Creation of Trusts

Lecture 1: Creation of Trusts

Overview of Topics Addressed in the Lecture

  • Part 1: What are Trusts; examples; Constitution of a Trust

    • Formalities

    • Capacity

    • Perpetuity Period

    • Statutory constraints including:

    • Validity of Wills

    • Conveyance of Land

    • Registration

  • Part 2: Creation of Trusts - Three Certainties

  • Part 3: Property Must Transfer (Vest) Settlor

Part 1: Constitution of Trusts & Formalities

Constitution of a Trust

  • The interests of the beneficiaries are usually detailed in the trust instrument, known as the 'Deed' for express trusts. However, they can also be implied by courts or imposed by law (statute).

  • Verbal Trusts: Very rarely, courts accept words and conduct as sufficient to demonstrate the intention of setting up a trust (Example: Paul v Constance [1976] EWCA Civ 2).

  • A Settlor can also serve as a trustee or beneficiary, but cannot hold all three roles simultaneously.

  • Legal vs. Equitable Ownership:

    • Trustees are considered ‘legal owners’ in the eyes of common law.

    • Beneficiaries are regarded as ‘equitable or beneficial owners’.

Classification: Types of Trusts

  1. Express Trusts: Examples include Will Trusts and Family Trusts.

    • Types of express trusts include:

      • Fixed Trust

      • Discretionary Trust

      • Power of Gift

  2. Purpose Trusts: Trusts formed for a specific purpose, such as charitable trusts.

  3. Trusts Arising from Operation of Law:

    • Resulting Trusts

    • Constructive Trusts

    • Statutory Trusts

  • Trusts can be established:

    • Inter vivos (during life) or by will

    • Bare/Simple Trusts: Merely hold assets for a beneficiary (Example: Saunders v Vautier (1841) 4 Beav.115).

    • Blind Trust: Used in public office scenarios.

    • Secret Trust: Provisions made for mistresses or illegitimate children.

Uses of Trusts

  • Primary Purposes:

    • Preservation of wealth and tax avoidance (not evasion).

  • Applications:

    • Allow property, especially land, to be held by those who cannot do so themselves.

    • Facilitate private provisions for dependants (e.g., mistresses, illegitimate children).

    • Ensure property passes to successors.

    • Protect family assets from debt or care costs in old age.

    • Set aside future gifts.

    • Make provisions for non-human dependents (Example: A saucer of milk per day for a cat named "Tiddles").

    • Enable joint ownership of land.

    • Provide pensions for retired employees and their dependants.

    • Facilitate investment through trusts and avoid taxes (e.g., with charities and family trusts).

Constitution of a Trust

  • Milroy v Lord (1862) 4 De.GF & J 264, quote: "A settlor must have done everything which, according to the nature of the property…was necessary to be done in order to transfer the property…"

  • Required actions include:

    1. Compliance with formalities

    2. Effective declaration of a trust (Three Certainties)

    3. Effective transfer of property to trustees (Vesting)

  • Once the trust is properly created or constituted, the Settlor loses all rights to the property.

    • Example: Paul v Paul (1882) 20 ChD 742, emphasizes that if not properly constituted, there’s no equity to perfect an imperfect gift.

  • Maxim: "Equity will not perfect an imperfect gift."

Consequences of an Unconstituted Trust

  • Without a properly constituted trust, the property (both legal & equitable interests) stays with the Settlor or their estate unless:

    • Beneficiaries gain rights through consideration, allowing them to sue under Contract Law (Example: Jones v Lock (1865) LR 1ChAPP 25).

    • They fall within exceptions permitted by equity.

Exceptions to the Maxim: "Equity will not perfect an imperfect gift"

  1. Conveyance of Land to a Minor: Governed by the Trusts of Land & Appointment of Trustees Act (ToLATA) 1996.

  2. ’Every Effort’ Rule: Re Rose (1952) Ch 499.

  3. Unconscionable Change of Mind: Example: Pennington v Waine (2002) 1LR 2075.

  4. Deathbed Gifts (Donationes mortis causa): Example: King v Dubrey [2016] Ch 221.

  5. Rules on Fortuitous Vesting: Example: Strong v Bird (1874) LR 18 Eq 315.

  6. Proprietary Estoppel:

    • Example: Dillwyn v Llewellyn (1862) 4 De GF & J 517.

    • Definition: Representation made by the transferor leads the transferee to act in a way that may make it unjust for the transferor to withdraw.

Key Formalities in Setting up Trusts

Capacity: Governed by the Mental Capacity Act 2005, sections include:

  • Section 2(1): Ability to understand the information relevant to the decision.

  • Section 2(2): Ability to retain that information.

  • Section 2(3)(a): Ability to weigh information in decision-making.

  • Section 3(1): Ability to communicate decisions.

  • Relevant case law: Banks v Goodfellow (1869-70) LR 5 QB 549.

Perpetuity Period: Governed by the Perpetuities and Accumulations Act 2009, section 5(1).

Statutory Constraints in Setting up Trusts

  • Validity of Wills: Governed by Wills Act 1837, s9; Administration of Justice Act 1982, Part IV; including case law on defaults such as Harrison v Gibson [2005] 1 All ER 858.

  • Conveyance of Land: Governed by the Law of Property Act 1925, s52(1); s53(1)(b).

  • Registration Directive: EU 2018/843 does NOT apply to various trusts, included but not limited to: pension trusts, insurance trusts, charitable trusts, will trusts, tenancy in common trusts, trusts for bereaved minors, and business trusts holding client funds.

Part 2: Creation of Trusts - The Three Certainties

The Three Certainties of Trusts

  • The principle of seeking certainty of trusts rather than gifts: Richards v Delbridge [1874] LR 18 Eq 11.

Certainty of Intention

  • Importance of intention: There is no strict formula for the words needed to create a trust. The maxim states that equity looks to intent rather than form.

  • The word 'trust' is not conclusive; precedent indicates that a clear intention to separate legal interests from equitable interests needs to be present (Example: Wright v Atkyns [1823] EWHC (Ch) 143).

  • Must include imperative words: Importance noted in Knight v Knight (1840) 49 ER 58 emphasizes the failure to use precatory words (non-imperative).

  • Case law influences interpretation (Example: Re Kayford [1975] 1 All ER 604).

Certainty of Subject-Matter

  • Definition: Trust property/interest must be certain and clearly defined (Example: it cannot be vague like "some of my land").

  • The interest of beneficiaries must also be clearly defined; uncertainty causes the trust to be void (Example: not stating "a few of my horses").

  • Void Trust Principle: Uncertainty in subject matter renders the trust void, as demonstrated in multiple cases:

    • Case examples include: