EQUITY AND TRUSTS
Creation of express trusts 1
Creation of express trusts
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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 land
cannot 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 constitution
The 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 effect
2. The extent of his property
3. The moral claims on his “bounty”
Formalities:
equity looks to intent not to form
Inter 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 1925
Any 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:
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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
form
Has 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 words
wish … 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
(i)
(ii)
… in full confidence that
she will do what is right as to the disposal thereof
between [his] children …”
Alternative interpretations?
The words created a trust under which the wife took no
interest in the property but held it for the children
The words created no trust, the wife taking the property
entirely
The 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. 25
A 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 matter
The 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 215
The 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 or
3. 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 preMcPhail
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 trust
Stamp 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 492
Privy 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.