Lecture Handout 3 - The Express Trust PDF

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In today’s lecture, we focus our attention on the express trust. We will understand the different types of express trusts, the requirements for the creation of an express trust, beneficial interests and the duration of a trust....

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LECTURES 3-7: INTER VIVOS DISPOSITIONS 3.

THE EXPRESS TRUST

INTRODUCTION In the previous lecture, we introduced ourselves to the various different methods by which property could be disposed of. Importantly, our focus was on “gratuitous dispositions”. In today’s lecture, we focus our attention on the express trust. We will understand the different types of express trusts, the requirements for the creation of an express trust, beneficial interests and the duration of a trust.

3A .

TYPES OF TRUSTS

In Lecture 2, we introduced you to the different types of trusts that exist. In preparation for Seminar 4, there will also be an additional Vodcast available which goes through the various different types of trusts and their function. In this lecture, we shall focus on the “express trust”. As the name suggests, an express trust is one in which the settlor declares his express intentions in respect of the operation of the trust. An express trust may come in a number of forms, for our purposes we shall identify three types of express trusts: 

Bare trust – is one where the trustee holds property, for the benefit of a sole (single) beneficiary. This beneficiary is entitled to the entire state (i.e. no restriction). The property is in the name of the name of the trustee and they hold legal title. But the trustee does not have any active duties towards the trust (i.e. no duty to perform in respect of the trust). The only duty that this kind of trustee has is to hold the property for the beneficiary until the beneficiary takes the property absolutely. (also known as the duty of stewardship).

In this kind of trust, the trustee is known as the nominee, as they hold the name for another.

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

Fixed trust – is a trust in which the beneficial interest is fixed by the settlor. In this case, a trustee is told who the beneficiaries are and what they are entitled to. Because the trustees have been told this information, they have no discretion as to how the property is to be distributed.

The identity of the beneficiary may either be by name eg a trust to benefit my niece Kaitlyn, that is to identify someone by name, or you could identify by class e.g. Creation of a trust for my children (children are a class and not identified individually, but are identifiable). The nature of a fixed trust is that each and every beneficiary must be “ascertainable” (simply meaning, we’ve got to know who they are and that they exist)

A fixed trust enjoys no discretion i.e., whatever the settlor has said in the creation of a trust is what stands or happens.



Discretionary trust – concerns the situation where ethe trustee may determine in their discretion who is ti benefit and by what amount. Two aspects of this, namely: 

Trustees may have the ability of deciding who will benefit. They will also have the ability to decide by how much they benefit.



Beneficiaries do not have an equitable interest from the outset unlike fixed trust. They will only have an equitable interest if they are chosen to be a beneficiary. The technical term is when the beneficiary is “appointed”. So, until they are chosen or appointed, they have no equitable right in the property. Instead, they simply have a mere hope that that will happen.

Discretionary trust themselves can be broken down into two main forms: 

The exhaustive discretionary trust – the trustees are required to distribute the income or capital to beneficiaries, but they can decide who may benefit and by how much. (they’ve got to do something with it or in other words, distribute)



Non-Exhaustive trust – the trustees can decide not to distribute the property or income to the beneficiaries. Instead, they can accumulate the income instead of distributing it. (can decide whether to not to distribute)

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Type of Express

Example and Explanation

Trust Bare

“Wendy borrows money from a bank to purchase a house. Wendy uses a firm of solicitors for conveying purposes. The bank includes a provision that the money can only be transferred to Wendy on completion of sale and no earlier. The bank transfers money to the solicitors.”

In this case, the solicitors are the nominees on behalf of the bank. They are holding the money in the name of the bank and are holding the money on bare trust for Wendy. Fixed

“£100,000 on trust for my grandchildren, shared equally between them”.

This is called a class gift as the grandchildren can be identified. This is a fixed trust and the beneficiaries have an equitable interest in the property from the outset. Discretionary

“£100,000 on trust for my trustees to distribute the income amongst such of my grandchildren as the trustees in their absolute discretion shall decide”.

3B.

BENEFICIAL ENTITLEMENT

It is important to appreciate from the outset that a trust may involve several different types of beneficiaries, each with different beneficial interests and entitlements. To begin with, we can break those interests down into: 

Vested interests; and



Contingent interests.

A second way of breaking down beneficial interests is to consider interests or entitlements which are fixed, and those that are discretionary (see above). Here, we shall focus on vested and contingent interests.

(i) Vested Interest THINK POINT – OVER TO YOU… What do you understand a “vested interest” as being?

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Simply means that a beneficiary as an immediate right to a property. i.e., they do not have to satisfy any condition or expectation in order to benefit from the trust. Immediate in this context does not mean now or at this point in time. This only mean that the don’t have to satisfy any condition. It may be the case that they can only benefit later down the line. A vested interest can itself be broken down into two: 

An interest vested in possession; and



An interest vested in remainder.

Type of Interest Vested in possession

Explanation This is one where the beneficiary is entitled to enjoyment of the trust property now. In this example the trustees will hold the £1000 and A would be entitled to any interest produced by any capital from the creation of the trust to the date of their death. They have an interest in possession

E.g. “£100,000 to A for life” Vested in remainder (also known as “vested in

This is where someone has a vested interest, but their

interest”)

enjoyment of the property has to wait. They are only entitled to enjoyment of the trust property in the future.

In this situation, this party is known as a remainder man or person because their interest is in reminder. This basically means that party B in the example would have to wait until party A dies.

E.g. “£100,000 to A for life remainder to B”

Two further terms require consideration: Interests can be: 

Concurrent Interests: Is where there are multiple beneficiaries with multiple interest vested in possession at the same time.

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

Consecutive Interests: Is where there are multiple beneficiates with some with an interest vested in possession and others with an interest vested in remainder. So, one follows after the other. I.e., party A has an interest, once they die, party B then has an interest.

The phrases life tenant and “remainder man “are only used if there is a consecutive interest. If there are no consecutive interest, they won’t be used. (ii) Contingent Interest THINK POINT – OVER TO YOU… What do you understand a “contingent interest” as being? One in which you have to satisfy some sort of condition. Although the beneficiary is known, thus the phrase “ascertainable”, they are only entitled to benefit under the trust if they satisfy a certain condition. The that respect, the phrase used is that they have a contingent interest. Once this is satisfied, they would then have a vested interest.

Much like a vested interest, a contingent interest may be “in possession” or “in remainder”. THINK POINT – OVER TO YOU… Use the following table and identify what the contingency is in each scenario. Statement in the Trust “For the benefit of my son, Simon, upon

What is the Contingency?

attaining the age of 25”

Contingency vested in possession Gift with a condition precedent

“For the benefit of my nephew, Harry, so long

Contingency vested in possession

as he does not become a solicitor”

Gift with a gift of subsequent

“For the benefit of my niece, Caitlin, upon

Contingency vested in possession

successfully obtaining an undergraduate

Gift with a condition of precedent

degree in law” “For the benefit of any grandchildren of mine

Contingency vested in remainder

who are still alive at the time of my death”

Gift with a condition of precedent.

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It is worth noting at this stage that a contingent comes in two forms: 

Gift with a Condition Precedent: Is where the condition must be fulfilled in order for the property to vest. E.g., for party A for life so long as she attains the age of 21. So, the attainment of the age of 21 is a condition which must be achieved before the gift is vested. It is a preceding condition. So, if one has to fulfil a condition before the entitlement of a property, it is a condition precedent.

So in summary, you have to meet a condition in order to for you to get the gift.



Gift with a Condition Subsequent: Something that must be avoided. So, the only way for one to continue to benefit form the gift id to avoid a particular condition. I.e. the gift is yours for the outset and it continues to be yours (vested) so long as you do not breach a condition of the trust. Ypuve got to avoid a certain condition in order for your gift to continue.

THINK POINT – OVER TO YOU… Return to the table above and identify whether the contingencies are “condition precedent” or “condition subsequent”.

The final questions to ask on contingent interests are these: What happens when the contingency is met? When the contingency is met, the beneficiary is entitled to the property and ca take the property outright. When contingency is met, this turns to a vested interest and by becoming a vested interest, you can take the property outright and absolutely as your own

What happens if the contingency is not met?

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If this is not met e.g. The beneficiary dies before the contingent is met dies before the contingent is met. If this happens, this is quite simply, the gift fails, the point of contingency is that it may never become vested. In this example, if there is no provision to prevent the failure of the gift, the trust will result back to the settlor THINK POINT – OVER TO YOU… Consider the following example and identify the beneficial interests at play. Wendy declares a trust in favour of her husband, John, for the duration of his life, and on his death, to be divided equally between her child, Anna, and stepchild Ben. Anna must attain the age of 25 before she is entitled to the trust property. Ben has no such requirement. Ans: John has a vested interest – vested in possession as he is entitled to the enjoyment of the property now. Anna has a contingency vested in remainder – gift with a condition of precedent Ben has an interest vested in remainder –

3C.

REQUIREMENTS TO CREATE AN EXPRESS TRUST

In order to create an express private trust, there are four requirements that must be complied with, these are: 

The settlor of the trust must have the capacity to create the trusts



The settlor must comply with what is known as the three-certainties



Legal formalities for the creation of the trust must be complied with



The trust must be constituted (the trust property must be transferred or vested in the correct party)

There could be said to be a fifth requirement: namely that the trust does not offend the rules of perpetuities. We consider Formalities and Constitution in Lectures 4-7; we shall consider capacity and the three certainties here. We will also consider the duration of a trust, including the rule against perpetuities.

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(i) CAPACITY In order to create a trust, the settlor must have the requisite capacity to do so. “Capacity” in this sense simply means that they the necessary ability and understanding to create the trust. Who is this requirement likely to cause problems for? Children and mentally ill.

General rule is that you must eb over the age of 18 to create or make a trust. And the reason for this is because in most situations, children cannot own property including land. So, because they can’t own land, they therefore cannot create trust in respect of land. However, children can own personalty. So, in that regards, it is possible for a child to create trust. But in order to ensure that a child is properly protected, what the law does is that it says whilst the child can create a trust, the trust remains revokable until a reasonable time after the child reaches majority (once they become adults). This does not apply to adults.

All adults are presumed to have capacity except proven otherwise or if a doubt is raised. If a doubt has been raised, it must be proven that the settlor understands the nature of his act and its effect, the extent of the property of which he is disposing and its character and appreciate and comprehend the claims to which to which he sought to give effect.

(II) THREE CERTAINTIES According to Lord Langdale MR in Knight v Knight [1840] 3 Beav 148, in order for a trust to be valid, there are three certainties that must be present: to create a trust, first, if the words are so used, that upon the whole they ought to be construed as imperative; secondly, if the subject of the recommendation or wish be certain; and, thirdly, if the objects or persons intended to have the benefit of the recommendation or wish be also certain according to lord Langdale, there are three certainties, name: certainty of intention, certainty of subject matter and certainty of objects. Thus, the three certainties are: 

Certainty of intention



Certainty of Subject matter



Certainty of objects

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THINK POINT – OVER TO YOU… Go back to the above quotation from Lord Langdale MR in Knight v Knight. Highlight and identify the three certainties - use a different colour for each certainty.

Why do we have these requirements. These conditions are required because a trust creates legal obligations which a court must be able to enforce, if necessary. A court will not be able to enforce a trust if its terms are not clear. Also, a trust will need at least one person to act as trustee and administer it. Obviously, that person must know that he or she is supposed to be a trustee, rather than the lucky recipient of an outright gift. He or she must also understand the terms of the trust, in order to administer it properly. We shall briefly consider each in turn to allow you to appreciate the relevant rules. You are advised to consult your chosen textbook for more detail on the three certainties.

Certainty of Intention: Certainty of intention is, arguably, the most understandable of the three certainties. Quite simply, in order for a trust to be valid, the settlor of the trust must have had a clear intention to create a trust. We can begin this discussion by returning to an equitable maxim considered in Lecture 1. When we speak of creating a trust, we mean that the settlor has used words which dispose of title and impose a duty on the trustees to act in accordance with his or her instructions. THINK POINT – OVER TO YOU… Return to your notes from Lecture 1 and identify what you understand the phrase “equity looks at the intent and not the form” to mean. Equity does not require a set formula in order for a trust to be created, what equity will do is that it will look at what has happened, the words used, the conduct of the parties. Form that conduct or words can equity identify the existence of a trust.

However, whilst equity focuses on the substance and not the form, the words used by the settlor must still indicate his intention to create a trust.

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In Paul v Constance [1977] 1 All ER 195, the Court of Appeal considered that the word “trust” need not be used (we consider this in more detail in Lecture 4). Therefore, whilst the settlor need not use the word “trust”, or legal language in general, he should aim to use words which are imperative. Difficulties arise in fulfilling this certainty where the words used by the settlor are not obligatory. We call these words: precatory words. See also Re Kayford Intention is established by considering all the circumstances of the case 

Equity looks at intent (substance) rather than form.



The courts will look at the other words used (whether it be written oral).

However, this will be confusing as there might be questions like “how do we distinguish between the intention to create a trust and intention to do something else”. Since the case of Lambe v Eames, the courts have generally made a distinction between the use of precatory and imperative words THINK POINT – OVER TO YOU… What do you understand the words “imperative” and “precatory” mean? Imperative: these are words of command. They are commanding and they impose an obligation. Its these sorts of words that allow you to create a trust. They indicate that trust is intended. E.g. I give£1000 to Chris and Andrew, to be held on trust for peter and Mary. Note: even if the word trust was not indicated or missing, it would still be imperative.

Precatory: these are merely words of hope, wish, desire. You hope or desire something to be done. These types of words are exceptionally common, especially in your non professional drafted wills. Unless you can find some ort of other evidence to demonstrate the existence of a trust, will prevent the trust from working. E.g. I hope peter and Mary will distribute my property to my children. This is a precatory phrase as there doesn’t seem to be any form of obligation on peter and Mary to do this.

THINK POINT – OVER TO YOU… Use the following table to identify whether certainty of intention has been complied with. Words used I give £5,000 to my sister, Joanne. It is

Certainty of Intention? No. this is precatory, as there was no obligation

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my desire that she uses this money to pay

whatsoever on Joanne to pay for Michael’s

her son Michael’s university fees.

university fees. She has been given a power, i.e., merely an ability to do something. This is an outright gift to Joanne and has been given an ability to give the money to Michael for his university fees.

I give £20,000 to my brother, Andrew, in

No. the words “full confidnec that he will do what is

full confidence that he will do what is right

right” indicates that they are precatory. They are

with regard to sharing it among his

insufficnet evdnec to prove an intention to create a

children.

trust.

I want my nephew, Charlie, to hold my

Indicates that chralie hol...