'Thus is the very impotence of the common law which provided the basis upon which the Chancellor could intervene in the name of good conscience and equity and require the feoffee to hold the land for the benefit of the cestuis que use and allow him to take the profits.'- Simpson.
'of all the exploits of equity the largest and the most important is the invention and development of the Trust, it is the most distinctive achievement of English lawyers, it is an institute of great elasticity, as elastic as any contract.'- Maitland.
'Although the trust may be the most important invention of equity, it has proved resistant to precise and exhaustive definitions.'- Haley and McMurty.
'There can be no area of law in which there is more confusion about basic definitions than the law of trusts.'- Parkinson.
'A trust arises when the owner of property declares himself a trustee of it, or transfers it to someone else to be trustee of it, for the benefit of one or more beneficiaries.. Trustees have two roles, first to hold and administer the trust assets, and second, in the case of a trust for...
Nature of a trust
beneficiaries, to distribute the income from the trust assets and ultimately the trust assets themselves, to appropriate beneficiaries.'- Hayton and Marshall
International law- the trust is a distinctly English concept, and so despite the lack of any clear definition of what a trust is, an international treaty was agreed to help with international interpretation of trusts- Hague Convention on the Law Applicable to Trusts and on their Recognition 1985.
- settlor: the person who sets up the trust
- trustee: the person who holds the legal title to the property
- beneficiary: the person from whose benefit the trustee holds the property
- fiduciary obligations: particular obligations owed by the trustee to the beneficiary.
Key features- a split between economic benefit and management of property- with absolute ownership the owner can use the property how they wish. With a trust, the legal title holder must use the property exclusively for the benefit of the beneficiary.
A split between the legal title and the equitable title to the property.
Conscience- the basis of the beneficiaries claim against the trust property is that it would be unconscionable for the trustee to deny the beneficiarys interest- Westdeutsche v Islington LBC 1996. Even third parties who were not party to the original trust may be bound by the beneficiaries interest in the trust property. For example, if the trustee wrongfully transfers the legal ownership of the shares to a third party, then the conscience of that third party will also be bound to respect the beneficiaries claim to the shares.
There are management powers and duties of the trustee. Also fiduciary duties.
The private express trust-
This type of trust arises through the express intention of the settlor to create a trust. The intention may be apparent in the settlors use of the words 'trust' in the relevant instrument or gathered by implication from S's words or conduct.
A trust is private if it is for the benefit of an individual or class with standing to enforce the trustees duties, irrespective of any benefit which may incidentally be conferred on the public.
The trustee is the owner of the trust property. He is free to deal with the trust property as he wishes provided that he does not exceed his equitable authority under the terms of the trust.
We call the legal title of the trustee a 'bare legal title'. It is bare in the sense that the trustee only has the residue of rights over the property that have not been allocated to the beneficiary under the terms of the trust.
Intervivos trust- a trust created during the lifetime of the settlor. The settlor may declare himself trustee of property or convey the property to another to hold on trust. In the first case, the settlor is the same person as the trustee.
Testamentary trust- a trust that is created through a will. It takes effect on the death of a testator.
The functions of an express trust-
Property management- a trust enables the beneficial use of a fund of property to be separated from the powers and duties of management over it. There may be advantages of this. Say there is a gift of a share portfolio to be given. The task of overseeing the portfolio to get the best financial return may be complex. Would have to be an active manager. The trust allows you to have all
the advantages of owning the income in the shares but you are spared the risks and effort of having to manage the property yourself.
Varities of ownership- Complex property rights- Gift of house and shares on trust to children/husband - the trust structure allows a testator to create more complex property rights than is possible at common law. An outright gift of the legal estate to her children would have been impossible at law. A minor cannot hold legal estate in land: LPA s1(6). A life estate and an interest in remainder have been created. By giving the husband a life interest his only rights in the property will be to take the income from it during his life time. He will have no power to dispose of the freehold interest house or capital interest in the shares during his life, nor by his will on his death. The testator therefore controls the uses to which he can apply the property even after her death. The husband may remarry and have other children. She can block her husband from ever making a gift by will of the shares to his second wife or to any children of the second marriage.
Imposing conditions- The trust structure can be used by a settlor to control the vesting of the gift by imposing conditions (typically conditions precedent). The gift to the beneficiary is 'contingent' while the condition remains unfufilled. Can protect the trust property from being wasted by a person before they are of an age where they can use it responsibility. Only vests when the
condition is fulfilled. If you were to get it when youre 25 and die at 24 you cannot pass it on as you have no interest in it. A condition precedent can also be used to create incentives to make the beneficiary behave as the testator wishes. Once the condition on which the childs interest depends has been fulfilled then they have a 'vested interest'. All the examples have been of fixed trusts but a discretionary trust can be useful as it allows the settlor to delegate to a trustee the power to select which of the potential beneficiairies should benefit from the trust. This can protect a potential beneficiary's interest in insolvency.
Commercial utility- the beneficiary's equitable property right in the trust assets ring fences those assets. This is especially relevant when the trustee or beneficiary is bankrupt. Protects trust property from the trustees personal creditors. Protects trust property from beneficiary's creditors. Allows for the payment of creditors on insolvency.
Barclays Bank v Quistclose Investments 1970- Wilberforce- 'I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend could not be carried out, is clear and I can find no reason why the law should not give effect to it.'
Re Lehman Brothers International 2010- Patten LJ- 'The commercial nature of these agreements is not in dispute but the trust mechanism has long been regarded as an important safeguard against insolvency and has been imported into commercial contracts for that very reason.'
Tax avoidance- IRC v Duke of Westminster 1936- Tomlin- 'Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased rate.'
The beneficiary principle- has to have human beneficiaries-
Re Astor 1952- Roxburgh- 'a trustee would not be expected to be subject to an equitable obligation unless there was somebody who could enforce a correlative equitable right, and the nature and extent of that obligation would be worked out in proceedings for enforcement.'
Re Endacott 1960- Evershed- 'no principle perhaps has greater sanction or authority behind it than the general proposition that a trust by English law, not being a charitable trust...
in order to be effective, must have ascertained or ascertainable beneficiaries.'
The rule in Saunders v Vautier 1841- a beneficiary of a full age (now 18) and capacity may direct the trustee to convey the legal title to the trust property to them. This winds up the trust in relation to the property. The beneficiary now has full ownership of the property.
Stephenson v Barclays Bank Trust 1975 (a trust of shares rather than money and one more trustee)
Re Smith 1928- where there is more than one beneficiary they can band together to wind up the trust.
Types of private express trusts- bare trust, fixed trust, and discretionary trust.
Bare trust- trust holds property for a sole beneficiary who can demand conveyance of the trust property at any time. The trustee has no duties other than holding the property for the beneficiary. The classic example is where a solicitor holds client money in its bank account on trust for its client. Clarence House v National Westminster Bank 2010
Fixed trust- arises where the trustee holds property on trust for specified beneficiaries and the extent of beneficiaries interest in the trust fund is defined at the outset by the settlor. No discretion is conferred on the trustee to select beneficiaries or to vary amount of entitlements. From the moment the trust is created, the beneficiaries have an equitable interest in the trust property. Everything is predetermined by the settlor.
Discretionary trust- arises where the settlor gives the trustee the power to select which of the potential beneficiaries should benefit from the trust. No beneficiaries have rights into the property until the decision is made. Trustee has to divide the money between the children, but has discretion as to which will recieve which amount. The settlor defines a class of beneficiaries under the trust. The trustee then owes a duty to distribute capital or income under the trust (make appointments). But the trustee has discretion in selecting to which of the potential objects the trustee appoints the trust property to (a discretionary dispositive power.)
The discretion given to a trustee may vary. A settlor may give his trustee full discretion to decide what property, if any, the beneficaries shall recieve. Alternatively the settlor may stipulate that each of the beneficiaries must recieve something but leave it to the trustee to determine exactly how much. The class of beneficiaries might be quite large.
The advantages of this is that it gives flexibility to respond to changes in the circumstances or needs of the beneficaries. No beneficiaries have any property rights until the trustee exercises its discretion. The beneficiary just has an expectation. They can demand tha tthe trustees exercise their discretion in accordance with the trust, and can band together to wind it up.
Trusts v Powers- 'with a discretionary trust, the discretion relates to how the property is to be distributed or, in other words, the proportions of the trust fund that each beneficary is to recieve. With a power of appointment the discretion relates to whether the property is to be distributed at all.- Webb.
The delegation of the settlors control over gifts can be taken a stage further by creation of a mere power of appointment. This allows even more flexibility than a discretionary trust in determining the beneficial entitlements to the trust property.
Here the settlor defines a class of beneficiaries who are objects of the power. The 'donee' has a power (but not a duty) to distribute capital or income from the trust fund (make appointments). The donee has discretion in selecting which of the potential objects the donee appoints the trust property to.
Trusts v Powers
With both a power and a discretionary trust there may be a provision for the distribution of assets between members of a class but with a discretionary trust the trustees are obliged (look for words such as must and shall) to distribute the property in the prescribed manner. If the discretion must be exercised then the relationship is a trust. By contrast, with powers of appointment, the donees of the power do not have such obligations. Powers are only exercisable at the election of the donee, they are permissive not mandatory (words such as may.) If the power is not exercised, the property goes to those entitled in default of appointment.
With a power of appointment, the settlor or testator provides a 'gift over'. This provides for the contingency that the donee of the power may choose not to exercise it in favour of the objects. The presence of a gift over will indicate the lack of intention to create a trust because there is no intention to benefit the objects of the power if it is not exercised. Re Mills 1930.
Distinguishing a power from a discretionary trust is therefore a matter of settlor intent. This is ususally a matter of construction. Note that potential objects under a power have no entitlement. They simply live in the hope that the power will be exercised in their favour. Re Brookes Settlement 1939- Farwell- 'it is impossible to say that until an appointment has been made in favour of this son that the son had any interest under his mothers settlement.'
Powers may be fiduciary and personal. Re Gulbenkian 1970- Reid- 'it may be that when a mere power is given to an individual he is under no duty to exercise it or even to consider whether he should exercise it. But when a power is given to trustees as such, it appears to me that the situation must be different. A settlor or trustee who entrusts a power to his trustees must be relying on them in their fiduciary capacity so they cannot simply push aside the power and refuse to consider whether it ought in their judgement to be exercised.'
Fiduciary powers are vested in office holders (eg a trustee) and they must exercise the power responsibly and in good faith. They have a duty to survey the class of objects periodically. Re Hays Settlement Trust 1982- Megarry VC- 'the duties of a trustee which are specific to a fiduciary power seem to be threefold. Apart from the obvious duty of obeying the trust instrument, and in particular making an appointment that is not authorised by it, the trustee must, first consider periodically whether or not he should exercise the power, secondly consider the range of objects of the power, and thirdly, consider the appropriateness of individual appointments.
Personal powers are given to an individual in their personal capacity. The donee of the power does not need to survey the class periodically. The exercise of the power can only be challenged on the grounds of fraud. Exercise or lack of cannot be challenged.
Powers may be general, specific or hybrid-
- A general power means that the donees is allowed to exercise the power in favour of anyone.
- A special power can only be exercised in favour of specified persons or purposes.
- A hybrid power can be exercised in favour of anyone except for specified people or purposes.
Distinguishing trusts from other legal concepts-
- Debt or contract
- Bailment - legal title doesnt pass.
- Agency- contract- both owe fiduciary duties
- Gifts- legal and equitable title pass. No consideration.
- Powers of appointment.