Trust Law Issues - Essay Example

Introduction The law in relation to the validity and enforceability of trusts under the general principles of Equity and Trust is not altogether straightforward. The general view taken by the court is that once the intention of a founder of a trust is determined, the courts will attempt to enforce the trust provided the declaration of trust complies with the substantive and procedural provisions of both statutory and common law. This can be a complicated exercise as there are a number of circumstances and facts that guide the court and each case is determined by its own facts. As a result there is no uniform set of rules capable of general application. As often happens, the applicable standards in one case may be obsolete in another case. Therefore, ascertaining the validity and enforceability of a declaration of trust can be an onerous task. Ivor’s attempt to create trusts is no exception as will be borne out in the preceding passages. Seaside Cottage and Secret Trusts When Ivor Fortune conveyed his seaside property to his brother Max with specific instructions that he hold the same in trust for Ivor’s mistress Gloria, absolutely, the instructions constituted a declaration of trust. Whether or not it amounted to a valid and enforceable declaration of trust is another matter entirely. Certainly Ivor’s instructions to Max were sufficient to create a trust since a declaration of trust can be created by word of mouth ‘or even inferred from conduct.’1 In fact, failure to use specific words, do not render the creation of a trust invalid as ‘no particular form of words are necessary.’2 Indeed Ivor’s instructions to Max are consistent with the three requisite certainties necessary for the creation of a trust. These certainties are certainty of subject matter, intention as well as objects. The subject matter is the trust property, intention is words and conduct capable of defining the intent by the donor to create a trust and the objects are the intended beneficiaries.3 That said, the subject matter is the seaside property, the intention to create a trust are contained in the instructions given to Max and the object is Gloria. The validity of the trust is compromised by the fact that it is not an ordinary declaration of trust. The trust created by Ivor is a secret trust which requires closer examination. A secret trust is created when a donor makes a transfer of putative trust property to another by virtue of a deed of trust or a will or by some other instrument while separate and apart from the bequest requests that the property be held for the benefit of another. The person in whom the legal title is vested is required to carry out the wishes of the donor provided he agrees to hold the property as requested or if he acquiesces by remaining silent.4 When Ivor communicated his desire to have the bequeathed seaside property held upon trust for Gloria absolutely, there is no evidence of Max’s response. We can assume for present purposes that he remained silent and that silence will be construed as consent to Ivor’s wishes. The validity and enforceability of secret trusts were tested in Gold and Gilbert v Hill. The case involved a non-testamentary disposition. In this case, Gilbert named Gold as the beneficiary of a life insurance policy worth 350,000 pounds sterling. On the insurance policy, Gold described as Gilbert as the executor of his estate. Some time after this, Gilbert executed a Will in which his solicitor, Hill was appointed as the executor of his estate with his wife named as the only heir to Gilbert’s estate. Following the formation of Gilbert’s Will, he became romantically involved with Carol. At some stage following his involvement with Carol Gilbert informed Gold of the contents of his insurance policy and advised him that ‘if anything happens to me you will have to sort things out. You know what to do - look after Carol and the kids. Dont let that bitch get anything.’5 Following Gilbert’s death, Gold and Carol, both seeking declaratory relief, namely; Gold held the proceeds from the insurance policy upon trust for Carol, pursued the matter in the courts. The court found that the information contained in Gilbert’s insurance enrollment form as well his communication to Gold favored the position that Gilbert’s intention was for Gold to hold the insurance policy proceeds in trust for Carol. The facts of Gold’s case can be distinguished from the facts of Ivor’s case to the extent that there is no evidence capable of corroborating Ivor’s intention to create a trust. The conveyance of the seaside property to Max alone does not indicate that Ivor intended that Max hold the property for anyone other than himself. In Gold’s case, the term executor on the document vesting the funds in Gold indicated that Gold was not a beneficiary. Since Gold divulged the content of his conversation with Gilbert, there was evidence of Gilbert’s intended beneficiary. Moreover the validity and enforceability of a secret trust is ascertained by whether or not the donor’s intention was for the creation of moral or legal obligations. In Re Cleaver, Norse J said ‘I would emphasise that the agreement or understanding must be such as to impose on the donee a legally binding obligation to deal with the property in the particular way and that the two other certainties, namely those as to the subject matter of the trust and the persons intended to benefit under it, are as essential to this species of trust as they are to any other…..As in this case the principle difficulty is always whether there was a legally binding obligation or merely what Lord Loughborough LC in Lord Walpole v Lord Orford (1797) 3 Ves 402,419, described as an honourable obligation.’ 6 The reality is that if Max is the only person with knowledge of Ivor’s communication to him or specific the terms of the intended trust, there will be no legal obligation on Max’s part to comply with Ivor’s request. Therefore the creation of a secret trust in respect of the seaside cottage is not a valid trust and cannot be enforced. There is another matter that compromises the trust of the seaside property in favor of Gloria. As the cottage itself is realty, it is subject to the provisions of The Law of Property Acts. Section 52 of the Law of Property Act 1925 provides that ‘all conveyances of land, or any interest therein are void for the purposes of conveying or creating a legal estate unless made by deed.’7 Although the transfer of the property to Max complies with the provisions of Section 52 of the Law of Property Act 1925 the conveyance of any interest in that property is required to be made by deed. That section would apply to the disposition of the equitable interest to Gloria. As Gloria is not Ivor’s wife, and there is no evidence that she might have acquired an interest in the property by virtue of the doctrine of constructive or resulting trusts, the oral declaration of trusts will not operate to exempt the disposition of an equitable interest in the seaside cottage to her from the provisions of Section 52. Sir Christopher Slade said the following with regards to the disposition of a beneficial interests in circumstances in the absence of a declaration of trust by deed: ‘In the absence of any declaration of trust, the parties respective beneficial interests in the property fall to be determined not by reference to any broad concepts of justice, but by reference to the principles governing the creation or operation of resulting, implied or constructive trusts which by s 53(2) of the Law of Property Act 1925 are exempted from the general requirements of writing imposed by s 53(1).’8 Section 53 (1) (c) provides that ‘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.’9 Unless the declaration of trust to Max is in writing, the trust in favor of Gloria is void by virtue of the provisions of Section 53(1)(c). Shares in Innitt Townitt/Certainty of Intention Ivor’s transfer of shares in Innitt Townitt plc with the proviso that, “I am sure that you will use the income towards Emma’s University education” appears to be a discretionary trust. The words ‘I am sure’ can be construed as Ivor’s confidence and trust in Missie’s application of the income derived from the shares. These words are commonly used to indicate an intention to create a trust. 10 However, the validity of this kind of discretionary trust can be challenged on the grounds that Ivor’s words do not impose upon Missie a legally binding obligation. Rather, the words used most probably impose upon her an honourable obligation. As explained by Norse J. in Re Cleaver, this difference determines whether or not a valid trust is created or not. If the words used impose an honourable duty there is no valid trust capable of enforcement.11 Despite this argument, one must remember that the binding affect of the words used will be construed by the courts with reference to the certainty of intention. In Tana & Anor V Tana & Anor, the Chancery Division found that ‘certainty of intention is in many ways the most important’of the three certainties.12 Once the court is satisfied that the ‘declarant had the requisite intention it will strive to validate it.’13 Based on this precedent, it is very likely that Ivor’s use of the words, ‘I am sure’ will operate to convey his intention that a trust for the benefit of Emma’a university education be created. On this ground a validly constituted trust is created and is capable of enforcement. 10,000 pound grant and Trustee’s Duties The transfer of 10,000 pounds sterling to Gordon for the express purpose of paying the tuition in respect of his children’s enrollment at Posh Academy is a valid and enforceable trust. The fact that Gordon is declared bankrupt in the sum of 250,000 pounds sterling is of no moment to the trust property. The funds are not Gordon’s assets, they are trust assets to which he has no legal right to dispose of in a manner inconsistent with the terms of the trust holding the property. The interest of the beneficiaries will function to defeat the interest of Gordon as trustee of the funds held.14 If Gordon uses the funds held upon trust for his children or any part thereof for the purpose of discharging any part of his debts he will be in breach of his fiduciary duties as trustee. Likewise his trustees in bankruptcy and/or his debtors cannot compel Ivor to dispose of the 10,000 pounds in their favor as they will be vicariously liable for any suit brought by the beneficiaries of those funds for equitable relief.15 Certainty of Objects Ivor’s disposition of “£50,000 to my friend Harold to be distributed amongst such of my friends and in such shares as he shall think fit,” is a valid and enforceable trust. Although it is not possible to create a complete list of the objects of the trust, the ruling in McPhail v Doulton will apply to this bequest and render the trust valid despite the somewhat uncertainty of objects. Prior to McPhail v Doulton, in order for the requisite certainty of objects to be satisfied the clause identifying the objects in the trust instrument was required to be such that it was possible for the trustees to make a complete list of all the designated beneficiaries. This mechanism was commonly referred to as the ‘complete test.’16 However, the House of Lords in McPhail v Doulton, made a brave departure from the application of the ‘complete test’. The House introduced what became known as the ‘in or out’ test. Lord Wilberforce said all that the trustees only had to ascertain whether or not it was possible to say ‘with certainty that any given individual is or is not a member of the class’ of beneficiaries.17 In this case the donor left assets to be divided as follows:- ‘The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such condition (if any) as they think fit.’18 Based on the facts of the case, the House of Lords held that it was not impossible to ascertain whether a person coming forward was an employee, ex-employee, officer, ex-officer, dependant or family member. That said, the House of Lords ruled that the trust was a completely constituted trust.19 Moreover, the necessity for drawing up a complete list of the designated beneficiaries would only arise in circumstances where the whole of the trust fund was about to be divided among the class of beneficiaries. Since the relevant trust was not by any means a fixed trust, but a discretionary trust an ‘in or out’ test could be satisfactorily applied.20 . Lord Wilberforce went on to say that based on a construction of the words used by the donor there might be cases ‘where the meaning of the words used is clear but the definition of beneficiaries is so hopelessly wide as not to form "anything like a class" so that the trust is administratively unworkable’. 21 Offering an example of an administratively unworkable trust, Lord Wilberforce said that words identifying the class of beneficiaries as ‘all the residents of Greater London’ would be determined to be administratively unworkable.22 With the relaxation of the rules regulating the certainty of objects in MacPhail v Doulton, Ivor’s settlement to Harold upon trusts for Ivor’s friends is a valid and enforceable trust. This conclusion is fortified by the cases that followed Macphail. As impossible as it might seem, the rules were relaxed even further. For example, in Re Manisty , a trust instrument which granted trustees the power to add beneficiaries to an existing list of beneficiaries was held to be both valid and enforceable. There was only one proviso, and that was that the power to add beneficiaries had to be consistent with the intention of the settlement as provided for by virtue of the trust instrument itself.23 This relaxation of the rules governing certainty of objects by the House of Lords in McPhail v Doulton developed even further in Re Hay’s Settlement Trusts. Megarry VC held that a trust was valid and enforceable even if the donor failed to provide a list beneficiaries or a class of beneficiaries and vested in his trustees the power to choose beneficiaries. All that was necessary was that a beneficiary be ascertained if the trustees failed to distribute part of the trust property or all of it.24 The development of the common law principles on certainty of objects as expounded on in Re Hay’s Settlement Trusts and Re Manisty reflect the impact of the comparison drawn between the test for discretionary trusts powers and mere powers by as introduced by the House of Lords in McPhail v Doulton. The unanimous conclusion by the House of Lords in McPhail v Doulton is that there is no appreciable difference between the test required for the validity of discretionary trusts and the validity of discretionary powers. Harold might have his work cut out for him, but he has a duty to comply with Ivor’s request since it is very unlikely that the bequest will fail for uncertainty of objects. As Lord Wilberforce pointed out, the administration of a trust could call upon trustees to conduct a ‘duty of inquiry or ascertainment, in each case the trustees ought to make such a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty.’ 25As in the case of McPahil v Doulton ‘a wider and more comprehensive range of inquiry is called for in the case of trust powers than in the case of powers.’ 26 Thankfully, Ivor vested in Harold a discretionary power wide enough to protect Harold for a breach of trustees’ duties if he fails to distribute funds to someone claiming to be a friend of Ivor’s. Harold, by virtue of the testamentary disposition has the authority to determine whom among Ivor’s friends can and should be added to the list of beneficiaries. Bibliography Gold and Gilbert v Hill, The Times on 24th August, 1998 Huntingford v Hobbs [1993] 1 FLR 736 McGhee, John. Snell’s Equity. Sweet & Maxwell. 2005 McPahail v Doulton [1971] AC 424 Re Gestetner Settlement [1953] Ch 672 Re Hay’s Settlement Trusts 1981] 3 All ER 786 Re Manisty [1974] Ch 17 Tana & Anor v Tana & Anor [2001] EWHC Ch Watt, Gary. Todd and Watt’s Cases and Material on Equity and Trust. Oxford University Press. 2005 Read More