The Law of Trusts - Case Study Example

The Law of Trusts Answer: In order to Advise Tony and Nathan it is necessary to consider two of the maxims that operate closely together are ‘equity will not perfect an imperfect gift’ and ‘equity will not assist a volunteer’. It is a pithy way of stating that, where a trust is incompletely constituted or a gift is imperfectly made, equity will not give its remedy of specific performance to an intended beneficiary who is a volunteer, or to intended donee. It is also necessary to consider the Law of Property Act 1925 which specifies certain formalities relating to the declaration of trusts and the disposition of beneficial interests. A promise contained in a deed is called a covenant. Where a promise is contained in a deed it can be enforced at common law. In 2004 Brian entered into a covenant under a trust deed with his children Pat and Richard. Pat and Richard can sue against Brian at law for damages to compensate Pat and Richard for their loss of expectation if Brian does not perform his promise. In Cannon v Harley1 a father promised his daughter by deed that he would pay to her any sum exceeding £1,000 which he received under his own father’s will. When he failed to do so, she successfully sued to him at law for the amount she would have obtained had his promise been performed. It is important to note, however, thatthe same promise was not enforceable in equity. Equity will enforce promises made for consideration, but not ones whose only claim to enforcement is that they are contained in a deed. None of the property referred to in the 2004 covenant has been transferred to Pat and Richard. Brian appointed Tony and Nathan as his executors and trustees under his will. Now the question arise who can enforce the covenant. If the Contract (Rights of Third Parties) Act 1999 were to apply to covenants (which is doubtful) then assuming the requirements of the Act were satisfied, Pat and Richard would be able to enforce the covenant at law and obtain damages for lost expectation. The covenant would not, however, be enforceable in equity. Tony and Nathan as his executors and trustees under Brain will. Being a party to the covenant, they will have a right to sue Brian on it non-performance of the covenant. It can be argued that they hold the benefit of the right to sue on the covenant on trust for Pat and Richard. If this argument, the ‘trust of the covenant’ argument, can be made out, then Pat and Richard can compel Tony and Nathan to sue Brain. The assumption is that Tony and Nathan would recover substantial damages, which they would then hold on trust for Pat and Richard. There are three difficulties, which stand in the way of this argument succeeding, To be a valid trust, it is necessary three certainties, formalities, and perfect constitution. A trust will be perfectly constituted where the rights, which are to form the subject matter of the trust, are vested in the intended trustee. The principle laid down in the case Milroy v Lord2, Lord Tuner LJ explained three ways of benefiting third parties. The easiest way to benefit a third party is by an outright gift. If the Beneficiary is minor and gift is real property then it is not possible. In this situation he need to create a trust or declare himself as a trustee. The transfer to the trustees must accord with the rules applicable to the property concerned. Legal estates in land must transferee by deed, equitable interest, and copyright by writing (which may include an electronic document), chattels by deed of gift or by an intention to give coupled with a delivery of possessions, a bill of exchange by endorsement, and shares by the appropriate form of transfer followed by registration. The traditional approach also adopted in subsequent cases like Re Fry3, required all stage should be completed. However, if the settlor wants to become a trustee himself he must declare it in clear and unequivocal terms, which carry out man’s intention. In Richards v Delbridge4, Sir George Jessel MR declared that: ‘he need not use the words “I declare myself a trustee” but he must do something which is equivalent to it.’ a. Transfer to Pat and Richard the five thousand shares that he held in Echo Ltd to be held by them on trust for Tony; A disposition of an equitable interest is required to be in writing; otherwise, the disposition of is void. Section 53 (1) (c) of the Law of Property Act 1925 provides: "A disposition of an equitable interest or trust subsisting at the time of the disposition must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will." Here the word "subsisting" in Section 53 (1) (c) indicates that the subsection only applies where the equitable interest has already been separated from the legal estate. Generally this section has been interpreted on a number of occasions in the House of Lords, namely in Grey v IRC 5, Vandervell v IRC 6 and Oughtred v IRC7, in the court of appeal, in Re Vandervell’s Trusts (no. 2)8. In each of this cases it fell to be determined whether a particular transaction attracted ad valorem stamp duty or income tax. However, here it is main issue whether it a valid trust or not because equity will not assist a volunteer. Now it needs to discuss Stamp duty and Ad valorem duty. Stamp duty is a tax on documents only; it has in recent years been restricted in scope, but it still applies to transfers of land and to sales of shares. The consequence of failure to have a document stamped is that it cannot be produced as evidence in court. Ad valorem duty is a duty that varies according to the value of the property transferred. Such a duty is payable on a conveyance or transfer on sale. Until 1985, ad valorem duty was payable on a voluntary disposition as if it were a transfer on sale, which meant that the stamp duty was frequently payable on the creation of a trust. Prima facie, ad valorem duty (as opposed to a fixed duty of 50p) was payable only if the document was effective to dispose the beneficial interest. No a d valorem duty was payable if, therefore, if only the legal interest passed on a transfer, e.g., on a change of trustees. On the other hand, ad valorem duty was payable on a transfer of shares to a full owner, because the transfer passed the beneficial interest as well as the legal title. In Re Rose (1952), the court held that if the settlor done everything he could to divest himself of the interest in the property and to vest it in the transferees, the transfer will be effective even if there still remains something to be done. However, to perfect their legal title, transferee must apply for registration. A similar conclusion was reached in Mascall v Mascall [1984], in respect of the execution of a transfer concerning registered land. An even further dilution of the Milroy v lord principle recently occurred in Pennington v Waine [2002], where the CA said that the donor need not has done every thing necessary to perfect the gift. To be fair, the number of reported cases where the courts actually have applied equitable principles relating to imperfect gifts to unconstituted trusts can be counted on the fingers of one hand (some would say on the fingers of one foot). Nevertheless, trust lawyers generally accept that courts would decide this way, should they be so called on. From the above discussion it can be concluded that may be court will consider Re Rose principle. Then transfer to Pat and Richard the five thousand shares that he held in Echo Ltd to be held by them on trust for Tony, Tony tank the property beneficially. b. Transfer to Pat and Richard on trusts for Nathan some prime agricultural land from the farm, which he, Brian, will inherit under his father's will: To advise Nathan two thinks need to consider. First of all whether it is a valid trust or would be void for lack of formalities. Otherwise Pat and Richard hold resulting trust for Brian’s estate, or they take the property beneficially. However, equity assist a volunteer than Pat and Richard hold the prime agricultural land from the farm for Nathan. Anyway, this prestidigitation is necessary to allow the transfer to take effect despite lack of compliance with s.53 (1) b of the LPA 1925. Before attempt to answer this question it is essential to discuss s 53 (1) (b), and s 53 (1) (b), of the Law of Property Act 1925. With regard to trusts of land, the Law of Property Act 1925, s 53 (1) (b), provides: "A declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will." The writing is required as evidence of intention; the declaration need not itself be writing. Failure to comply with the requirements of s. 53(1) (b) renders the trust unenforceable, and not void [Gardner v Rowe9]. The signature will normally be that of the settlor, although there is authority that the transferee of the land may sign. But the problem arise that whether the will is valid or not. In 2006 Brian's father died leaving his farm to Brian under his will. Last month Brian was struck by lightning whilst playing golf. A will is a formal statement of the testator's intentions for the disposition of his property, which, according to s.9 of the Wills Act 1837 must be In writing, Signed by the testator, Signed by two people who have witnessed the testator's signature PT is a right given to a volunteer whenever a landowner stands by allows the volunteer to improve his property by incurring expenditure on the property on the assumption that there will be a transfer to him [Pascoe v Turner]. It works as a shield not as a sword. There may be detrimental reliance on the part of the donee or beneficiary. In Dillwyn v Llewellyn10, court held that, it would have been unconscionable to deny the son an interest in the property. The modern approach to PS is to broaden its scope and focus on the defendant’s unconscionably, rather then strict, rigid rules. This test was laid down by Oliver J in Taylors case. The Rule in Strong v Bird: The first exception is the rule in Strong v Bird11. If there is an intention to give the property to a beneficiary or realise a debt, the intention remains unbroken until the donor’s death. The donee is then appointed an executor of the donor’s estate and so an imperfect gift will be perfected upon the death of the settlor. The rule originally applied to debts only but it was extended in Re Stewart [1908], to gifts of realty and personality and in, Re James12 the same principle was held to apply to administrators. In Re Rose13, the court held that if the settlor done everything he could to divest himself of the interest in the property and to vest it in the transferees, the transfer will be effective even if there still remains something to be done. However, to perfect their legal title, transferee must apply for registration. A similar conclusion was reached in Mascall v Mascall14, in respect of the execution of a transfer concerning registered land. An even further dilution of the Milroy v lord principle recently occurred in Pennington v Waine15, where the CA said that the donor need not has done every thing necessary to perfect the gift. So it can be concluded Brian get the property if court apply Proprietary principle. Nathan will take the property beneficially. c. Transfer to Pat his house Blackacre when Pat gets married. Pat was engaged to marry Jonathan; A volunteer is a person who has not furnished consideration for the creation of the trust. Consideration in equity consists of both common law consideration (money or money’s worth) and (in certain instance) marriage. It is clear that a covenants (Although it may be enforceable at common law) does not complies consideration in equity. A trust set up in contemplation of marriage, usually to benefit the children of the marriage. Although anybody to create such a trust, in practice it is usually one or both of the marriage partners, or their parents. Although most of the case-law on marriage settlements is quite old, trusts of this form are still used today, because when properly set up they can reduce the children's liability to Inheritance Tax. The settlement usually contains a Covenant To Settle property acquired after the marriage on the trust. The defining feature of such a trust is that it can be enforced by the children of the marriage, despite their not having offered consideration that would be recognized at common law. In addition, if the settlement does contain covenants to settle, these covenants can enforced by the children, against despite their not being parties to the covenants. If marriage is to constitute consideration, the trust must be made either before in consideration in a particular marriage, or (if made after the marriage) in pursuance of an ante-nuptial agreement to make such a trust. Further more, only certain persons within a marriage settlement a treated by equity as provided by consideration: Re Cooks Settlement Trusts16. But they may come within if their interest are so closely intertwined with those of the issue of marriage in question that they cannot be separated: A-G v Jacobs Smith17. Next of kin are outside the marriage consideration: Re Plumptre (1895). In Re Pryce18 as part of a MarriageSettlement, the settlor entered into a covenant with his trustees to transfer certain property into the trust to benefit his children. In the event of there being no children to take the benefit, the trust was to benefit his next of kin. As it turned out there were no children, and the settlor died while holding title to a large amount of property that he should have put into the trust under the terms of the covenant. The settlor's next of kin knew that they would not be allowed to sue the settlor's estate for specific performance, as they had offered no consideration to support the covenant. So instead they persuaded the trustees to sue for breach of covenant at common law. In principle this action ought to have succeeded -- the fact that the trustees had offered no consideration was irrelevant, because they agreement entered into by the settlor was by deed, and no consideration was required. In fact the action failed. Various reasons were offered, but the only one of any substance is that the court would not allow the next of kin to succeed in an action through the trustees, that they would not even have had standing to bring in their right. This is a strange and much-criticised decision. For, while it is a general principle that `equity will not assist a volunteer', there is no principle that equity should actively hinder a volunteer. Earlier this year Pat married George. Transfer to Pat his house Blackacre when Pat gets married. Pat was engaged to marry Jonathan; earlier this year Pat married George. Illegitimate and adoptive children do not have standing to enforce the trust, or any covenants to settle, because these are not children `of the marriage'. However, beneficiaries of the settlement other than those who have offered consideration cannot enforce the covenants, if they have not provided consideration of their own (Re Plumptres Marriage Settlement19). Neither can they ask the trustees to sue the covenantor at common law on their behalf even if the trustees would have a good cause of action in breach of covenant. So George and Jonathan can sue to enforce the trust. d. Transfer to Richard one of my other houses; A private express trust cannot be created unless the three certainties are Present. In Knight v Knight20 Lord Langdale, a private express trust cannot be created unless three certainties are present; these are certainty of intention, certainty of subject matter and certainty of beneficiaries. Settlors specify the number of beneficiaries to create fixed trust, for example a trust in favour of ‘my children’. In Hunter v Moss21, the CA held that a declaration of trust of 50 shares from a holding of 950 did not fail for uncertainty of subject matter. Here intention is clear that Brain has shown an intention to create a trust for Richard. Beneficiary is also certain. Transfer to Richard one of my other houses creates a problem regarding certainty of subject matter. Now it is necessary to advise Tony and Nathan whether they will take the property beneficially or hold the house as a resulting the trust for the testator estate. In this case Brain use precatory word to create a trust. In Sprange v Barned22 a testatrix transferred property by her will to Thomas Sprange for his sole use and added that at his death the remaining part of what was left that he did not want for his own use was to be divided equally between two named persons. The Court decided that Thomas Sprange was not a trustee, and took the property beneficially. In Boyce v Boyce23, A testator devised two houses to trustees on trust to provide one for Maria, whichever she might choose, and the other to Charlotte. Maria died before the testator and had failed to make a selection. The question in issue was whether Charlotte might acquire one of the properties. The Court decided that a personal obligation to select was imposed on Maria. No other person could have made the selection and the intended express trust failed but a resulting trust was set up for testator’s estate. If court follows this case then the trust will be failed and Tony and Nathan cannot take the property beneficially and they will hold the house as a resulting the trust for the Brain’s estate. Theoretically, according to Milroy v Lord, all four stages required to transfer to be completed before the trust was upheld but practically this principle is relaxed now. To honour the intention of settlor and protect unconscionability equity will perfect an imperfect gift and equity regards, as done that which ought to be done. None of the property referred to in the 2004 covenant has been transferred to Pat and Richard. Brian appointed Tony and Nathan as his executors and trustees under his will. If the 1999 Act does apply to covenants to settle, then this means that beneficiaries who have not provided consideration ‘volunteers’ will be able to sue the settlor. This issue only applies to volunteers because non-volunteers should normally be entitled to specific performance. Bibliography: 1) Hanbury & Martin, Modern Equity, 17th Edition, (2005), London: Sweet & Maxwell, 2) Penner, J. E. The Law of Trusts, 4th Edition, (2004), London: Butterworths, 3) Ramjohn M. Unlocking Trusts, 1st Edition, (2005), Hodder & Stoughton, 4) Margaret wilkie & Rosalind, Equity & Trusts, (2004 -2005), Oxford University Press. Read More