Equity and Trusts - Case Study Example

Equity Scenario At the outset, Sara’s mental capa as a testator is not in doubt, because she satisfies the three conditions to establish mental capacity, as set out in the case of Banks v Goodfellow1. Capacity is a functional test, looking at the testator’s ability to carry out the particular task2 and requires that Sara must have understood (a) the extent of her property (b) the claims which she should have regarded and (c) the nature of the act and its effects3. Sara’s words to Jim about taking care of her family suggest that she is aware that her family may have a claim on the contents of her will. Testamentary capacity will be established if it can be shown that the testator had the required capacity while preparing the will and that the will was prepared in accordance with those instructions.4 It also appears unlikely that in Sara’s case, the disposition would take place in accordance with the intestacy rules, because her will clearly states that all her “real and personal” property has been left to Jim for a specified purpose. But the problem that arises in this case is the lack of clarity in what that purpose is. The will as it is written, allowing all of Sara’s property to pass to Jim is valid because it also satisfies the formality requirements,5 i.e, that a will is made in writing in the presence of two reliable witnesses. The question of whether it may be held to be lacking for want of knowledge and approval in execution of the wills6 may arise in this case, because Jim was aware that Sara was making a will and naming him as a beneficiary. This may also provide grounds for Sara’s family to bring action against Jim for a breach of trust, as was the case in Mitchell v Halliwell7 where the Court ordered that a family member had an entitlement to a disposition from a testator’s estate. Hence, the most important issue that rises in Sara’s case is the determination of whether the disposition made to Jim under her will constitutes a trust or whether Jim is intended to be the beneficiary. Although Sara has orally stated that she wants Jim to look after her family in accordance with some written instructions, those instructions have not been found. A declaration of trust that is made orally may not be enforceable in court unless it is manifested and proved in writing8. This formality requirement has been implemented to prevent hidden oral transactions for equitable interests in trusts, which are difficult to determine and implement with any measure of certainty. It has been argued that a direction to a trustee by the owner of the property could be equivalent to a declaration of trust, but even this requires that it be in written form.9 Applying these criteria, Jim would therefore be the legal beneficiary of Sara’s estate and the shares, because any other written instructions from Sara, if existent, have not been found and cannot be presented in the Court. Therefore the existing will that names Jim as the beneficiary may hold good and he may be entitled to the shares. The will however states clearly that Jim is to hold the property “for a purpose that I will make known to him.” The question is therefore whether a secret trust exists, where a testator may arrange with a trusted friend to leave property under a will to the friend, but that it is actually to be held in trust for the secret beneficiary whose identity will be disclosed only to the friend.10 The theory underlying the formulation of a secret trust is that the Wills Act “has nothing to do with the matter.”11 This presumption of existence of a secret trust may arise in this case because Sara has informally made Jim aware during her lifetime that Jim is to hold the property for the benefit of her family. Her will makes it clear that while he is the legal beneficiary, he is not the ultimate beneficiary because he is to hold it “for a purpose”. This implies that a half secret trust may have come into existence, where the existence of a trust may be clear but the terms of the trust remain secret.12 Although Sara has not passed on the written instructions to Jim, she has stated orally that he is to look after her family. Hence an inter vivos trust may have come into existence, which may operate independently of the Wills Act and the Law of Property Act. This is a bare trust, not dependent upon the formality requirements but direction given to a trustee about passage of the legal interest and thereby the equitable interest as well. In the case of Vandervill v IRC13 which also involved the disposition of shares, the Court held that the lack of written formality may not necessarily constitute a barrier, because it would apply only in those cases where equitable interest in a property had been disposed of independently of the legal interest. Since in this instance, Sara’s words in her will clearly suggest that Jim is to hold her property for a purpose, the equitable interest had not been disposed of, therefore the lack of writing may not constitute a barrier. Where the question of existence of such a secret trust arises, the Courts may not allow Jim to claim the shares beneficially but may require him to hold it in trust for Sara’s family. As stated by Viscount Sumner, “The facts commonly but not necessarily involve some immoral and selfish conduct on the part of the legal owner. The necessary elements are intention, communication and acquiescence. The testator intends his absolute gift to be employed as he, and not the done, desires...”14 But another aspect that must be considered is that while Sara has made Jim generally aware that her family is the beneficiary, she has not clearly spelt out the instructions and has not given the purported written instructions to Jim earlier. In the case of Blackwell15 Lord Viscount also held that a testator cannot reserve to himself the power to make future dispositions and merely naming a beneficiary but not supplying the purpose of the trust at the same time, because a trustee needs to know how to carry out his obligations as a trustee. This rationale was also applied in the case of Re Keen16 where it was held that when communications occurs after the formulation of the will, the trust will fail and the property will be held by the legatee on a resulting trust for the residuary estate. In conclusion therefore, since the terms of Sara’s will state that Jim is to hold her property “for a purpose”, the existence of a trust is clear and it does not appear that Sara has given her property to Jim; rather he is to serve as her trustee in the disposition of that property. On the question of whether or not Sara’s family is the beneficiary, it must be noted that Sara has communicated her intent that Jim take care of her family only before her death. It must also be noted that the trust created by Sara with Jim as the trustee, does not therefore, fall under the category of a fully secret trust as in the case of Re Spence17 because the trustee has been named. If it had been a fully secret trust as in the case of Spence, it would have been exempt from the requirement of communication. But being a half secret trust, this communication must occur before the execution of the will.18 The Courts will therefore attempt to determine whether such communication has occurred, to determine whether a trust has come into existence with Sara’s family as the beneficiaries, or whether the trust fails and the legatee Jim must hold the estate on a resulting trust for the residuary estate. Sara’s words before the fire imply that she has discussed this issue with Jim earlier and has made him aware that he is to look after her family in accordance with her intentions which she discussed with him. Additionally, she has also set this out as written instructions, although these instructions have not been found. The requirement for communication where a half secret trust exists was set out in the case of Blackwell as indicated earlier, because the trustee must know the nature of his obligations and how they are to be carried out. A trust will fail and become a resulting trust only when such communication cannot be established, thereby proving to be a source of confusion for the trustee and make it difficult to execute the trust. In this case however, it appears likely that Jim may be aware of the manner in which Sara wishes him to dispose of the proceeds of the trust of which he is the legal owner, i.e, the 50,000 shares, among her family members. On this basis, the Court may hold that a trust has come into existence, with Jim as trustee and holding the legal interest, but the beneficiary interest under this trust would go to Sara’s family members in accordance with her earlier discussions with Jim, where she has clarified her intent and the “purpose” for which the trust has been set up. Bibliography Hudson, Alastair, 2004. “Understanding Equity and trusts”, Routledge Cavendish. Kodilinye, Gilbert and Carmichael, Trevor A, 2002. “Commonwealth Caribbean Trusts law”, Routledge Cavendish Legislation Cited: The Wills Act of 1940 The Wills Act of 1963 The Law of Property Act of 1925 Cases cited: Banks v Goodfellow (1870) LR 5 QB 549 Blackwell v Blackwell (1929) AC 318 McClintok v Calderwood 26 April 2005 (Ch), [2005] All ER (D) 356 (Apr) Mitchell v Halliwell EWHC 937 (Ch), [2005] All ER (D) 210 (May) Parker v Felgate (1883) 8 PD 171 Re Keen (1937) Ch 236 Re Spence (1949) WN 237 Re Young (1950) 2 All ER 1245 Vanderville v IRC (1967) 1 All ER 1 Read More