Introduction Flashcards
(28 cards)
What is a trust and what are its two key components?
A trust is an equitable duty relating to property. It is a legal mechanism that divides ownership and management of property. The two key components of a trust are:
- The property component – There must be identifiable trust property.
- The obligation component – There must be obligations owed by a trustee to a beneficiary in relation to the property.
(Lord Browne-Wilkinson: “It is a fundamental proposition of trust law that there must be identifiable trust property.”)
What is the nature of the legal and equitable interests in trust property?
The trustee holds the legal interest, recognised at common law, which gives full rights of ownership (e.g. to sell, lease, etc). The beneficiary holds the equitable interest, recognised in equity, which is also a proprietary right. The legal and equitable interests split the ownership:
- Trustee = legal/formal owner
- Beneficiary = equitable/true owner
The beneficiary may deal with their equitable interest (e.g. transfer or sell it) but not with the legal title.
What types of property can be held on trust?
Almost every asset or right can be held on trust, including:
Chattels (tangible personal items, e.g. jewellery, books)
Choses in action (intangible rights, e.g. debts, shares)
What happens if trust property is destroyed or changed?
trust ceases if the trust property is destroyed without fault by the trustee. However, a change in trust property (e.g. sale and reinvestment) does not destroy the trust—the assets are simply altered. If the property is destroyed due to trustee fault, they must either restore it or pay compensation, which itself becomes subject to the trust.
What are the trustee’s duties under a trust?
Trustees own the trust property and must exercise their legal ownership rights for the benefit of the beneficiary. These are equitable obligations, and a trustee’s breach allows the beneficiary to sue for breach of trust. Trustee duties vary depending on the trust’s nature (e.g. investment duties vs. administrative compliance).
What are trust ‘objects’?
Trust objects are either:
- Beneficiaries (the usual case), or
- Permitted purposes, e.g. charitable purposes.
A trust must have either a beneficiary or be for a legally permitted purpose. Most non-charitable purpose trusts are not valid except in limited cases.
Can a trustee also be a beneficiary of the trust?
Yes, a trustee can be one of the beneficiaries but still owes fiduciary duties to the others. A trustee cannot use trust property solely for their own benefit. If someone has absolute use of property, they are not a trustee of it.
Principle regarding right to mix assets with their own?
A person cannot be a trustee if they have the right to mix assets with their own and deal with them freely. Such freedom is inconsistent with the existence of a trust.
What are the primary benefits of using trusts?
Separation of ownership and management
Expertise (e.g. professional management)
Protection (e.g. minors, incapacity)
Flexibility (e.g. conditional or future interests)
Control (settlor can retain influence)
Ringfencing from insolvency
Tracing and proprietary claims
Tax planning (subject to limits and potential tax triggers)
How do trusts protect against insolvency?
Trust property is not part of the trustee’s estate during bankruptcy, due to the beneficiary’s equitable proprietary interest.
E.g. if £50,000 of £100,000 in a bankrupt’s account is trust money, it cannot be claimed by the bankrupt’s creditors.
What are express and implied trusts?
- Express trusts are deliberately created in response to intention (covered later).
- Implied trusts arise by operation of law and include:
- Resulting trusts (benefit returns to settlor)
- Constructive trusts (to prevent unconscionable outcomes)
What other trust classifications exist?
Statutory trusts – imposed by statute (not covered here).
Testamentary trusts – created in wills.
Inter vivos trusts – created during lifetime.
Fixed trusts – fixed entitlement for each beneficiary.
Discretionary trusts – trustee chooses who benefits and how much.
Bare trusts – trustee holds legal title only and must follow beneficiary’s instructions.
Note: Trusts can fall into multiple categories simultaneously.
How do trusts differ from contracts?
A contract is created by agreement between parties, with each party owing obligations to the other. It arises under common law.
A trust, by contrast, arises under equity and does not require an agreement between parties. An express trust is created solely by the intention of the settlor.
The only obligations in a trust are from the trustee to the beneficiary.
While contracts can be used to create trusts, they are fundamentally different in nature and legal foundation.
What are Quistclose trusts and what case established them?
A Quistclose trust arises when money is transferred for a specific purpose and the transferee is not free to use it otherwise.
Established in Barclays Bank Ltd v Quistclose Investments Ltd
Facts: Quistclose lent money to Rolls Razor Ltd to pay a dividend. Money was placed in a special account. Rolls went insolvent before payment.
Held: Money held on resulting trust for Quistclose. Barclays could not set off the amount against Rolls’ debts as they had notice of the trust.
What did Lord Wilberforce say about the compatibility of loan and trust in Quistclose?
Lord Wilberforce affirmed that legal and equitable rights can coexist in a single transaction.
The agreement that money could only be used for a specific purpose meant it was not part of the borrower’s general assets.
If the purpose failed, the borrower held the money on trust for the lender.
Can Quistclose trusts arise outside loan or monetary contexts?
Yes, a Quistclose trust can arise wherever:
Property is transferred with use restricted to a specific purpose;
The transferee does not have free disposal of the property.
It is not limited to loans or cash transfers.
What are the key principles about Quistclose trusts?
There must be mutual intention that funds be used only for a particular purpose.
The purpose must be sufficiently certain so one can determine what falls within it.
If the borrower uses funds for that purpose, the lender’s interest ends (debt arises).
If used otherwise, this is a breach of trust, and the lender can trace the funds.
If the purpose becomes impossible, money must be returned.
How are trusts categorised and what overlap can exist between these categories?
Trusts can be categorised in many ways, and the categories are not mutually exclusive. For example:
Trusts can be lifetime or testamentary.
They can also be fixed or discretionary.
A lifetime trust may be fixed or discretionary, and the same applies to testamentary trusts. This overlap demonstrates that many categories can apply simultaneously, and no single diagram can fully represent all trust types.
What is the key distinction between express trusts and trusts created by operation of law?
Express trusts arise from a deliberate intention to create a trust, usually by a settlor.
Trusts arising by operation of law are not intentionally created; they arise automatically or by implication in response to certain circumstances where equity recognises that a trust should exist.
What are the three broad categories of trust arising by operation of law?
Resulting trusts
Constructive trusts
Statutory trusts
These are often grouped together as implied trusts to distinguish them from express trusts. They arise not from a settlor’s intention but from equity’s response to legal circumstances that misrepresent true beneficial ownership.
What are statutory trusts and when do they arise?
Statutory trusts are imposed by legislation, not by intention or equity.
What is the general nature and purpose of resulting trusts?
Resulting trusts arise when a person has transferred legal title to property but, for various reasons, equity requires that the beneficial interest remains or reverts to them. They correct situations where legal title does not reflect the proper equitable ownership and are categorised as either:
Automatic resulting trusts
Presumed resulting trusts
What are automatic resulting trusts and when do they arise?
Automatic resulting trusts are default mechanisms that arise when a trust fails, either wholly or in part. Examples include:
- A trust fails due to lack of certainty at the outset
- A purpose trust fails as its purpose becomes impossible to fulfil
In both cases, equity imposes a trust for the settlor. The settlor can then rely on Saunders v Vautier rights to recover the property. These trusts are imposed regardless of actual intention—they ensure property returns to the settlor when there is no valid trust disposition.
What are presumed resulting trusts and how do they operate?
Presumed resulting trusts arise from voluntary or gratuitous transfers, where the transferor provides property to another without clear explanation. Equity presumes the transferee holds it on trust for the transferor.
- Based on the maxim that equity is cynical about unexplained gifts
- This presumption can be rebutted by evidence showing a gift was intended
If no such evidence is provided, a resulting trust will be imposed in favour of the transferor.
