Trusts, Key Concepts and Comparisons and Distinctions

Question 1

A trust separates which two aspects of property ownership?
A) Legal ownership and use
B) Legal ownership and equitable ownership
C) Ownership and possession
D) Ownership and sale

Answer 1

B) Legal ownership and equitable ownership

Question 2

What happens if a trustee breaches their duties?
A) The beneficiary has no legal remedy
B) The trust is automatically terminated
C) The beneficiary can sue for breach of trust
D) The trustee gains full ownership

Answer 2

C) The beneficiary can sue for breach of trust

Question 3

Which of the following is not a benefit of a trust?
A) Tax benefits
B) Retaining control over assets
C) Unlimited duration of ownership
D) Protection against insolvency

Answer 3

C) Unlimited duration of ownership

Question 4

Which type of trust arises automatically by law rather than by intention?
A) Express trust
B) Discretionary trust
C) Resulting or constructive trust
D) Testamentary trust

Answer 4

C) Resulting or constructive trust

Question 5

Which of the following best describes a discretionary trust?
A) Beneficiaries have fixed entitlements
B) Trustees decide who benefits and in what proportions
C) Trusts that last forever
D) Trusts only created through wills

Answer 5

B) Trustees decide who benefits and in what proportions

Question 6

Emily is 10 years old. Her grandfather passed away, leaving her a large sum of money in a trust. Her uncle is appointed as the trustee.

Question: Why is a trust a suitable way to manage Emily’s inheritance?
A) Minors cannot legally own property, so a trustee must manage it
B) Trusts allow Emily to access the money whenever she wants
C) Trusts provide no real benefits over direct inheritance
D) The trustee gains full ownership of the property

Answer 6

A) Minors cannot legally own property, so a trustee must manage it

Question 7

Scenario: A company creates an Employee Benefit Trust (EBT) to reward employees based on their performance.

Question: What type of trust is an Employee Benefit Trust?
A) Fixed trust – Each employee gets a fixed amount
B) Discretionary trust – The trustee decides how much each employee gets
C) Charitable trust – It exists to benefit the public
D) Bare trust – Employees have full control over the assets

Answer 7

B) Discretionary trust – The trustee decides how much each employee gets

Question 8

James, a wealthy businessman, transfers assets into a trust to protect them from personal creditors.

Question: Can James’ trust be challenged in court?
A) No, trusts are never legally challenged
B) Yes, if it was set up to defraud creditors
C) No, once assets are transferred, they cannot be recovered
D) Yes, but only if the trustee agrees to dissolve it

Answer 8

B) Yes, if it was set up to defraud creditors

Question 9

What are the two fundamental components required for a trust to exist?
A) Legal ownership and tax benefits
B) Property component and obligation component
C) Beneficiary rights and trustee compensation
D) Perpetuity rule and charitable intent

Answer 9

B) Property component and obligation component

Question 10

What is the difference between a trustee’s legal interest and a beneficiary’s equitable interest?
A) The trustee owns the legal title, but the beneficiary owns the beneficial interest
B) The beneficiary can override the trustee’s decisions
C) The trustee can ignore the beneficiary’s interests
D) The beneficiary cannot transfer their equitable interest

Answer 10

A) The trustee owns the legal title, but the beneficiary owns the beneficial interest

Question 11

What happens if a trustee fails to act in the best interests of the beneficiary?
A) The trust automatically terminates
B) The trustee is removed but faces no legal consequences
C) The beneficiary can sue for breach of trust
D) The trustee gains full ownership of the trust property

Answer 11

C) The beneficiary can sue for breach of trust

Question 12

Which of the following cannot be held on trust?
A) Land
B) Money in a bank account
C) Personal debts owed to the trustee
D) Company shares

Answer 12

C) Personal debts owed to the trustee

Question 13

Which of the following is not a valid purpose trust?
A) A charitable trust for education
B) A trust for maintaining a family tomb
C) A trust for buying luxury goods for no one in particular
D) A trust for rescuing abandoned animals

Answer 13

C) A trust for buying luxury goods for no one in particular

Question 14

Olivia, aged 12, inherits £200,000 from her late grandfather. Her parents establish a trust to manage the money until she turns 18.

Question: Why is a trust a suitable structure in this case?
A) Minors cannot legally own property, so a trustee must manage it
B) Trusts allow Olivia to spend the money immediately
C) Trusts ensure the money belongs to the trustee permanently
D) The money will be split among multiple random beneficiaries

Answer 14

A) Minors cannot legally own property, so a trustee must manage it

Question 15

A trustee sells trust property and reinvests the money into different assets.

Question: What happens to the trust?
A) The trust is terminated because the original property is gone
B) The trust remains intact with the new assets replacing the old
C) The beneficiaries automatically gain control over the trust
D) The trustee must return the original property

Answer 15

B) The trust remains intact with the new assets replacing the old

Question 16

Mark is a trustee of £50,000 held on trust for Liam. Mark becomes personally bankrupt.

Question: What happens to the trust money?
A) The money is seized by creditors to pay Mark’s debts
B) The money is protected and remains on trust for Liam
C) Mark can use the money to settle his personal bankruptcy
D) The trust collapses, and the money returns to Mark

Answer 16

B) The money is protected and remains on trust for Liam

Question 17

Which of the following is true?
A) The trustee can use the trust property for their sole benefit
B) The trustee still owes duties to the other beneficiaries
C) The trust is invalid because a trustee cannot be a beneficiary
D) The trustee can transfer the entire trust property to themselves

Answer 17

B) The trustee still owes duties to the other beneficiaries

Question 18

What does the rule in Saunders v Vautier state?
A) Beneficiaries can terminate a trust early if they all agree and are legally competent
B) A trust cannot be collapsed under any circumstances
C) Trustees have absolute control over trust property
D) A trust will automatically end after 125 years

Answer 18

A) Beneficiaries can terminate a trust early if they all agree and are legally competent

Question 19

What is the main difference between a charitable trust and a private trust?
A) Charitable trusts do not require identifiable beneficiaries
B) Private trusts must benefit the general public
C) Charitable trusts must have a fixed term
D) Private trusts can exist without a trustee

Answer 19

A) Charitable trusts do not require identifiable beneficiaries

Question 20

Which of the following must be present for a trust to be valid?
A) Certainty of intention, subject matter, and objects
B) The settlor’s personal guarantee
C) A fixed period of 50 years
D) The trust must be approved by a court

Answer 20

A) Certainty of intention, subject matter, and objects

Question 21

When do constructive trusts arise?
A) Only when a formal trust deed is executed
B) When a person acquires property unfairly and equity steps in
C) Only in the case of charitable trusts
D) When a trustee acts within their legal rights

Answer 21

B) When a person acquires property unfairly and equity steps in

Question 22

David wants to create a trust during his lifetime for his children.

Question: What type of trust is this?
A) Resulting trust
B) Inter vivos trust
C) Testamentary trust
D) Bare trust

Answer 22

B) Inter vivos trust

Question 23

How do trusts affect taxation?
A) Trusts always provide tax benefits
B) Trusts can create tax liabilities depending on their structure
C) Trusts are exempt from all taxes
D) Only charitable trusts are taxed

Answer 23

B) Trusts can create tax liabilities depending on their structure

Question 24

A wealthy grandmother transfers £200,000 to her son and tells him, “Use this only for your children’s university fees.” Instead, the son spends some of the money on a holiday. What legal principle applies?

A) The son is the absolute owner of the money.
B) A Quistclose trust exists, and the son has breached trust.
C) The son has no legal obligation to use the money for university fees.
D) The grandmother can only claim breach of contract.

Answer 24

B - A Quistclose trust exists, and the son has breached trust.
Explanation: A Quistclose trust arises when money is given for a specific purpose. If the recipient misuses it, they breach the trust, allowing the lender (the grandmother) to reclaim the funds.

Question 25

Which of the following is NOT a key requirement for creating a valid express trust? A) Certainty of intention B) Certainty of subject matter C) Certainty of purpose D) Certainty of objects

Answer 25

C) Certainty of purpose Explanation: The three certainties required for a valid express trust are certainty of intention, certainty of subject matter, and certainty of objects. Certainty of purpose is not a recognized requirement in trust law.

Question 26

Sarah gives £10,000 to Tom and tells him to "use it for whatever you think is best for charity." What is the most likely legal outcome? A) A valid charitable trust is created B) A resulting trust arises in Sarah’s favor C) The trust fails due to lack of certainty of objects D) Tom has full discretion and becomes the absolute owner

Answer 26

C) The trust fails due to lack of certainty of objects Explanation: A charitable trust must have certainty of purpose. The phrase "whatever you think is best for charity" is too vague, meaning the trust may fail and result in a resulting trust in favor of Sarah.

Question 27

A property is purchased in Alice’s name using funds provided entirely by Ben. There is no written agreement. Who is likely to be the beneficial owner? A) Alice, because the property is registered in her name B) Ben, because of a resulting trust in his favor C) Both Alice and Ben as joint owners D) The property is held on an express trust for Ben

Answer 27

B) Ben, because of a resulting trust in his favor Explanation: In the absence of contrary evidence, equity presumes a resulting trust in favor of the person who provided the purchase funds, meaning Ben is the beneficial owner.

Question 28

ohn lends £50,000 to Liam, specifying that it must only be used for setting up a youth center. Liam later declares bankruptcy before using the money. What legal principle applies? A) A constructive trust arises in John’s favor B) The money is part of Liam’s general assets and belongs to creditors C) A Quistclose trust exists, and John can recover the funds D) John has no legal claim once the money is transferred

Answer 28

C) A Quistclose trust exists, and John can recover the funds Explanation: A Quistclose trust arises where money is advanced for a specific purpose, meaning the lender retains an equitable interest if the purpose fails. Since Liam could not use the money for the intended purpose, John retains his right to recover it.

Question 29

Which of the following statements is TRUE about the differences between a trust and a contract? A) A trust arises from mutual agreement between the settlor and trustee B) A contract does not require consideration, but a trust does C) A trust is enforceable by beneficiaries, while a contract is enforced by parties to the contract D) A contract creates equitable obligations, while a trust creates legal obligations

Answer 29

C) A trust is enforceable by beneficiaries, while a contract is enforced by parties to the contract Explanation: Trusts are enforceable by beneficiaries, whereas contracts are enforced by parties who entered into the agreement. Trusts arise from the unilateral intention of the settlor, while contracts require mutual agreement.

Question 30

Which of the following is a key feature of a charge rather than a trust? A) The chargee has an equitable proprietary interest in the charged asset B) The chargee has a personal claim against the debtor C) The chargor has an automatic right to take legal title to the charged asset D) The charged asset belongs to the chargee from the outset

Answer 30

A) The chargee has an equitable proprietary interest in the charged asset Explanation: A chargee has an equitable proprietary interest in the charged asset as security for a debt. However, unlike a trust beneficiary, the chargee does not have full beneficial ownership of the asset.

Question 31

A wealthy individual sets up a trust, appointing themselves as trustee and their children as beneficiaries. What issue might arise? A) The trust is invalid because a settlor cannot be a trustee B) The trustee may have a conflict of interest C) The beneficiaries must also act as trustees D) The trust requires court approval to be valid

Answer 31

B) The trustee may have a conflict of interest Explanation: While a settlor can be a trustee, there is a risk of conflict of interest if they favor their own interests over the beneficiaries’. Trustees must act in the best interests of the beneficiaries, even if they are also the settlor.

Question 32

Which of the following statements is TRUE regarding Quistclose trusts? A) The lender retains an equitable interest in the funds until they are used for the specified purpose B) The borrower holds full ownership of the funds from the moment of receipt C) The trust arises only if the borrower expressly agrees in writing D) If the purpose fails, the borrower can still use the funds for other expenses

Answer 32

A) The lender retains an equitable interest in the funds until they are used for the specified purpose Explanation: In a Quistclose trust, the lender retains equitable ownership until the borrower applies the funds for the specific purpose. If the purpose fails, the funds revert to the lender rather than forming part of the borrower’s general assets.

Question 33

In Twinsectra Ltd v Yardley, what principle was established regarding Quistclose trusts? A) A borrower must always return funds if the lender changes their mind B) A trust arises only if the borrower agrees to it explicitly C) The purpose of the loan must be sufficiently certain for a trust to arise D) Once a loan is given, the lender loses all control over its use

Answer 33

C) The purpose of the loan must be sufficiently certain for a trust to arise Explanation: Twinsectra Ltd v Yardley confirmed that a Quistclose trust requires a sufficiently certain purpose. If the purpose is unclear, the borrower may not have the authority to use the funds, and they may be held on resulting trust for the lender.

Question 34

A trustee transfers trust property to a third party in breach of trust. The third party had no knowledge of the breach and paid full market value. What is the legal consequence? A) The third party holds the property on trust for the beneficiaries B) The beneficiaries can reclaim the property from the third party C) The third party takes free from the trust D) The trustee is personally liable, but the transaction is void

Answer 34

C) The third party takes free from the trust Explanation: A bona fide purchaser for value without notice takes the property free of any trust obligations. However, the trustee remains personally liable for the breach of trust and may need to compensate the beneficiaries.

Question 35

A father transfers property to his son "to hold for the benefit of my grandchildren." No formal trust deed is created. What is the likely legal outcome? A) A valid express trust is created for the grandchildren B) A resulting trust arises in favor of the father C) The son takes the property as an absolute gift D) The trust fails for lack of certainty of intention

Answer 35

D) The trust fails for lack of certainty of intention Explanation: To create a valid express trust, there must be certainty of intention to create a trust. Vague or ambiguous wording like "to hold for the benefit of" may not be sufficient to demonstrate that a trust was intended, leading to the trust failing and a resulting trust potentially arising in favor of the father.