Equity and trusts - Case Study Example

EQUITY AND TRUST Scenario Vito was an extremely successful businessman. A few years ago, he wished to treat his son, Michael, on his 16th birthday. Vito wanted to give Michael one of his favourite properties, a penthouse flat in London, so he told Michael that he was, with immediate effect, to hold the penthouse as trustee for Michael. Last summer, Vito's daughter, Connie, turned 18. Vito gave her a card, inside of which he had written, 'To my darling daughter Connie, "Happy Eighteenth Birthday! On this special day, I give to you 5,000 shares in my oldest company, Lucrative plc." Vito never actually got round to executing a share transfer in favour of Connie, however, until his death, he occasionally emailed statistics to her in order to keep her informed as to the performance of the shares on the stock market. Late last year, Vito executed a will. Along with leaving various legacies, he also appointed his brother, Fredo, and his daughter, Connie, as executors. A few weeks ago, Vito went fishing with his best friend, Tom. At the end of the fishing trip, Vito said to Tom, "I have, during my lifetime, made more than adequate provision for Connie and Michael. However, I often worry about my other family. Therefore, I have left a legacy of 100,000 to you. I did this because I have absolute confidence that you will not use it for your own use. Instead, you shall divide it equally between my mistress Lucy, and my illegitimate son, Santino." Tom did not answer. Instead, he turned around, got into his car and drove home. Vito died two days later. Vito's will was found to contain the following dispositions: a) I leave 100,000 to Tom. b) I leave all of my shares in my haulage company Transit Ltd to my brother and executor Fredo, to hold on trust for any of my family members, as he shall, in his absolute discretion choose, within a period of 10 years. He may, within that period of ten years, distribute any income that may arise from the said shares amongst any of the residents of the West Midlands as he may in his absolute discretion think fit. c) 2,000 to the Aston Villa Football Club Supporters' Association, to be spent on a new bus to transport fans to away games d) I leave my residual estate to my wife, Kay. (1) Tom wants to know whether he can keep the 100,000 for himself In the scenario, Tom was appointed by Vito as "trustee" over a "general legacy" worth 100,000. As defined, a trustee is someone who has nominal title over a property that he/she holds for the benefit of one or more beneficiaries. He/she must show a high standard of care towards her/his beneficiaries and must never permit his/her own interests to conflict with those of the beneficiaries; this person must not profit from whatever that was entrusted to him/her (Martin, 2002). Based on the definition of the word, Tom can't keep the money for himself. It must be noted that there was no overt manifestation (verbal acceptance or rejection) from Tom at the time Vito conveyed his intentions which might be construed as non-acceptance of the responsibility, however, the law only requires the presence of three "certainties" for a trust to exist - certainty of intention (Vito worries about his mistress and illegitimate son so he's leaving some money for them), certainty of subject matter (100,000) and certainty of objects (mistress Lucy and son Santino). In the scenario, these three were explicitly present, therefore, Tom must shoulder this obligation. (2) Fredo wants to know what he should do with the shares in Transit Ltd, as he finds clause of the will very confusing There is nothing confusing in the provision of the will as far as the shares in Transit Ltd are concerned or who should benefit from the company's income. It was evidently declared that Fredo, aside from being one of Vito's estate executors, was also to act as trustee of Transit Ltd for the benefit of any of the family members within the period of ten (10) years. Likewise, he is to distribute income from the shares among residents of West Midlands whomever he sees is fit to get any from the fruits of the said company's business. In effect, income from Transit Ltd shares will be distributed among family members and those who live in West Midlands subject to Fredo's good judgment and preference. (3) The executors of the will have asked you about the validity of the gift to the Aston Villa FC Supporters' Association The gift to Aston Villa FC Supporters' Association is valid. First, it was established that such "pecuniary legacy" (a specific amount of 2,000) to the said association was clearly specified in the testator's (Vito) will. As characterized, the will is a document where in a person, called the testator (in this case, Vito), appoints executors to administer his estate after his death, and directs the manner in which it is to be distributed to the beneficiaries he specifies (Martin, 2002). In the scenario, Vito specified how much he wants to give to the association and for what purpose he was giving away that gift. As named executors, Fredo and Connie must abide by that provision of the will. If the executors intend to contest that gift, then they must prove beyond reasonable doubt that Vito didn't have testamentary capacity when the will was drafted. That is, they need to prove that Vito didn't have the mental capacity to execute a will at the time he signed it; that he didn't understand why he was making a will or that he didn't have a good idea of what he owns and didn't know who are the members of his immediate family or other natural objects of his bounty. If they cant satisfactorily do that, then they will need to follow whatever was stated in the will, whether they like it or not and whether they think it was prudent of the testator or not. In addition, the law provides that pecuniary legacies carry with them interest from one year after the testator's death. So it follows that IF the executors attempt to delay giving away that money, interest will accrue until such time that the association will receive that gift. (4) A bitter family dispute has also broken out since Vito's death. His wife, Kay, has a new boyfriend, Pete, who claims the shares and the penthouse belong to Kay. Connie and Michael dispute this, and want to know who actually owns the shares in Lucrative plc and the penthouse. There were facts that have been established before Vito's death. First, there was an expressed declaration that 5,000 shares of Lucrative Plc will go to Connie, Vito's daughter. Although Vito was no longer able to execute an actual share transfer in favour of Connie, such intention was manifested in a card wherein it was explicitly written that such number of stock shares be given to his daughter. In addition to the written note, was the fact that he occasionally emailed statistics to her in order to keep her informed as to the performance of the shares on the stock market, another manifestation that indeed he was bent on letting his daughter be aware of stock market circumstances in preparation for her coming into possession of a substantial amount of stock shares. Second, Michael has been held as the sole beneficiary of the London penthouse, it was expressedly given to him as a gift during his 16th birthday. Since according to the law, those under 18 could not yet enjoy the fruits or income of whatever trusts that have been left to them, Fredo is there, the brother and executor to see to it that Michael gets the penthouse when he gets to the age of maturity. Third, in the will, it was clearly stated that Kay was left with Vito's "residual estate." Residual estate refers to what remained of a deceased person's estate after all particular gifts have been made and all taxes and debts, probate costs, administrative fees and court expenses are paid. Most probably, the basis for Kay's boyfriend in their claim for the Lucrative shares was the fact that it was not stated in the will that Connie will get 5,000 shares of stock in that company. But that isn't so. In Milroy v. Lord, the vital tenet is that if the testator has accomplished everything in his power that is necessary to constitute a transfer of trust property, the court will consider the gift to be complete. Nevertheless, the general proposition is that everything must have been done which is necessary to complete the transfer, not necessary for all formalities to complete a legal transfer to have been carried through. In other words, if the Settlor has done everything it is necessary for him (under his control) to do, then the gift is completed in equity. Therefore, it can be safely concluded that despite the non-inclusion of a clause stating that Connie gets 5,000 shares of stock from Lucrative it was in principle hers because Vito has done everything necessary for him to do to convey the intention of giving those shares to his daughter. Connie owns the shares of stock while Michael owns the penthouse. Brief Background A trust is a fiduciary relationship wherein one person called the trustee gets a property, either personal or real, from another person referred to as the settlor to hold in his ownership and control for the use or benefit of a third person called the beneficiary, who has the right to enforce such beneficial interest through the Courts. The legal ownership is entirely vested in the trustee, however, the beneficiary has an interest recognised in equity and thus described as an equitable interest. A trust can be: (1) Express, this one is created by the express and intentional declaration of the Settlor. This pronouncement is usually a written deed, but can, in specific situations, be manifested by the behaviour of the parties concerned. Or a non-express, this is created without any express intention to do so by a settlor. This kind of a trust is usually referred to as an implied trust. It may be a presumed resulting trust, an automatic resulting trust or a constructive trust. (2) Private or Public, here the difference lies simply purely in relation to its purpose. For instance, a charitable trust for a public charitable purpose is a public trust. In the United Kingdom, such trusts must be registered, must file annual audited accounts, and are subject to supervision by Her Majesty's Attorney- General. Further, a public trust is always an express trust. (3) Discretionary or Non-Discretionary - A non-discretionary trust is where a trustee has no discretion as to which of a class of beneficiaries shall receive benefits, nor the amounts or timing of such benefits while in a discretionary trust the trustee has such discretion to a greater or lesser extent as the trust deed may determine. In addition, a bare trust is where a trustee holds property on trust for a single beneficiary absolutely. He has no power or discretion to do anything other than hold the property, and deliver it when requested by the beneficiary. Elements of a Trust A trust comes into being as a consequence of the express or implied wish or actions of the settlor. It is intrinsically a human relationship between a trust and beneficiaries with regards to the disposition of the trust property. Basically, in any trust, there are specific vital components. There must be a (1) Settlor, sometimes called a Grantor or a Trustor. The Settlor is likewise referred to as a creator or in the case of a trust set up upon death, a testator. In any event, the settlor is the person whose assets he has caused to be placed, given, granted or settled, into the trust or settlement. It is possible for a person to be both settlor and trustee. In which case, a person would, by a declaration, declare that, henceforth, he declares certain assets of his own to be held on trust by him for a named beneficiary; (2) a trustee, being the recipient of the assets given by the Settlor; (3) a beneficiary, or cestui que trust; (4) a trust property. Since the trust derives its existence from arrangements relating to property, it is impossible to establish any trust without Trust Property. The nature of the property is irrelevant. It is possible that the settlor and the trustee can be the same person. The settlor can be a beneficiary (she/he can be the sole beneficiary). But the trustee cannot be the sole beneficiary, though he/she can be one beneficiary where there are also other persons as beneficiaries. It is not imperative, except in circumstances relating to land, for the terms of the trust to be in writing. A trust can exist without written documents, although where there is the slightest complexity or room for doubt, a trust deed is evidently critical as evidence. An inter-vivos trust is, as the name suggests, one established between living persons. The settlor, while alive settles the property on the trustee. In establishing a trust by will, the trust can be set up on the death of the settlor. Called the testator, directs in his will that the trust property be taken from his estate and given to the trustee to establish the trust. Since a trust is not dependent upon a document in writing, or the existence of a contract, or upon any public registration procedure, the existence and validity of a trust is judged by reference to the criteria broadly described above. The transfer of the trust property to trustees has the nature of a gift. Since the conveyance of the property to the trustee is critical element in the creation of a trust, a trust cannot come into being until the trust property has been so conveyed, or, at least, the process of conveyance has been irreversibly instigated. Once the trust is in existence, additional properties can be added to the trust property by additional settlements. The longest period for which a trust can exist is 150 years (Trustee Act 2001, sec. 38). On the other hand, the maximum period can be, as established in the old rules of equity, the duration of any relevant life or lives in being at the date of the trust deed, plus a further period of 21 years from the date of death of that life in being. Sources of the Law of Trust and Legislations that Govern it The law on Trust was a derivative from the Rules of Equity, which evolved in England in the Middle Ages, and which, surprisingly persists to develop. Since a trust is a form of human relationship, trust law, at its core, is concerned with the recognition of that relationship, enforcing its provisions and providing remedies where there has been a breach of such relationship. Legislation has not been used to create trust law, but to guide it and to check it when it threatens to develop undesirable practices, or to clarify uncertainties. The legislations that govern trusts are: Trustee Act 1961; Variations of Trust Act 1961; Perpetuities and Accumulations Act 1968; Powers of Attorney Act 1971; Power of Attorney Act 1983; Recognition of Trusts Act 1988; Trusts Act 1995; Purpose Trusts Act 1996; Trustee Act 2001. Other legislation which are relevant to trusts are: Settled Land Act 1891; Settled Land Act 1983; Public Charities Act 1922; Charities Act 1962; Charities Registration Act 1986; Wills Act 1985. References/Readings Martin, E. (2002). A dictionary of law. Oxford University Press. Available at http://www.oxfordreference.com/ Hicks. 2001, The Trustee Act 2000 and the modern meaning of 'investment.' Trust Law International, 15, 4, p. 203 Getzler. 2002. Legislative incursions into modern trusts doctrine in England: The Trustee Act 2000 and the Contracts ( Rights of Third Parties) Act, 1999. Global Jurist Topics, 2, 2. www. dictionary.law.com Trustee Act. 2001. Sec 38 Read More