The Trust and Its Principle Application - Literature review Example

Trusts A. The Trust and Its Principle Application According to Hudson the trust “arose as an accident of English history The trust was initially devised as a method for resolving issues where a number of interests in land arose all at once (Hudson 2008, 14). In simple terms, the trust provides at least two or more parties to exercise or maintain rights in one fund, asset or piece of property. The legal regime for permitting and managing multiple interests in the same asset, fund or piece of property are founded on principles of equity which is essentially a creation of the common law.2 In order to fully understand the trust and its principle application it is necessary to know what a trust is, the different types of trust and the specific requirements for the creation of a trust. A trust can be either express or implied.3 The express trust entails a purposeful creation while the implied trust occurs by operation of law in cases where an unconscionable outcome would occur.4 The implied trust can be either constructive or resulting.5 The resulting trust occurs where property transferred reverts to the settlor or his/her estate. A resulting trust can also be established to fill a “gap in ownership” or dispose of “surplus of trust funds” after the disposition of the trust property.6 Quite often a resulting trust follows from a trust which is settled by virtue of a condition precedent which fails.7 A resulting trust may also be implied by law where it is necessary to interpret and give effect to the settlor’s intention.8 In such a case, the settlor of the property is presumed to be the equitable owner of the property 9. When property is purchased in the name of a third party this may obviate such a presumption. For instance, an individual purchases stock and directs the vendor to transfer the stock to a third party. It is naturally presumed that the stock is held upon trust for the purchase of the stock.10 A constructive trust is most often used as a means of resolving what would otherwise amount to an unconscionable result. Ramjohn explains that: On occasions when a trustee abuses the confidence reposed in him by realizing an unauthorised profit derived from the trust property, or becomes unjustly enriched at another’s expense, the court may impose a constructive trust on the party who acted with impropriety.11 In Broadman v Phipps [1967] 2 AC 46 the court imposed a constructive trust in a situation where an attorney in the course of representing a trust happened to come across some confidential information which he used for the purpose of acquiring company shares that were partly owned by the trustees. The company did well and made significant profits as a result of the attorney’s participation. It was held that the attorney was a constructive trustee and as a result was required to account to the trust for the profits made by the company12. Statutory trusts are another type of trust which are obviously created by law. These kinds of trusts are self-explanatory and are created by virtue of legislative acts. For instance, Section 33 the Administration of Estates Act 1925 as amended by the Trusts of Land and Appointment of Trustees Act 1996, all personal representatives of estates are required to hold the estate property upon trust with a residual power to postpone sale.13 Section 34(2) of the Law of Property Act 1925 as amended by the Trusts of Land and Appointment of Trustees Act 1996 also provides for the creation of a trust. Section 34(2) of the 1925 Act, provides that when land is transferred to individuals in non-specific shares, the first four persons named in the transfer deed will hold the property upon trusts as tenants in common.14 Ultimately, whether a trust is implied or express, all trusts are subject to the same substantive criteria. For instance, all trusts are comprised of a settlor, trustee and a beneficiary. Hudson defines the express trust as follows: A trust is created where the absolute owner of property (the settlor) passes the legal title in that property to a person (the trustee) to hold the property on trust for the benefit of another person (the beneficiary) in accordance with terms set out by the settlor.15 In the creation of an express trust, what happens is that property is divested so that it creates two distinct entitlements.16 The Settlor, characterized as the absolute owner of the property, transfers the legal title to a trustee with instructions to hold and distribute the property in a specific way to a beneficiary or class of beneficiaries who then hold the equitable interests in the trust property. Consequently there are three members of the trust.17 An express trust is therefore created when property moves from the settlor to the trustee with directions for the administration of the trust property in a specific among the designated beneficiary/beneficiaries.18 There are two specific methods by which an express trust can be created. The first method is by virtue of the settlor transfering the property to a third party subject to specified terms and conditions. This involves two steps; the transfer of the trust property to the trustee; and a declaration setting out the terms of the trust.19 The second method by which an express trust may be created is by virtue of the absolute owner of certain property making a declaration that he/she holds the property upon trust for the benefit of others on certain terms and conditions. This is referred to as a “self-declaration of trust” and obviously does not require the transfer of property since the property is already vested in the settlor who appoints himself/herself as trustee .20 Turner LJ. Describes the two methods for the creation of an express trust as follows: In order to render a voluntary settlement valid and effectual, the settler must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. He may, of course do this...if he transfers the property to a trustee for the purposes of the settlement, or declares he himself hold it in trust for those purposes.21 To this end, there are certain legal requirements for the disposition of both a legal and equitable interest in property. Any declaration of trust for the disposition of an equitable interest in respect of realty for instance, is required to be evidenced in writing.22 With respect to movable property or chattels, the transfer of that property is evidenced by delivery, possession and control, although a Bill of Sale will be just as substantial23. The formalities for the creation of a trust are referred to as the three certainties; certainty of intention, certainty of subject and certainty of objects.24 The objects refer to the beneficiaries of the trust, the subject refers to the trust property, and intention refers to the settlor’s intention to create a trust.25 Each of these certainties are required to meet specific standards so that the trust is administrable, otherwise the trust will fair for lack of certainty. Even so, the most important certainty is said to be the certainty of intention.26 In instances where there is a mere declaration of trust, trustee will typically have less certainty with respect to what is expected of him in the administration of the trust. For instance, in a case where a settlor transfers funds to a relative and directs that relative to use the funds for his/her siblings, this is a mere declaration of trust with no fixed terms. As such it is a discretionary as opposed to a fixed trust, but is administrable nonetheless .27 The trust is a useful tool for the management and preservation of property in a variety of ways. For example in Re Kayford [1975] 1 WLR 279, a mail order business took payment in advance from clients before delivering the goods purchased under mail order. In the interim the funds advanced were placed in a bank account so that it was separated from the funds of the business. When the business became insolvent the question of the ownership of the funds held on the separate account was resolved by virtue of a trust. It was held that those funds had been held upon trust for the customers advancing those funds for delivery of goods.28 In this regard, a trust can be useful for regulating funds exchanged in business transactions and as a means of protection against creditors. The application of the trust is also useful for the maintaining control over property following the death of a settlor. It provides a useful method for the settlor to ensure that his loved ones or other beneficiaries are taken care of after his/her death29. A trust can also be a living instrument in that the trust property can be distributed during the lifetime of the settlor and after his/her death.30 This is known as an inter vivos trust rather than a testamentary trust which will only take effect upon the settlor’s death31. The difference is, the inter vivos trust can take effect without having to go through probate.32allHH A principle application of the trust is for the settlement of family assets and organizing the distribution of these assets among family members33 . Subject to the rule against perpetuities, family property can be settled by trusts well into the future. The assets can be distributed and divided among spouses, disabled family members/friends/dependents and minor children and even spendthrift relatives so as to ensure that their maintenance, education and other essential needs are taken care of until they are old enough or responsible enough to manage those matters on their own.34 Trusts can also be set up for charitable purposes and as opposed to the non-charitable purpose trusts, the rules relating to the charitable purpose trust is more relaxed.35 Ultimately, the trust is a flexible instrument and provided it comports with the three certainties so that the trust is administrable, it will be a valid tool for settling property, escaping liability and caring for relatives and friends into the future. Despite its flexibility, or perhaps because of its flexibility, the trust is a complex instrument, regulated by a long and complicated mix of statutes, common law and equitable principles. Therefore understanding the trust law is no easy task, so that the difference between creating a trust and an absolute gift can be entirely confusing. 36 B. Case Study The gift created by virtue of the will is a testamentary trust, in that the gift contained in the will not take effect until such time as the settlor dies and his will is probated.37 In any case the validity of the testamentary trust is determined by reference to the same legal regime that regulates the inter vivos trust. In this regard each of the three certainties must be applied to the disposition in an attempt to determine whether or not the gift is a valid trust. i. Certainty of Subject The test for the identification of subject is determined by reference to whether or not the subject matter can be objectively ascertained, certainty of subject is made out.38 In other words, once the trust is worded so that it can reasonably be determined what the subject matter is, the test of certainty of subject is satisfied. The testator/testatrix directs that all of his/her property be held upon trust. The question is therefore whether or not that property can be objectively ascertained. Moreover it was held in Sprange v Bernard [1789] 2 Bro CC 585 that in order for a trust to be valid it had to be so certain that it was capable of execution at the time it was created.39 In Re Golays Will Trusts [1965] 1 WLR 96 it was held however, that if the trustees were at liberty to determine what the trust property was, the trust would be upheld.40 Therefore it is possible for the property to be objectively ascertained and certainly the trustees have a discretion to determine what property belongs to the testator/testatrix. Therefore, the subject of the trust meets the criteria for certainty of subject. ii. Certainty of Intention It has been established by virtue of the common law that a mere manifestation of an intention to establish a trust may be sufficient to create a trust.41 However, this proposition may not be as simple as it sounds because an intention to create a trust will be manifested by the transfer of property to trustees and the designation of beneficiaries. Therefore, to a certain extent, certainty of intention requires corroboration by the satisfactory proof of subject and object. It was held in the Tana & Anor case that once the court was satisfied that “declarant had the requisite intention it will strive to validate it.”42 Essentially, the words used may be sufficient to satisfy certainty of intention, although certainty of intention may be proven by transfer of property to trustees and the designation of beneficiaries/beneficiary. In this regard, the testator/testatrix specifically used the word “trust” in that a desire was expressed that the trustees hold the property in trust. Moreover, there is presumably a transfer of property to the trustees under the will upon probate. The testatrix/testator does in fact instruct his/her trustees to hold the property upon trust for a class of beneficiaries. In all the circumstances, the intention to create a trust is amply evidenced by these factors. Therefore, certainty of intention is established. iii. Certainty of Objects The House of Lords’ decision in McPhail v Doulton created an “in or out test”43 which is useful assessing whether or not the designation of the black community in London as beneficiaries under the trust is too vague. By virtue of this test, all that is necessary is for the trustees to be able to determine whether or not a person coming forward is a member of the class of beneficiaries. The House of Lords ruled that where a discretionary trust rather than a fixed trust was created, complete list of the beneficiaries was not necessary. Lord Wilberforce explained that there may be situations in which the words used: …are 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.44 Therefore, is the black community in London too broad to form a class to that the trust is administratively unworkable? It might certainly be possible for the trustees to determine whether or not a person coming forward is member of the black community of London. However, this is precisely the kind of the provision that the House of Lords deemed to be too broad. It therefore follows that if upon a construction of the words used to define or designate the potential and actual beneficiaries, the trust is administratively unworkable and not a valid trust. For example a disposition designating “all the residents of Greater London” as the class of beneficiaries would be administratively unworkable.45 There is a question here as to what constitute being a member of the black community. Does it refer to only black people living in London, or originating from London? Or does it refer to persons who live in black communities? This raises another question. What exactly is a black community? Is it a place where only black people live or does it refer to an area where a large number of black people live or is it all black people in London as a whole? There are far too many unresolved questions and it therefore follows, that despite the discretionary nature of the trust, there is no certainty of subject. It therefore follows that the trust will fail despite the testatrix/testator’s intention to create a trust. Since he/she failed to be more specific as to the class of beneficiaries, the court cannot effect the testatrix/testator’s intention since it is unclear who he/she intended to take the gift. Bibliography Administration of Estates Act 1925 Barclays Bank v Quitclose Investments [1970] AC 567 Baron, J. (1986) “The trust res and Donative Intent.” Tulane Law review. Vol. 61:45. Broadman v Phipps [1967] 2 AC 46 Clements, R. and Abass, A. (2008) Complete Equity and Trusts: Text, Cases and Material. Oxford University Press. Gardner, S. (2002. An Introduction to the Law of Trusts. OUP. Godbe, D. (2006) The Wills and Trust Kit: Your Complete Guide to Planning for the Future. Sphinx Legal. Haley, M. and McMurty, L(2009) Equity and Trust. Sweet and Maxwell. Hepburn, S. (2001) Principles of Equity and Trusts. Routledge. Hudson, A. (2008) Equity and Trusts. Routledge. Jaffey, P. (2007) Private Law and Property Claims. Hart Publishing. Knight v Knight [1840] 3 Beav 148 Law of Property Act 1925 MacDonald., A (2006) “Testamentary Trusts: Not Just ‘Another’ Trust?” Journal of Tax Research Vol. 1(1): 153-196. Madoff, R.; Tenney, C.; Mingolla, L. and Hall, M. (2008) Practical Guide to Estate Planning 2009. CCH McPhail v Doulton [1971] AC 424 Milroy v Lord [1862] 31 Ch 798 Moffat, G.; Bean, G. and Dewar, J. (2008) Trusts Law: Text and Materials. Cambridge University Press. Oakley, A. (2008) Parker and Mellows: The Modern Law of Trusts. Sweet and Maxwell. Palmer v Simonds (1845) 2 draw 221. Ramjohn, M. (1998) Sourcebook on Trusts Law. Cavendish. Ramjohn, M. (2008) Text, Cases and Materials on Equity and Trusts. Taylor and Francis. Re Golays Will Trusts [1965] 1 WLR 96 Re Kayford [1975] 1 WLR 279 Shenkman, M. (2002) Estate Planning after the 2001 Tax Act: Guiding your Clients Through the Changes. Bloomberg Press. Sprange v Bernard [1789] 2 Bro CC 585. Tana & Anor v Tana & Anor [2001] EWHC ch 413 Trusts of Land and Appointment of Trustees Act 1996 Watt, G. (2008) Todd and Watts Cases & Material on Equity and Trusts. OUP . Zaphiriou, G. (1985) The Transfer of Chattels in Private International Law: A Comparative Study. Athlone Press Read More