Formalities of trusts

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The function of formalities

'Deciding whether to require formality involves assessing the advantages and disadvantages either way, and comparing them, to see where the greater benefit lies. So, for example, in having the rule that any attempt to dispose of property on death other than by using the formalities is a nullity, the law takes it that the balance lies in favour of such insistence, that the potential ineffectiveness of attempted informal dispositions is an acceptable price to pay for the advantages of minimising uncertainty.'- Gardner 

Three functions- by Haley and McMurty- 

  • Evidentiary- provides documentary evidence of the existence and terms of the transaction. This protects against fraud and other wrongdoing. It also creates certainty by showing who currently holds the equitable interest under the trust and what the obligations of the trustee are.
  • Cautionary- focuses the mind of the settlor/testator and allows them to change their mind until the formalities have been completed. This prevents property rights from being created or disposed of casually.
  • Channelling- authenticated writing relieves the court of having to enquire whether a particular legal transaction was intended, and if so what its nature is. The court does not have to rely on witnesses but can instead look at the document. 
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Creation of trusts of land

Creation of life time (inter vivos) trusts of land- The statute- S53(1)(b) of the LPA 1925. Failure to observe makes the trust unenforceable- not void. 

The LPA s205 defines land widely. Can include mines, minerals, buildings and incorporeal heriditaments. Compare to s9 Wills Act 1873 for trusts created upon a will.

'It is indeed rather surprising that a declaration of trust requires the appropriate writing even if it relates to as little as a square foot of land while a declaration of trust of millions of pounds of cash or investments does not, however that is what the statutory provisions provide.'- Oakley 

'Trusts of land are particularly likely to be made formally in practise. People making dispositions of land are especially likely to percieve that they are doing something important and will almost certainly use professional advisers, who will always want to put important matters down on paper. So, as with wills, the dangers of a requirement of formality frustrating a settlors intentions is slight, allowing the balance of advantage to come down in favour of its imposition.'- Gardner. 

Gardner v Rowe 1828- applying Statute of Frauds 1677 s7

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Creation of trusts of land

Equity will not allow a statute to be used as an instrument of fraud- Rochefoucauld v Boustead 1897- Lindley J- 'notwithstanding the statute, it is competent for a person claiming land conveyed to another to prove by parol evidence that it was so conveyed upon trust for the claimant, and that the grantee, knowing the facts, is denying the trust and relying upon the form and conveyance and the statute, in order to keep the land for himself.' 

But there is some confusion around classification of fraud cases: express, resulting or constructive trust?

Bannister v Bannister 1948

Hodgson v Marks 1971- Russell LJ- 'nevertheless, the evidence is clear that the transfer was not intended to operate as a gift and in those circumstances, I do not see why there was not a resulting trust of the beneficial interest to the plaintiff, which would not, of course be affected by S53(1).

Dealing with subsisting equitable interests- The statute- S53(1)(c) LPA 1925. Failure to observe makes the disposition void. 

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Meaning of disposition-

'disposition'- Grey v IRC 1960 -the settlor aimed to transfer shares to his grandchildren without attracting Stamp Duty, by i) establishing 6 settlements for the grandchildren ii) transferring valuable shares to the trustees on bare trust for himself iii) orally directing the trustees to hold the share on the trust of the six settlements and iv) documenting the earlier oral transactions. Held- the oral declarations at stage iii were ineffective under s53(1)(c) and therefore the documents at stage iv were stampable. Disposition was given its ordinary meaning- you once had it but no longer do. Grey wanted a narrow interpretation so it didnt have to be written. 

Viscount Simmonds- 'if the word 'disposition' is given its natural meaning, it cannot be denied that the direction given by Mr Hunter, whereby the beneficial interest in the shares theretofore vested in him became vested in another or others is a disposition.' Grey wanted it read narrower as being synonymous with 'grants and assignments.' 'There is no justification for giving the word 'disposition' a narrower meaning than it ordinarily bears.' 

Lord Radcliffe- 'I think that it did. Whether we describe what happened in technical or in more general terms, the full equitable interest in the 18'000 shares concerned which at the time was his, was diverted by his direction, from his ownership into the beneficial ownership of the various equitable owners, present and future, entitled under his six existing settlements.' 

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Meaning of subsisting at the time-

Re Danish Bacon Company 1971- Employee wanted wife to get benefit from pension. Changed beneficiary. Changed the form he did it on and sent explanatory letter to pension fund. This was effective. Subsisting at the time- equitable interest already exists. Disposed of after the trust has come into existence. No relevance to the creation of the trust. 

Megarry J- 'I agree that the word 'subsisting' also seems to point against the nomination falling within s53(1)(c) but, as I have indicated, I do not have to decide this point.' 

'In writing'- Re Danish Bacon Company 1971- two documents can be used to be the 'writing'. 'I do not see why two or more documents should not satisfy the requirement that the disposition should be in writing. If two or more documents, when read together, dispose of an equitable interest, I do not see why the court should insist on separating them and subjecting each separately to the test of s53(1)(c). 

Two exceptions- glosses- created through Vandervell. 

Exception 1- transfer of legal and equitable interests in property subject to a bare trust- 

Vandervell v IRC 1967- The settlor aimed to provide a gift of £150'000 to the Royal College...

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of surgeons to reduce his surtax liability. This was to be effected by a) transferring 100'000 shares of which he was the beneficiary under a bare trust into the full legal ownership of the College subject to b) the grant of an option to the trustees of his childrens settlement by which the shares could be purchased for £5000, c) the declaration of £150'000 dividends on the shares, and d) the purchase of the shares by the family trust if necessary. The Revenue argued that the transfer in a) failed for informality, that the settlor failed to divest himself of his beneficial interest in the shares and that he was thus liable to surtax on the dividends in c). Held inter alia that s53 did not apply to the transfer in a). Didnt apply where legal and equitable interest moves in one transaction. There is no disposition. 

Lord Upjohn- 'The object of the section is to prevent hidden oral transactions in equitable interests in fraud of those truly entitled, and making it difficult for the trustees to ascertain who in truth were beneficaries. But where the beneficial owner owns the whole beneficial estate, and is in a position to give directions to his bare trustee with regard to the legal as well as the equitable estate, there can be no possible ground for invoking the section where the beneficial owner wants to deal with the legal estate as well as the equitable estate.'

Lord Donovan- 'When Mr Vandervell instructed the bank to transfer the shares to the college...

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he achieved the same result as if there had been no separation of interests. The transfer thus was a disposition not of the equitable interest alone, but of the entire estate of the shares. In such as case I see no room for the operation of S53(1)(c). 

Lord Wilberforce- 'No separate transfer therefore, of the equitable interest ever came to or needed to be made and there is no room for the operation of the subsection.'

Lord Reid- 'this case provides yet another illustration of the folly of entering into an important transaction of an unusual character without first obtaining expert advice regarding tax liabilities it may create.

Ratio- s53(1)(c) only applies where equitable interests are dealt with separately to legal.

Exception 2: extinction of an interest arising by way of resulting trust- Re Vandervells Trusts (no 2) 1974- the option to repurchase created at step b above was found by the CoA to be held on resulting trust for the settlor (V). The option was exercised without writing in 1961 with the intention that the shares should be held on the trust of the childrens settlement, but in order to resolve any doubt a deed was executed in 1965 transferring any remaining right of V in the option, shares or dividends to the same settlement. 

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Held that s53(1)(c) did not apply to the exercise of the option and that the shares were held on the trusts of the childrens settlement from 1961. 

Lord Denning (his reasoning has been criticised)- 'a resulting trust for the settlor is born and dies without any writing at all. It comes into existence whenever there is a gap in the beneficial ownership. It ceases to exist whenever that gap is filled by someone becoming beneficially entitled. As soon as the gap is filled by the creation or declaration of a valid trust, the resulting trust comes to an end. In the case before the option was exercised, there was a gap in beneficial ownership. So there was a resulting trust for V. As soon as the option was exercised and the shares registered in the trustees name, there was created a valid trust of the shares in favour of the childrens settlements. Not being a trust of land, it could be created without any writing.' 'Mr V did not dispose in 1961 of any equitable interest. All that happened was that his resulting trust came to an end- because there was created a new valid trust of the shares for the childrens settlements.' 

Lawton LJ- 'The exercise of the option and the transfer of shares to the trustee company necessarily put an end to the resulting trust of the option. Neither the extinction of a resulting trust of the option resulting from its exercise nor the creation of a beneficial interest in the shares....

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by the declaration of trust amounted to a disposition of an equitable interest or trust within the meaning of s53(1)(c).'

People say this is straining to find in the childrens favour. 

Creation of resulting and constructive trusts- 

The statute- s53(2) LPA 1925- s53 doesnt affect resulting or constructive trusts.

Case law- Oughtred v IRC 1960- 200'000 shares were held in trust for Mrs O for life and after her death for her son P absolutely. For Estate Duty reasons it was intended that P's reversionary interest in the shares would be transferred to Mrs O in consideration for some other shares in the compnay. Both get absolute interest. On 18th June 1956 an oral agreement was made to this effect and on 26th June deeds were executed consecutively that 1) confirmed that the shares were to be held on trust abosolutely for Mrs O and 2) transferred the legal interest in the shares to Mrs O. The taxpayers aimed to establish that the oral agreement of 18th June gave rise to a constructive trust in favour of O which did not fail as an informal assignment of P's equitable interest, and therefore that the final deed 2) did not comprise an instrument whereby any property or any estate or interest in any property, upon the sale thereof is transferred to or vested...

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in a purchaser for stamp duty purposes. Held- that the equitable interest generated by the specifically enforceable contract did not prevent the subsequent document from being stampable. 

Lord Radcliffe (diss on stamp duty point)- 'by his oral agreement of that date he created in his mother an equitable interest in his reversion, since the subject matter of the agreement was property of which specific performance would normally be decreed by the court. He thus became trustee for her of that interest, having regard to subsection 2 of s53, subsection 1 did not prevent that trusteeship arising by operation of law.' 

Denning- 'But I may say that I do not think the oral agreement was effective to transfer P's reversionary interest to his mother. I should have thought that the wording of s53(1)(c) of the LPA clearly made writing necessary to effect a transfer, and s53(2) does not do away with that necessity.' 

Lord Jenkins- 'I find it unnecessay to decide whether s53(2) has the effect of excluding the present transaction from the operation of s53(1)(c). In truth the title secured by the purchaser by means of an actual transfer is different in kind from, and may well be far superior to, the special form of proprietary interest which equity confers on a purchaser in anticipation of such transfer.'

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Neville v Wilson

Lord Keith agreed with Jenkins. 

Neville v Wilson 1996- An oral contract was concluded in 1969 for the informal liquidation of N. It was decided that N's equitable interest in U should be distributed to the shareholders of N in proportion to their shareholdings. Held- that each shareholder was a constructive trustee for the other shareholders and that s53(2) of the LPA 1925 displaced the formality requirements in s53(1)(c). 

Nourse LJ- 'the effect of the agreement was that each shareholder agreed to assign his interest in the other shares N's equitable interest in exchange for the assignment by the other shareholders of their interests in his own alquot share.' 'The simple view of the present case is that the effect of each individual agreement was to constitute the shareholder an implied or constructive trustee for the other shareholders, so that the requirement for writing contained in subsection (1)(c) was dispensed with by S2. This was the view taken by Radcliffe in HoL case of Oughtred.' 'We are of the opinion that the analysis of Radcliffe, based on the proposition that specifically enforceable agreements to assign an interest in property creates an equitable interest in the assignee, was unquestionably correct.' 'Why then should subsection 2 not apply? No convincing reason was suggested in argument and none has occured to us since.' 

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Creation of sub trusts

There is an issue as to whether sub trusts (where the beneficiary creates a trust of their equitable interest) are covered by s53(1)(c). This depends on what duties or functions the beneficiary (the new trustee) retains under the subtrust. If the beneficiary reatins some duties (eg to divide property under fixed trust, allocate property under a discretionary trust or make investments under bare trust) then it is thought that they have not disposed of their entire beneficial interest and s53(1)(c) does not apply. If, however, the beneficial interest has been completely disposed of (eg the trust is a bare trust and the beneficiary/trustee has no active duties) then a written transfer may be needed. 

Grainge v Wilberforce 1889. 

Re Lashmer 1891- potential authority for the position that where A holds on trust for B and B declares a bare subtrust for C, B drops out the picture, in which case there might be a disposition of a subsisting equitable interest for the purposes of s53(1)(c). But there has been criticism of this. 

Grey v IRC 1960- note potential divergence in emphasis between Viscount Simmons ('the beneficial interest in the shares theretofore vested in him became vested in another or others') and Lord Radcliffe ('the full equitable interest in the 18'000 shares concerned was diverted...

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Creation of sub trusts

by his direction from his ownership into the beneficial ownership of the various equitable owners') The orthodox view is that most declarations of trust over subsisting equitable interests are outside s53(1)(c) but the view of Simmonds could be used in support of the contrary view. 

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