EQUITY AND TRUSTS

Creation of express trusts 1

Creation of express trusts

To create an express trust four requirements must be satisfied:

• 1 Capacity to make a trust

• 2 Formality

• 3 Certainty

• 4 Constitution

Capacity to make a trust

What is capacity? Generally, anyone over the age of majority (18) who is mentally competent has the “capacity” to create a trust. Note …Minors: can create an inter vivos trust but it is revocable during their minority cannot create a trust of landcannot create a testamentary trust (I.e. a trust created by will)

Mental Capacity

The settlor must understand the nature and effect of the act.

Different rules regarding capacity apply depending on whether the trust is “inter vivos” (during the life of the settlor) or through a testamentary trust (by will and after his death).

Mental Capacity (contd.) trusts created inter vivos

Re Beaney [1978] 1 WLR

Beaney laid down a test for capacity – the degree of understanding required depends upon the circumstances of the transaction.

If the value of the gift is trivial in relation to the donor’s other assets then a lesser degree of understanding will suffice. BUT if the gift disposes of the donor’s only assets of value then the degree of understanding required equals that for a will.

Trusts by will: capacity formality certainty

constitutionThe test for capacity for creating a valid will was set down in Banks v Goodfellow (1890) L.R. 5 Q.B. 549

The testator must be able to appreciate:

1. The nature of the act and its effect2. The extent of his property3. The moral claims on his “bounty”

Formalities:equity looks to intent not to

formInter vivos trusts: S53(1)(b) LPA 1925

Land: a declaration of a trust in land or any interest in it must comply with the formalities of S53 LPA ‘25 (above) – it must be proved in writing and signed by the person declaring it or contained in his will.

Equitable interests: s53(1)(c) LPA 1925Any disposal of an equitable interests (an interest under a trust) must, by s53(1)(c) LPA ’25 be made in writing.

Trusts made by will

Section 9 Wills Act 1837

Trusts to take effect on the settlor’s death must be made by will and accordingly must comply with the requirements of formal validity for wills. The will must be:– in writing– signed by the testator– in the presence of 2 witnesses– who sign in the presence of the testator

Certainty

Knight v Knight (1830) 3 Beav 148

Three “certainties” must be satisfied for the valid creation of an express trust. These were set out by Lord Langdale in Knight v Knight:– Intention– Subject matter (is divided into 2 parts – certainty of

the trust property itself and of the beneficiaries interest in it)

– Objects (the beneficiaries)

Certainty of intention equity looks to intent not to

formHas the settlor shown an intention to create a trust rather than e.g. make a simple outright gift?

• The settlor must make clear that his intended trustees are under an obligation to carry out his wishes. The words must be imperative (i.e. express a command) – words which impose a duty on the trustees rather than words allowing a discretion to act.

• Providing the above, the word trust need not be used

Precatory wordswish … hope …desire

Precatory words such as wish, hope, desire are generally insufficient to give rise to a trust.

The courts once considered them sufficient to establish an intention to create a trust but this is no longer the rule – a stricter approach has applied since Lambe v Eames (1871) L.R. 6 Ch 597 and Re Adams v Kensington Vestry (1884) 27 Ch. D 394

Re Adams v Kensington Vestry (1884) 27 Ch. D 394

“ … to the absolute use of my wife … in full confidence that she will do what is right as to the disposal thereof between [his] children …”Alternative interpretations?

(i) The words created a trust under which the wife took no interest in the property but held it for the children

(ii) The words created no trust, the wife taking the property entirelyThe court held that the words were insufficient to impose a trust upon the wife in favour of the children – they were a mere expression of desire.

Comiskey v Bowring Hanbury [1905] AC 84

No trust from precatory words? Precatory words will not automatically give rise to a trust. But, they still can if on a proper construction of the words, that was the testator’s intention.

Consider Comiskey, a testator gave all his state to his wife “in full confidence that … at her death [my wife] will devise it ot such one or more of my nieces … ”. Although similar to Re Adams, on construction, the words were found to have created a trust.

Words used as a precedent

Re Steele’s WT [1948] Ch 603

If words have created a trust in the past and a settlor uses them as a precedent then although the words would not create a trust but they will be sufficient to show an intention to create a trust.

Settlor declaring himself as trustee

The same principle applies where instead of making a third party a trustee, the settlor declares himself to be trustee – there must be an intention to create a trust.See Jones v Lock (1865) L.R. Ch. App. 25A father puts a cheque in the hands of his baby son and says: “Look you here, I give this cheque to baby; it is for himself, and I am going to put it away for him, and will give him a great deal more along with it.”The father was held not to be a trustee because the words indicated an outright gift which failed. The father was not declaring himself trustee for the child.

Settlor declaring himself as trustee

Compare the above with the cases of :

Paul v Constance [1977] 1 WLR 527 and

Rowe v Prance [1999] 2 FLR 787

Paul v Constance [1977] 1 WLR 527

Paul concerned the ownership of £950 held in a bank account. Evidence was adduced that Mr Constance had said to Mrs Paul on a number of occasions, “the money is as much yours as mine.”

When Constance died his wife claimed the money that Mrs Paul claimed had been held by Constance on trust for them. The court held that Constance had declared himself trustee of the money and half of the fund belonged to Mrs Paul.

Rowe v Prance [1999] 2 FLR 787

Similarly – in Rowe the court found an express declaration of trust from the repeated use of the word “our” in reference to a boat together with the assurance given by Mr Prance that Mrs Rowe’s security was her interest in the boat and his explanation of why he alone could be registered as legal owner. The size of the shares should be equal. The regular use of the word “our” indicated an intent that no distinction was to be made between the parties as to the ownership of the interest. Alternatively, “equality is equity” applied.

“Sham trusts” – the intention must be real

The intention must be real and not a sham – i.e. no genuine intent for the trust to be acted upon e.g. a sham to avoid the consequences of insolvency.

See Midland Bank v Wyatt [1995] 1 FLR 697: a husband executed a trust deed in favour of his wife and daughters and then mortgaged the house. His business failed and when the bank applied for a charging order on the house the husband produced the trust deed. The court refused to give effect to the trust because it was a sham to be used only in the vent of insolvency.

Certainty of subject matterThe property subject to the trust and the beneficial interest in it must be ascertainable. Certainty of the trust property: i.e. the question of what the trust property is. Trusts are proprietorial by nature. It is thus necessary to know to what property they relate. See for example: Palmer v Simmonds (1854) 2 Drew 221 where a trust using the phrase “the bulk of my estate” failed. See also Sprange v Barnard (1789) 2 Bro CC 585 where the phrase; “the remaining part of what is left that he does not want for his own wants and use” as making the trust property unclear unclear and impossible to execute after his death. (Also: Mussoorie Bank v Raynor (1882) 7 App Cas 321.

A trust over unallocated assets?

Where the trust is claimed over unallocated assets, it will generally fail. Re London Wine Co (Shippers) Ltd [1986] Palmer Company Cases 121.The company bought and held wine is its cellars for its customers. It went into liquidation to avoid the company’s creditors claims to the stock, the customers argued that it was held on trust for them. The court held that there was no trust and that the stock had not been allocated to the individual customers therefore there was no certainty of the trust property.

A trust over unallocated assets?

See also Re Goldcorp Exchange Ltd [1995] 1AC 94.

In Goldcorp a similar claim failed over the stock of gold held for customers except in the case of those customers who were able to show that for them the company did actually buy and hold the ordered amount of gold.

Contrast these cases with:Hunter v Moss [1994] 3 AER

215The settlor owned 950 shares. He declared a trust of 50 shares. The court held that there was no need to segregate the shares provided that they were of the same class and in the same company. Thus – are there different rules for tangible and intangible property? But – note the effects of the Sale of Goods (Amendment) Act 1995 which gives to the parties of unallocated bulk assets a tenancy in common offering some protection against insolvency of the supplier.

The effect of uncertainty of subject matter – a resulting trust?

Where a trust fails for uncertainty of subject matter the property remains with the settlor or – if dead – his estate. A resulting trust will not apply as the property has never been alienated to the trustees. But note the effect Hancock v Watson [1902] AC 14.

Application of the rule

The rule applies where there is an absolute gift of property in the first instance and trusts are then imposed on that property. If the trusts fail - the property is not subject to a resulting trust but vests in those to whom the property was first given absolutely

Examples of application

The rule can be seen operating in Palmer v Simmonds and Sprange v Barnard (see above) where under the principle in Hancock the husband’s took absolutely.

Certainty of the beneficial interests in the trust

property

Settlor must identify what interest each beneficiary is to take in the trust property.

Example

See Boyce v Boyce (1849) 16 Sim 476

Where a gift of two houses to two daughters failed because one died and was unable to choose a property.

Compare with:

Re Golay’s WT [1965] 1WLR 969

Where the gift of a “a reasonable income”did not fail because it could be determined.

The effect of uncertainty on beneficial interests

Uncertainty of the beneficial interests will cause those interests to fail whilst those that are certain will succeed. If all gifts are uncertain then = resulting trust (unless Hancock v Watson applies).

Other possibilities? 1. The shares might be at the trustee’s discretion 2. The court may apply “equality is equity” and divide the property equally. See Burrough v Philcox (1840) 5 Myl or3. The court might decide what is a proper division in the circumstances. McPhail v Doulton [1971] AC 424.

Certainty of objects

The question here is: who are the beneficiaries?Which test is applied will depend on the type of trust. Fixed trusts: interest or share specified. The rule for determining certainty in a fixed trust was set down in IRC v Broadway Cottages [1955] Ch 678: the whole range of objects must be ascertained or capable of being ascertained. (The so-called “list test”/ or “class ascertainability” test).Test requires that bens are all known – if named in trust instrument then no problem but if they are merely members of a class then the class must be sufficiently certain – i.e. no conceptual or evidential uncertainty.

Discretionary trusts: McPhail v Doulton [1971] AC 424.

In DT distribution is at trustees discretion. Test for certainty of objects established in Mc Phail: is it possible to say of any given individual whether or not he is a member of the group? (aka “individual ascertainability” test). Is the same test used to determine certainty of objects in powers of appointment see Re Gulbenkian ST [1970] AC 508.

Discretionary trusts pre-McPhail

Prior to McPhail test for certainty of objects in DTs was same as for FTs – the whole range of objects had to be ascertained. See IRC v Broadway Cottages [1955] Ch. 678 and the approach of equal division during administration.

Complete list test

Decision on validity of the trust in McPhail would depend on whether a complete list could be created following the decision in Broadway Cottages. Was the test correct in law – if not should it be assimilated with test for powers? Effect of Broadway decision on DTs was that where a DT was found the test for validity often rendered trust void. But if a power was construed rather than a trust then the test established in Re Gulbenkian would be easily satisfied. Lord Wilberforce in McPhail: “differences there certainly are between trusts (trust powers) and powers, but as regards validity should they be so great as that in one case complete … ascertainment is needed, but not in the other?”

Equal division?

Applying the rationale of equal division Broadway to a trust such as McPhail would be paradoxical, contrary to the settlor’s intention and would probably produce a result beneficial to none.

Execution of DTs by the court

A D.T. can be executed otherwise than by equal division. The court will endeavour to give best effect to the settlor’s intention e.g. by appointing new trustees or by directing representatives of the bens to prepare a scheme for distribution.

McPhail contd.

Clause (9)(a) of the trust deed in McPhail provided that:“The trustees shall apply the net income of the Fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit”

- was this a trust or power? HL decided this was a trust for distribution of income with a power of selection (i.e. a DT - not merely a power to appoint).

Assimilation of the tests

HL accordingly felt able to review Broadway Cottages. Distinction between test for powers and DTs was unfortunate and wrong. Test fro DTs was to be same as that in Re Gulbenkian STs for powers: T is valid if it can be said with certainty that any given individual is or is not a member of the class.

McPhail

Once HL decided clause 9 was mandatory and constituted a trusts and determining the correct test as above, the case was remitted back to Chancery Div to determine where on this basis, clause was valid.

Brightman J: test satisfied and clause was valid as a trust. Executors of settlor’s estate then appealed to C of A.

Re Baden’s Trust Deed no. 2 [1973] Ch.9:

Two grounds of appeal: 1. words: "relatives" and "dependents" were conceptually uncertain/ Gulbenkian test not satisfied and trust therefore invalid.2. Even if concept “relatives” was clear there was uncertainty whether any given individual was a member of the class.Test was the “in and out” test.

1st ground of appeal

Gulbenkian test requires conceptual certainty of the class – so settlor must either defined the terms or use objectively ascertainable terms.

In Re Baden the words “relative” and “dependent” were held to be sufficiently objective to be valid.

2nd ground of appeal

Test requires it to be shown that any individual is or is not a member of the class. In the case of the term “relatives” it would be uncertain whether any individual was a member or not.

The class was of an indeterminate size – unless some limit is placed on the class it remains undefined.

Re Baden

If it cannot be said whether an individual is or is in or out of the class then the clause should be void for uncertainty of objects. Differing approaches:Sacks LJ: court is never defeated by uncertainty: it is a question of fact whether any postulant is a member of the class. Megaw LJ: test is satisfied if with regard to a substantial number of objects it can be said with certainty that they fall within the trustStamp LJ: validity/invalidity depends on whether you can say of any individual whether he is or isn’t within the class.

Re Baden

CA dismissed appeal. In applying Gulbenkian test to DTs it is necessary to distinguish between conceptual uncertainty and evidential difficulty. If an individual could not establish that he was a member then he is not – thus no evidential difficulty in distinguishing dependents from relatives. Thus – if the uncertainty stems from evidential matters, DT is still valid. For example, if the group of potential objects were to be described as "Employees of X. Co. Ltd." This is very clear, even if one particular person was unable to furnish sufficient proof to show that he qualified. NB in FTs class has to be both conceptually and evidentially certain.

Administrative workability

AW is also requirement for certainty of objects. Wilberforce in McPhail: may not be certainty where def of bens is so hopelessly wide that it doesn’t form a anything like class. Therefore a trust, for example: “to the residents of Greater London” might fail. See R: v District Auditor for West Yorkshire (1986) 26. R: V. R. 24. Trust had 2.5 million potential beneficiaries and void for A unW.

Administering a DT

Trustees have a duty to “survey the field”.

In McPhail, Wilberforce in McPhail: ought to make a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty. Wider range of inquiry needed for DTs as opposed to powers.

The effect of uncertainty

Uncertainty of intention – donee takes absolutely.

Uncertainty of subject matter – property remains with the settlor or the estate. NB effect of Hancock v Watson above applies, but note other possibilities

Uncertainty if the beneficial interests – those uncertain fail, if all uncertain then whole trust fails (thus RT unless Hancock applies)

Uncertainty if objects – RT unless Hancock applies.

Constitution of express trusts

Trust must be constituted – vesting the property in the trustees as trustees.

Constituting a trust

Two ways to do this:

1. By settlor declaring himself trustee – owner declares he hold property not as beneficial owner but as trustee for some other(s). Vests title in settlor as trustee (n.b. t’s of land need to be in writing)

Constituting a trust

2. Settlor transfers title to the trust assets to the trustees. Title to the trust assets is transferred in the most appropriate way.

If settlor does not do one of these two things then title will not vest and the trust will be incompletely constituted.

Effect of non-constitution

Beneficiaries will not be able to enforce their rights under the intended trust. Thus there is no trust at all, no-one can compel performance of the trustees’ “duties”.

Self-declaration

In this case no transfer of title is necessary, but settlor must have made an effective declaration. Words must clearly express the settlor’s intention to create a trust not e.g. a gift.

Jones v Lock (1865) LR Ch App 25

See slide 16. Was the father a trustee of the cheque for his son or was it simply part of his estate? Judge held not an effective gift nor a valid declaration of trust. Words and actions were insufficient to give rise to a trust. NB case of Richards v Delbridge (1874) LREq. 11

Compare

Jones v Lock with the cases of Paul v Constance [1977] 1 WLR 527 and Rowe v Prance [1999] 2 FLR 787 (see above).

In Paul, “money is as much yours as mine” amounted to a declaration of bank account. In Rowe, use of word “our” in relation to boat together with discussion of security and title of boat established that boat was held on trust for Rowe and Mrs Prance equally.

Choithram International v Pagarini [2001] 2 AER 492

Pagarini had large shareholding in Choithram int. He executed trust deed establishing Choithram Int. Foundation – trustees included himself as did the beneficiaries together with a number of charities. Use words to effect that he was giving his wealth to the foundation. But no steps were taken. After his death his family brought action against trustees and company claiming gift to foundation ineffective. Court held gift required intention + transfer of assets or self declaration as trustee (Milroy v Lord applied) gift was incomplete.

Choithram International v Pagarini [2001] 2 AER 492Privy Council reversed decision. Pagrarini had intended immediate gift to the foundation. But Pagarini had not vested the gift in the trustees. This did not make the gift ineffective because his words must have meant that the property be given to the trustees to be held on the trusts of the foundation trust deed. Pagarini was one of the trustees and his conscience was affected as soon as he declared the gift.

Choithram International v Pagarini [2001] 2 AER 492

Courts have in the past refused to construe a gift as a declaration of trust. But where donor is trustee of the trust, words of gift to the trust will take effect as immediate declaration of trust.

Next lecture

Second lecture (Creation of Express Trusts 2) will consider the second way in which a trust can be constituted, the effect of non-constitution and potential remedies.