Trusts Law Flashcards
(185 cards)
1
Q
Outline the key features of a trust arrangement?
A
A trustee holds property for the benefit of another. It involves;
- A duty imposed on a trustee(s)
- To deal with property over which they have control
- For the benefit of beneficiaries who can enforce the duty.
2
Q
What is an express trust and what makes it enforceable?
A
A trust that the settlor expressly intends to create. To be enforceable, the settlor must;
- make a valid declaration of trust
- put assets in the trust.
Once these steps are complete, the trust is said to be ‘constituted’, and the settlor cannot change their mind.
3
Q
What should a valid declaration of trust do?
A
- Identify the trustees
- Identify the individual property that is to be held in trust
- Identify the beneficiaries (by name or description)
- Identify the powers and duties that the trustees have in running the trust and administering trust property.
N.B. Settlor drops out of the picture after this point.
4
Q
When can trusts be created?
A
During the settlor’s lifetime - requires the settlor to make a valid declaration of trust and ensure that the property is put into trust and transferred to the trustee.
On their death in their will - testator/testatrix must make a valid declaration of trust in a will and direct that title to trust property goes to the trustee.
5
Q
How do trusts allow property ownership to be split up?
A
Legal title goes to the trustee and equitable title goes to the beneficiary.
N.B. Beneficiaries carry all the benefits of trust property without managing it, with a personal right to enforce trustee duties and seek compensation for breach of trust.
6
Q
What are some of the general trustee duties?
A
- To observe the terms of the trust deed
- To act impartially between beneficiaries
- To provide information
- To act unanimously unless trust deed says otherwise
- To distribute assets carefully.
7
Q
Explain how trusts are more versatile than gifts?
A
They ensure property is controlled and managed by a trustee, who is under a duty to maintain, and potentially increase the property value on trust for the benefit of beneficiaries.
Trustees will make decisions in the best interests of beneficiaries who are too young or unwell to make such decisions alone.
Trusts can put conditions on beneficiary entitlement and drip-feed money early if needed.
8
Q
What is the difference between a fixed interest trust and a discretionary trust?
A
Under a fixed interest trust, the trustees have no discretion as to how the trust property is to be distributed between the beneficiaries. The settlor has stipulated once and for all who the beneficiaries are and the proportions in which they will share the trust property.
Under a discretionary trust, the trustees have discretion as to the amounts any person may receive and/or whether particular people receive anything at all.
9
Q
When are discretionary trusts most likely to be useful?
A
In situations when it will be a while before anyone will benefit from the trust fund. The trust allows the trustees to respond to changes in circumstances when the time comes for the distribution of trust property.
10
Q
What happens if a declaration of trust is silent on the shares that beneficiaries will take?
A
It is presumed that they will share equally.
11
Q
What are the 5 requirements for a valid declaration of trust?
A
1) Certainty of intention
2) Certainty of subject-matter
3) Certainty of object
4) Compliance with the beneficiary principle (be for the benefit of individuals)
5) Compliance with the perpetuity rules
12
Q
What is required for certainty of intention?
A
The settlor must have used words (no requirement to use the word ‘trust’ but must be obligatory/mandatory) or actions that impose a duty on someone to act as a trustee and hold property for the benefit of someone else.
13
Q
What if there is no certainty of intention?
A
If someone transfers property to another using precatory wording, it is likely that the person will be deemed to have made a gift.
If someone transfers property to another and there is no evidence of what they intended, the law relies on various presumptions as to what the correct legal result should be.
14
Q
What is required for certainty of subject-matter?
A
1) The trust property must be described with certainty, and
2) The settlor must define the beneficiaries’ interests with certainty (e.g. ‘generous amounts’ does not suffice)
15
Q
Explain how trust property can be described with certainty, especially where collection of items involved?
A
- Trust property must be identifiable.
- The thing held on trust must be ‘property’ currently owned.
- Residue of my estate is certain, bulk of estate is not.
- Can create a trust over part of a collection of items (e.g. 50/950 shares in Hunter v Moss) so long as the items in that collection are all identical (only true for intangibles, not tangibles e.g. wine bottles).
- For tangibles, important to physically separate intended trust property from other property.
16
Q
What if there is no certainty of subject-matter?
A
If the settlor intended to create a trust with themselves as trustee but there is no certainty of trust property, no trust is created and the settlor will remain the outright owner.
If the settlor transfers property to a 3rd party and declares that that person shall be a trustee over ‘some of it’ and that a gift is intended over the rest, then no trust is created. The 3rd party will take the entire property absolutely, free from any trust.
If the settlor has appointed a trustee and intended to create a trust for the benefit of individuals but does not specify the interests that those individuals will take, the trustee shall hold the trust fund for the benefit of the settlor under a ‘resulting trust’
17
Q
Where 3rd party trustees are involved, what 2 stages are involved in the creation of a valid trust?
A
1) Constitution of the trust by the effective transfer of the legal title to the trust property to the trustee.
2) A valid declaration of trust which details the terms of the trust with certainty.
18
Q
What is required for certainty of objects?
A
The beneficiaries to be identified with sufficient certainty so that the trustees know who to distribute property to, to ensure they do not breach trust.
No problems when named individually, but difficulties when described as a class.
19
Q
What is the certainty of objects test for fixed interest trusts?
A
Complete list test. It must be possible to draw up a complete list of each and every beneficiary. Here, we need;
- Conceptual certainty - the trustees must have sufficient criteria to know what type of person to look for or the trust will fail.
- Evidential certainty - we need sufficient evidence to identify all the beneficiaries who will benefit under the fixed interest trust.
20
Q
What is the certainty of objects test for discretionary trusts?
A
Given individual test - can it be said with certainty whether any given individual is or is not a member of the class of objects?
For the test to be satisfied, we need;
- Conceptual certainty
- Administrative workability (trust invalid if the class is too large in number - Q of fact but depends on the size of the class compared to the size of the trust fund)
- Capriciousness (trust invalid if capricious - no rational reason for the trust).
21
Q
What if there is no certainty of objects? (or in the case of a discretionary trust, the trust is administratively unworkable or capricious).
A
There will be a resulting trust in favour of the settlor.
22
Q
Explain the rule against perpetuity?
A
To be a valid trust, the beneficial interests under the trust must vest - i.e. become unconditional within the relevant perpetuity period of 125 years for trusts > April 2010.
23
Q
What are the formalities that a valid declaration of trust over land must comply with under s53(1)(b) LPA 1925?
A
- Be evidenced in writing and signed by the person able to declare the trust in the joint presence of two witnesses.
- N.B. A signed letter containing trust terms will suffice.
- N.B. Over email, if a trustee declares the terms of an express trust over land and types their name at the end, the typing constitutes a signature.
- N.B. Declaration of trust over other property can be done orally so long as subsequently confirmed in writing.
24
Q
What are the 3 common ways to constitute an express trust?
A
1) Settlor declares themselves to be trustee by making a valid declaration of trust (easy and constituted).
2) Settlor declares themselves and 3rd parties to be trustees
3) Settlor appoints 3rd party to be trustee (steps must be taken to put legal title to the trust property in the hands of the trustee - differs based on type of property).
25
How does the settlor constitute an express lifetime trust in shares?
If shares are within CREST system (public-listed companies);
- Shares recorded electronically, can be done instantaneously without the need for paperwork.
If shares are outside CREST system (all other shares in private companies);
- Settlor must execute a stock transfer form and give completed stock transfer form and relevant share certificate to the trustees to pass to company or company direct.
- Company secretary will then register the trustee as new shareholder (and thus new legal owner) in the register of members.
26
At what point is legal title transferred (shares/land)?
When all steps are complete and the trustee is the new registered shareholder/proprietor of the land.
27
How does the settlor constitute an express lifetime trust in land?
- Executing a deed where the land is registered (TR1), and giving these either to the trustee to pass to Land Registry or to Land Registry direct.
- Land Registry will register the trustee as the new legal owner.
28
How does the settlor constitute an express lifetime trust in money?
Cash from settlor to trustee - legal title passes with delivery.
Bank transfer from settlor to trustee - legal title passes once monies arrived in trustees account.
Cheque - legal title passes once the cheque has cleared. If the settlor dies before then, the cheque can no longer be cashed.
29
How does the settlor constitute an express lifetime trust in chattels?
Legal title passes by physical delivery of the asset to the trustee or by deed.
30
What is 'equity will not assist a volunteer'?
The transfer rules cannot be bent or overlooked to constitute a trust. If the settlor does not follow the relevant transfer rules to the property that was going to be held on trust, there will be no trust as equity cannot assist a volunteer (beneficiary).
31
What are the exceptions to the maxim that 'equity will not assist a volunteer'?
In the below, equity will get involved and help to create an enforceable trust.
1) The 'every-effort' test - if the settlor has done everything required to transfer legal title in land/shares and no longer holds transfer documents, but the transfer is incomplete due to 3rd party, equity may consider the transfer complete. (E.g. registration by 3rd party pending at the settlor's death).
2) The rule in Strong v Bird - if the settlor has intended to create an immediate trust with a third party acting as trustee, but failed to transfer legal title during their lifetime, the trust can be constituted if the intended trustee becomes the settlor's executor/administrator, provided the settlor's intention persisted until death (nothing on the facts to suggest that X changed their mind before death).
32
What must be done where settlor declares themselves and third party to be trustees?
Steps must be taken to transfer legal title from their sole name into the joint names of the settlor and the other trustees, complying with the relevant transfer rules.
33
Why is it important to understand the nature of any beneficial interest under a trust?
To be able to advise;
a) whether the beneficiary's interest is unconditional or conditional and liable to fail if the condition is not satisfied.
b) when the beneficiary will be able to call for trust property.
c) to what the beneficiary is entitled.
34
What interest does a beneficiary with an interest in capital have?
Absolute interest.
N.B. A settlor can decide that a particular beneficiary should get both capital and income return or just one or the other.
35
What interest does a beneficiary with an interest in the income only have?
Limited interest.
N.B. A settlor can decide that a particular beneficiary should get both capital and income return or just one or the other.
36
What 3 interests can there be under a fixed-interest trust?
1) Vested - B has a vested interest if B exists and does not have to satisfy any conditions imposed before becoming entitled to the trust property (unconditional interest).
2) Contingent - Conditional on the happening of a future event that may not happen, or B does not exist yet. Once the condition is satisfied, the beneficial interest vests in them and they have a vested interest.
3) Successive - Trusts can be used to distribute property over successive generations. Usually involves separating capital from income.
37
What happens if a beneficiary with a vested interest dies before the trust property is paid over to them?
The trust property will belong to the beneficiary's estate; i.e. will pass as part of the beneficiary's property under their will or intestacy.
38
What happens if a beneficiary is a minor?
The trustees will hold the property on trust for the beneficiary until they reach 18; only once they do so can the transfer of property to them discharge the trustees from the trust ('good receipt').
Once a beneficiary turns 18, the trust does not automatically end. Beneficiary must request that the trust property be transferred to them and until that happens, the trustees will hold property on a 'bare trust'.
39
What happens if a beneficiary dies before the happening of the stipulated event?
Their interest will go back to the settlor unless the settlor has provided that the beneficial interest should pass to someone else.
N.B. Stipulated event could be reaching a specific age or surviving life tenant.
40
What different interests may be created within successive interests when separating capital from income?
Life interest; being able to enjoy trust income now (during lifetime).
'Remainder to my son A' = vested interest in trust capital, remainderman who must wait until the other person's life interest expires.
N.B. If the remainderman dies before other person, their interest in remainder would NOT fail; trust property would pass to his estate on the other person's death and pass via will/intestacy.
41
Prior to the distribution of trust property in discretionary trusts, how are the individual membrs of the class referred to?
As 'objects' of the trust as opposed to beneficiaries. If an individual object (e.g. out of 4 children) is selected by a trustee, at that point they usually have a vested right in that part of the trust property that the trustee has decided to transfer to them.
42
What is the rule in Saunders v Vautier?
It is logical that a sole adult beneficiary with a vested interest can require that trust property be conveyed to them by the trustees, thereby bringing the trust to an end.
However, this principle has been extended to include trusts with more than 1 beneficiary; beneficiaries can end the trust by calling for a transfer of trust property to themselves or other trustees, so long as ALL the beneficiaries under the trust who could possibly become entitled;
- Are in existence and ascertained.
- Are aged 18+ and have mental capacity.
- Agree to what is being proposed.
43
What are the general rules for creating purpose trusts (settlor wanting trust to carry out a purpose or advance a cause)?
Must follow same general rules;
- Settlor must make a valid declaration of trust and property must be put into the trust.
- Certainty of intention
- Certainty of object
- Certainty of subject-matter.
- Beneficiary principle*
- Perpetuities*
- Formalities (if trust property contains land).
44
Why does the beneficiary principle pose a problem for purpose trusts?
There is no individual who can go to court and enforce the trust as purpose trusts are not directly for individuals.
General rule - purpose trusts are void.
45
Why does the rule against perpetuities pose a problem for purpose trusts?
If the purpose trust is not charitable, it will be void if it locks capital away for a period of more than 21 years (rule against inalienability of capital).
Therefore, non-charitable purpose trusts are void for offending the rule unless either;
- The trust states that is it to last for no more than 21 years (worded in trust deeds as 'for as long as the law allows'), or
- The trustees may spend all the trust capital on the purpose and thereby end the trust at any time.
46
Is this purpose trust void 'I give £40,000 to my Trustees so that they may use the income to maintain the changing rooms at Bees Tennis Club'?
Yes - capital will be locked away, offends the rule against inalienability of capital.
47
List the key features of Charitable trusts?
Exempt from the beneficiary principle and the rule against inalienability of capital.
Commission decide whether the trust satisfies the conditions set out in the 2011 Charities Act;
a) The trust must be for a charitable purpose.
b) The trust must have sufficient public benefit.
c) The trust must be exclusively charitable.
48
List some examples of charitable purposes (satisfying requirement a)?
- The prevention or relief from poverty; could include trusts to help the unemployed, build hostels for asylum seekers.
- The advancement of education; could include provision of scholarships, payment of teachers, building educational facilities, published research.
- The advancement of religion; could include maintaining places of worship, paying for future services, and distributing religious publications.
49
What are the 2 aspects to requirement b) the trust must have sufficient public benefit?
1) The trust purpose must have an identifiable benefit or benefits.
-- must be clear and relate to the purposes of the charity.
2) The benefit must accrue to the public or a sufficiently large section of the public.
-- no problem when benefits of a trust are offered to the whole public (e.g. trust to maintain a museum open to all), but less clear-cut if the benefits only offered to a restricted group.
50
How is the 'sufficiently large section of the public' requirement satisfied for each of the 3 main charitable purposes?
Prevention or relief of poverty;
-- Trust to relieve poverty amongst named individuals is not charitable.
-- Trust to relieve poverty amongst a class of individuals is charitable.
Advancement of religion;
-- Public benefit only present if the place of worship is open to all (even if only a small number attend) or members of religion mix with the public.
-- Contemplative religious orders that are closed off from the outside world are not charitable.
Advancement of education;
-- People who might benefit from these must not be numerically negligible but need to satisfy below test too;
-- 'Personal nexus' test - people linked by a personal nexus are not a sufficient section of the public (e.g. family and employment link).
-- 'Class within a class' test - class of people to benefit from a charitable purpose can be limited, so long as the limits are legitimate, proportionate, rational, or justifiable and not arbitrary.
-- Charitable trusts must not exclude the poor.
51
List some key features of requirement c) The trust must be exclusively charitable?
A trust must not have any political purpose but can engage in political activities as a means of achieving charitable purpose.
If charging fees, profits must be ploughed back into the trust instead of paid to owners of the institution.
Any political purpose (campaigning to change the law, govt policy) must be ancilliary.
52
What are the 2 valid non-charitable purpose trusts that are exceptions to the general rule?
1) Re Denley trust
2) Trusts of imperfect obligation
53
List the key features of a Re Denley trust?
The purpose of the trust must be sufficiently clear and give rise to a sufficiently tangible benefit.
The persons who stand to benefit from the carrying out of the purpose must be ascertainable (class of persons description must be conceptually certain), and
The trust must be limited to 21 years, or trustees able to spend all the trust capital on the purpose and bring trust to an end.
54
When will trusts of imperfect obligation apply?
In limited cases e.g. trusts to care for specific animals and trusts to maintain graves/tombs.
As the trust lacks a human beneficiary, it offends the beneficiary principle but these trusts are held to be valid but unenforceable (no one can compel trustees to spend money in the way set out in the trust).
55
When are resulting trusts express?
Trusts that the settlor expressly intends to create (formalities required).
56
When are resulting trusts implied?
In situations where it is presumed that the settlor intended to create a trust.
Where a person transfers property to another in circumstances where it is unclear who owns the beneficial interest.
57
List the 3 situations that give rise to a resulting trust?
1) Voluntary transfer of personalty (non-land property) - a resulting trust is presumed when property is transferred without consideration.
-- May be rebutted by evidence of person A's actual intention when transferring money to B (e.g. birthday money; intended that B became absolute owner).
-- N.B. Presumption of advancement too.
2) Voluntary transfers of land - less likely to result in a presumption of a resulting trust but may if there is evidence or additional factors (e.g. transfer between 2 strangers).
3) Purchase money cases - when X pays for property but puts it in Y's name, Y may hold the property on trust for X (giving that party a beneficial interest proportionate to contribution).
58
What is required for a contribution towards purchase price of property to give rise to a presumption of resulting trust?
The contribution must be;
- Contemporaneous with the purchase; it does not count if someone tries to make a 'contribution' after the event.
- Directed towards the actual purchase price itself; if X pays the price tag and Y pays the lawyers' fees in relation to their advice on the purchase, only X's contribution counts.
59
When does the presumption of advancement apply?
To some voluntary transfer and purchase money cases; when equity regards the transferor as being under a moral obligation/financial responsibility to provide for the transferee.
- Father - son.
- Husband - wife.
- Fiance - fiancee (so long as couples go on to marry).
60
Will the presumption of advancement apply if the roles are reversed (e.g. wife purchases property in name of her husband)?
No; presumption of resulting trust will apply and it is presumed wife will retain the beneficial interest in the house, unless rebutted by contrary evidence.
61
What is the result when the presumption of advancement applies?
There is no resulting trust and the transferor is presumed to be gifting property to the transferee.
62
What evidence can be given to rebut an underlying presumption?
Must be of the transferor's intention before or at the time of transfer (e.g. retaining title deeds suggests transferor intended to retain ownership).
- Result is that it replaces the presumption of advancement with a resulting trust.
N.B. Any evidence of your intention after the transfer can only be used against you; not support your case to rebut presumption of advancement.
63
When do automatic resulting trusts arise?
When there is an 'equitable vacuum' where the settlor attempts to create an express trust/transfer property to trustees on trust, but the anticipated trust does not dispose of all or part of the equitable interest as the declared trust is void or does not exhaust the fund.
64
What is the result of an automatic resulting trust?
The equitable title jumps back to the settlor and the trustees hold the property on bare trust for the settlor, who can then direct that the trust property be conveyed back to them using the rule in Saunders v Vautier.
65
Why might an attempted trust not dispose of the equitable interest?
Due to gaps in beneficial ownership as there is no beneficiary who attains a vested interest.
Where the attempted trust lacks certainty of objects (e.g. a trust for my 'best friends').
Where the attempted trust does not define the beneficial interests with sufficient certainty (e.g. 'give a decent amount').
Where the attempted trust offends the rules against perpetuity.
Where the attempted trust offends against the beneficiary principle.
66
Do any formalities attach to a resulting trust?
No; a resulting trust is an implied trust which can be created without any formality.
67
List the 2 main mechanisms developed by equity to help determine who is entitled to what share of the family home to achieve a fair result when unmarried couples separate?
1) Common intention constructive trust.
2) Proprietary estoppel.
68
How can a couple finalise a valid declaration of trust when purchasing a house in joint names?
By completing the relevant section of TR1 (transfer deed used to transfer legal title in registered land).
Evidence of decision to hold as JT/TIC in signed writing to create an enforceable express trust.
69
What are the different regimes to deal with separating couples?
If married/in civil partnership and subsequently divorce/dissolve, family courts are given wide redistributive powers under the Matrimonial Causes Act (MCA) 1973 to determine who gets what out of the divorce; involves quantifying the beneficial interests in the family home and applying whether or not the couple created an express trust over the home when purchased.
If just cohabiting, affairs are governed by trust law principles (important)*.
70
What is the result if the cohabiting couple have created an express trust over the family home?
Their beneficial interests in the family home are set out in their declaration of trust, which must be evidenced in signed writing to comply with s53(1)(b) LPA 1925 to be enforceable.
If the couple become registered co-proprietors of the family home, they will often have created an express trust that deals with the beneficial interests in the home.
71
What is the result if the cohabiting couple have not created an express trust over the family home?
Need to consider whether an implied trust over the land has arisen by operation by law (no need for any formalities).
72
Why are resulting trusts not deemed appropriate when dealing with the family home?
Resulting trusts only give you a beneficial interest if you contributed towards the purchase price at the time of purchase;
- Payment of ancillary items e.g. conveyancing fees, stamp duty, bills do not give rise to a resulting trust.
- Given that most of the purchase price of a family home is funded by a mortgage, if it is not in your name but you nevertheless pay off that mortgage after the date of purchase, that will not give rise to a resulting trust.
- Resulting trusts only recognise monetary contributions and ignore childcare etc.
N.B. Given these difficulties, in the absence of an express trust, the beneficial interests in the family home are now usually determined using a common intention constructive trust.
73
How are common intention constructive trusts established?
Common intention (express understanding or inferred from conduct) AND detrimental reliance on that intention.
74
How to quantify beneficial interests when the family home is jointly owned?
If registered as co-proprietors, legal title will be held jointly and equally.
In the absence of an express trust, equity will generally follow the law meaning that the partners own the beneficial interest in the house jointly and equally on a common intention constructive trust.
If one wants a bigger share, they have the onus of persuading the court to depart from this presumption (unlikely unless evidence can be shown that couple intended throughout their relationship to keep financial affairs separate);
-- A specific agreement or change in intention must be supported by evidence of detrimental reliance e.g. financing major property improvements.
-- Without clear agreement or change in intention, the court examines the 'whole course of dealing' to enable them to quantify the size of each partner's share in the family home, but the detrimental reliance triggers the quantification exercise.
75
List some factors that are considered when the court examines the 'whole course of dealing' to enable them to quantify the size of each partner's share in the family home?
- Advice/discussions at the time of purchase.
- The reasons why the home was transferred into their joint names.
- The nature of the partners RS.
- Whether they had children for whom they had a responsibility to provide a home.
- How the purchase was financed (initially and subsequently).
- How the partners arranged their finances.
- How the partners discussed the outgoings on the home and other household expenses.
76
What 2 stages must be followed in cases where the family home is solely owned?
1) The common intention constructive trust must be established (where home is jointly owned, this is presumed), and
2) The beneficial interests under the trust must be determined or quantified (same factors to be used as above).
77
How can a common intention constructive trust be established in cases where the family home is solely owned?
N.B. No presumption of joint beneficial ownership. Onus is on the claiming partner to establish that they are entitled to a beneficial interest.
By showing that there was a common intention between the partners that both were to have an interest, and that
The claiming partner acted to their detriment in reliance on that common intention.
-- Detrimental reliance needs to be substantial e.g. financial contributions or substantial housekeeping payments.
78
What 2 methods are there for establishing the 2 elements above?
1) Express common intention + detrimental reliance.
-- Oral agreement that house is to be shared beneficially e.g. 'It is as much yours as mine.'
2) Inferred common intention + detrimental reliance.
-- Can only be inferred from a direct contribution to the purchase price or a significant contribution to mortgage payments falling due after the purchase.
N.B. If a claiming partner has made significant contributions towards the mortgage, this enables the court to both infer the necessary common intention and demonstrate that the claiming partner acted to their detriment in reliance on that common intention.
79
What is proprietary estoppel and what 2 stages are involved in establishing it?
Prevents someone from going back on their word in relation to property, where it would be unfair to do so.
1) The estoppel must be established.
2) The estoppel must be satisfied (remedies at court discretion).
80
What are the 3 key elements to establishing a claim in proprietary estoppel?
1) Assurance - the legal owner must have made a representation or created/encouraged an expectation that the claiming party would become entitled to an interest in land.
-- Active - legal owner tells the claiming party that they have or will have an interest in land.
-- Passive - conduct from the claiming party that suggests that they think they have a right to the property. The legal owner knows this (or must have known) and remains silent.
2) Detriment - must be substantial, weighed against any benefits claiming party may have obtained. May include;
-- Spending money on refurbishing a home or improving property.
-- Working without adequate remuneration.
-- Giving up a job and moving to a new area.
-- Looking after someone who is gravely ill.
3) Reliance - assurance has caused the claiming party to act to their detriment.
81
List the available remedies that the court can grant?
- Transfer of the legal ownership in land.
- Grant of a lease.
- Some right of occupancy (e.g. right to live in house rent-free for life).
- Financial compensation.
- A beneficial share in the home.
82
In what 2 circumstances may a claiming party under proprietary estoppel find themselves barred from obtaining a remedy?
1) If the claiming party's conduct is inequitable or unconscionable ('he who comes to equity must come with clean hands').
2) There is an unreasonable delay in bringing a claim under proprietary estoppel.
83
What are the 2 main differences between the 2 mechanisms (common intention constructive trust and proprietary estoppel)?
If established, a common intention constructive trust guarantees the claiming partner a beneficial share in the home; whereas proprietary estoppel gives the court discretion over the remedy that the claiming partner may be awarded (can be more than a beneficial share).
Common intention constructive trusts are used to establish present interests in property (i.e. when 2 partners share a house together), not for future interests in property as with proprietary estoppel.
84
What is the effect of a resulting trust arising?
The person then holds a beneficial interest in the property proportionate to the contribution made.
85
Who can be a trustee?
Most adults with mental capacity.
N.B. A company can act as a trustee so long as it is authorised by its constitutional documents.
86
What is the minimum and maximum number of trustees?
Trusts over land should have at least 2 human trustees or a sole trust corporation (to ensure beneficial interests can be overreached).
Trusts of personalty can have a sole trustee but usually better to have 2.
Trusts over land cannot have more than 4 trustees; trusts of personalty can have more than 4.
87
Is it rare for trust documents to contain additional powers for trustees to be appointed, replaced or removed?
Yes; as statute grants wide powers in this regard.
88
If a trustee wishes to retire, what 3 provisions may they use to do so?
1) Trust instrument may contain an express power for trustees to retire (rare).
2) s36(1) TA 1925.
3) s39 TA 1925.
89
What does s36(1) TA 1925 provide regarding retirement of a trustee?
The retiring trustee must be replaced by the appointment of a new trustee (appointed by the person nominated in the trust instrument to exercise the s36 power, OR the continuing trustee(s)).
Appointment must be made in writing; advantageous to use a deed.
90
What does s39 TA 1925 provide regarding retirement of a trustee?
A trustee can retire without being replaced provided;
-- There will be 2 trustees or a trust corporation left.
-- The trustee retires by deed.
-- The other trustees consent by deed.
91
Is a trustee who has retired liable for breaches of trust?
Remains liable for their own breaches but will not be liable for future breaches.
92
If trustees or beneficiaries want to remove and/or replace a trustee, what 4 provisions may they use to do so?
1) Trust instrument may contain express powers (rare).
2) s36(1) TA 1925.
3) s41 TA 1925.
4) s19 TLATA 1996.
93
What does s36(1) TA 1925 provide regarding removal and/or replacement of a trustee?
Grounds for replacing a trustee;
-- Trustee is dead.
-- Remains outside the UK for more than 12 months.
-- Desires to be discharged (retire).
-- Refuses to act (disclaims).
-- Is unfit to act.
-- Is incapable of acting.
-- Is a minor.
Replacement is effected by the person nominated in the trust instrument or the continuing trustee(s).
Appointment to be made in writing; advantageous to use a deed.
N.B. If all trustees have died, the PRs of the last surviving trustee to effect replacement.
94
What does s41 TA 1925 provide regarding removal and/or replacement of a trustee?
Grounds - court will replace a trustee if it is expedient to do so and it is otherwise inexpedient, difficult or impractical to appoint without the court's assistance.
Court makes the appointment following an application by the trustees or beneficiaries.
Court will only replace a trustee if not in best interests of the trust for them to continue; mere dislike of a trustee is generally insufficient.
95
What does s19 TA 1925 provide regarding removal and/or replacement of a trustee?
Allows beneficiaries to serve a written direction on a trustee(s) to retire and appoint the person (if any) specified in the direction.
96
If trustees or beneficiaries want to appoint additional trustees, how can this be done?
1) Trust instrument (rare).
2) s36 TA 1925.
3) s41 TA 1925.
4) s19 TA 1925.
97
What does s36(6) provide regarding appointment of an additional trustee?
Person nominated in trust instrument or continuing trustee(s) make appointment; must be done in writing and advantageous to use a deed.
98
Why is it advantageous to use a deed in retirement, removal and appointment of trustees?
A deed automatically vests the trust property (apart from company shares) in the continuing and new trustee.
99
What happens in the event of 1 trustee dying?
Legal title will devolve to the surviving trustees. If only 1 surviving trustee left, trustee should be advised to appoint a replacement trustee to ensure trust can continue.
100
When can trustees delegate their functions to an attorney?
As deputy if unable to perform their functions. Must be made by deed and can run for up to 12 months.
N.B. Choose with care as trustees remain liable for acts of that attorney.
Written notice to be given to other trustees within 7 days of appointment.
101
What conditions must be satisfied in order for trustees to exercise their power to use income to pay for the maintenance, education and benefit of a beneficiary under TA 1925?
-- No contrary provision in the declaration of trust.
-- Trustees can only exercise this power in favour of minor beneficiaries who have some kind of interest in income, whether vested or contingent, but not where there are any 'prior interests' to income e.g. life interest.
102
Who should the trustees pay the income to in the case of a minor or very young beneficiaries?
Direct to the beneficiary's parent or guardian, or alternatively directly to the maintenance, education or benefit provider (e.g. school directly).
103
Can trustees be compelled to exercise their power to apply income for a minor beneficiary's maintenance, education or benefit?
No; matter for their discretion.
If they decide not to, accumulate income (invest it for beneficiary's benefit) and then transfer it with the trust capital when the beneficiary calls for it on or after their 18th birthday.
104
Are adult contingent beneficiaries entitled to trust income as it arises?
Yes; and trustees must pay that income to them, pending the vesting of their beneficial interests.
105
What happens if an adult beneficiary dies before the condition is satisfied?
Their estate will receive nothing (no capital and no accumulated income).
106
What power do trustees have to pay or apply trust capital early for a beneficiary's advancement or benefit under TA 1925?
If following conditions are satisfied;
-- There is no contrary provision in the declaration of trust.
-- The beneficiary has an interest in capital (vested or contingent).
-- The payment must be for the beneficiary's advancement or benefit (any use of money that will improve the material situation of the beneficiary).
-- For trusts created after 1/10/2014, the advance payment must not exceed the beneficiary's entitlement.
-- For trusts created on or before 1/10/2014, the trustees can only advance up to half the beneficiary's entitlement.
-- The payment is taken into account when the beneficiary becomes entitled to trust capital (minus the amount advanced earlier when beneficiary calls for the remainder share of trust property when satisfied condition).
-- If there is a beneficiary with a prior interest, an advancement to another beneficiary can only take place if the prior interest-holder is an adult and has given written consent to the advancement.
107
Are trustees obliged to exercise powers to apply or pay capital to beneficiaries interested in capital for their advancement or benefit?
No; at their discretion.
108
What is the difference between powers and duties with beneficiaries?
Beneficiaries can compel trustees to perform duties.
- E.g. in a fixed interest trust, trustees are under a duty to distribute trust property at the right time to the right beneficiaries. Should the trustees refuse to do so, the beneficiaries can enforce the duty by obtaining a court order.
Beneficiaries have very little control over the exercise of powers.
- E.g. trustees are under no duty to exercise their power to give money early to beneficiaries and cannot be compelled to do so.
When it comes to powers;
- Trustees must consider from time-to-time whether to exercise them, and
- If they do decide to exercise them, they must ensure that they do so properly.
109
What duty of care do trustees owe?
Objective standard - duty of prudence; higher standard for professional trustees and solicitors.
110
What must a newly appointed trustee do?
- Ensure that they have been properly appointed.
- Ascertain what the trust property consists of and take all reasonable and proper measures to obtain control of trust property - if the transfer of trust property to the new trustee is outstanding, the new trustee must press for that transfer to take place.
- Review the trust document and associated paperwork to familiarise themselves with the trust and how it works - other trustees must produce papers relating to the administration of the trust.
- Enquire into the past business of the trust to ensure that there have been no past breaches of trust, and take appropriate action to remedy any breaches.
- Where there are chattels held on trust, ensure that a proper inventory is drawn up.
111
What duty does a trustee owe when faced with a choice between 2 beneficiaries, whose interests appear to conflict with each other?
Must act impartially in the interests of each beneficiary.
N.B. May be found in breach of trust if they continually prefer the interests of 1 beneficiary over the other.
112
How must co-trustees generally take decisions?
Unanimously (unless trust document provides otherwise).
Important safeguard to limit opportunities for 1 trustee to abuse their legal powers.
113
How must trustees act personally?
Must be personally active in the running of the trust. If a trustee;
- Leaves matters in the hands of a co-trustee without enquiry.
- Allows trust funds to remain in the sole control of a co-trustee.
- Fails to watch over and if necessary, correct the conduct of their co-trustees or
- Fails to take action knowing that a co-trustee was committing or about to commit a breach of trust.
This passive trustee may be liable to make good any loss that the beneficiaries suffer.
114
Can trustees seek the advice from experts (legal, financial or otherwise)?
Yes; but cannot allow the experts to take decisions for them.
115
Having decided to exercise a power, how must trustees then exercise that power?
- In good faith
- Rationally
- For the purpose for which it was created
- With regard to relevant material matters and without regard to irrelevant ones
- With regard to all relevant facts
- With regard to any legitimate expectation that a beneficiary might have that the power be exercised in a certain way.
116
Do trustees need to give reasons for their decisions?
No; but if they do, beneficiaries and the court may enquire into their soundness.
However, where a particular beneficiary has a legitimate expectation that a discretion will be exercised in their favour, trustees may be obliged to give reasons and advance warning if planning to exercise discretion differently.
117
What documents are beneficiaries entitled to see?
The trust document or will that created the trust
The trust accounts and
A schedule of trust investments.
Beneficiaries cannot demand to see documents that record the reasons for your decisions (although the beneficiaries may go to court and access these).
- Court will start with presumption that such documents should not be disclosed, unless good evidence exists that trustees have breached trust and it is thus in interest of sound administration of trust.
118
What duty do trustees owe beneficiaries with regard to investment?
As part of management duty, trustees must duly and promptly invest all trust capital and income not being distributed to or applied for beneficiaries, and the trustees may become liable for any losses arising out of trust funds being left uninvested for an unreasonable period of time.
119
How does the law aim to strike a balance for trustees investing?
Given that the trustees are investing on behalf of the beneficiaries, the beneficiaries must have some ability to recover any losses caused by the trustees' failure to act properly, but
If trustees follow the right process when selecting investments, the fact that those investments then perform badly is not generally something that beneficiaries can complain about.
As a matter of best practice, trustees must generally take expert advice when thinking about investing trust property and can also delegate their investment functions down to a more suitably qualified agent.
120
How can trustees tailor their investment strategy according to the particular trust they are dealing with?
By considering;
- What sort of interests beneficiaries have?
- What the circumstances of the individual beneficiaries is?
- How long the trust will last for? Investing for short/long term?
- What is the size of the trust fund?
- What is the tax position of the trust and beneficiaries?
N.B. As a general rule, the longer you have to invest, the more risk you can afford to take in the early years as you have time to ride out any downturns.
N.B. The larger the trust fund, the greater opportunity there is to buy a mixture of investments (diversification).
121
List some of the common types of investment?
Shares
- Income = dividend payments.
- Capital = any rise in the value of the shares.
Bonds
- Income = coupon (interest runs on the loan).
- Capital = mainly income producing investments but can generate capital growth when sold on secondary markets.
Property (real estate)
- Income = rent if let.
- Capital = rise in property value.
Cash in bank
- Income = interest.
- Capital = no capital growth.
122
What governs investments in the absence of express provisions in the declaration of trust?
TA2000.
General power of investment = a trustee can make any kind of investment that they could make if they were absolutely entitled to the assets of the trust, save for investments in land where a trustee may acquire freehold or leasehold land in the UK either;
- As an investment.
- For occupation by a beneficiary.
- For any other reason.
123
What are the statutory duties that trustees should have regard to when purchasing or reviewing investments?
s4 Trustee Act 2000.
- The investments must be suitable for the trust. 2step process;
1) Trustees to consider whether the trust should be investing in shares.
2) If so, trustees to consider whether shares in X are a good choice (consider all factors inc risk, markets, timescale etc).
- There is a need for diversification (as far as appropriate given circumstances of the trust).
Trustees must then review the investments of the trust from time-to-time (question of fact) to assess whether they need to be varied (every 6 months good if in early days of managing a long-term trust but more if economic downturn for e.g.).
When reviewing investments or thinking of purchasing/selling investments, trustees should obtain and consider professional advice from someone the trustees reasonably believe to be qualified to do so, unless they conclude it is not necessary (e.g. one trustee is a qualified financial advisor).
- Act reasonably when selecting.
124
List some non-statutory duties (common duties) outside the TA 2000 for trustees to have regard to when exercising their investment powers?
Trustees must act impartially between beneficiaries' and strike a fair balance between all needs (life tenant who wants income vs remainder beneficiary who wants capital).
Trustees must secure the best return for the beneficiaries.
- Involves financial considerations trumping moral/ethical except where;
--- Ethical and non-ethical investments offer comparable returns, trustees may choose ethical option.
--- Charitable trustees may avoid investments that conflict with charity's aims or risk alienating supporters.
--- The settlor may direct trustees, via trust deed to avoid certain sectors deemed unethical.
125
Who can trustees collectively delegate their investment functions to?
Either a 3rd party (e.g. independent financial adviser) or to one of their number (so long as that trustee is suitably qualified to make investment decisions).
-- CANNOT collectively delegate these functions to a beneficiary.
N.B. A 3rd party agent can be paid reasonable remuneration for their services.
126
Outline the processes that trustees must comply with when delegating their investment functions to someone else?
They must retain the investment agent by written agreement.
They must prepare a written statement (policy statement) that gives guidance as to how the agent should exercise their asset management functions in the best interests of the trust.
The written agreement under which the agent is retained must include a term to the effect that the agent will secure compliance with the policy statement.
The agent must comply with the same statutory and non-statutory investment duties that would otherwise apply to the trustees.
The trustees must regularly review the arrangements under which the agent is acting and how those arrangements are working (includes considering whether to revise/update policy statement, assessing whether trustee is complying with it).
The trustees must select a suitably qualified person to whom their asset management functions will be delegated. Select with reasonable care and skill.
127
Is a trustee liable for any act or default by the agent?
No; unless the trustee has breached any of the personal duties listed above and those breaches cause loss to the trust.
128
Is property outside the UK classed as an authorised trust investment?
No; trustees breach their investment duties purchasing such.
129
May trustees be generally justified in avoiding certain investments due to social, moral or political views that they may hold about such investments?
No.
130
What is the purpose of the fiduciary relationship between trustees and beneficiaries?
It prevents the trustee from exploiting their control over trust property or the running of the trust to make a profit for themselves.
The duties are applied in a strict manner; designed to deter a trustee from putting their self-interest above the interests of the trust.
131
List some people who fall within the fiduciary relationship?
- Trustees to beneficiaries.
- Company directors to their company.
- Business partners to each other.
- Agents to their principal.
- Senior employees with access to confidential information to their employer.
- Solicitors to their clients.
132
What are the core fiduciary duties?
No conflict rule - fiduciary must not put themselves in a position where their own interests conflict with the interests of the principal.
No profit rule - fiduciary must not make an unauthorised personal profit from their position or use their principal's property to make such a profit.
133
What will happen if the trustee acts for their own benefit rather than the trust's and makes a personal profit?
The trustee will be obliged to account for that profit, i.e. pay it over to the trust.
- Strict liability applied here.
134
In what 3 situations may trustees keep personal profits?
If;
1) This is authorised by the declaration of trust ('charging clause' - relatively common in trust deeds and wills).
2) All beneficiaries are aged 18+, know the full facts and consent.
3) This is authorised by a court order (made if in best interests of beneficiaries as e.g. skillset of trustee in question is needed) or by statutory provision (TA2000).
135
List some examples of common breaches of fiduciary duty?
1) Self-dealing.
2) Competition with the trust.
3) Use of information or opportunity.
4) Incidental profits (director's salary).
5) Incidental profits (commission).
136
Explain 1) self-dealing?
If a trustee sells property to, or purchases from the trust, the trustee will put themselves in a position of conflict as;
-- As seller acting in the interests of the trust, the trustee will want the purchase price to be as high as possible but
-- As buyer acting in their own self-interest, the trustee will want the purchase price to be as low as possible.
If a trustee is involved in this kind of transaction, the beneficiaries can set the transaction aside at a later date, within a reasonable period of time. Not automatically void, as beneficiaries may decide that transaction was a good deal for the trust.
N.B. Applied strictly; courts do not consider whether or not the trustee has paid fair value for the property or whether the trustee was acting honestly.
137
Is a trustee able to get around the self-dealing rule by retiring from the trust before purchasing trust property?
No; if the trustee has retired with the object of purchasing trust property, they will still be caught by the rule and the beneficiaries will still be able to set the transaction aside.
138
Explain 2) competition with the trust?
Where the trust includes a business, the trustee must not set up their own business in competition.
If they do so, they will be liable to account for any profits made by their competing business. If the beneficiaries become aware that the trustee is planning to set up a competing business, they can obtain an injunction to prevent this from happening.
139
Explain 3) use of information or opportunity?
A trustee is liable to account for any profits they receive where they received that profit by exploiting an opportunity that belonged to the trust.
Likewise, a trustee who makes use of confidential information for their own personal gain when they only become aware of the information due to their trusteeship will have to account for any profits they receive.
- This is the case whether or not the trust could have taken advantage of the opportunity or was interested in the information.
140
What should a trustee do when seeking to exploit opportunities that properly belong to the trust?
Obtain the authorisation of all the beneficiaries.
E.g. solicitor looking to purchase shares in company.
141
Explain 4) incidental profits: director's salary?
Trustees with substantial company shareholding may secure board appointments to oversee management.
In the absence of any authorisation from the trust deed, the beneficiaries or the court, the trustee must surrender their salary to the trust if they acquired the directorship only by virtue of being a trustee.
N.B. If someone was a director before becoming a trustee, they may keep their salary.
142
Explain 5) incidental profits: commission?
Example being the payment of commission to a trustee when that trustee places trust business with a particular firm. The commission received by the trustee has to be accounted to the trust.
143
Is someone acting in a professional capacity who is not a sole trustee entitled to receive reasonable remuneration?
Yes; provided the trust instrument does not prohibit it and the other trustees agree.
N.B. Whether or not a trustee is entitled to charge for their work, TA 2000 provides that the trustee can be reimbursed from the trust fund for any expenses properly incurred when acting on behalf of the trust e.g. cost of travelling to trustee meetings.
144
What 2 remedies are the beneficiaries entitled to bring if a trustee breaches their fiduciary duty and have not obtained authorisation to keep any personal profit?
1) A personal claim; trustee pays over their unauthorised profit (must surrender any unauthorised personal profits they have secured by virtue of their position whether or not the trust has suffered a loss and/or).
2) A proprietary claim; to seek to recover property owned by the trustee that represents the personal profit they received.
-- Particularly attractive where e.g. shares have gone up in value (where trustee made unauthorised profit through exploiting investment opportunity) as the trust would get the benefit of that increase.
145
What should a beneficiary do before bringing a personal claim against a trustee?
Assess the financial standing of the trustee for 'deep pockets' as a personal claim is only as good as the financial solvency of the trustee.
146
List some circumstances in which a personal claim may not be appropriate or advantageous?
If the trustee is insolvent (cannot pay their own debts when they fall due). The beneficiary will rank as an unsecured creditor in any bankruptcy, whose claims generally come 'at the back of the line' where there is very little money left.
The trustee may have used trust property to buy themselves something that the beneficiary considers attractive (e.g. trustee stole money from trust fund and used it to purchase shares that have gone up in value; seek proprietary claim to take advantage of increase in value).
The trustee's wrongdoing happened some time ago; personal claims are sometimes statute-barred 6 years after the date of breach.
- Proprietary claims however are not subject to any statutory limitation period and may remain available in such a case.
147
What trustees may be the subject-matter of a personal claim?
That trustee must themselves be in breach of trust (trustees are not automatically or vicariously liable for the defaults of their co-trustees).
If more than 1 trustee has breached trust, their liability is joint and several.
-- Beneficiaries may decide to bring a personal claim for the full loss against the wealthiest trustee or against a professional trustee more likely to be backed by insurance.
Beneficiaries must establish causation (trustee's breach of trust caused the loss suffered, 'but-for test').
148
Why will it sometimes be difficult to bring a personal claim against trustees in relation to investment decisions they have taken?
As beneficiaries will need to establish that the decision made was one that no reasonable trustee could have made.
149
So long as beneficiaries can satisfy breach of trust + causation (and subject to any defences available to the trustee) what value can be recovered for a personal claim?
Compensation equal to the loss to the trust + interest from the date of breach (rate of interest is at court's discretion but usually is the rate allowed on the court's short-term investment account).
150
List the defences that may be available to a trustee who is facing a personal claim for breach of trust?
1) An exemption clause in the trust deed.
2) Knowledge and consent of the beneficiaries.
3) s61 of Trustee Act 1925.
4) Limitation and laches.
151
How can an exemption clause in the trust deed relieve trustees from liability?
Will do for negligent or innocent breaches but void insofar as it tries to exclude liability for fraudulent breaches.
Professional trustees must take reasonable steps to ensure the settlor is aware of the meaning and effect of any such clause before including it, as any ambiguity in the clause will be interpreted strictly against that professional.
152
How can knowledge and consent of the beneficiaries relieve trustees from liability?
If all beneficiaries have consented (freely informed and given by adults of capacity) to a course of action that constitutes a breach of trust (whether before the action occurred or afterwards) they cannot subsequently bring a claim against the trustees.
If only one beneficiary consents to a breach of trust, that beneficiary can no longer bring any personal claim against the trustees, but the other non-consenting beneficiaries can.
153
How can s61 of the Trustee Act 1925 relieve trustees from liability?
The court has a discretion to relieve trustees from liability wholly or in part, if they acted honestly and reasonably and ought fairly to be excused.
- E.g. genuine mistake made from someone who doesn't know about trusts who failed to advance money to beneficiary. N.B. Higher standard expected of solicitors.
N.B. As a matter of public policy, courts are reluctant to excuse passive trustees from the consequence of their inactivity for fear this might encourage future trustees to be passive in the management of trust business.
154
How can limitations and laches relieve trustees from liability?
6 year period (runs from date of breach).
- In case of minors, time only runs from their 18th birthday.
- In case of remainder beneficiaries, time only runs when their interest falls into possession (when life tenant dies).
6 year period does not run against trustees who have committed a fraudulent breach of trust.
Where there is no statutory limitation period, the court might still have regard to the equitable doctrine of laches. Laches will prevent a claimant from asserting a personal claim where;
- The claimant knows the facts that gave rise to the breach of trust.
- The claimant delays in taking action.
- This delay either is deemed to constitute acquiescence in or waiver of the breach by the claimant or causes detriment/prejudice to the trustee.
Delay by itself is not usually a sufficient form of detriment; court will want to see some evidence that prejudice has been caused.
155
What possibilities exist if one trustee is sued for the entire loss?
They may be able to share the burden of paying monetary compensation with the other trustees in breach. 2 possibilities;
1) The defending trustee may be able to claim the full amount of compensation from a co-trustee under an equitable indemnity, or
2) The defending trustee may be able to claim a contribution towards the compensation from a co-trustee under the Civil Liability (Contribution) Act 1978.
156
What does 1) equitable indemnity involve?
A trustee who is sued for breach of trust can recover a full indemnity from a co-trustee who;
-- Acted fraudulently when the others acted in good faith or
- Is a solicitor who exercised such a controlling influence that the other trustees blindly followed the solicitor's advice or
-- Has benefitted personally from the breach or
-- Is also a beneficiary and benefitted from the breach (in which case, the indemnity is limited to the value of their equitable interest, which will be impounded to meet the claim).
157
What does 2) contribution involve?
Pursuant to s1 of Civil Liability (Contribution) Act 1978, the court can order a co-trustee to make a contribution that is just and equitable having regard to the extent of that co-trustee's responsibility for the loss.
Contribution can be anything up to 100% of the compensation ordered.
In deciding how to exercise its discretion, the court will primarily reflect on the blameworthiness of the co-trustees.
158
In proprietary claims, how do we identify property that now represents trust property?
Using tracing rules which trace trust property into the hands of the trustee.
Over the years, wrongdoing trustees have engaged in various different transactions with trust property, and equity has correspondingly developed a number of tracing rules to work out what the end result is.
159
What does a proprietary claim enable?
The beneficiaries to recover the asset and bring the asset back within the trust's control.
N.B. A proprietary claim is only as good as the property that the beneficiaries can trace into.
-- E.g. if the trustee has spent trust property in such a way that there is no longer any physical asset to trace into (e.g. credit card bills or holidays), the trust property is said to have 'dissipated'.
160
Is tracing required where the trustee still holds the original property in its original form?
No; a proprietary claim will enable the beneficiaries to recover the property.
161
What is the situation where the trustee holds substitute property?
Where the trustee has sold trust property and purchased another asset with the sale proceeds, a proprietary claim will enable the beneficiaries to recover the new asset which is treated as if it belongs to the trust (known as a 'clean substitution').
In this situation, the beneficiaries can choose either;
- To take the substitute property (do where substitute property has increased in value), or
- To sue the trustee for compensation for the loss to the trust and take a charge over the property for the amount that the trust has lost (do where substitute property has decreased in value).
162
When do tracing rules come into play?
In the more complex situations where a trustee starts to mix trust funds with either their own money or money belonging to someone else.
Situations include;
1) Mixed asset (trustee buys an asset using partly their own money and partly funds wrongly drawn from the trust).
2) Withdrawals from a mixed bank account (trustee pays money from the trust into their own bank account, mixes that money with their own money, and then makes various withdrawals from the bank account).
3) Trustee buys a mixed asset using some money from Trust A and some money from Trust B.
4) Trustee transfers money from Trust A and from Trust B and pays both sums into their own bank account, mixes those monies and then makes various withdrawals from the bank account.
163
What options does the beneficiary have in the case of scenario 1) mixed asset?
Option to claim a proportionate interest in the mixed asset (do when mixed asset has increased in value) or
Option to sue the trustee for compensation for the loss to the trust and take a charge over the mixed asset for the amount that the trust has lost (do when mixed asset has decreased in value).
N.B. Equity tries to give the beneficiary the best result against the wrongdoing trustee whether the property has gone up or down in value.
164
What tracing rules does equity use in the case of scenario 2) withdrawals from a mixed bank account?
Equity uses a number of tracing rules to work out different end results, and then allows the beneficiary to cherry-pick between these rules (the beneficiary can choose the tracing rule that gives them the best end result).
Tracing rule 1 - Re Hallett
- Provides that the trustee is deemed to spend their own money first.
- Particularly attractive where there is a healthy balance on the trustee's bank account, because the court will use the rule to trace trust property into that balance.
- But, if Re Hallett works to benefit the wrongdoing trustee due to dissipation, the below tracing rule will apply to ensure a better result for the beneficiary.
Tracing rule 2 - Re Oatway
- Provides that the beneficiary has a first charge on the mixed fund (first choice and can generally choose how best to satisfy their proprietary claim -favours innocent beneficiary).
- The trustee must wait until the beneficiary's claim is satisfied before the trustee can get any of the property.
- As is the case in Re Hallett, if an asset purchased partly with trust money increases in value, it is now believed that the beneficiary can also benefit from that increase in value.
165
Explain the limitation on the tracing rules?
Where a trustee spends all the money in their mixed bank account, and then subsequently pays in some extra money into their account, the trust's interest cannot be traced beyond what is known as the 'lowest intermediate balance' (the lowest balance to which the account sank before extra money was paid in - confirmed in Roscoe v Winder).
The trust's proprietary claim is therefore limited to the balance on X's account.
166
Explain scenario 3) mixed asset using some money from Trust A and some money from Trust B?
In cases where an individual (e.g. solicitor) is a trustee of many trusts, it is possible that such a person could take money from a number of trusts in breach of trust and mix those together.
In such circumstances, the beneficiary of each trust must use tracing rules to unravel what each trust owns. However, if each trust is innocent of the trustee's wrongdoing, as between those trusts, equity must use a different set of tracing rules that aim to treat each innocent trust in a more equal fashion.
In the situation where the trustee takes money from one trust, mixes it with money from another trust and then uses the entire mixed fund to buy an asset in their own name, the beneficiaries of each trust will share pari passu in the mixed asset purchased (rateably in the same proportion as their funds contributed to the purchase price).
As between 2 innocent trusts, therefore, the outcome is always that each trust is entitled to a proportionate share in the mixed asset whether that asset has increased or decreased in value.
167
Explain scenario where withdrawals from a mixed bank account (trustee transfers money from one trust and money from another trust into their own bank account and then makes various withdrawals from that bank account?
Question is how do the beneficiaries of each trust know whether the company shares were purchased using money from their trust fund or from the other trust fund.
Tracing rule 1 - Clayton's case
- As between two or more innocents, the first money paid in is the first money paid out (First In, First Out - FIFO).
- Will only be applied if it does broad justice having regard to the compelling claims to disentangle.
Tracing rule 2 - Barlow Cloves v Vaughan
- FIFO rule can be departed from where;
--- It is impossible to apply FIFO (e.g. where the records are so poor that ordering payments chronologically cannot be accurately undertaken).
--- FIFO would result in injustice.
--- The application of FIFO would be contrary to the parties' intentions.
Result in case of departure from FIFO is that generally each investor (or trust) takes a rateable share in any remaining assets.
168
What happens in the situation 4) the trustee takes money from two innocent trust funds and mixes that money with the trustee's own money, before making various withdrawals?
First apply the rules of Re Hallett and Re Oatway with the aim of pushing as much of the trustee's own money into dissipation as possible and
Then apply the rules of Clayton's case and Barlow Clowes v Vaughan to allocate any remaining assets between the two (or more) innocent trusts.
169
Can principals of other fiduciary relationships (aside from beneficiaries) bring proprietary claims to recover property that has been misappropriated by their fiduciaries?
Yes and use tracing rules too.
170
What is the presumption in cases involving withdrawals through a mixed bank account?
Everything is presumed against the trustee and the beneficiaries can generally identify the more valuable items of property remaining as trust property.
171
When can beneficiaries bring claims against third parties 'strangers to the trust'?
If they become entangled in a breach of trust or fiduciary duty. May happen in one of two ways;
1) Recipient liability - it might be possible to bring a personal and/or proprietary against a 3rd party if they are in receipt of trust property given to them in breach of trust or fiduciary duty.
2) Accessory liability - it might be possible to bring a personal claim against a 3rd party if they have assisted a trustee in breach of trust or fiduciary duty.
172
What are the 4 types of 3rd party claims to consider?
1) Equitable personal actions against 3rd parties who take it upon themselves to act as a trustee 'intermeddling'.
2) Equitable personal actions against 3rd party recipients - primary claim is often called 'knowing receipt'.
3) Equitable proprietary actions against 3rd party recipients.
4) Equitable personal actions against 3rd party assistors - primary claim is often called 'dishonest assistance'.
173
When is there no practical point in bringing a 3rd party claim?
When the 3rd party is not financially solvent and does not own property of value/interest.
174
When should a proprietary recipient claim be brought?
When the 3rd party is not financially solvent but does own property of value/interest.
175
When should a personal recipient claim be brought?
When the 3rd party is financially solvent but does not own property of value/interest.
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When should a personal AND proprietary recipient claim be brought?
When the 3rd party is financially solvent and owns property of value/interest.
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What are the key features of 3rd party claim 2) 'knowing receipt'?
The 3rd party has received property in breach of trust or fiduciary duty.
The 3rd party has received that property for their own benefit, and.
While in receipt of the property, the 3rd party has such knowledge that makes it unconscionable for them to retain or deal with the property as if it were their own.
E.g. 3rd party will be liable if;
- They receive trust property knowing that property was transferred to them in breach of trust, or
- They receive trust property without providing consideration and without any knowledge that it belongs to the trust, but gain that knowledge while in receipt of the property and before they spend it.
However, the 3rd party will not be liable where they only become aware that they received trust property after they have disposed of that property.
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In what cases will it be unconscionable for a 3rd party to retain and deal with trust property?
Where the 3rd party knows that the property belongs to a trust.
The 3rd party wilfully shuts their eyes to the obvious.
The 3rd party deliberately decides not to ask any questions notwithstanding they have their suspicions about the origins of the property.
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What is the 1st step when bringing a proprietary claim to recover property held by a 3rd party?
To decide into which of the following 3 categories the 3rd party falls;
-- Bona fide purchaser for value without notice; 'equity's darling' acquires property free of any equitable interests if they paid for it and had no knowledge of any trust. No proprietary or personal (knowing receipt) claim can succeed against them due to their lack of knowledge.
-- Wrongdoing receipt; if the 3rd party is an intermeddler or would have been guilty of knowing receipt on the grounds that their conscience is affected, then the beneficiaries can bring a proprietary claim against them to recover the property. As the 3rd party is a wrongdoer, the harsher tracing rules relevant to a trustee apply.
-- Innocent volunteer; if the 3rd party has no knowledge or notice of the breach of trust and provided no consideration for the transfer of property, then a proprietary claim can still be brought, but the tracing rules are the kinder rules that are applied against innocent parties.
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List the rules that apply when identifying property in the hands of a wrongdoing recipient stranger?
If the 3rd party still holds trust property in its original form, the beneficiaries can assert a proprietary claim against that property to recover it.
If the 3rd party has used trust property to buy something new, the beneficiaries can assert a proprietary claim against that new property ('clean substitution').
If the 3rd party has taken trust funds and mixed this with their own money to purchase property in their own name, the beneficiaries can assert a proprietary claim against that mixed asset. The beneficiaries can claim a proportionate share in the mixed asset or assert a charge over the mixed asset, depending on whether the mixed asset has increased or decreased in value.
If the 3rd party has taken trust funds and paid this into their own bank account mixing it with money of their own, before making various withdrawals from that bank account, the beneficiaries will use the tracing rules of Re Hallett and Re Oatway to determine what forms of property they can trace.
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List the rules that apply when identifying property in the hands of an innocent recipient stranger?
If the 3rd party still holds trust property in its original form, the beneficiaries can assert a proprietary claim against that property to recover it.
If the 3rd party has used trust property to buy something new, the beneficiaries can assert a proprietary claim against that new property ('clean substitution').
If the 3rd party has taken trust funds and mixed this with their own money to purchase property in their own name, the beneficiaries can assert a proprietary claim against that mixed asset. The beneficiaries will claim a proportionate share in the mixed asset whether that asset has increased or decreased in value.
If the 3rd party has taken trust funds and paid this into their own bank account mixing it with money of their own, before making various withdrawals from that bank account, the beneficiaries will use the tracing rules of Clayton's Case and Barlow Clowes to determine into what forms of property they can trace.
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What defences may the innocent volunteer be able to assert against the beneficiaries' proprietary claim?
If an innocent 3rd party receives trust money and uses that money to improve buildings they already own, then the beneficiary will not be able to trace any interest into that improvement because either;
-- That improvement has not increased the value of the 3rd party's land, such that the trust money has in essence been dissipated, or
-- That improvement has increased the 3rd party's land value, but forcing them to sell to satisfy the beneficiary's claim would be unjust. Enforcing a lien would recover the beneficiary's money but unfairly deprive the innocent 3rd party of their home. This inequitable outcome defeats the proprietary claim, a principle known as the Re Diplock defence.
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When will the Re Diplock defence not apply?
As against wrongdoing recipients.
In relation to mixed assets, even those purchased by innocent 3rd parties.
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Explain the 3rd party claim 4) dishonest assistance?
A 3rd party may be personally liable for losses caused by assisting in a breach of trust or fiduciary duty, but only if they acted dishonestly.
Elements;
- Breach of trust/fiduciary duty (need not be intentional or dishonest).
- Assistance by 3rd party - must be a positive act; not passive.
- Dishonesty - based on an objective test; would an honest person with the same knowledge, experience and intelligence have acted differently?
KEY POINT - the 3rd party doesn't need to know its a breach; assisting in an illegal scheme dishonestly is enough.
Examples;
- Solicitors drafting documents enabling breach
- Accountant hiding misconduct via false accounts
- Banker setting up accounts for misuse of trust funds.
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Can claims against 3rd parties be made by parties outside of beneficiaries?
Yes and use tracing rules too.
