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GDL - equity and trusts revision notes
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Equity W1 – Introduction to Trusts THE RULE IN DISCRETIONARY TRUSTS –SAUNDERS v VAUTIER
WHAT IS A ‘TRUST’? DIFFERENT TYPES OF TRUSTS
§ The beneficiaries can end the trust by calling for a transfer of that property
Keeting and Sheridan – (A) FIXED TRUSTS § Only if all beneficiaries under the trust who could possibly be entitled agree to the
“A trust is the relationship which arises when a requirements
trustee is compelled in equity to hold the
§ The terms of the trust define the share of the trust
property … for the benefit of beneficiaries or property which the beneficiary will receive
REQUIREMENT TO END THE TRUST –
sometimes objects …in a way that the real benefit
of the property accrues to the beneficiaries, not “On Trust for X for life remainder to Y” All beneficiaries must be:
the trustees” (a) In existence and ascertained
§ This type of trust creates successive interests (b) Are 18 or older and of sound mind
§ There is a binding obligation place on a person § X – called the ‘life tenant’ – has the ‘life interest’ (c) Are in agreement
– “a trustee” § Y – called the ‘remainderman’ – has an ‘interest in
§ To look after property for the benefit of remainder’ “in existence and ascertained”
another – “a beneficiary” § Trustees will pay only the trust income to X, on his death Y § E.g. if someone holds on trust for ‘their grandchildren’ and they haven’t been born yet,
the rule cannot apply
will receive the trust property
FEATURES OF A TRUST
Re Smith
TRUSTEES - “On Trust for A if he attains 21, but if he dies before then, for § Case that provides that courts may allow beneficiaries to get together and end the trust
§ Hold the legal title/ interest to the trust B” • The courts might agree because of this case
property § A’s interest is conditional/contingent on A attaining 21 BENEFICIAL INTERESTS
§ They have the management and control of the § If A dies before turning 21, his interest fails and B becomes
property § Important to understand whether the beneficial interest in conditional or unconditional,
entitled when the beneficiary will get his interest and what the beneficiary is entitled to receive
§ They are the legal owner of the property
BENEFICIARIES - “On Trust for C where C is an adult with full mental capacity”
§ Have an equitable / beneficial interest in the § This is called a ‘bare trust’
trust property § The trustees handle the trust property as the beneficiary
§ Have a personal right to enforce the trustee’s dictates
duties and to seek compensation for any § The beneficiary can end the trust at any time by
breach
demanding the trustees transfer legal title to him -
§ Have a proprietary right – an ownership in the
trust property itself Saunders v Vautier
o It can be enforced not only against the
trustee but also successors in title (B) BARE TRUSTS
o The proprietary nature on the § where the beneficiary, has an immediate and absolute
beneficiary’s interest means it is itself an right to both the trust capital and the income received by VESTED v CONTINGENT
item of property – can be sold/given
the trust from that capital. Vested – there are no conditions attached to the gift, once achieve conditions = vested
away
§ They can call for the trust to be ended any time Contingent – conditional upon the happening of some future event that may not happen /
TO AVOID MISUSING THE PROPERTY beneficiary not yet in existence (e.g. grandchildren)
§ The law imposes very rigorous duties on
trustees (B) DISCRETIONARY TRUSTS IN POSSESSION v REMAINDER
§ Trustees must dispose of the trust property in § Give the trustees a discretion as to the amounts any In possession – can enjoy interest immediately, no other person entitled before them
accordance with the terms of the trust beneficiary may receive and/or whether a particular In remainder – cannot enjoy immediately, interest is said to be ‘postponed’
§ They must also do the best for the trust – they
beneficiary receives anything at all
owe a duty to invest the trust property so that ABSOLUTE v LIMITED
it brings a reasonable return § Beneficiaries are mere objects – they have no right to any
Absolute – interest to the capital (and income) of the trust – all of it
§ Must avoid speculative investments interest but together they account for the absolute title
Limited – only entitled to the income generated from the trust
,CHANGING NATURE OF BENEFICIAL INTERESTS TYPES OF GIFT IN A WILL REVOCATION OF WILLS
LAW OF SUCCESSION – ON A PERSON’S
Saunders v Vautier DEATH A will may be wholly or partly revoked by the
Devise –
§ The nature of a beneficial interest may change testator at any time before his death by:
§ E.g. an interest begins as contingent but becomes vested ADMINISTRATION
§ a gift of freehold property (‘realty)
§ If a beneficiary’s interest is vested and in possession and not § When a person dies, his property is (a) The marriage or civil partnership of the
limited in enjoyment the beneficiary is described as ‘absolutely dealt with by his personal Legacy / Bequest – testator
entitled’ representatives (PR’s) § gift of personal property (‘personalty’) (b) The destruction of the will with an
intention to revoke
Can the beneficiaries end the trust?
“Estate” – all the property which the (c) The making of a new will which deals with
§ The rule has been extended to include trusts with more than Specific Gifts, Legacies or Devises –
person has a vested interest the same property in the first will
one beneficiary § gift of an asset or group of assets which are
They can end the trust if all beneficiaries who could possibly
§ PR’s will first use estate to pay distinguished in the will from all other
become entitled are :
a. In existence and ascertained inheritance tax, debts and then assets of the same kind e INTESTACY RULES
b. Are 18 or older and of sound mind (sui juris) distribute what is left to beneficiaries
c. They all agree § PR’s automatically become legal and Pecuniary Gifts – Intestacy Rules Apply To -
beneficial owners of the property § gifts of money § The whole estate If the deceased made no
CREATION OF TRUSTS § They can pass on legal/beneficial will at all; or
interest to beneficiaries § To his residuary estate if his will contains
Residuary Gift – no residuary gift; or
1. EXPRESS TRUSTS
“Executors” – where the PR’s are named § gift of what remains, usually after payment § If the residuary gift has failed or been
(a) Settlor can declare himself as trustee of debts, tax etc revoked
by the deceased in his will to carry out
§ Simplest way to create a trust the administration of the estate § ‘I give the rest of my property to X’
§ Owner declares ‘ I am going to hold … on trust’ Who Benefits?
(b) Settlor transfers property to trustees on trust § Obtain a grant of probate – Gifts on Trust –
§ All the deceased estate passes to his PR’s,
§ Settlor does not retain legal title to the asset but transfers to confirmation by the court of authority who use it to pay debts and tax and any
§ Can give property to trustees on behalf valid gifts
trustees to hold given in the will
§ Settlor cannot make himself sole trustee § What remains is shared between some of
“Administrators” – where there is no FAILURE OF GIFTS the deceased relatives – there is a specific
Once trust has been created properly, settlor cannot change his will/will doesn’t name executors order of entitlement
mind unless they reserved power of revocation ADEMPTION § The beneficiaries on intestacy are referred
§ Specific gifts fail if the testator no longer to as ‘next of kin’.
2. WILLS possesses the specified property when he
WILLS – FORMALITIES
§ Settlors can create trusts in their wills dies
Power of maintenance:
§ The settlor in this case is called a ‘testator’ or ‘testatrix’ Section 9 - Wills Act 1837
§ If and so long as the Beneficiary is under
the age of 18, the Trustee may pay or
3. IMPLIED TRUSTS
§ A will must normally be made in LAPSE
apply any income of the Trust Fund to her
Two types – writing and signed by the testator in § Any type of gift will fails if the beneficiary or for her maintenance or education, or
§ Resulting trusts the joint presence of two witnesses dies before the testator otherwise for her benefit, as he shall in his
§ Constructive trusts § They must witness the testator’s § Lapsed specific/pecuniary gifts fall into the discretion think fit.
signature by signing will in his
presence residue estate
Resulting Trust – Receipt clause:
§ Lapsed residuary gift falls into the intestacy
§ implied in certain situations § In exercise of their powers under clauses 4
§ e.g. ‘trust for X if he attains 21’ but no information on what LEGAL EFFECT OF WILLS rules and 5, the Trustee may pay or transfer the
happens if he doesn’t - resulting trust – property back to § A will does not take effect until the income or capital of the Trust Fund to the
settlor death of a testator WITNESS/BENEFICIARY RULE parent or guardian of the Beneficiary, and
§ Until the testator dies, a beneficiary Section 15 – Wills Act 1837 the receipt of such parent or guardian shall
Constructive Trust – has merely the hope of receiving his
§ If a will is witnessed by a beneficiary or their be a good discharge to the Trustee
§ it would be unconscionable for the legal owner of the property gift
to deny the claimant an equitable interest spouse, the will is valid but the gift fails
,Equity W2 – How to Make Gifts / Create Trusts : Intention, Subject Matter and Formalities KEY REQUIREMENTS FOR CREATION OF TRUST
Constitution – handing over the legal title to the
WAYS OF GIVING IN A LIFETIME trustee – not necessary if self-trustee trust
Milroy v Lord Declaration – telling the trustee to hold the
The settlor may benefit another in one of three ways: property on trust, identifying the beneficiaries,
1. Outright gift to the done their shares and the terms on which they benefit
2. Transfer to trustees to hold on trust for the
person to be benefitted Trust is COMPLETELY constituted if –
3. Declaration of self as trustee for person to be § The settlor has complied with the necessary
benefitted formalities to transfer the trust property to the
trustee
4 REQUIREMENTS FOR A VALID GIFT
Trust is INCOMPLETELY constituted if –
1. The donor must have the necessary mental
§ The transfer is defective – the trustees have
capacity
not acquired the legal title
§ Re Beaney – must have the ability to Understand
the nature of the transaction and its consequences
§ A higher degree of understanding sometimes FORMALITIES REQUIRED
necessary CHATTELS
§ Degree of understanding varies with nature of gift § Re Cole – simply physical delivery or deed
§ Banks v Goodfellow – court will presume capacity is § Jaffa v Taylor Gallery Ltd – if physical delivery
met and burden is on person contesting the will is impossible, the item may still be considered
2. The donor must have the intention, manifested by transferred
words or conduct, to make a gift SHARES
§ Can usually be inferred from the circumstances 1. Complete and sign stock transfer form (STF)
§ E.g. if transaction takes place at Christmas where 2. Send STF and share certificate to transferee
gifts are common 3. Transferee must send documents to company
to register new owner
3. The donor must ensure there is certainty of
4. Oral declaration is sufficient
subject matter and objects
If there is more than one trustee appointed, the
§ This will usually be obvious
legal title must be transferred to other trustees
4. Formalities - property must be transferred to the
LAND
donee in the correct manner
§ Must be done by deed + evidenced in writing –
§ What type of giving in question has been
s.53(1)(b) LPA 1925
attempted?
§ Send deed to Land Registry and notify as new
§ If the correct formalities have not been followed,
legal owner – s.52(1) LPA 1925
the gift fails
§ Formalities for deed – say it’s a deed, be in
writing, signed and witnessed and delivered as
VALID AND INVALID GIFTS
a deed – s.1 LP(MP)A 1989
Richards v Delbridge
§ The court will not ‘save’ an invalid gift by EQUITABLE INTERESTS
categorising a failed gift as a successfully created § Grey IRC - Must be in writing – s.53(1)(c) LPA
trust 1925
§ ‘there can be no pretence that instead of trying to § Must be signed by person disposing of the
make a gift, the intended donor meant to create a interest / an authorised agent/ in will
trust in favour of the disappointed intended § Exceptions – resulting trusts, constructive
recipient’ trusts, proprietary estoppels
, INCORRECT FORMALITIES – WILL EQUITY PERFECT AN IMPERFECTION? 4. CHOITHRAM INTERNATIONAL SA V PAGARANI – SELF-TRUSTEE LIFETIME TRANSFERS OF EQUITABLE INTERESTS
STARTING POINT – equity will not perfect an imperfect gift § If the transfer is defective, equity will not strive officiously to defeat a § A remainderman may sell their equitable interest
§ Equity will not benefit a volunteer (someone who has not provided gift to a third party even before the life-interest
consideration) § Rather, it may interpret gift as a trust if the settlor is a trustee beneficiary has died
§ Milroy v Lord – equity will not construe a trust from an invalid gift
Facts –
Dispositions Of Equitable Interests
5 EXCEPTIONS TO THE RULE § Trustee appointed himself and six others as trustees
s.53(1)(c) – Law of Property Act 1925
§ He orally stated that he was giving his shares to the trust without
§ Any sale, gift or other disposition of an equitable
1. STRONG v BIRD – DONEE (person receiving gift) BECOMES EXECUTOR completing the STF – failing to follow the correct formalities
§ Court of equity requires less from the transferor than demanded in Re
interest must be in writing and signed by the
On the death of the donor, the donee can claim legal title if: Rose as it is enough that the transferor’s conscience is affected parties to the document – Grey v IRC
a. Transfer fails due to not satisfying formalities § Important that settlor becomes trustee
b. Intention to make immediate gift by donor to done, not a plan in the future § Oral declaration is sufficient in intangible assets if the settlor remains s.53(1)(c) Does Not Apply To The Creation Of A
– Re Freeland the trustee – may interpret gift as trust if person is a trustee NEW Equitable Interest
c. Intention continues until death – Re Gonin § Creation of new equitable interest – when a legal
d. Donee becomes the executor/PR/administrator of donor and acquires legal owner declares a trust
title – Re James EXCEPTION FOR THE TRANSFER OF AN EQUITABLE INTEREST § If someone is the legal owner of some shares,
Vandervell v IRC and declares himself trustee of the shares for his
2. RE ROSE – EVERY EFFORT TEST (applies to gifts and trusts) § If an interest in under a bare trust, and the beneficiary directs the child, he does not have to comply with s.53(1)(c)
trustee to transfer the equitable estate with the intention of transferring § s.53(1)(c) only applies to equitable interests
§ Gift is complete in equity if donor has done everything he can to transfer the which already exist at the time
the legal estate as well – s.53(1)(c) LPA will not apply and an oral
gift to the extent that it is now out of his hands and the only outstanding
instruction will be sufficient
matters are left in the hands of third parties
§ Shares (using formalities for shares) Equitable title passes once donor has sent BARE TRUST
However – The Rule ONLY Applies If –
forms to donee, legal title passes once donee sends the form to the company § There are no conditions attached
§ The legal estate is being transferred as well as equitable interest
§ Even if it is under a bare trust, if only the equitable interest is being § It is simply a convenient way of arranging
APPLICATION OF EVERY EFFORT TEST – Mascall v Mascall
transferred then writing is required – Zeital v Kaye matters
§ A case which concerned a gift of registered land
§ Donor handed over a deed of transfer to donee, which was sufficient to enable § In a bare trust, when the beneficiary directs the
donee to become registered as legal owner Vandervell v IRC trustee to transfer the legal estate to a third
§ The donor, later, unsuccessfully tried to change his mind but every effort had § Whether the s.53(1)(c) LPA applies when the equitable interest is party with the intention that the third party
been made transferred along with the legal title – legal title must be duly transferred takes equitable interest as well, s.53(1)(c) does
for it to be effective not apply
§ If the property is held on bare trust, there is no need for the s.53(1)(c) § The transfer of the legal title also effects the
3. PENNINGTON v WAINE – UNCONSCIONABLE? Applies to specific situations writing requirement because the legal titles have already been transfer of the equitable interest
§ Extends Re Rose test to gifts even when incomplete transferred – an oral declaration to a bare trustee to transfer the trust § There is no need to discuss the separate transfer
§ Must be unconscionable to invalidate disposition (look at table of cases) property to a third party absolutely for his own benefit is valid of the equitable interest
§ s.53(1)(c) is only relevant when ‘dealings with the equitable estate are
Pennington v Waine divorced from dealings with the legal estate’.
§ Transferor told auditor she wanted to transfer shares to nephew § In a bare trust, when the beneficiary directs the trustee to transfer the EXPECTANCIES
§ Transferor signed STF and sent to auditor but NOT handed over to transferee legal estate to a third party with the intention that the third party takes
§ Auditor told nephew that he didn’t need to do anything further § An expectancy is not a proprietary interest, it is a
the equitable interest as well, S.53(1)(c) does not apply
§ Transferor passed away with the transfer incomplete mere hope of ownership of property in the
§ It was held that it would be unconscionable not to treat the transfer as future such as the legacy under the will of a
DISTINGUISHABLE FROM VANDERVELL person still alive
complete, even though no documents had been sent to transferee
Key factors to look out for Zeital v Kaye
Can You Transfer An ‘Expectancy’?
• Donor executed the necessary transfer document § X held a company share on bare trust for Y § The law takes the pragmatic view that you
• Donor told the donee of the gift § Y intended to give the equitable share ONLY to Z, and a completed stock cannot transfer that which you do not own
• Donee has acted upon it to her detriment – detrimental reliance required transfer form in favour of Z was handed over to Z (DISTINGUISHED PART) § It is, however, possible to enter into a binding
Curtis v Pulbrook – suggests Recipient must have taken steps to their own § The court found that as Y held an equitable interest, the correct way to contract, in order to transfer such future
detriment were they to not receive the gift e.g. quitting their job transfer was in writing, complying with s.53(1)(c) LPA 1925 property
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