust provisions

what must trustees assess before unwinding a trust?

• settlor capacity

• proper constitution

• three certainties

• fraud

• duress

• undue influence

• mistake

why must trustees be careful when unwinding a trust?

incorrect unwinding may lead to:

• breach of trust

• beneficiary claims

• financial liability

• repuational damage

what is the key principle when considering whether to unwind a trust?

trustees must ensure there are legitimate legal grounds before terminating or reversing the trust structure