Complete constitution of trusts and formalities notes PDF

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equity and trusts - formalities...

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CONS TITUTION OF TRUS TS AND FORMA L ITIE S In addition to satisfying the three certainties, trusts must also be ‘completely constituted’ ie, the settlor must have given up beneficial interest in the property concerned in favour of the beneficiaries. Inter vivos express trusts can be created by either: 1. the owner of the property declaring a trust over it (declaration of trust); or 2. transferring the property to another as trustee (trust by transfer).

Self-declaration of trust If declaration, the declarant is already the owner so the declaration itself meets the requisite formalities. Trust declaration is the separation of beneficial from legal ownership Basically a simple way of saying that the requirement of certainty to intention to create a trust has been satisfied. The settlor must intend to impose trustee obligations upon themselves. The court will not perfect an imperfect gift – an ineffective transfer will not operate as a declaration of trust. A court will not construe a declaration of trust out of an invalid gift: Richards v Delbridge (1874) LR 18 Eq 11 Only some inter vivos trusts created by declaration must comply with formalities (eg land)

Trust created by transfer Where a trust is created by transfer of property two requirements must be satisfied: 1. A declaration of trust/ intention to create trust Must establish that the recipient of property is to take the property in capacity as trustee and not beneficially. The words used to create the transfer will be construed in context. In T Choithram International SA v Pagarini [2001] 1 WLR 1 the settlor executed a trust deed attempting to establish a charitable foundation but then made inconsistent statements suggesting outright gifts. Privvy Council held that in context of creating a charitable foundation should be trust not outright gifts. 2. A valid transfer of intended property to intended trustee

A transfer may be invalid at law but valid in equity applying the principle in Milroy v Lord and Corin v Patton. Milroy v Lord (1862): in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property was necessary to be done in order to transfer the property and render the settlement binding upon him. A gift will be complete in equity once a donor has done all that they are required to do to transfer the legal title to the land to the donee and put it beyond the recall or intervention by the donor. Until the settlor has done everything that, according to the nature of the intended trust property, was necessary to be done in order to transfer the property, the trust is not completely constituted and, as a result, the beneficiaries have no equitable interest in that property. Once the trust is properly constituted, the beneficiaries take an equitable interest in the property and can enforce the trust whether or not they have given consideration.

ELEMENT 1: EVERYTHING MUST BE DONE Anning v Anning (1963) 109 CLR 9: who is responsible for these steps? 3 different views; 1. Donor must do everything they are required to do to transfer property 2. Donor must do everything they are able to do to transfer property 3. All steps necessary must have occurred before the gift is perfected and it doesn’t matter who has to them Norman v FCT (1963) 109 CLR 9: the transferor must do only those acts obligatory for them to do and no one else. Corin v Patton (1990) 160 CLR 540: The preferred approach from those mentioned in Anning v Anning, is the first, lenient approach: only the donor had to have done everything necessary to complete the gift. Mr and Mrs P registered as JTs of Torrens land subject to a registered mortgage in favour of bank, bank had possession of duplicate COT. Mrs P executed a memorandum of transfer to transfer interest as JT to brother C, and C executed a deed of trust that he held the land received as a trustee for her benefit jointly with Mr P – did not get transfer registered and she died. Husband sought declaration that he holds the whole of the land himself (right of survivorship), Mrs P tried to sever JT. C claimed half interest as TIC as Mrs P severed JT if not in law, then in equity.

HCA held that Mrs P failed to alienate her interest effectively to C, JT remained in existence on death and Mr P was entitled to the whole property. Mrs P failed to lodge memorandum with duplicate COT, did not tell bank that she was transferring property to C and request duplicate COT so C could lodge documents at LTO – failed to alienate interest and transfer it in equity.

ELEMENT 2: NATURE OF PROPERTY The transferor must use the appropriate mode of transfer according to the nature of the property involved. Jones v Lock (1865) 1 Ch App 21: Jones had failed to transfer the cheque in accordance with the law so the gift to his son failed. Illustrates the second limb of the rule in Milroy v Lord viz: “If the settlement is intended to be effectuated by one of the modes… the court will not give effect to it by applying another of those modes. If it is intended to take effect by transfer, the court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust.”

1. Lease: by way of assignment: Richards v Delbridge (1874) 2. Cheque: an effective gift by cheque requires the cheque to be endorsed to its beneficiary: Jones v Lock Cheques Act 1986 (Cth) s 41: a cheque is transferred by endorsing it 3. Chattels: the transfer is effective where the intending settlor delivers chattels to the intended trustee or executes and delivers a deed of gift of the chattels: Anning v Anning 4. Share transfer: signature of donor on form as prescribed by law: Re Rose [1952] Ch 499 5. General law land: duly executed deed of conveyance under LPA s 28 and instrument of transfer to intended trustee under RPA s 96. Registration is unnecessary as the intended trustee can effect it: Corin v Patton. 6. The mere opening of a bank account by a person in trust for another is not necessarily sufficient to make that person a trustee for the other person. Kauter v Hilton (1953) 90 CLR 86: where a person hands the passbook to purported B and consults B on the basis that they are the beneficial owner of the money, suggests an intent to create an immediate trust.

Haythorpe v Rae [1972] VR 633: where the alleged trustee retains possession of an item that is essential to the right to have any money paid over, the trust remains incompletely constituted.

Gifts of property At common law, for a gift to be legally effective there needs to be a clear intention by the donor to make a gift plus transfer of legal ownership of property to the done. Short of an effective transfer of title at law, the done will not have any rights. Gifts of chattels Sign, seal and deliver a deed of gift of the chattel - accompany words of gift with physical delivery of the chattel itself to the done. Paul v Constance [1977] 1 WLR 527: a declaration of trust over personal property may be made orally. Re Stoneham [1919] 1 Ch 149: man owned 2 houses and let his grandson live in one while he lived in the other. When grandfather visited grandson, he gave furniture to grandson. There was a valid gift in favour of the grandson, not necessary for grandfather to remove possession of the chattels – grandfather did not live there, grandson had exclusive possession and controlled the chattels. Re Cole [1964] Ch 175: husband bought and furnished house, surprises wife to show house and told ‘it’s all yours’, live in house together for many years. The gift was not perfected, no effective transfer of possession – the contents of the house remained the property of the husband who bought and furnished the home – husband had not relinquished control. Consider not the physical delivery of the goods, but the delivery of the control to the goods. Wrightson v McArthur [1921] 2 KB 807: certain goods were locked up in D’s premises and the sole keys + irrevocable license to come onto property were given to P (license + grant). D went bankrupt, dispute over ownership of goods – P proved that title had been transferred, by locking the room and giving P the only means to open the door, a transfer of exclusive means of control (although P did not actually own the real property) was sufficient to transfer the goods themselves. Things found in a landowner houses: presumption that land owner intends to exercise control.

Land Legal title to Torrens system in land in South Australia passes upon registration of the instrument of transfer: section 67 of the Real Property Act 1886 (SA) There are certain steps involved in transferring title to Torrens Land by gift. They are: 1. Execute a memorandum of transfer (must be done by transferor) 2. Lodge the memorandum of transfer at the Lands Title Office (transferor, transferee or conveyancer can lodge the memorandum) 3. Register the transfer on the certificate of title (registrar must register on title) A trust of land must comply with statutory requirements. The Law of Property Act 1935 (SA) s 29(1)(b) requires declaration of trust to be manifested and proved and signed in writing. If an oral trust over land is later reduced to writing, it can then be enforced and is treated as taking effect at the date of declaration (not writing): Secretary, Department of Social Security v James (1990) 20 ALD 5

Cloak for fraud doctrine There is an exception to the general rule – equity will not allow a statute to be used as an instrument of fraud. Last v Rosenfield [1972] 2 NSWLR 923: P’s and D’s owned house as JT. Ps transferred tehir share to the D’s at cost price as part of an oral agreement that if they did not live in the house within 12 months it would be transferred back at the same price. They sold the house to a third party. The court applied the ‘cloak for fraud’ doctrine to undo the sale. It operates where the person relies on the enforceability of the agreement to their detriment. Thus in Wratten v Hunter [1978] 2 NSWLR 367, an oral declaration of trust did not attract the protection because the siblings could not show that they relied on the promise to their detriment. Pearce v Public Trustee [1916] GLR 125: P transferred land to son upon oral express trust, but remained on land and made payments as if she retained the beneficial interest. Evidence that P had only transferred property to protect it from her estranged husband, to deny P’s beneficial interest would use the writing requirements as an instrument of fraud.

Tharp v Tharp [1916] 1 Ch 142: also applies where a person has by their fraud prevented a transaction from being reduced into writing. Jahnsen v Jahnsen [2002] NSWSC 995: it was appropriate to enforce an oral express trust because it would be unconscionable for the legal owner to rely on statutory writing requirements to defeat P’s beneficial interest. Parker v Glenninda Pty Ltd (1998) Q Conv R 54-499: does not apply where a person has done no more than decline to perfect or acknowledge an assignment they agreed to make. Equuscorp Pty Ltd v Jimenez (2002) 220 LSJS 252: does not apply to enable TP to enforce an oral trust where in the circumstances there is a resulting trust in favour of the person able to declare the trust.

Enforceability of Incompletely Constituted Trust The intended trustee or beneficiary of an incompletely constituted trust cannot enforce it if they have not given consideration to the settlor and are a volunteer. If a settlor promises to create a trust, the enforceability of this promise rests on the law of contract – a party to the promise may enforce the promise as a contract: FCT v Clarke (1927) 40 CLR 246.

Part Performance LPA s 31(d): the writing requirement does not prevent the court from enforcing the equity arising from acts of part performance by a party to an oral contract for an interest in land, or to grant SP of such a contract.

Volunteers The maxim, ‘equity will not assist a volunteer’ does not apply where the trust is completely constituted. Strong v Bird (1874) LR 18 Eq 315 - 4 conditions 1. T purported to make an inter vivos immediate gift of specific property to B 2. This gift failed for want of compliance for a complete divesting of title from T to B 3. At T’s death, T retained the intention that property should be treated as having been effectually given to B

4. T left a will appointing B as executor(s) If B can establish these conditions, they are entitled to an equitable claim against the estate for the property (can be defeated by a successful family provision claim: Cope v Keene (1968) 118 CLR 1). The rule only applies where the beneficial interest is given to the person who is granted probate as executor (Re Hince [1946] SASR 323) – it does not apply where B is to hold the gift on trust (Re Halley) or where B’s interest is subject to a condition (Blackett v Darcy (2005) 62 NSWLR 392).

Equity will not assist a volunteer – does not apply to fully constituted trusts but will defeat most attempts to enforce an incomplete trust where the beneficiary has not provided consideration.   

If an attempt to create a trust by declaration fails, the would-be settlor simply continues to hold the property on their own behalf. If an attempt to create a trust by transfer fails the trustee will hold the property on resulting trust for the settlor, and must retransfer the property to the settlor. If an attempt to create a testamentary trust fails the property will revert to the testators estate to be disposed of according to his will, or on partial intestacy.

Sham trusts A trust established for the sole purpose of avoiding payment of the settlor’s creditors is likely to be set aside as a sham. Legislation provides that dispositions of property made with intent to defraud creditors are voidable: LPA 1936 (SA) s 86 The HCA in Marcolongo v Chen (2011) 242 CLR 546, considering the similar NSW provision, held that defraud included delaying or hindering payments to creditors. A settlor’s intent to defraud creditors can be inferred from the fact that defrauding the settlor’s creditors is a necessary consequence of creating the trust. S 121 of the Bankruptcy Act 1966 (Cth) provides that a transfer of roperty be a person who later becomes bankrupt is void if: (a) the property would probably have become part of the transferor’s estate or probably would have been available to creditors if the property had not been transferred, and (b) the transferor’s main purpose in making the transfer was:

(i) (ii)

to prevent the transferred property from becoming divisible among creditors; or to hinder or delay the process of making property available for division among creditors

Trusts and perpetuity The common law rule against the remoteness of vesting provided that no interest in property was valid unless it could vest, if at all, no later than 21 years after the death of some life in being at the creation of the instrument creating the interest: Caddell v Palmer (1833)

The LPA 1936 s 61 abolishes the perpetuity rule. The rule against indestructible trusts (perpetual in duration) applies to non-charitable purpose trusts. Eg, Pedulla v Nasti: purpose trust to maintain chapel was invalid because maintenance may be required after the perpetuity period expired. The common law 21 year period is still applicable in SA. A trust for charitable purposes is subject to the rule against the remoteness of vesting and must vest within the perpetuity period: Re Lord Stratbeden and Campbell [1894]. However, the trust is not subject to the rule against indestructible trusts and can endure for as long as there is trust property that can be applied for the specified charitable objects. Gifts in Contemplation of Death These fall outside both the general rule of unenforceability of incompletely constituted trusts and the formal requirements of a valid will. Bayliss v Public Trustee (1988) 12 NSWLR 540: 4 conditions 1. The gift must be in contemplation of impending death 2. Its subject matter must be personal property 3. There must be delivery of the subject matter of the gift, a transfer of the means or part of the means of getting the property, or a transfer of the indicia of title 4. The gift must be conditional on the donor’s death buy otherwise be unconditional Donatio mortis causa becomes absolute only on the death of the donor and does not vest in the executor for distribution under the will – operate outside wills like secret trusts.

Harneiss v Public Trustee (1940) 40 SR NSW 414: the donee’s rights disappear and the gift reverts to the donor if the contemplated death does not occur. Cosnaha v Grice (1862): the onus for establishing a donatio mortis causa lies on the person alleging its existence. Strict onus due to uncertainty of words used by people in moral illness and their difficulty in expressing their intention. Woodard v Woodard [1995] 4 All ER 980: handing over of the keys to an item of personal property, such as a car, may be sufficient delivery if this presents unequivocal intention of evidence in the circumstances. Dufficy v Mollica [1968] 3 NSWR 751: T gave neighbours pouch with keys to house prior to being hospitalized for fatal illness. While in hospital, T told sister she may have money and key from neighbours. Valid donatio mortis causa of the money in the house given the evidence of T’s dispositive intention - handing over key to safe box could not support DMC Testamentary trusts The will creating the trust must comply with formalities for creating a will in the specific state legislation: The testator must have legal capacity, unimpaired intention to execute a will and the will must comply with formalities: a) will to be in writing b) signature c) two or more witnesses (at same time) and signatures

Voluntary assignment of a chose in action 

Voluntary assignments are those made without valuable consideration.



Assignment = transfer but law of assignments tends to refer to transfers of choses in action Chose in action = personal property rights which can only be enforced in court of law – eg debt, copyright, royalties etc

  

Legal chose in action and equitable chose in action No assignment of legal choses in action at common law so the legislature stepped in

Assignments of debts at law     

Must follow s 15 of the Law of Property Act 1936 (SA) Must intend transfer to take effect as an assignment Assignment must be absolute Assignment must be in writing and signed by the assignor Debtor must receive notice in writing

If all formalities except last one are met, the transferor is not required to give notice to the debtor when transferring the debt – anyone can give notice to the debtor (beneficiary, transferee, TP etc). Milroy applies for choses in action – transferor may do all they have to, anyone can give notice.

Equitable assignments of legal choses Rule in Milroy v Lord can apply to assignments of all legal choses in action – eg copyright, shares, insurance policies etc What about legal choses in action which cannot be assigned at law? Eg. Part of a debt? Then can assign in equity – just need clear intention to make immediate disposition of part of a debt

Assigning Equitable Interests Beneficiary B wants son TP to enjoy interest under trust created between T and S for B’s benefit. This can be achieved by: 1. B assigning equitable interest to TP directly: comply with s 29(1)(a) if trust fund is land and 29(1)(c) if it is personal property 2. B declaring a trust of equitable interest (create sub-trust): s 29(1)(b) does not apply 3. B issuing a direction to T that T must hold B’s interest for benefit of TP from this point onwards: s 29(1)(c) applies LPA S 29(1) Subject to the provisions hereinafter contained with respect to the creation of interests in land by parol— a) no interest in land can be created or disposed of except by writing signed by the person

creating or conveying the same, or by his agent thereunto law...