Effect of Illegality on the Applicability of the Presumptions of Resulting Trust - Coursework Example

Name Course University Tutor Date Equity and Trust: The effect of illegality on the applicability of the presumptions of resulting trust and advancement; and prospects for reform in this area of law Resulting trust and advancement are also referred to the twin presumptions. Resulting trust and advancement are rebuttable presumptions provided by equity in order to assist family members or close friends to deal with cases involving financial, and, or property proceedings. However, as equitable presumptions in law cases, resulting trust and advancement presumptions have always been seen to have significant limitations, mostly because of unavailability of cogent evidence given to the Court. More so, where property is transferred for an illegal purpose, the consequence of an application to regain the property significantly depends on the presumption applicable. However, this distinction is generally seen as indefensible. The following paper critically evaluates the effect of illegality on the applicability of the presumptions of resulting trust and advancement. Next, the prospects for reform in this area of law are examined. Background Families or friends often involve in transactions that involves the transfer of money or property from one party to another. However, in most cases, there is often lack of clear legal documentations. In the absence of clear documentation, Courts may use equitable presumptions such as resulting trust and advancement to determine the nature of money or property transferred within families. However, where property is transferred for an illegal purpose the outcome of an application to regain the property will depend significantly on the presumption applicable, but this distinction is generally seen as indefensible (Moffat 2009, 313). Definitions Presumption of resulting trust can be defined as the trust created where a property is not well disposed off (Edwards & Nigel 2007, 13). The trust is basically a property concept and indicates that any property that individuals do not effectually dispose of remain their own. A presumed resulting trust occurs where the transfer of property fails and there lacks a reason to assume that it was intended as an outright gift. Resulting trusts operate on the principle of ‘common intention’. This entails the idea that a resulting trust is a conglomerate of the intention of the settlor’s and the knowledge of the trustee that he or she is not intended to be the beneficiary (Edwards & Nigel 2007, 13). The principle in all cases of the presumption of resulting trusts is that equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not, thus for the recipient’s own purposes. It is supposed to be this way so that such a person will not be permitted to treat the property as his/her own or to use it for other purposes other than the stated one. If the common intention is that the property is transferred for a specified purpose rather than to become the property of the transferee, the transferee is forbidden to keep the property for any reason that the specified purpose cannot fulfil (Edwards & Nigel 2007, 15). Presumption of advancement can be defined as a presumption placed in trust, contract and family law that suggests that the property transferred from spouse to spouse, or parent to child, is a gift (Glister 2011, 41). Where property passes between individuals, the law presumes that the relationship between the individuals makes it an outright gift, and hence not subject to a resulting trust in the event of a failure. Situations in which presumptions of resulting trust and advancement occur Presumed resulting trusts occur in at least one of three situations. These are; where the property is a voluntary gift, or where there is a contribution to the purchase price, and where the presumption that it was an outright gift can be rebutted (Glister 2011, 42). Presumptive resulting trusts are transferred made, for instance by person X to Y where the law creates the rebuttable presumption of resulting trust that applies if the intention is not made clear by person X. Written evidence is produced in this case. For instance, when X transfers property to Y, unless the transfer was made between spouses, or parent and child, in the absence of any other advance, the law presumes that a resulting trust has been created for person X (Glister 2011, 42). The main categories of fact situations that give rise to the presumption of resulting trust include where X makes a voluntary transfer of property to Y; and where X made a monetary contribution to the purchase of property for Y (Glister 2011, 42). However, the presumptions are easily rebuttable, and this can be done by evidence of any intention that is inconsistent with such a trust, and not only by the evidence of an intention to give a gift. Some critics have argued that the presumption of resulting trust arises as a result of a lack of intention to transfer interest of benefit (Glister 2011, 42). However, this view has yet to receive satisfactory judicial endorsement. The presumption of advancement is sometimes applied by default when the transfer of the property or money is from a father to a child or between husband and wife (Glister 2011, 40). It is only on the availability of strong evidence that this can be rebutted. The presumptive advancement is based on the concept that where property is transferred to a party to whom the transferor had an obligation to support, it is presumed to be an advance of the interest that the dependent might reasonably expect to receive on the death of the transferor (Glister 2011, 40). Usually, when a donor purchases property in the name of a recipient, or transfers property to the recipient, equity always applies a presumption of resulting trust, meaning that the default position involves the recipient holding on the trust for the donor. For instance, in cases where monies in a joint or investment account are shared between a parent and an adult child [Madsen Estate v. Saylor]. The father opens the account and deposits a large sum of money which he shares with an adult daughter. Unfortunately, the father passes away but the contents of the account are passed to the daughter since the accounts carry a right of survivorship. However, the daughter’s entitlement to the funds are challenged by the other beneficiaries in the father’s will who claim that the account’s content were not intended as gifts, and should be included with the disposition of the rest of the father’s estate. In this case, the aim of the court is to determine whether or not the true intention of the father in creating a joint account was to provide a gift to the daughter (Madsen Estate v Saylor) [2005]. At times, from the relationship of the parties, for instance father and daughter, in this case, the presumption of advancement applies, such that the recipient is assumed to be the full legal owner rather than a trustee (Hudson 2009, 23). Worth noting is that both presumptions can be rebutted or reinforced to become redundant, by the presentation of evidence (Hudson 2009, 23). The common law has developed a rebuttable presumption that in situations where the gratuitous transfer is challenged, the transferee bears the burden of proving on a balance of probability that the transfer was indeed gift; otherwise, it is a resulting trust, where the property is held by the transferee on behalf of the transferor, who still retains the equitable title (Moffat 2009, 313). While this procedure follows the general rule, an exception occurs to the presumption when the transfer is made from a father and to one of his children (Madsen Estate v Saylor) [2005]. In these situations, the presumption of advancement reverses the onus so that such transfers are presumed to be gifts unless the challenger of the transfer can prove that it was not intended as such. When a donor seeks to rebut a presumption of advancement, there is doubt over the exact point to which that evidence must be directed (Hudson 2009, 27). It is a question of whether the donor shows that they intended a different arrangement, or whether it is enough to show only a lack of intention to make a gift. This questions whether the presumption of advancement is simply a description of when the presumption of resulting trust does not apply or whether the presumption of advancement rebuts the presumption of resulting trust (Hudson 2009, 28). It is almost obvious that the presumption of advancement merely rebuts a presumption of advancement rather than preventing it from occurring in the first place. Illegality in the presumptions Resulting trust arise in equity rather than common law because equity recommends ‘clean hands’ (Tan 1995, 196). Some jurisdictions accordingly might impose equitable defences such as unclean hands, laches and the responsibility to do equity. Where a transferor has transferred property for an unlawful purpose and still gained the benefit, a court might still hold that the person has waived his right to claim a resulting trust, in this case as a settlor. In such cases, the court balances the transferee’s illegal enrichment with the enablement of cheating by the transferor. This is because enabling a cheater in the process of gaining from his transaction would erode the court’s legitimacy. In other cases, other jurisdictions may elect to disregard any unlawful purpose. In situations where illegality is involved, it may become difficult to distinguish implementation of a resulting trust presumption, as implied by the operation law, from an oral express trust, as implied by the facts. A transferor that fails upon one presumption might still prevail upon the other. In Tinsley v Milligan, the House of Lords faced the question as to whether a plaintiff is entitled to rely on a presumption of resulting trust occurring in the context of a transaction entered to facilitate an illegal purpose (Tinsley v Millgan [1994]. A house had been purchased in Tinsley’s sole name using the joint money of Tinsley and Milligan. The reason for this occurrence was to allow Milligan to appear to be a mere lodger in the property, rather than a co-owner, so that she could make false claims for the state’s social welfare benefits. However, after the breakdown of their relationship, Milligan stepped forward to claim that Tinsley held the house on trust for them in equal shares. On the other hand, Tinsley claimed that the court should not enforce the claims put forward by Milligan because of the illegal purpose by which the transaction had taken place. Milligan demanded a strict application of the equity maxim. Conventionally, it occurred that if a person could seek to rebut presumptions but did so by relying on an illegal act to prove that the resulting trust was intended, the equitable maxim is applied (Tan 1995, 197). The equitable maxim requires that one who comes to equity must come with ‘clean hands’. Hence, the presumption takes place and no resulting trust is created, for instance as witnessed in Mucklestone v Brown. Furthermore, where the transfer purpose involves illegality, as seen in the case of Gascoigne v Gascoigne, the courts cannot uphold such as a resulting trust (Tan 1995, 197, 202, 206). This rule was further modified through the decision in Tinsley v Milligan. In the case, the equity maxim would obviously have the consequence that Tinsley was solely entitled to the property despite the fact that she had been as much party to the illegality as Milligan. Both accepted that the property had been bought for joint ownership, although it was also with Tinsley’s knowledge that Milligan was transferring her ownership for an illegal purpose (Tinsley v Milligan [1994]). Whilst this might have seemed a harsh result between the specific parties, especially given that the falsely claimed social security money had been repaid, the strict rule was intended to operate as a deterrent to those who might be tempted to involve in illegal transactions in the future. However, majority of the Courts of Appeal rejected the application of such a strict principle in favour of the adoption of a public conscience test that would vest the court with discretion to balance the consequences of neither granting nor refusing relief to the person seeking to claim an interest (Williams 2009, 650). On the other hand, the House of Lords rejected the discretionary approach instead favouring the application of a strict rule to determine when a plaintiff could assert an interest. However, the House was divided as to the application of the appropriate rule. Some Lords held that the equitable maxim requiring clean hands should be strictly applied (Williams 2009, 650). However, majority of the Lords adopted an evidential approach whereby a claimant is entitled to enforce an equitable interest provided that the individual did not have to rely on the fact of the illegal purpose in order to establish that interest. The House decided that Milligan could claim an equitable interest because of her contribution to the purchase price, which is a lawful act, and she was relying on, plus it was not the associated illegal act (Williams 2009, 650). Although the initial registration purpose was illegal, the purpose of the purchase itself was not. Nevertheless, since the Tinsley vs. Milligan, the courts seem to be more willing to examine the intention of the parties instead of strictly relying on the maxim that ‘he who comes to equity must come with clean hands’ (Williams 2009, 650). Using this equity interest, Milligan’s intention was to rely on the trust benefits by contributing to the purchase price. Milligan was entitled to assert her entitlement to half-share of the equitable ownership of the property since all she was required to do to establish her interest was to prove that she had contributed to the purchase prices. This would effect to a presumption of resulting trust in her favour, and she did not need to rely on the illegal purpose underlying the transaction (Williams 2009, 650). Other illegality issues and the need to withhold the equity interest have been observed in several other cases. In Silverwood v Silverwood where an elderly woman transferred money to her children to enable her to claim income support to contribute towards her residential care costs (Williams 2009, 649). In Lowson v Coombes, a man and his mistress purchased a flat together but it was put in her sole name so that the wife would not be able to maintain any claim of it (Williams 2009, 649). In both the cases, the plaintiffs were able to establish the equitable interest in the property without relying on the underlying illegal transactions (Williams 2009, 649). The Effects of Illegality in Equitable Presumptions From then, the standard law on equity indicates that the title to property passes at both law and equity even if the transfer is conducted for an illegal purpose. First, the fact that the title has been passed to the transferee does not necessarily preclude that the transferor from bringing an action for restitution (Williams 2009, 649). Second, according to the standard law, the transferor’s action will fail if it would be illegal for the transferor to retain any interest on the property. Third, subject to the second requirement, the transferor can recover the property if he or she can do so without relying on the illegal purpose. Fourth, that it will almost without change be so where the illegal purpose has not been carried out (Williams 2009, 650). However, it may be otherwise where the illegal purpose has been conducted and the transferee can rely on the transferor’s conduct as inconsistent with his/her retention of a beneficial interest (Edwards & Nigel 2007, 103). Fifth, the transferor can lead the evidence of the illegality of the purpose whenever it is mandatory for the individual to do so provided that he has withdrawn from the transaction before the illegal purpose has been fully or partly put into effect. Moreover, it will be necessary for the transferor to do so under two conditions. One, if the transferor brings an action at law, or two, if the transferor brings proceedings in equity and needs to rebut the presumption of advancement. Sixth, the only way in which a man can protect his property from creditors is by depriving himself of all the attached beneficial interest. In this case, the evidence that he transferred the property in order to offer protection from creditors thus does nothing by itself to rebut the presumption of advancement. Instead, it reinforces it (Edwards & Nigel 2007, 104). To rebut the presumption, it is required for the person to show that he intended to retain a beneficial interest and hide it from the creditors. Lastly, it is forbidden for the court to conclude that this was the person’s intention without compelling circumstantial evidence to this effect. The transferee’s identity and the circumstances in which the transfer was made would be extremely relevant. It is unlikely that the court would reach such a conclusion where the transfer was made in the absence of an imminent and perceived threat from the known creditors (Edwards & Nigel 2007, 103). From case experiences in the Courts, it is shown that a common form of illegality is where the transferor is worried about insolvency or bankruptcy, and transfers the property to avoid the need to make payment to the creditors. According to the Insolvency Act, courts are empowered to reverse any transfer which removes assets from creditors with the intention to avoid their claims (Williams 2009, 649). Moreover, the creditors do not have to be creditors at the period of the transfer. Rather, it is enough that they be creditors after the transfer or sale, as witnessed in Midland Bank v Wyatt (Williams 2009, 649). It is clear that evidence for the right ownership of property may be inadmissible because of illegality. In Tinsley v Milligan, the defendant won because a presumption of resulting trust applied to the transaction, but where she would have lost is the court required her to rebut a presumption of advancement (Williams 2009, 650). According to the Lords, where the presumption of resulting trust applies, the plaintiff does not have to depend on illegality. If the plaintiff proves that the property is vested in the defendant alone but that the plaintiff provided part of the purchase or money or involuntarily transferred the property to the defendant, the plaintiff establishes the claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the resulting trust presumption. It has been stated that other cases cannot evoke similar sympathy on the part of the court. For instance, cases in which the fraud is far more serious than in the situations demonstrated in Tinsley v Milligan, Silverwood v Silverwood, or Lowson v Coombes (Edwards & Nigel 2007, 212). This includes cases where the illegality is uncovered after a lengthy police investigation rather than a confession, and a prolonged criminal trial. Other cases involve where terrorists, armed robbers, or such groups secure a base for their criminal activities by buying property in the name of a third party not directly implicated in those activities (Tan 1995, 98). In such cases, there will almost certainly be no presumption of advancement. However, it makes one to question whether criminals such as these or their personal representatives are entitled to invoke the assistance of a court of equity in order to establish an equitable interest in the property. Prospects for Reform in this Area of Law Application of the equity law in the ways demonstrated above has been subjected to criticism especially where illegality is involved (Tan 1995, 97). In the light of such criticism, the Law Commission has recently reviewed the law regarding illegality. This has recommended the abandonment of the ‘reliance principle’ which was adopted in Tinsley v Milligan in favour of granting the court discretion to declare a trust invalid or illegal. The range of relationships in which equity recognises a presumption of advancement reflects a 19th century setting understanding of family responsibility (Glister 2011, 60). However, it is clear that in this era, the strengths of the presumptions differ to reflect differing social circumstances but the state of the law in this area remains unsatisfactory. The presumptions of resulting trusts largely operate as a mechanism for allocating the burden of proof when there is a dispute as to intended effect of a transaction on the beneficial ownership of property Moffat 2009, 313). Moreover, arbitrary factors like whether a claim is brought wife against a husband or a mother against a son must not be largely depended on to effect an outcome in a presumptive law. This is because in the area of matrimonial property, the presumption of advancement is applied between a husband and wife, but the presumption of resulting trust between a wife and a husband (Moffat 2009, 314). This application may not result in co-ownership of property even when a married couple desires this. The public needs an approach that operates consistently, regardless of the nature of the presumption applicable. The operation of the presumptions can be criticized on the grounds that they are archaic and anachronistic, and continue to enshrine outdated paternalistic and chauvinistic values. Alternatives for reform in this area of law are many. The wholesale introduction of community of property during marriage should be discarded as some spouses in the contemporary society would prefer independent management of property. Money or property transferred from one spouse to the other for whatever purpose should automatically make the other, the owner of the property. The general rule should give way to a contrary intention on the part of the transferor, provided that the contrary intention is known to that other spouse. This revision would make the presumption of advancement to be applicable to both husband and wife. List of References: Edwards, R., & Nigel, S. 2007. Trusts and Equity, 8th Ed. UK: Pearson Longman Glister, J. 2011. Is there a presumption of advancement, Sydney Law Review, vol. 33(39), 39-66 Hudson, A. 2009. Equity and Trusts, 6th ed. U.K: Routledge-Cavendish Madsen Estate v Saylor. [2005]. 261 DLR (4th) 597 at [32] Moffat, G. 2009. Trusts Law, 5th ed. Cambridge: Cambridge University Press Tan, G.,S. 1995. Effects of illegality: A comparative study in French and English Law, International and Comparative Law Quarterly, vol. 44(1), 196-213 Tinsley v Milligan. [1993].3All ER 65 at [90] Williams, R. 2009. Statutory discretion to decide the effect of certain ‘illegal’ trusts, Trusts & Trustees, vol. 15(8), 649-655 Read More