Constitution and Formalities of a Trust

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Capacity of the Settlor

The person creating the trust must have the capacity to do so.

  • Capacity is defined by the Mental Capacity Act 2005 as the ability to understand and retain information relating to the decision, to weigh it in the balance when making a decision and to communicate the decision

A person is presumed to have mental capacity unless the contrary is established (Mental Capacity Act 2005, s1(2))

In all decisions, the level of capacity required depends upon the seriousness of the decision. For example, the level of capacity required of a person giving £5 to a charity collector would be much lower than the level required to decide to dispose of one’s estate by will, or to sell or give away one’s home

Children

Children (aged under 18) can, if they have capacity, create a valid trust, but the trust is voidable

The child may repudiate (i.e. abandon) the trust, either under the age of 18 or within a reasonable time of reaching that age

  • In Carter v Edwards [1893] it was left too long (4.5 yrs), so could not revoke the trust

Note: a child may not hold a legal estate in land (LPA 1925 s.1(6))

Formalities – Requirement of Writing

Lifetime Trusts

In general trusts don't require a specific formalities → so they can be made orally as long as they are not of land (which need to be evidenced in writing) or testamentary (which must be in writing, signed by testator and attested by two witnesses: Wills Act 1837, s9)

The basic rule is that a settlor may create a trust by manifesting an intention to create it

Transfer of legal title

Legal ownership of some forms of property can only be transferred in writing or by some other formal process.

  • So with a trust you can transfer the beneficial/equitable interest in the property (to a beneficiary) or the legal title in the property (to a trustee), or both
  • When transferring the legal ownership of some forms of property (see below) this transfer can only be effected by writing or some other formal process (i.e. NOT orally)

Land: must be transferred by deed (s. 52(1) Law of Property Act 1925) and the requirements of the Land Registration Act 2002 must be observed.

Shares: must be transferred by the form of transfer laid down by the Companies Act 2006 together with the stock transfer form prescribed by the Stock Transfer Act 1963.

Copyright: must be transferred by writing (s. 90(3) Copyright Design and Patents Act 1988) e.g. IP

Bills of exchange: must be transferred by indorsement (s. 31 Bills of Exchange Act 1882) (i.e. signing on the form itself)

Land

The Law of Property Act s.53

The Law of Property Act s.53 provides that transactions for the creation or disposition of an interest (either the beneficial or legal interest) in land must be in writing and signed (s.53(1)(a));

  • So, equitable interests in land must be created by signed writing
  • And if you want to transfer legal title to someone you need a deed following the requirements of LPMPA s.2

Express trusts of land must be evidenced in writing and signed (s.53(1)(b)

  • So with an express trust of land there must be evidence of the trust’s existence should someone choose to enforce it, and does not necessarily mean it need be in existence at the trust’s creation i.e. so when the trust is created it could be done orally so long as it is later proved in writing
  • Failure to comply with this renders the trust unenforceable and not void

Any disposition of an existing (‘subsisting’) equitable interest (i.e. beneficial interest) must be in writing and signed (s.53(1)(c)) – if not, it is void

  • So if you are a beneficiary under a trust you can give or sell your interest to another person. But if you want to do that you must do so in writing
  • Subsisting in the sense that legal/equitable ownership have been separated

These provisions do not affect implied, resulting or constructive trusts (s.53(2))

  • So the above only affects express trusts
  • So no writing is needed for implied, resulting, or constructive trusts as these arise from the operation of the law

Equity will not allow a statute to be used as an engine of fraud

I.e. a person will be precluded from relying on her common law or statutory rights where to do so would enable her to carry out a fraud on another person

Where a person is fraudulently relying on s.53(1)(b) to deny a trust in land, Equity will not allow the person to retain the beneficial ownership of the land or the interest in land.

  • In other words: Though normally, under statute, an oral declaration of trust will not be upheld, to prevent fraud the court will sometimes uphold an oral trust

See the cases of Rochefoucauld v Boustead [1897] and Hodgson v Marks [1971]

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CONTENT

Law of Property Act 1925 s.53(1)(c): Disposition of an equitable interest

A disposition of an equitable interest must be in signed writing (s53(1)(c)) and not merely evidenced in writing), otherwise the disposition is void

  • So a disposition of an equitable interest is required to be in signed writing (and not just merely evidence in writing); otherwise, the disposition is void
  • Disposition includes a range of methods for transferring an equitable interest e.g. gifts and sales
  • So, s.53(1)(c) applies when a beneficiary under an existing trust transfers the beneficial interest in the property to another person.

The purpose of this section is twofold: first, to prevent hidden oral transactions in equitable interests defrauding those entitled to property; and, secondly, to enable trustees to know where the equitable interests are at any one time

See the cases of Oughtred v Inland Revenue Commissioners [1960] and Grey v Inland Revenue Commissioners [1960]

  • In both cases, it was held that the oral direction to the trustees to hold the shares on trust for another beneficiary was ineffective.
  • However, in Oughtred, it was held that the trustees held the beneficial interest on a constructive trust for Oughtred (i.e. the transaction was effective); in Grey, it was held that the oral declaration had no effect and the trustees held the shares on trust for the original owner, Hunter (i.e. the transaction was ineffective and the original trust (between Hunter and the trustees) was upheld)
    • The difference between the cases is that Oughtred was providing value (i.e. there was consideration), by transferring her other shares into her son’s name, whereas Hunter was making a voluntary transfer.

Also see the cases of Vandervell v IRC [1967] and Vandervell’s Trusts (No 2): White v Vandervell Trustees [1974]

Ineffective transfers of property

The transfer or conveyance of land, and the transfer of shares both require formalities

  • When creating a trust you need to transfer property (i.e. the settlor needs to give the property to a trustee) and this transfer requires certain formalities
  • In the case of land, the conveyance must be registered with the Land Registry.
  • The transfer of shares requires the delivery of a proper instrument of transfer to the company (Companies Act 2006 s.770).
  • Legal title of the trust fund must be effectively transferred to trustee to create a trust

If the person making the transfer, whether as an outright gift or as part of a declaration of trust, does not complete the formalities required, is the transfer valid?

  • I.e. if someone makes a trust and decides to transfer legal title to a trustee but something happens (e.g. drops dead) before completing the formality requirements, has the trust been formed? Will equity help implement the trust?
  • If, as in this example, the person dies, the answer to this question will determine whether the property goes to the beneficiaries or forms part of his estate and disposed of in accordance with his will
  • The rule is that legal title does not pass until the formalities (of a gift or trust) are completed.

However, even if the formality requirements for the transfer of legal title are not fulfilled, can the beneficial interest in property pass to the transferee in equity?

  • Yes, in some circumstance, particularly where there is a contract or the recipient has provided value, Equity will complete the transfer by ordering specific performance or by declaring that the legal owner holds the property on constructive trust for the intended recipient e.g. Oughtred v Inland Revenue Commissioners [1960]: the transferor held the shares on a constructive trust for transferee pending completion of deal

Gifts and Trusts

Gifts and trusts are both ways in which a person voluntarily transfers the beneficial interest in property to another.

With gifts, the legal title is transferred along with the beneficial title. In the case of the trust, the legal title is transferred to a trustee or can remain with the legal owner

  • It is important to make this distinction → gifts and trusts are NOT the same: an intention to create a gift is not the same as an intention to create a trust

So a declaration of gift coupled with delivery, is sufficient to transfer absolute title in a chattel (chattel = things that don't require formalities). A gift may also be made by deed

  • Where something is not a chattel (i.e. land), saying you will give someone that non-chattel will not be enough and will not transfer legal title → transfer of legal title in land must be done in accordance with statutory principles

Where there is an ineffective transfer of legal title, as a result of a failure to complete the required formalities, it would be possible for Equity to complete the gift, by holding that the legal owner holds the property on trust for the recipient e.g. Oughtred v Inland Revenue Commissioners [1960]

  • BUT, as a general rule, and as Maitland said (as quoted in Pennington v Waine 2002), equity will NOT perfect an imperfect gift → gifts and trusts are distinct, and the court will very rarely blur the distinction

In the case of incomplete gifts, the following maxims are applicable:

  • Equity will not aid a volunteer;
  • Equity will not perfect an imperfect gift

So, if a person purports to make a gift, but the formalities are not complied with, then, as a general rule, Equity will not step in to aid the beneficiary: who is, as not providing value, a volunteer.

  • An intention to declare a trust arises in circumstances in which there is a division in the ownership of property between the legal title and equitable interest
  • By contrast, an intention to make a gift involves an intention to affect a transfer of absolute title in property from the owner of absolute title in that property (‘the donor’) to another person (‘the donee’)
  • The donor owes no fiduciary obligations to the donee in ordinary circumstances and the donee acquires no rights in the property until the transfer of absolute title takes effect

When will Equity step in?

The general rule is, if you make a gift and that gift fails, the court will not transfer that into a trust. See, for example, Milroy v Lord (1862)

However, under some circumstances, Equity will step in i.e. there are circumstances in which equity WILL allow a transfer to occur even though the formality requirements have not been complied with:

  1. Conveyance of land to a minor
  2. Gifts made in contemplation of death
  3. Failure to make an effective gift: the ‘Every Effort’ rule
  4. The rule in strong v bird
  5. Where the donor is also a trustee

1) Conveyance of land to a minor

Where land is conveyed to a minor, the transfer will have no legal effect, as land cannot be legally owned by a person under 18 (so the original owner will remain the legal owner).

However, by TOLATA 1996, Sched.1, the land so conveyed is to be held on trust for the minor → so it becomes a statutory trust

2) Gifts made in contemplation of death

Donationes mortis causa (DMC): where the donor makes a gift conditional upon, and in contemplation of death, then title will pass upon the death of the donor.

  • The doctrine arose specifically to create an exception to the rule that a testamentary gift must be made properly or else it will not be effective → so the courts will uphold ‘deathbed gifts’
  • These gifts are gifts made during the donor’s lifetime, made in expectation of immediate death, and which are intended to take effect on the donor’s death
  • There are 3 requirements as laid down by Lord Russell CJ in Cain v Moon 1896:

i) The donor must be contemplating the real possibility of his death: this may be because of illness, going on active service or a hazardous trip. The mere reflection that we all die does not suffice to make a donatio mortis causa; nor does a gift conditional on death automatically become a donatio mortis causa: death must be either imminent or a real possibility i.e. doctrine only ordinarily operates in cases of people acting in extremis

  • E.g. donatio moris causa would cover a situation like that of a soldier lying dying on a battlefield, who says “I want my Facebook shares to be given to my 2nd son”

ii) The gift, or title to or means to obtain the gift, must be physically delivered to the donee. This may be the chattel itself or something like a bank-book, cheque or title deeds. A gift should be distinguished from a bailment, to place the goods in safe keeping

  • So, it is important that the donor intends to ‘give up dominion’ to the property (i.e. not just safe-keeping to look after for you) at the time of making his donatio mortis causa (Wilkes v Allington 1931)
  • Thus, the donor must not intend to be able to deal with the property after the purported gift and must intend, in effect, to give up her rights to property at that time

iii) The gift should be conditional upon death, and does not take effect if the donor recovers or survives

Continued: Gifts of land made in contemplation of death

Land may be the subject of a donation mortis causa: it may prevail over the requirement that a transfer of land must be in writing → this is confirmed in the case of Sen v Headley [1991]

Also, in Vallee v Birchwood [2013] and King v Dubrey [2014], title deeds to property were handed over with words to the effect, ‘I want you to have my house when I go’. In both cases, the High Court found a valid DMC

  • However, on appeal, Vallee v Birchwood was disapproved and the appeal in King v Dubrey allowed: King v Chiltern Dog Rescue [2015]
  • In neither case was donor acting in contemplation of their death in way required: there was no fatal illness, operation or hazardous expedition.

Note: in all 3 of the above cases (Senn v Headley; Vallee v Birchwood; King v Dubrey), where land was transferred as a deathbed gift, it concerned UNREGISTERED land

  • It would seem, if your land is registered then it would not be possible to make an effective dominio mortis causa of that land (because of the added formalities associated with registering and proving ownership of that land)

Continued: What if the donor dies from some other cause?

If a person, contemplating his death from one cause, actually survives the contemplated cause but dies from another, unexpected cause, does the DMC take effect? → Yes it does (In re Richards. Jones v Rebbeck [1921] → here they considered this very issue and confirmed it does)

Wilkes v Allington [1931] → The donor was suffering from an incurable disease, and made a gift in the knowledge that he had not long to live; as things turned out, he had an even shorter time than he imagined, for he died two months later of pneumonia; it was held the gift remained valid

  • If a man, in contemplation of death... in fact dies from some cause other than the disorder which was present to his mind when he made the gift, I have a difficulty in seeing why the gift is not operative”

3) Failure to make an effective gift: the ‘Every Effort’ rule

If the donor has made every effort to effect the transfer, but has been unable to complete it because of circumstances that they are not in control of, then the court may, following the case of Re Rose, complete the gift.

  • The question is: if the donor has performed all the acts necessary to be performed by her to complete the making of a gift, should the donor have been deemed to hold that property on trust for the intended donee from that moment of completing the necessary acts
  • It was held in Re Rose [1952] that if the donor had done everything necessary for her to do to make the gift, then equity will deem an equitable interest in the relevant property to have passed automatically, even if the donee is a volunteer
  • So this is an exception to the rule that equity will not assist a volunteer

This was established by CA in Re Rose [1952] in which an earlier unconnected first instance decision, coincidentally also bearing the name Re Rose [1949], was applied and followed → remember that these are two distinct cases, but both are relevant!

See Re Rose (decd), Midland Bank Executor and Trustee Co Ltd v Rose [1949] (i.e. the 1st case)

  • Jenkins J, held that, because the testator (Mr Rose) had done everything in his power to transfer the shares inter vivos, from that moment he held the shares on trust for the transferee (Hook); consequently, the legatee (Hook) had taken the shares inter vivos

See Re Rose (decd), Rose v IRC [1952] where the Court of Appeal approved the decision in Re Rose [1949] and held that the equitable interest in the shares had been transferred as soon as the transferor had completed all of the formalities, which he was required to complete i.e. as soon as transferor completed all the formalities he could there was a constructive trust over the shares

Continued: Every Effort

The principle requires that every effort has been made.

If the transferor purports to make the gift, but omits a step, then the principle set out in Milroy v Lord applies (i.e. an ineffective gift does not constitute a declaration of trust). So, a failure to hand over the share certificate, as well as the share transfer form, would prevent the ‘every effort’ rule from applying.

  • In Milroy v Lord itself, the agent had not completed all of the formalities necessary to achieve a transfer of the property; in Re Rose (1952), Lord Evershed held that all of the actions necessary to be taken by the transferor to effect a valid transfer had been carried out, such that the court considered that it would have been against conscience for the donor to have south to renege his intention to make a transfer of the property

See the case of Pennington v Waine [2002], which has been criticised by academics because the ‘every effort rule’ was not applied → rather a wholly novel position was established in this case: it was said that an ineffective transfer will take effect in equity where it is unconscionable for the transferor to change his mind

  • This case has been criticised for introducing what appears to be a discretionary element to the law → “It is difficult to disagree with the view that the court has given itself an unfettered discretion to give effect to ineffective transactions if it would be unconscionable not to do so” (Glister and Lee 2015)

In the recent case of Kaye v Zeital [2010], the Court of Appeal took a more orthodox approach in the application of the every effort rule. In that case, it appeared that the share certificate was missing. The Court of Appeal held that the donor had it in his power to obtain a copy of the certificate, whereas the donee did not. By not taking steps to obtain the copy, the donor had not made every effort within his power, so the transfer failed.

4) The rule in Strong v Bird

This is also known as the fortuitous vesting rule. It is based on the Common Law rule that a person cannot bring an action against him or herself.

When a person dies, their property becomes the property of their executors. If a person is an executor of the estate and a debtor of the testator, they cannot, as executor of the estate, bring an action against themselves as debtor. This means that any debts owed by an executor are, under Common Law, unenforceable.

E.g., a woman with 3 children makes a will leaving all her property to be shared equally between her children. She appoints the eldest child as executor. Ten years before she dies, she lent the eldest child £30,000 as a deposit on the house. The loan was interest free and the eldest child was paying it back over 20 years: the eldest child still owes £15,000. At her death, the woman’s estate was worth £150,000. Should each child receive £50,000; or should the eldest receive £40,000 and the other two £55,000?

  • At Common Law, the appointment of the eldest child as executor releases the deb i.e. At common law because the eldest child (who was in debt to the now dead creditor) was appointed the executor, that debt can no longer be enforced → so the eldest child would not have to pay back that money

In Equity, the rule in Strong v Bird provides that the debt is released only if that was the intention of the testator; and the intention continued until the date of death.

  • So, in Strong v Bird it was stated that although at common law the debtor is released of his debts, at equity the debtor nevertheless remains liable
  • Jessel MR held that for the debtor to be released of the debts when appointed as executor, the following requirements MUST be fulfilled:
    • 1) There must be evidence that donor intended to make an immediate inter vivos gift i.e. a gift whilst donor was alive (a testamentary gift would FAIL due to non-compliance with formality requirements)
    • 2) There must be evidence of intention that gift continued throughout the entire period up until the donor’s death
  • So although at the common law the debt will be discharged, in equity (the rule in strong v bird) the fact you are the executor will not release you automatically from your debts: you must first have evidence the testator intended to release you from your debt

See the case facts of Strong v Bird (1855)

The principle in Strong v Bird can also be used to complete an imperfect gift: if a person has a continuing intention to give, but does not complete the gift before death, then if the recipient is appointed as executor, legal title is vested in them by operation of law. This is sufficient to complete the gift.

5) Where the donor is also a trustee

See T Choithram International SA v Pagarini [2001]

  • This is another case where court of equity completed an ineffective transfer

This was an unusual case in that TCP (i.e. Pagarini) was trustee of the foundation; in his own right he was the legal owner of the property; the intention was the property would vest in the trustees of whom TCP was already one (i.e. TCP was a trustee of the trust) → so if somebody holds property as a trustee they don't need to transfer legal title because they already have it

“Although the words used by TCP are those normally appropriate to an outright gift—'I give to X'—in the present context there is no breach of the principle in Milroy v Lord if the words of TCP's gift (ie to the foundation) are given their only possible meaning in this context.”

  • Lord Bronwne-Wilkinson said the only way the foundation could actually hold the property would be as beneficiaries because there are seven trustees existing to hold the legal title
  • So saying that you will give property to the foundation (which looks like a gift i.e. a transfer of absolute ownership), only can involve the transfer of equitable ownership to the foundation (as the trustees retain the legal title) → therefore, what looks like a gift to the foundation is actually translated as giving the property to the trustees to hold the property on trust for the foundation
  • So, if you give to a trust you are technically giving to the trustees of the trust to hold on trust for the beneficiary
  • So although it looks like words of trust they are actually creating a gift on trust

So whether a donor is a sole trustee or part of a group of trustee there is to be no distinction to be made; So what this means is, is that because he is giving the property to the trustees, and he is one of those trustees, he is giving the property to himself as one of those trustees to hold on trust for the foundation

So although it looks like a word of gift on its true construction it can have no meaning other than words of trust

And it is not important that there are 6 other trustee because if someone receives property as a trustee their conscience is bound and they are bound to hold the property on the terms of the trust

  • So once TCP declares he is giving his property to himself as one of the trustees to hold on trust for the foundation that is a declaration of trust and once he has made that declaration of trust his conscience is engaged and it would be unconscionable for him to try and change his mind or resile from the gift
  • So it was a valid transfer of property → the transfer was upheld but only in the particular circumstance where someone is a trustee and gives to the trust, then words of gift on their true construction be words of trust
  • This is not a common scenario

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