Introduction to the trust

Question 1

What is the purpose of equity?

Answer 1

1. Mitigate the rigours of common law
2. Provide victims of wrong more options for redress

Question 2

What are the maxims of equity?

Answer 2

1. He who comes to equity must have clean hands
2. Equity will not assist a volunteer
3. Delay defeats equity
4. Equity looks at substance rather than form
5. Equity follows the law (but if the two conflict, equity prevails)
6. Equity will not allow statute to be used as an instrument of fraud

Question 3

What are the two key components a trust?

No single definition of a ‘trust’

Answer 3

1. Property - T holds proprietary interest on trust for B; will typically have legal interest and can do with as they wish
2. Obligation - T must exercise rights on behalf of B (for its benefit) through its duties - B has personal rights against T if fail (B can sue for breach of trust)

Question 4

Who has ownership of trust property?

Answer 4

Split:

• T has legal ownership/interest; responsible for managing (subject to duty)
• B has equitable proprietary interest; is the true owner (is owed duty)

Both proprietary interest

Question 5

Benefits of using a trust?

Answer 5

• Separation of ownership and management of property
• Trust assets are ring-fenced from T’s creditors in insolvency/bankruptcy
• Expertise e.g. fund manager
• Protection of minor interests or incapable individuals
• Flexibility - property can be held by several owners concurrently (create future and immediate interests)
• Minimise tax liability (but can also trigger taxes)

Question 6

What rights do beneficiaries have under a trust?

Answer 6

1. Rights in rem (proprietory right in the trust fund binding world at large); AND
2. Rights in personam (personal rights to enforce trustee duties and receive compensation for breaches)

Question 7

Key uses of trusts

Answer 7

1. Commercial arrangement (pension funds, investment funds, corporate tax avoidance etc…)
2. Private arrangements (testamentary planning, land ownership (i.e joint ownership), tax planning (IHT) )
3. Charitable purpose

Question 8

What are the different categories of trusts?

Answer 8

**1. Express trusts (created by settlor) **- deliberately created
a) Testamentary - created by will
b) Inter vivos - created in lifetime

Can be used to benefit individuals or to achieve a purpose/attain an objective

**2. Implied trusts **- arise by operation of law (imposed by the courts)
a) Resulting
b) Constructive

Question 9

What are fixed and discretionary trusts?

Answer 9

• Fixed = B’s interests are fixed (T knows exactly what to give)
• Discretionary = T knows who Bs are, but have the power to determine who benefits and in what shares (flexible!)

Question 9

What is the difference between resulting and constructive trusts?

Answer 9

1. Resulting trusts –implied where it is presumed that S would have intended such a trust had they thought about it (eg: if all beneficiaries die, equity presumes settlor would want trust property back)
2. Constructive trusts – implied to achieve a fairer result between parties involved (eg: couple both contribute to purchase of house but it’s held only in one sole name)

Question 9

What must a settlor do to create an inter vivos trust?

Answer 9

1. Make a valid declaration of trust
2. Ensure that property is put into trust (ie: it is transferred to the trustee, unless settlor appoints themselves as trustees)

Question 10

What are charitable purpose trusts and non-charitable purpose trusts?

Answer 10

• Charitable purpose trusts = exception to general rule that trust must have B
• Non-charitable purpose trusts = smaller class of exceptions; private trusts set up for very specific purposes

Question 11

What is a bare trust and what is the alternative?

Answer 11

• Bare trust = T holds legal title on trust for benefit of B; has no discretion and no active management duties - just have to follow instructions of Bs (most common with stockbrokers etc.)

Contrast to trusts where Ts have active management functions

Question 12

What two rules arise when considering the temporary nature of trusts?

Answer 12

1. Perpetuity rules: trusts cannot last indefinitely and must be brought to end within a defined period (broadly prevent trust lasting longer than 125 years)
2. Saunders v Vautier: Bs of trust can collapse trust by directing T transfer legal title to them or someone else = legal and equitable interest merge and trust ends

Question 13

What is the trust property and what is the rule on it?

Answer 13

• The trust property is the subject matter of the trust
• This subject matter must be identifiable trust property

E.g. Mac-Jordan - D would pay C as construction work progressed, retain a % of payment in separate fund and hold on trust to pay once completed - no separate fund was made = no identifiable assets so no (also could not claim D held sum in own bank account on trust as D never agreed to do this)

Question 14

Can trust property be both chattel (tangible item other than the land) and chose in action (intangible item e.g. the right to be paid £100)?

Answer 14

Yes - almost every asset or right can be held on trust

Question 15

What happens if the trust ceases to exist (destroyed/consumed) at the fault or non-fault of T?

Answer 15

• Without fault of T = trust ceases to exist as nothing to which a trust can attach
• With fault of T = T personally liable to restore trust property using own funds (or pay compensation)

Trust property can change e.g. T sells and invests in other property to maximise value

Question 16

What is the basic duty of the T?

Answer 16

Hold or apply property for benefit of B (or be personally liable for breach of trust)

Cannot be a T of property which they have absolute right to use for own benefit

Question 17

Can a T also be one of the Bs of a trust? If so can it therefore use trust property exclusively for own benefit?

Answer 17

Can be a B of a trust - but will still owe duties to other Bs and cannot simply use trust fund for own benefit

If using freely = cannot be a T

Customs - cinema that stated company would hold purchase money ‘upon trust’ for purchaser until performance took place and return if it was cancelled - no restrictions on how the company could use money so company was not a T

Re Bond Worth - ability of a company to use fibres in manufacturing process was inconsistent with company holding fibres on trust for unpaid seller

Question 18

What is the exception for a T using trust property freely?

Answer 18

Where the broker is contractually under a duty to B to replace any securities it sold with identical securities

Question 19

What is meant by the ‘objects’ of a trust?

Answer 19

The Bs or purposes of the trust; rule that trust must have a B or permitted purpose

Question 20

What is a purpose trust, and can it be for any purpose?

Answer 20

• Purpose trust = trust for promotion or realisation of a purpose (with no B!)
• Can only create a trust for a permitted purpose e.g. charitable purposes or small closed category of non-charitable purpose trusts

Question 21

What are the 2 important reasons that the B has an equitable proprietary interest in the trust property?

Answer 21

1. B’s rights are enforceable against TPs (e.g. T gives trust property to X, B can enforce their interest against X and demand restoration)
2. B’s rights are protected against insolvency of T (B enjoys priority over unsecured creditors of T)

Insolvency example: T has £100,000 in bank account, £50,000 of which is trust money, and T is made bankrupt. T owes B, C and D £50,000 each. £50,000 trust money not part of T’s estate for bankruptcy purposes, so B, C and D only receive £16,667 (1/3 of the £50,000 that is not trust money)

Question 22

When can equitable proprietary interests not be enforced?

Answer 22

Against a purchaser of a legal interest who does not have notice of the trust (e.g. T transfers legal title to property to purchaser unaware they are purchasing trust property)

Does not apply to someone who is gifted trust property

Question 23

Are Ts entitled to remuneration?

Answer 23

Professional Ts entitled to remuneration; otherwise typically unpaid

Question 24

What is meant by a waterfall/chain of equitable relationships?

Answer 24

Three parties re 10,000 shares: 1. CREST member is the **trustee** - legal owner but no beneficial interest; legal title held on trust for broker 2. Broker is the **sub-trustee** - has an **equitable interest** in the shares (no beneficial interest, holds equitable interest on trust for private investor) 3. Private investor is the **beneficiary** - has an **equitable and beneficial interest** in the shares | Example

Question 25

What is the difference between a trust and a contract? | Both give rise to personal liability

Answer 25

* Contract is a result of agreement between parties each of whom owe obligations to another * Trusts are the creation of equity; no requirement for agreement between party and only obligations that arise are from the T to the B

Question 26

What is the difference between a trust and a debt?

Answer 26

* B of trust has an equitable proprietary interest in the trust property * Creditor has mere personal right to payment A debt will also not relate to specific assets or funds, like a trust will

Question 27

What is the difference between a trust and a charge? ## Footnote Charge = chargor creates charge over their property in favour of chargee - if chargor unable to pay debt, chargee can compel sale of property and use proceeds to reduce debt

Answer 27

Both have proprietary interest in trust/charged property, but... * Chargor can use charged property for own benefit (e.g. mortgagor occupying a home), T cannot * Bs are entitled to beneficial enjoyment of whole trust property, chargee limited to amount of debt secured

Question 28

What is the difference between a trust and agency? ## Footnote Agency = rship where agent has authority to create legal relations between principal and TPs

Answer 28

Both subject to fiduciary duties, but T cannot commit a B to contract with a thid party

Question 29

What are the differences between trusts and bailment? ## Footnote Bailment = transfer of possession of chattels fromone person or another e.g. bailor leaves clothes with a dry clear (the bailee)

Answer 29

* Only tangible personal property can form subject matter of bailment; any asset/right can be held on trust * Bailment involves transfer of possession but does not affect bailor's legal title (whereas transfer of assets to T completely divests settlor of their interest) * Bailor's interest will survive misapplication of bailed property to a third party as bailee has possessory right to property but is not legal owner (T can transfer legal ownership so interest will not survive misapplication)

Question 30

What is the difference between a trust and companies? | Both can be used as vehicles for holding property

Answer 30

* A trust does not have legal personality so cannot bring/defend lgal action in own name * Shareholders will not have proprietary interest in company's assets

Question 31

What is the difference between a trust with estate administration? | Both cases - one will hold property for benefit of other

Answer 31

Unlike B of trust, a person interested in deceased's estate does not have an equitable proprietary interest in any estate assets, but rather a personal right against executor

Question 32

What is the difference between a trust and a gift?

Answer 32

A gift involves transfer of absolute legal ownership (no separate equitable interest)

Question 33

What should trusts contain in the interests of perpetuity?

Answer 33

Express limitation on the trust duration; rules dealing with how and when trust is brought to an end

Question 34

What are the 2 different sets of perpetuity rules and to what do they apply?

Answer 34

1. **Rule against remoteness of vesting** - applies to trusts with people or charities as objects, consider re trust that does not immediately give rise to vested interestes e.g. DTs and trusts with contingencies 2. **Rule against inalienability** - only applies to operation of non-charitable purpose trusts

Question 35

What is the rule against remoteness of vesting and what if it is broken?

Answer 35

* A person/charity must obtain a vested interest in trust property within statutory 'perpetuity period' of 125 years * If an interest does not vest in statutory perpetuity period = void ## Footnote Intends to prevent never-ending life interest trusts for their descendants with nobody obtaining a vested interest in the capital

Question 36

What is the 'wait and see' rule?

Answer 36

Trust can subsist until it becomes apparent that the interest cannot vest within perpetuity period; anything done before will remain valid | I.e. perod for interest to vest need not be clear from outset

Question 37

What do the class closing rules do?

Answer 37

Save a trust by excluding objects who might otherwise cause trust to fail because interest would vest outside perpetuity period ## Footnote E.g. *On trust for A (age 2) for life, remainder divided equally between A's children and grandchildren* - could take many years before impossible for more grandchildren to be born, so to prevent trust from failing, class closing rules will apply limit to class of Bs to A's children and grandchildren who are alive at end of perpetuity period A better drafted version of this would be: *on trust for A for life, remainder divided between A's children and grandchildren **as are living at the date of A's death***

Question 38

Examples of life interests that will be okay

Answer 38

* *On trust for A for life, remainder to B* - no problem; B has vested interest from start * *On trust for A for life, remainder to B if B survives A* - B has contingent interest so perpetuity rules technically irrelevant

Question 39

Examples that would not be okay

Answer 39

*On trust for the first of settlor's lineal descenants to obtain a first class law degree* * Clear condition for obtaining vested interest but unknown whether/when condition might be satisfied * Wait and see rule applies - but if nobody fulfils condition within 125 years = trust comes to an end and will be a resulting trust for settlor (or their estate after 125 years) ## Footnote Well drafted trust instrument would set out what happens at end of perpetuity period

Question 40

What is the rule against inalienability? | ONLY RELEVANT TO NON-CHARITABLE PURPOSE TRUSTS

Answer 40

Assets cannot be tied up on trust for longer than perpetuity period of specified life plus 21 years (or just 21 years if no life specified)

Question 41

Does the wait and see period apply where the rule against alienability applies?

Answer 41

No - so must be clear from outset when trust will end within prescribed perpetuity period * In practice requires inclusion of an express perpetuity period (fails without)

Question 42

Examples of non-charitable purpose trusts that will fail due to rule against inalienability?

Answer 42

*A testator leaves £10,000 on trust from which*... 1. *the interest fom which is used to maintain grave of testator* - capital could never be disposed of and trust go on forever 2. *the interest and capital from which is used to maintain the grave of the testator* - not clear when capital will be used up 3. *both the capital and income are to be used to maintain pet tortoise* - tortoise could live for longer than 21 years 4. *both the capital and income are to be used to maintain pet dog* - restrictive approach means this highly likely to despite shorter lifespan of dog

Question 43

What should non-charitable purpose trusts include to ensure their validity?

Answer 43

An express perpetuity clause e.g. *trust should last 21 years/for as long as law allows*

Question 44

How can the perpetuity period be extended?

Answer 44

Provide that it should only start running at the death of a named person e.g. *for a period not exceeding 21 years following the death of the last surviving descendant of Queen Elizabeth II who is alive at my death*