Delclaration of a Trust
EQUITY AND TRUSTS
Validity of express trusts: the Declaration of Trust
Context
Imagine that Sam said to his brother, Tim, ‘I want you to look after my house and some of my money for my children until they reach the age of 21’. Sam dies that night. Did he create a valid trust for his children?
A lawyer analysing the situation will ask two questions:
(1) Did Sam make a valid declaration of trust?
(2) Did Sam transfer the money and house to the trustee in the proper manner?
If the answer to either of those questions is ‘no’, the attempted trust is void.
In the declaration of trust, the settlor says what the trustees should do with the property. Settlors are allowed considerable freedom but there are some rules which have to be observed. For example:
The settlor’s declaration must lay down the terms of trust unambiguously. It is no good trying to create a trust over ‘my best silver’ (or indeed ‘some of my money’!). Similarly, a trust ‘for the people who have helped me the most’ would be void for uncertainty.
As you have seen, trusts can be used to give beneficiaries interests in the future. Some settlors carry this too far by creating trust interests which vest at an extremely remote future date. The rules against perpetuity aim to ensure that trusts of this nature do not continue indefinitely.
Trusts, with some exceptions, also have to be set up for the benefit of human beneficiaries, who can enforce the trust if the trustees do not do their job.
Lastly, some declarations of trust have to be in writing. Others can be oral.
Sam’s example illustrates one of the methods of creating trusts, namely a transfer of property to another to hold on trust for the beneficiary. Another method is for the settlor to declare himself a trustee of property for the beneficiary. Alternatively, a client may want to create a trust in their will to have effect when they die; in this case, the transfer of the property to the trustees and the declaration of trust must be contained in a validly executed will.
Needless to say, lawyers must take the correct steps to create valid trusts. Disputes over the validity of trusts can lead to prolonged court cases, bitter family feuds and the erosion of the trust fund by expensive legal costs. Added to which, if the trust is declared void, the property will not end up with the people whom the settlor intended to benefit.
In this large group, we will look at the rules for making valid declarations of trust. In Large Group 3 we will look at how a settlor can validly transfer assets to trustees.
Outcomes
By the end of this large group you should be able to:
identify different methods of creating a valid trust, and explain the steps required.
identify and apply the requirements for a valid declaration of trust.
IS THE TRUST VALID?
INTRODUCTION
A valid trust requires:
Method 1 In his lifetime the settlor declares himself a trustee of property for B.
Need valid declaration of trust (evidenced in signed writing containing all the terms of the trust, if land, s.53(1)(b) LPA 1925).
No (actual) transfer of property required.
Method 2 In his lifetime, the settlor transfers property to T to hold on trust for B.
Need valid declaration of trust (evidenced in signed writing containing all the terms of the trust, if land, s.53(1)(b) LPA 1925)
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Transfer of property to the trustee
Method 3 In his will, a testator transfers property to T to hold on trust for B.
Need valid declaration of trust.
The testator’s assets automatically vest on the PRs/Trustees on death, provided the declaration of trust is included in a will executed in accordance with s9 Wills Act 1837,
A valid declaration of trust AND
A valid transfer to trustees
METHODS TO CREATE A TRUST
3. THE DECLARATION OF TRUST
IS THE DECLARATION OF TRUST VALID?
The declaration of trust must satisfy all of the following requirements:
1 Certainty of intention
2 Certainty of subject-matter
3 Certainty of objects
4 Beneficiary principle
5 Rule against perpetuities
6 Declaration is in writing if trust is over land.
3.1 THE DECLARATION OF TRUST MUST SATISFY THE THREE CERTAINTIES.
certainty of intention on the part of the settlor to create a trust;
certainty of trust property and the beneficiaries’ interests (certainty of subject-matter)
certainty as to who the beneficiaries are (certainty of objects)
(Knight v Knight (1840))
3.1.1 Certainty of intention
S must intend to make himself or T a trustee of the property.
e.g. “I am holding my Monet painting on trust for B” or
“I am transferring my Monet painting to T to hold on trust for B”.
S’s words must impose a duty on himself or T to act as a trustee.
Activity 1 Which TWO of the following impose a duty and therefore, a trust? A “I give my art collection to George Carol, hoping that he will give a painting to each of my children.” B “I give my art collection to George Carol and express the wish that he will give a painting to each of my children.” C “I give my art collection to George Carol, trusting that he will give a painting to each of my children.” D “I give my art collection to George Carol to distribute a painting to each of my children.” E Dinesh Shah wrote a letter to his brother saying, “I am, as from today, holding 4,000 shares in TJ Company Ltd for you subject to you being responsible for all tax consequences and liabilities arising from this declaration.” |
Precatory words do not create a trust.
Re Adams and Kensington Vestry (1884)
Testator’s will left his property to his wife “in full confidence that she will do what is right as to the disposal thereof between my children, either in her lifetime or by will after her decease”.
Paul v Constance (1977)
Mr C lived with, but was not married to Mrs P. He received £950 for an industrial injury. They went to the bank intending to open a joint account. On the advice of the bank manager, the account was opened in Mr C’s name alone. The parties treated the account as their joint money paying in joint bingo winnings and making withdrawals for joint purposes. Mr C told Mrs P, “the money is as much yours as mine”.
Mr C died intestate. Had Mr C declared himself a trustee of half the bank account for Mrs P?
3.1.2 Certainty of subject matter
(a) The trust property must be certain
Palmer v Simmonds (1854)
Trust of ‘the bulk of my estate’.
Trust of part of a collection of items:
Re London Wine Co (Shippers) Ltd [1986] PCC 121
Customers had ordered and paid for consignments of wine which were stored by the Company. The Company declared itself a trustee of each customer’s consignment but did not separate each customer’s bottles from the general stock. Had it created valid trusts for the customers?
Hunter v Moss [1994] 3 All ER 215
Mr Moss owned 950 shares in a small company. He declared himself a trustee saying he was holding 50 of the shares on trust for Mr Hunter but did not indicate which 50 shares were to form the trust property.
Is a trust of “residue” certain?
Residue = what is left of the estate
Yes.
What happens if the trust property is uncertain?
There is no trust created.
(b) The beneficial interests must be certain
Are the following certain?
“£100,000 to be held on trust for my children equally”.
“£100,000 to be held on trust for my children”.
“£100,000 to my trustees to hold on trust for such of my children and in such shares as my Trustees think fit”.
Re Golay (1965)
In his will, a testator gave his property to trustees on trust to allow his daughter (“Tossy”) to “enjoy one of my flats during her lifetime” and to enjoy a “reasonable income from my other properties”.
‘reasonable income’ was a certain subject matter.
Activity 2 Watch the media clip ‘Tom Grady’. Advise:
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What happens if the beneficial interests are uncertain?
3.1.3 Certainty of objects (and other rules regarding the objects)
Reasons why trusts need certain objects.
Need to ascertain who the beneficiaries are.
Are the beneficiaries named or described as a class?
No problem if they are named. There would be more problems if there were certain objects but to a class.
Identify whether the trust is a fixed trust or a discretionary trust.
Activity 3 Do you agree that all of the following are fixed trusts? £100,000 on trust for: A for my nephews in equal shares B for my friends C for my brother for life remainder to any children he may have D for such employees of X Limited, their widows or widowers, children, relatives, and dependants as the trustees think fit |
(d) Certainty of objects test for fixed trusts
Complete list test (IRC v Broadway Cottages Trust [1955] Ch 20)
Activity 4 Do the following trusts satisfy the complete list test? Why?
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(e) Certainty of objects test for discretionary trusts
McPhail v Doulton [1971] AC 424
Mr Baden’s will included a discretionary trust for ‘…. the employees or … ex-employees of the company or ... any relatives or dependants of any such persons’.
The House of Lords had to decide whether it was necessary to have a complete list of objects of discretionary trusts.
Was a complete list of objects necessary for the trustees of a discretionary trust to carry out their duties?
Did the court need a complete list of all the objects to carry out a discretionary trust if necessary?
The House of Lords adopted the ‘any given postulant test’ for discretionary trusts: the trust is valid if it can be said with certainty whether any given postulant (individual) is or is not a member of the class of objects.
To satisfy the test, the objects had to be described with conceptual (or linguistic) certainty.
Activity 5 Do the following declarations of discretionary trusts satisfy the any given postulant test? If not, why not? 1. on trust for such of those to whom I am under a moral obligation, as my trustees think fit 2. on trust for such of my good friends as my trustees think fit 3. on trust for such of my first and second cousins, as my trustees think fit 4. on trust for such of my deserving employees as my trustees think fit. |
(f) Administrative workability
Discretionary trust is void if the class of objects is too large.
“There may be a third case where the meaning of the words used is clear, but the definition of beneficiaries is so hopelessly wide as not to form ‘anything like a class’ so that the trust is administratively unworkable.”
per Lord Wilberforce McPhail v Doulton.
R v District Auditor ex p West Yorkshire Metropolitan County Council [1986] RVR 24.
The Council created a discretionary trust to benefit “any or all or some of” the 2.5 million inhabitants of West Yorkshire” in a number of specified ways. Was the trust valid?
(g) Capriciousness
A discretionary trust is void if it is capricious i.e. there is no rational reason for benefiting that class of objects and the trustees have no rational basis on which to distribute the trust fund.
(h) What happens if the objects are uncertain, or the trust fails due to administrative unworkability or capriciousness?
THE BENEFICIARY PRINCIPLE
As a general rule, trusts must be created for the benefit of individuals, so there is someone who can enforce the trust in the courts.
(there are some exceptions e.g. trusts set up for a purpose such as a charity that funds medical research to discover a cure for a disease)
THE PERPETUITY RULE
As a matter of policy, trusts cannot go on forever.
Trust set up for individuals are subject to the rule against remoteness of vesting.
The rule against remoteness of vesting applies to trusts which create contingent interests. The trust is void unless the interests vest within the perpetuity period (125 years for trusts created and wills executed on or after 6 April 2010: Perpetuities and Accumulations Act 2009).
Contingent interests for the purpose of the rule against remoteness of vesting cover the following:
beneficiary’s interest is conditional or
beneficiary is not yet born or ascertained or
the trust is a discretionary trust or includes a power of appointment.
A DECLARATION OF TRUST OVER LAND MUST BE IN SIGNED WRITING
Personalty: Settlors can declare trusts over personalty orally or even by conduct.
Personalty includes money, company shares, chattels.
Land
section 53(1)(b) Law of Property Act 1925 - “A declaration of trust respecting any land, or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust ….”