Anda di halaman 1dari 19

2

Introduction to trusts

AIMS AND OBJECTIVES


By the end of this chapter you should be able to:
appreciate the main legal definitions of trusts
identify the essential characteristics of trusts
grasp the various types of trusts that exist
comprehend some of the more popular reasons for the creation of express trusts

2.1 Introduction
Constructing a comprehensive definition of a trust is extremely difficult, for a variety
of trusts exist, and some of these do not fit into any of the traditional definitions. It is
much simpler to describe a trust and identify its essential characteristics. In essence,
the mechanism of the trust is an equitable device by which property is acquired and
controlled by trustees for the benefit of others, called beneficiaries. These beneficiar-
ies, subject to a few exceptions, are entitled to enforce the trust. For a variety of
reasons, it may be prudent to prevent the entire ownership of property (legal and
equitable) being vested and enjoyed by one person because such person would be in
a position to dispose of the entire interest, perhaps for an inappropriate purpose such
as gambling away the entire fund. A trust may be set up in order to advance this
objective.

2.2 Trust concept


By origin, the trust was the exclusive product of the now defunct Court of Chancery,
but since the Judicature Acts 1873 and 1875, trusts may be enforced in any court of
law.

2.2.1 Definitions of trusts


The trust has been defined, or described, by many academics and, recently, by statute.
The classic definition of a trust was stated by Underhill as follows:
quotation
A trust is an equitable obligation, binding a person (called a trustee) to deal with property over
which he has control (which is called the trust property) for the benefit of persons (who are
called the beneficiaries or cestuis que trust) of whom he may himself be one, and any one of
whom may enforce the obligation.
A Underhill and D Hayton, Law of Trusts and Trustees (16th edn, Butterworths, 2002), p.1

This definition does not include charitable and private purpose trusts, but Underhill
was merely defining traditional private trusts. A private purpose trust is intended to
benefit objects which do not have the capacity to enforce the trust (such as maintaining
a grave in a cemetery), as distinct from benefiting society as a whole or the public at
large. Charitable trusts are distinct from private trusts in many ways (see Chapter 12),
and the Attorney General, as a representative of the Crown, is empowered to enforce
20 such trusts on behalf of the public. Private purpose trusts (or trusts for imperfect obliga-
tions) in any event are considered anomalous and are exceptionally treated as valid.
Underhills definition of a trust refers to an equitable obligation in that originally the
Introduction to trusts

Lord Chancellor and later the Court of Chancery enforced moral obligations undertaken
by trustees (feoffees) in the interests of natural justice and conscience. The definition
refers to property under the control of trustees. It is evident that the trustees have the
legal title to property but the essence of a trust is that they are required to hold the prop-
erty for the benefit of the beneficiaries. It is because of the fiduciary position of the trus-
fiduciary tees and the temptation to abuse their position that a number of duties are imposed on
A person whose the trustees. Finally, the beneficiaries, by definition, are the persons who are entitled to
judgment and skill
is relied on by
enjoy the benefit of the trust property and who are given a locus standi to enforce the
another. trust and to ensure that the trust property is properly administered.
Maitland defined a trust thus:

quotation
When a person has rights which he is bound to exercise upon behalf of another or for the
accomplishment of some particular purpose he is said to have those rights in trust for that
other and for that purpose and he is called a trustee.
FW Maitland, Equity: A Course of Lectures (ed. AH Chaytor and WJ Whittaker,
revd J Brunyate, Cambridge University Press, 2011)

It may be noted that this is a vague definition of a trust, as Maitland admitted, but, on
examination, it is not a definition at all, but a description of some of the elements of a
trust.
In Lewin on Trusts a comprehensive definition set out by an Australian judge, Mayo J,
in Re Scott [1948] SASR 193 was referred to in the text.

quotation
The word trust refers to the duty or aggregate accumulation of obligations that rest upon
a person described as trustee. The responsibilities are in relation to property held by him, or
under his control. That property he will be compelled by a court in its equitable jurisdiction to
administer in the manner lawfully prescribed by the trust instrument, or where there be no
specific provision written or oral, or to the extent that such provision is invalid or lacking, in
accordance with equitable principles. As a consequence the administration will be in such a
manner that the consequential benefits and advantages accrue, not to the trustee, but to the
persons called cestuis que trust, or beneficiaries, if there be any; if not, for some purpose
which the law will recognise and enforce. A trustee may be a beneficiary, in which case
advantages will accrue in his favour to the extent of his beneficial interest.
Mayo, J quoted in L Tucker, N Le Poidevin, J Brightwell, Lewin on Trusts (Sweet & Maxwell, 2014)

The American Restatement of the Law of Trusts (1959) declares:

quotation
A trust ... when not qualified by the word charitable, resulting or constructive is a
fiduciary relationship with respect to the property, subjecting the person by whom the prop-
erty is held to equitable duties to deal with the property for the benefit of another person,
which arises as a result of a manifestation of an intention to create it.
21
G Thomas and A Hudson in The Law of Trusts (Oxford University Press, 2004) offer a
definition of a trust in this form:

2.2Trust concept
quotation
The essence of a trust is the imposition of an equitable obligation on a person who is the legal
owner of property (a trustee) which requires that person to act in good conscience when
dealing with that property in favour of any person (the beneficiary) who has the beneficial
interest recognised by equity in the property. The trustee is said to hold the property on
trust for the beneficiary. There are four significant elements to the trust: that it is equitable,
that it provides the beneficiary with rights in property, that it also imposes obligations on the
trustee, and that those obligations are fiduciary in nature.

The equitable obligation that is referred to in Thomas and Hudsons definition is a ref-
erence back to the historical origin of trusts which were recognised only by equity prior
to the Judicature Act 1873. The obligation to carry out the terms of the trust is attached
to the trustee to control his actions as a fiduciary and to allay the fears that he may be
tempted to take the property or otherwise abuse his position. The trustee acquires the
legal title to the property and the beneficiary, as an equitable owner, acquires the right
to enjoy the property.

2.2.2 Recognition of Trusts Act 1987


Section 1 of the Recognition of Trusts Act 1987 declares that the term trust possesses the
characteristics detailed in Art 2 of the Hague Convention on the Recognition of Trusts,
referred to in the Schedule to the Act:

section
Section 1
inter vivos For the purposes of this Convention, the term trust refers to the legal relationship created
During the lifetime inter vivos or on death by a person, the settlor, when assets have been placed under the
or before death.
control of a trustee for the benefit of a beneficiary or for a specified purpose.

A trust has the following characteristics:


(a) the assets constitute a separate fund and are not a part of the trustees own estate;
(b) title to the trust assets stands in the name of the trustee or in the name of another
person on behalf of the trustee;
(c) the trustee has the power and the duty, in respect of which he is accountable, to
manage, employ or dispose of the assets in accordance with the terms of the trust and
the special duties imposed upon him by law.

The reservation by the settlor of certain rights and powers and the fact that the trustee
may himself have rights as a beneficiary are not necessarily inconsistent with the exist-
ence of a trust.
This description of a trust has been formulated by reference to the characteristics of a
trust (these are discussed below).

2.2.3 Lord Browne-Wilkinsons essential characteristics


22 of a trust
In Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669, HL (for facts, see
Chapter 16), Lord Browne-Wilkinson identified four fundamental principles of trusts
Introduction to trusts

law the existence of which he considered uncontroversial:

JUDGMENT
(i) Equity operates on the conscience of the owner of the legal interest. In the case of a trust,
the conscience of the legal owner requires him to carry out the purposes for which the
property was vested in him (express or implied trust) or which the law imposes on him by
reason of his unconscionable conduct (constructive trust).
(ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience of the
holder of the legal interest being affected, he cannot be a trustee of the property if and
so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware
that he is intended to hold the property for the benefit of others in the case of an express
or implied trust, or, in the case of a constructive trust, of the factors which are alleged to
affect his conscience.
(iii) In order to establish a trust there must be identifiable trust property. The only apparent
exception to this rule is a constructive trust imposed on a person who dishonestly assists
in a breach of trust who may come under fiduciary duties even if he does not receive
identifiable trust property.
(iv) Once a trust is established, as from the date of its establishment the beneficiary has, in
equity, a proprietary interest in the trust property, which proprietary interest will be
enforceable in equity against any subsequent holder of the property (whether the original
property or substituted property into which it can be traced) other than a purchaser for
value of the legal estate without notice.
These propositions are fundamental to the law of trusts and I would have thought
uncontroversial.

The reference to the conscience of the trustee concerns the original assumption of juris-
in rem
diction by the Lord Chancellor for enforcing trusts. The trustee is treated as a fiduciary
A right that exists
against the world with special duties imposed on him. If they abuse their position as fiduciaries by receiv-
at large as ing unauthorised profits they become trustees of those profits. This notion of conscience
opposed to in requires the trustees to be aware that they are acting with impropriety. It is evident that
personam.
the trust is required to attach to identifiable property, except with regard to the liability
to account as an accessory. Finally, Lord Browne-Wilkinson declares that a beneficiary
under a trust acquires a proprietary interest in the trust property (i.e. a right in rem). The
effect is that the beneficiary is entitled to recover the property in either its original or
substituted form, except as against a bona fide transferee of the legal estate for value
without notice (equitys darling).

activity
Compare Lord Browne-Wilkinsons essential characteristics of a trust laid down in West-
deutsche Landesbank Girozentrale v Islington BC [1996] with those laid down in the Recog-
nition of Trusts Act 1987.

2.3 Characteristics of a trust


The distinctive features of a trust are outlined below. It is submitted that an understand-
ing of these features is a more practical way of recognising and distinguishing a trust 23
from other concepts.

2.3Characteristics of a trust
2.3.1 Trust property
chose(s) in Any existing property which is capable of being assigned may form the subject-matter
action of a trust. Thus, the trust property may take the form of personalty, such as chattels or
These are
personal,
debts enforceable at law (choses in action), or an interest in land called realty (freehold
intangible or leasehold interest in land). Moreover, the nature of the trust property may vary
property(ies) such throughout the trust. The property may take the form of realty which is sold and the
as rights to have a
loan repaid, the
proceeds of sale reinvested in shares.
right to dividends However, only subsisting property is capable of being the subject-matter of a trust.
from shares and Accordingly, an expectancy or future property (such as a right under a will which has
intellectual
property.
not vested because the testator is still alive) cannot be the subject-matter of a trust.

2.3.2 Separation of legal and equitable interests


expectancy The legal interest in property is the title which reflects the indicia of ownership. The
These are rights
that do not
legal owner has the right to have his title to the property and the incidents of ownership
currently exist but respected by the rest of society. Thus he may enforce or protect his interest in the prop-
may or may not erty through litigation. The equitable interest, on the other hand, is a right or an interest
exist in the future.
in property which, before the Judicature Acts of 1873 and 1875, was recognised solely by
a Court of Chancery. The Judicature Acts effected a fusion of the administration of law
and equity, so that in appropriate cases equitable principles may be applied in common
law courts. The equitable title is the beneficial interest in property or the right to enjoy
the property.
Generally, the trustee holds the legal title to property for the benefit of the benefici-
ary. The beneficiary enjoys the equitable interest. The rule is that whenever the two
interests (legal and equitable) are separated, a trust is in existence. For example, T (a
trustee) holds the legal title to shares in X Co (trust property) on trust for B, a beneficiary,
absolutely. B acquires an equitable interest in the shares.

T(trustee with the legal title)B(beneficiary with the equitable interest)

In addition, the same interests may be enjoyed jointly by the same persons under a trust.
For example, T and B may hold the legal estate on trust for T and B equally.

T & B(legal interest)T & B(equitable interest)


If, however, the legal and equitable interests are united in the hands of the same person
without a separation of interest, no trust exists. Thus, no trust exists if T holds the legal
estate for himself absolutely.

2.3.3 Sub-trusts
Sometimes the trustee may hold the equitable interest on behalf of a beneficiary. This
would be the case where a beneficiary, who enjoys an equitable interest under a subsist-
ing trust, creates a trust of his interest in favour of another, i.e. a beneficiary under a trust
creates a sub-trust of his entire interest in favour of a sub-beneficiary. The effect of this
arrangement is that the beneficiary under the original trust assigns his interest to the
new beneficiary by way of a trust. In this situation the original beneficiary adopts the
role of the settlor and trustee for the benefit of another:

T(legal owner)B(original equitable owner)C(sub-beneficiary or new equitable


24 owner)

Indeed, it is possible for the original equitable owner to create a sub-trust and, at the
Introduction to trusts

same time, remain an equitable owner of trust property. This would be the position
where the original equitable owner declares a trust of part of his equitable interest. For
example, T (legal owner) holds on trust for B absolutely (equitable owner). B retains a
life interest in the property and declares himself a trustee of the remainder for C
absolutely.
The new arrangement may be illustrated as follows:

B(life interest) C(remainder interest)


T(legal title) __________________________________


(equitable owners)

It should be noted that in respect of the sub-trust, B will have active duties to perform on
behalf of his new beneficiary, C.
locus standi
The right to be
heard in court or 2.3.4 Obligatory
other proceedings. A trust is mandatory in nature. The trustees have no choice as to whether they may fulfil
the intention of the settlor. Instead, the trustees are required to fulfil the terms of the
trust as stipulated in the trust instrument and implied by rules of law. The beneficiaries
will are given a locus standi to ensure that the trustees carry out their duties (but note the
A document
anomalous nature of private purpose trusts see Chapter 11).
signed by the
testator and
attested by two or
more witnesses
2.3.5 Inter vivos or on death
which disposes of Trusts may be created either inter vivos (during the lifetime of the settlor) or on death, by
the testators will or on an intestacy (under the Administration of Estates Act 1925, as amended). An
assets on his
death.
inter vivos trust may be created by deed or in writing other than by way of a deed, orally
or by conduct. Irrespective of the form which the trust takes, the trust becomes effective
from the date of the execution of the document or statement. On the other hand, trusts
intestacy created by wills or on intestacies take effect on the death of the testator or person dying
A person who dies intestate.
without making a
valid will. His
estate devolves on 2.3.6 The settlors position
those specified The settlor is the creator of an express trust. He decides the form that the trust property
under the
intestacy rules. may take, the interests of the beneficiaries, the identity of the beneficiaries, the persons
who will be appointed trustees and the terms of the trust. Indeed, he may appoint
himself one of the trustees or the sole trustee. In short, the settlor is the author of the
trust. But once the trust is created, the settlor, in his capacity as settlor, loses all control
or interest in the trust property. Unless he has reserved an interest for himself, he is not
entitled to derive a benefit from the trust property, nor is he allowed to control the
conduct of the trustees. In other words, following the creation of a trust the settlor, in his
capacity as settlor, is treated as a stranger in respect of the trust.

CASE EXAMPLE
Re Bowden [1936] Ch 71
The settlor, before becoming a nun and in order to undertake the vows of poverty, chastity
and obedience, transferred property to trustees on trust for specified beneficiaries. Later, she
changed her mind when she left the convent and attempted to reclaim the property for her
own benefit. The court held that, since the trust was created, the claimant as settlor lost all
25
interest in the property and therefore could not recover the property.

JUDGMENT

2.3Characteristics of a trust
the persons appointed trustees under the settlement received the settlors interest ... and,
immediately after it had been received by them, as a result of her own act and her own decla-
ration ... it became impressed with the trusts contained in the settlement.
Bennett J

The settlors position vis--vis the trust is analagous to the position of a promoter (or
shareholder) of a company and his relationship with the company. The well-known,
fundamental rule in company law is that a company is an artificial legal person, distinct
from its members. Thus, a company is capable of enjoying rights and is subject to duties
which are generally not attributable to its members. In other words a company may own
property, enter into contracts, sue and be sued and open and operate bank accounts in
its own name. The rights and liabilities of the company are treated separately from the
rights and duties of the members or shareholders. Accordingly, even if a company is
controlled by one shareholder, the company and that shareholder are treated as distinct
legal persons. This is known as the doctrine in Salomon v Salomon & Co Ltd [1897] AC 22.
A company was formed to take over Mr Salomons business and the House of Lords
ruled that, despite Mr Salomon holding 20,001 of the 20,007 shares issued by the
company, the company and Mr Salomon were distinct legal entities. Lord Macnaghten
expressed the general rule thus:

JUDGMENT
The company is at law a different person altogether from the subscribers to the memoran-
dum; and, though it may be that after incorporation the business is precisely the same as it
was before, and the same persons are managers, and the same hands receive the profits, the
company is not in law the agent of the subscribers or trustee for them.

The same general principle of independent legal personality of a company (or corporate
veil) was affirmed by the Supreme Court in Prest v Petrodel Resources Ltd [2013] 2 AC 415.
However, the corporate veil may be lifted in limited circumstances when the notion of
separate legal personality is abused for the purpose of promoting some wrongdoing.
The test was stated by Lord Sumption in Prest v Petrodel in the following manner:
JUDGMENT
I conclude that there is a limited principle of English law which applies when a person is under
an existing obligation or liability or subject to an existing legal restriction which he deliberately
evades or whose enforcement he deliberately frustrates by interposing a company under his
control. The court may then pierce the corporate veil for the purpose, and only for the purpose,
of depriving the company or its controller of the advantage that they would otherwise have
obtained by the companys separate legal personality. The principle is properly described as a
limited one.

2.3.7 The trustees position


The trustees bear the responsibility of controlling and managing the trust property solely
for the benefit of the beneficiaries. This responsibility is treated as giving rise to a fiduci-
26 ary relationship. Its characteristics are a relationship of confidence, trustworthiness to
act for the benefit of the beneficiary and a duty not to act for his (the trustees) own
advantage.
Introduction to trusts

The trustees are the representatives of the trust. Owing to the opportunities to abuse
their position the rules of equity were formulated to impose a collection of strict and
rigorous duties on the trustees. Indeed, trustees duties are so onerous that they are not
even entitled to be paid for their services as trustees, in the absence of authority.
Trustees are liable in their personal capacity for mismanaging the trust funds and in
extreme cases may be made bankrupt, should they neglect their duties.

2.3.8 The beneficiaries position


The beneficiaries (as the owners of the equitable interest) are given the power to compel
bona fide
the due administration of the trust. They are entitled to sue the trustees and any third
In good faith.
party for damages (joining the trustees in the action as co-defendants) for breach of trust.
In addition, the beneficiaries may trace the trust property in the hands of third parties
(see Chapter 16) with the exception of bona fide transferees of the legal estate for value
without notice. Through this process the beneficiaries may be able to recover the trust
property that was wrongly transferred to another or obtain a charging order represent-
ing their interests. The beneficiaries are given an interest in the trust property and are
entitled to assign the whole or part of such interest to others. The beneficiaries are enti-
tled to terminate the trust by directing the trustees to transfer the legal title to them,
provided that they have attained the age of majority, and are compos mentis (mentally
sound) and absolutely entitled to the trust property.

CASE EXAMPLE
Saunders v Vautier [1841] Cr & Ph 240, CA
Stock was bequeathed upon trust to accumulate the dividends until Vautier (V) attained the
age of 25. At this age, the trustees were required to transfer the capital and accumulated
income to V. V attained the age of majority (21) and claimed the fund at this age. The question
in issue was whether the trustees were required to transfer the fund to V.

Held: Since the income had vested in V, the sole beneficiary (by operation of law), subject to
the enjoyment of the capital being postponed (i.e. the fund that produced the income), V
acquired an indefeasible interest in the capital, subject to attaining the age of 25. As V was of
full age, he was entitled to terminate the trust.
JUDGMENT
I think that principle has been repeatedly acted upon; and where a legacy is directed to be
accumulated for a certain period, or where the payment is postponed the legatee, if he has an
absolute indefeasible interest in the legacy, is not bound to wait until the expiration of that
period, but may require payment the moment he is competent to give a valid discharge.
Lord Langdale MR

2.3.9 Equitable proprietary interests


The trustees interest in the trust property is legal. His interest is described as a right
in rem. This refers to a right that attaches to the relevant property to such an extent
that it is enforceable against the world. The legal owner cannot be deprived of his
rights to the property by the fraud of some third person. A beneficiarys interest in the
trust property is by origin and nature equitable, which traditionally has been treated
27
as a right in personam. This means that the beneficiary has the right to compel the
trustee to perform his duties in accordance with the law and may pursue a claim
against the trustee personally. Moreover, the equitable interest is inviolable against

2.3Characteristics of a trust
everyone, except the bona fide transferee of the legal estate for value without notice of
the equitable interest.
However, despite its origin, and the justification for the Chancellors intervention
to remedy injustice, on a practical level, the equitable title may be treated as a propri-
etary interest. The beneficiary is entitled to protect his interest against everyone,
except the bona fide transferee of the legal estate for value without notice. To this extent
his interest is regarded as proprietary or exists in rem, i.e. the beneficiarys rights are
attached to the trust property itself. His interest may be bought, sold or gifted away in
the same way as the legal title. In Tinsley v Milligan [1993] 3 All ER 65, Lord Browne-
Wilkinson described the nature of a beneficiarys interest under a trust as a propri-
etary right:

JUDGMENT
[I]n 1993 English law has one single law of property made up of legal estates and equitable
interests. Although for historical reasons legal estates have differing incidents, the person
owning either type of estate has a right of property, a right in rem, not merely a right in
personam.

Occasions when a beneficiary has the locus standi to maintain a claim against third parties
are for knowingly receiving trust property for his own benefit and equitable proprietary
claims. In the former case the beneficiary has the capacity to bring personal claim against
the third party because that third partys conscience has been affected by knowledge of
the trustees breach. In these circumstances equity imposes the duties of a trustee on the
third party. The effect is that the claim by the beneficiary against the third party is put
on the same footing as a claim against the trustee for an account. Likewise, the process
involving equitable proprietary claims by the beneficiary to follow or trace the trust
funds in the hands of third parties is based on a form of ownership. Assuming the third
party is not a bona fide purchaser of the legal estate for value without notice the claimant
beneficiary is entitled to maintain the claim by virtue of his proprietary interest. The
effect is that the beneficiary is treated as having some form of proprietary interest, dis-
tinct from the trustees legal interest in rem, which entitles him to institute certain pro-
ceedings against third parties.
2.3.10 Bona fide transferee of the legal estate for value
without notice
The policy here was that in the fifteenth century, when the law of trusts was being
moulded, the various Chancellors interceded only against those persons who, owing to
the circumstances in which they had acquired the property, ought in conscience to be
held responsible. Those persons were the heirs of the trustees, those who did not provide
consideration and those who provided consideration, but bought the property in bad
faith. Absent from this list was the bona fide transferee of the legal estate for value without
notice of the equitable interest. Such a person acquired the legal title in priority over the
beneficiary: see James LJ in Pilcher v Rawlins [1871] 7 Ch App 259:

JUDGMENT
I propose simply to apply myself to the case of a purchaser for valuable consideration without
28
notice, obtaining upon the occasion of his purchase, and by means of his purchase deed, some
legal estate, some legal right, some legal advantage; and, according to my view of the estab-
lished law of this court, such a purchasers plea of a purchase for valuable consideration
Introduction to trusts

without notice is an absolute, unqualified, unanswerable defence, and an unanswerable plea


to the jurisdiction of this court ... but when the purchaser has satisfied the terms of the plea
... this court has no jurisdiction whatever to do anything more than to let him depart in pos-
session of that legal estate, that legal right, that legal advantage which he has obtained what-
ever it may be. In such a case the purchaser is entitled to hold that which, without breach of
that duty, he has had conveyed to him.

Each of the elements of this principle must be satisfied. The expression bona fide is not
synonymous with the absence of notice but is a distinct requirement. It involves the
genuineness or mores of the actions of the purchaser and requires him to act in good
faith. In Midland Bank Trust Co v Green [1981] AC 513, Lord Wilberforce said:

JUDGMENT
The character in the law known as the bona fide (good faith) purchaser for value without
notice was the creation of equity. In order to affect a purchaser for value of a legal estate with
some equity or equitable interest, equity fastened upon his conscience and the composite
expression was used to epitomise the circumstances in which equity would or rather would
not do so. I think that it would generally be true to say that the words in good faith related to
the existence of notice. Equity, in other words, required not only absence of notice, but
genuine and honest absence of notice ... it would be a mistake to suppose that the require-
ment of good faith extended only to the matter of notice ... Equity still retained its interest in
and power over the purchasers conscience.

The third party who acquires an interest in substitution of the beneficiary under a trust
is required to purchase the trust property for valuable consideration. This involves
money or moneys worth or marriage consideration. It is immaterial that the considera-
tion is not adequate and may involve all forms of non-monetary consideration. Marriage
consideration is limited to ante-nuptial settlements and assumes the existence of a future
marriage. A promise made in relation to a past marriage (post-nuptial agreement) is not
deemed to have been supported by valuable consideration.
In order to gain the benefit of this principle the innocent third party must acquire the
legal estate. This will involve a contract with the trustees to sell the property to the third
party. The principle is based on the assumption that as between the two innocent parties,
namely, the beneficiary under the trust with the equitable interest and the third party
who acquired the legal title, the court of equity favoured the latter. The approach of the
court was based on the maxim, where the equities are equal the law prevails. The effect
was the courts insistence that the third party acquires the legal title.
The final requirement concerns the lack of notice. Notice in this context embraces
actual or constructive notice. Actual notice involves knowledge, including wilful blind-
ness, on the part of the defendant. Constructive notice is much broader and involves
knowledge which would be revealed by making reasonable inquiries.
In the case of MCC Proceeds v Lehman Bros International (Europe), The Times, 14 January
1998, CA, the court decided that the defendants were bona fide transferees of the legal
title to the shares for value without notice and, thus, acquired good title to the shares.
The claimants cause of action in equity was therefore extinguished.

CASE EXAMPLE 29
MCC Proceeds Inc v Lehman Bros International (Europe), The Times, 14 January
1998, CA

2.3Characteristics of a trust
Macmillan Incorporated, a Delaware company, was taken over in 1988 by Maxwell Commu-
nications Corporation plc (MCC) and became controlled by Robert Maxwell and members of
his family. Macmillan Inc placed shares in a wholly owned subsidiary (Berlitz International Inc)
together with the relevant share certificates, in the name of Bishopsgate Investment Trust plc
(a nominee company controlled by Mr Maxwell). An agreement was entered into declaring
that Bishopsgate held the legal title to the shares as nominees for Macmillan, who retained the
beneficial interest in the shares. The agreement specified that, on Macmillans written demand,
Bishopsgate would immediately transfer the shares to Macmillan. Without Macmillans know-
ledge or consent, Bishopsgate pledged the certificates with the defendants as collateral under
a stock lending scheme. The defendants, who were ignorant of Macmillans interest in the
shares and certificates, subsequently arranged for the cancellation of the certificates on
transfer of the shares into a central depository paperless system in New York. The defendants
subsequently sold the shares to an associated company, Shearson Lehman Bros Holdings plc.
The claimants, who were Macmillans successors and assignees, instituted proceedings against
the defendants in conversion. The claim was based on the ground that Macmillan had a bene-
ficial interest in the shares and certificates and was entitled to an immediate right to posses-
sion. Such interest, the claimants alleged, was sufficient to maintain an action in conversion
and the defendants lack of knowledge of Bishopsgates wrongdoing or of Macmillans interest
was no defence to the conversion claim. The judge granted an application to the defendants
to strike out the claim for conversion on the ground that no reasonable cause of action was
disclosed on the facts. The claimants appealed to the Court of Appeal.
The Court of Appeal dismissed the appeal on the following grounds:
(a) The defendants, who were bona fide purchasers of the legal interest in the shares
without notice of any breach of trust by Bishopsgate or of any claim by Macmillan, acquired
good title to the shares and certificates, free from any adverse claims. Thus, the claimants
cause of action was extinguished. The claimants enjoyed an equitable interest in the shares
and certificates and, in the circumstances, their interest was overreached.
A claim for (b) conversion of goods was not maintainable by a person who had only an
equitable interest in the property. Conversion was a common law cause of action and the
common law did not recognise the equitable interests of beneficiaries under a trust. Accord-
ingly, the common law recognised only the title of the trustee as a person normally entitled to
immediate possession of the trust property. The claimants action in conversion could not be
maintained as its predecessor in title, Macmillan, had only an equitable interest in the shares
and certificates. This rule of substantive law was not altered by the Judicature Acts 1873 and
1875, which merely fused the administration of law and equity.
2.4 Trusts and other relationships
There are a variety of legal devices that may be adopted to deal with issues concerning
property rights. The trust is one of these institutions which gives rise to a number of
similarities with and differences from other concepts such as gifts, contracts, bailment,
the status of personal representatives of a deceased estate and the agency relationship.

2.4.1 Trusts and gifts


A gift results in a donor transferring rights in the relevant property directly to the
donee for no consideration. Thus, if the donor is the absolute owner of property the
gift will be complete when he transfers both the legal and beneficial ownership in
theproperty to the donee. In order to transfer the legal title to the donee, the donor
will need to comply with the relevant requirements for that type of property, for
instance the transfer of registered land must be done by executing a transfer docu-
30
ment followed by registration in the land registry, the transfer of shares in a private
company requires the transferor to execute a share transfer form followed by registra-
tion in the share register of the company, the transfer of tangible moveable property
Introduction to trusts

requires the donor to deliver the property to the donee. Once the legal formalities
have been completed the beneficial interest will be transferred in accordance with the
intention of the donor. The effect is that the donor retains no control over the property
that has been gifted to the donee.
An express trust, as distinct from a gift, is one where the settlor assigns his legal
rights over the property to trustees on condition that they control and deal with the
property for the benefit of the beneficiaries. The settlor indicates the nature of the
interests of the beneficiaries who, in turn, acquire equitable rights to compel the trus-
tees to perform their duties. The transfer of the legal interest to the trustees may be by
way of a gift or sale inter vivos or on death. On the creation of the trust the settlor loses
all interest in the property save for any rights retained as trustee or beneficiary. The
trustees acquire a legal interest in the property and the beneficiaries acquire equitable
interests in the property. Thus, the original interest of the settlor becomes split into
legal and equitable interests acquired by different parties.

2.4.2 Trusts and contracts


There are two types of contracts recognised in English law, a simple contract and a
specialty contract or one created by deed or covenant. A simple contract is an agree-
ment made between two parties for consideration in money or moneys worth. Whereas
a specialty contract is a deed, executed as such, and which incorporates the terms of the
agreement in writing. There is no need to provide consideration in order to enforce
the deed at common law, but this principle does not extend to enforcement in equity.
The classic features of contract law, as developed at common law, are that the agreement
is essentially a bilateral arrangement between the parties and the requirement of con-
sideration (except in relation to a speciality contract) and enforcement only by the parties
to the agreement.
A trust, on the other hand, had originated and was developed in accordance with
the exclusive jurisdiction of equity. Before the Judicature Acts 1873/75 the common
law courts had failed to recognise the institution of the trust and it was left to the Lord
Chancellor, initially, and the courts of equity, subsequently, to recognise and develop
the sophisticated rules that comprise the law of trusts. An express trust is created by
reference to the unilateral act of the settlor in vesting the property in the hands of the
trustees and setting out the terms of the trust. It is true that the vesting of the property
may be achieved by way of a contract with the trustees, but such contract will be
regarded as purely collateral to the trust. Once a trust is created the beneficiary may
be a volunteer and will still be capable of enforcing his rights against the trustees. It
would be irrelevant that the claimant beneficiary has not provided consideration. The
reason being that the beneficiary acquires an equitable interest in rem which the court
of equity was prepared to protect, irrespective of his capacity as a volunteer. If, on the
other hand, an intended trust had not been created because the property had not been
vested in the trustees, the transaction will operate as an agreement to create a trust
and will be enforced in equity only by non-volunteers. The common law rule, subject
to statutory modification, is that only parties to the contract may enforce the agree-
ment, see Woodar Investment Developments Ltd v Wimpey Construction (UK) Ltd [1980] 1
All ER 571. This is the position even though the contract was made for the benefit of a
third party. The Contracts (Rights of Third Parties) Act 1999 has restricted this prin-
ciple where inter alia the contract was made for the benefit of a third party and the
agreement does not prevent the third party from enforcing it. Under a trust a benefici- 31
ary may enforce the trust against the trustee despite the fact that he was not a party to
the trust instrument. Indeed, the beneficiary may not even have been in existence

2.4Trusts and other relationships


when the trust was set up.

2.4.3 Trusts and bailment contracts


A bailment contract involves the specific delivery of tangible, moveable property to
another (called the bailee) for a specific purpose, on condition that it is to be returned to
the bailor when the stated purpose had been achieved, e.g. the delivery of clothes to a
laundry for cleaning and ironing and to be returned on a specific day.
The confusion with trusts law was created by the definition of bailment by Black-
stone. In his Commentaries he defined bailment as a delivery of goods in trust, upon a
contract expressed or implied, that the trust shall be faithfully executed on the part of
the bailee. However, this elaborate definition has very little significance in the law of
trusts for the two concepts, bailment and trusts, have very little in common. A bailment
contract, as distinct from the trust, is a common law device. The bailee, as opposed to the
trustee, does not acquire control over the property and the bailee, generally, does not
have the power to transfer ownership of the property. Further, bailment is restricted to
one type of property, namely chattels, whereas, any form of property may be the subject-
matter of a trust.

2.4.4 Trustees and personal representatives


Personal representatives include both executors and administrators. An executor is a
person nominated under the will of a deceased person to collect in the assets of the
deceased, pay his debts and distribute the estate in accordance with the will. An admin-
istrator achieves the same objectives but is appointed where there is no will. The simil-
arities between personal representatives and trustees are that the representatives owe
fiduciary duties to the creditors and those interested in the deceaseds estate, whereas
the trustees owe similar duties to the beneficiaries under the trust. Differences between
the two groups of fiduciaries include their respective functions, the interests of the
beneficiaries and the limitation periods.
The function of the personal representatives is to wind up the estate by paying the
debts of the deceased and distributing the net estate to those entitled under the will
or in accordance with the intestacy rules. The duty of trustees is to administer the
trust for the benefit of the beneficiaries and this may involve a prolonged period of
time. The beneficiaries under a trust acquire an equitable proprietary interest as soon
as the trust is created which they can sell, exchange or give away. Whereas, those
interested in the estate of the deceased do not acquire an interest in the assets, instead
they acquire the right to ensure that the estate is duly administered by the personal
representatives. The limitation period for actions against the personal representatives
is 12 years, whereas the limitation period for actions for breach of trust is six
years, subject to fraud and actions for the recovery of trust assets in the hands of the
trustees.
Wills sometimes include a clause to the effect that personal representatives may also
act as trustees. In this event, it not easy to determine when the personal representatives
cease to act as personal representatives and become trustees. The test is when the per-
sonal representatives have completed their functions of winding up the estate and have
taken on the mantle of trusteeship. Once the residuary estate has been established and
remains undistributed, this is the time that the personal representatives are likely to
become trustees for the beneficiaries.
32

2.4.5 Trusts and agency


In some respects the duties imposed on a trustee are broadly similar to the duties
Introduction to trusts

imposed on an agent. Both institutions impose fiduciary duties on the trustee and agent.
Accordingly, the trustee and the agent are not allowed to profit from their position
except with authority. Similar remedies may be exercised by a beneficiary against his
trustee as exist by a principal against his agent. Generally, trustees and agents may not
delegate their responsibilities. However there are differences between the two relation-
ships. The essence of the agency relationship is based on an agreement between two
parties, the principal and the agent, on the understanding that the agent acts on behalf
of the principal. Thus the agent is under the control of the principal. In addition the
relationship is treated as one of creditor and debtor. Whereas the relationship between
the trustee and beneficiary is different in that the trustee is not under the control of the
beneficiary, the trustee has legal title to the trust property and the beneficiary has an
equitable proprietary interest.

2.5 Classification of trusts


The various forms of trusts may be classified into express and implied trusts. Express
trusts are created in accordance with the express intention of the settlor. The term
implied trusts is a generic expression which includes resulting, constructive and statu-
tory trusts.
The following is an indication of the various methods of classifying express trusts.

2.5.1 Private/public trusts


The broadest division is that between private and public (charitable) trusts.
Private trusts exist for the benefit of persons, or benefit a narrow section of the
public, for instance a gift on trust for the education of the children of the settlor. There
are a number of anomalous trusts in respect of which the beneficiaries are private
purposes. These beneficiaries are obviously incapable of enforcing such trusts: for
instance a trust for the benefit of the testators pets or a trust for the execution and
maintenance of a monument in memory of the testator. These are called hybrid
trusts, or trusts for imperfect obligations. Charitable trusts are public trusts which
benefit the public as a whole in a number of specified ways such as the relief of poverty,
the advancement of education, the propagation of religion and other purposes which
are beneficial to society within the spirit and intendment of the preamble to the
Charitable Uses Act 1601. The Charities Act 2011 (re-enacting the Charities Act 2006)
creates a fairly detailed list of charitable purposes. This Act creates a statutory defini-
tion of charities for the first time in English law.
Private trusts may be sub-divided into various categories, namely express, resulting,
constructive and statutory trusts. An express trust is one that is created intentionally by a
settlor or testator for the benefit of a person or group of persons (including purposes).

Private trusts

Express Resulting Constructive Statutory

Figure 2.1 Classification of private trusts 33

2.5.2 Fixed/discretionary trusts

2.5Classification of trusts
Express trusts may be sub-divided into fixed and discretionary trusts. A fixed trust is
one where the beneficiaries have settled and identifiable interests in the property which
they are entitled to enjoy and protect. For instance: on trust for A for life, remainder to B
absolutely. A enjoys the interest or income for as long as he lives, whereas B has a vested
interest in the capital or the entire property subject to As interest.
A discretionary trust is one whereby the trustees are given a duty to exercise their
discretion in order to distribute the property in favour of a selected group of persons.
The beneficiaries, individually considered, do not have an interest in the property but
have only a hope (spes) of acquiring an interest in the property, prior to the exercise of
the discretion by the trustees. For instance: For a period of 21 years from the date of the
transfer to hold on trust to apply the income to such of the settlors children as the trus-
tees may decide in their absolute discretion. The settlors child or children do not have
an interest in the property before the exercise of the discretion by the trustees, but each
potential beneficiary has a locus standi to sue the trustees for breach of trust in the event
of the trustees improperly exercising their fiduciary duties.
Discretionary trusts may be exhaustive or non-exhaustive. An exhaustive discre-
tionary trust is one where the trustees are required to distribute the income and/or
capital to the objects. The trustees are given a discretion to select which objects may
benefit and the quantum of the benefit.
A non-exhaustive discretionary trust is one where the trustees are not required to
distribute the entirety of the income and/or capital but may retain or accumulate the
relevant property at their discretion (see Chapter 6).

2.5.3 Resulting trusts


student
A resulting trust is a trust created by the courts in accordance with the presumed inten-
mentor tip tion of the settlor. The settlor or his estate is presumed to be the equitable owner. An
Understand the
occasion giving rise to this presumption is the purchase of property in the name of
difference another. For instance, B purchases shares and directs the vendor to transfer the shares in
between the types the name of T. T is presumed to hold the shares on trust for B.
of trusts!
In addition, a resulting trust may be created when there is a surplus of trust funds left
over after the trust purpose has been achieved. For instance, a surplus of trust funds is
left over after the testators pet, the sole beneficiary, dies. This surplus is held on result-
ing trust for the testators estate.
2.5.4 Constructive trusts
A constructive trust is one created by the courts in the interests of justice and con-
science. Thus, whenever a trustee abuses the confidence of the settlor by realising an
unauthorised profit derived from trust property, that profit is held on constructive trust
for the beneficiaries. The constructive trust extends beyond express trustees and may
attach to strangers who intermeddle with trust property with notice that they are dealing
with trust property. This is a subject that is in the process of development by the
courts.

2.5.5 Statutory trusts


Statutory trusts are created by Parliament in special circumstances. For example, the
Administration of Estates Act 1925 (as amended) created a statutory trust for the benefit
of the deceaseds heirs.
34 Section 33 of the Trustee Act 1925 created a protective trust, namely a determinable
life interest in favour of the principal beneficiary coupled with a discretionary trust in
favour of a specified class of objects, including the principal beneficiary, on the occur-
rence of the determining event.
Introduction to trusts

2.6 Reasons for the creation of express trusts


There are a variety of reasons why a settlor may wish to create an express trust. These
may be loosely classified as family situations, to undertake commercial transactions or
to promote charitable or non-charitable purposes. Some of the popular reasons for such
creation are:
to provide for secret beneficiaries after the death of the testator;
to create a marriage settlement for the benefit of the parties to a marriage and their
issue, if any;
to obtain fiscal advantages by way of tax planning;
to protect property from spendthrift beneficiaries by means of discretionary or pro-
tective trusts;
to promote commercial arrangements and protect lenders and customers;
to provide an incentive to the workforce through employee trusts of various kinds;
to enable charitable objects to be carried out;
to make provision for a limited number of non-human objects such as pets and the
maintenance of monuments;
to benefit minors who may not have the capacity to acquire the legal interest.

key facts
The characteristics and classification of trusts

Trust concept
Underhills definition
Section 1 of the Recognition of Trusts Act 1987
Lord Browne-Wilkinsons essential characteristics of a trust: Westdeutsche Landesbank
Girozentrale v Islington BC [1996]
Characteristics of trusts
Trust property
Separation of legal and equitable interests
Sub-trusts
Mandatory duties imposed on the trustee
Inter vivos or on death
Settlors position: Re Bowden (1936)
Trustees position (fiduciary; legal interest): Westdeutsche Landesbank [1996]
Beneficiarys position (equitable interest): Saunders v Vautier [1841]
Equitable proprietary interests
Bona fide transferee of the legal estate for value without notice: Pilcher v Rawlins [1871];
MCC Proceeds Inc v Lehman Bros Int [1998]

Classification of trusts
Private/public trusts 35
Fixed/discretionary trusts
Resulting trusts
Constructive trusts

2.6Reasons for the creation of express trusts


Statutory trusts: s33 of the Trustee Act 1925

Reasons for the creation of express trusts


To provide for secret beneficiaries
To create marriage settlements
To implement tax avoidance schemes
To protect spendthrift beneficiaries
To create commercial arrangements
To create employee trusts
To promote charitable activities
To provide for a limited number of non-human objects

Express Resulting Constructive Statutory

private/ fixed/ automatic presumed fiduciary strangers e.g. s 33 TA 1925


public discretionary

Figure 2.2 Classification of trusts

activity
Self-test questions
1. What difficulties are posed by any attempt to define a trust?
2. Identify the fundamental characteristics of trusts.
3. What essential features distinguish the various types of trusts that exist?

SUMMARY
There have been several legal definitions or descriptions of trusts. The main ones
mentioned in this chapter were provided by:
Maitland;
Lewin;
Underhill;
the American Restatement of the Law of Trusts;
the Recognition of Trusts Act 1987.
The essential characteristics of a trust are:
Lord Browne-Wilkinsons four essential characteristics laid down in Westdeutsche
Landesbank Girozentrale v Islington BC [1996] operates on the conscience of the
owner of the legal title to property, this is based on awareness of the factors affect-
ing his conscience, the property is required to be identifiable and the beneficiary
acquires a proprietary interest in the trust property;
separation of the legal and equitable interests;
obligatory nature of the trust relationship;
the beneficiary acquires a proprietary interest in the trust property which he may
assert against anyone except the bona fide transferee of the legal estate for value
without notice;
36 the trustee is regarded as a fiduciary and is prohibited from acquiring a benefit
from the trust property by virtue of his position as a fiduciary.
The various types of trusts that may exist are:
Introduction to trusts

express these are trusts created in accordance with the express intention of the
settlor. This intention may be expressed orally or in writing or affirmed by the
conduct of the parties;
resulting these are trusts that arise in accordance with the implied intention of
the transferor or where a transfer of property fails or does not exhaust the entire
property;
constructive these are trusts created by the courts in the interests of justice and
conscience;
statutory these are trusts that are created by Parliament;
fixed trusts these are trusts that are created by the settlor in which the benefici-
aries and their interests are ascertained or are ascertainable on the date of the
creation;
discretionary trusts these are express trusts whereby the settlor has imposed an
obligation on the trustees to exercise their discretion in favour of a class of
objects;
private trusts a private trust exists for the benefit of a defined class of objects;
public trusts a public or charitable trust is designed to benefit society as a whole
or a large section of society in a way that the law recognises as charitable;
bare trusts these are trusts in which the trustees have no active duties to
perform.
Some of the more popular reasons for the creation of a trust include:
to obtain fiscal advantages by way of tax planning;
to promote commercial arrangements and protect lenders and customers;
to provide an incentive to the workforce through employee trusts of various
kinds;
to enable charitable objects to be carried out;
to make provision for a limited number of non-human objects such as pets and
the maintenance of monuments.
sample essay question
Consider the following essay question:
Explain how versatile trusts are capable of being.
Answer plan

Refer to the various legal definitions of the expression, trust.


Consider the description of trusts adopted by the Recognition of
Trusts Act 1987.
Classify the various types of trusts that may exist.
State some of the popular reasons why an express trust may be
created.
Elaborate on each of the following concepts: 37
separation of the legal and equitable interests;
mandatory nature of duties imposed on trustees;

Further reading
proprietary nature of interests acquired by the beneficiaries;
creation of trusts inter vivos or on death;
the prominence of the bona fide transferee of the legal estate
for value without notice;
the irrevocable nature of trusts;
the types of property that may be subject to a trust;
the significance of the rule in Saunders v Vautier (1841).

CONCLUSION

Further reading
Blackstone, W, Commentaries on the Laws of England (ed. W Morrison, Vol. 2, Cavendish
Publishing, 2001).
Goodhart, W, Trust law for the 21st century (1996) 10(2) Tru LI 38.
Hargreaves, E, The nature of beneficiaries rights under trusts (2011) 25(4) Tru LI I63.
Hayton, D, Developing the law of trusts for the 21st century (1990) 106 LQR 87.
Millett, P, Equity: the road ahead (1995) 9(2) Tru LI 35.