Clear, precise, detailed, yet concise, Equity and Trusts summary for PDGL and SQE students. I have devoted so much time and energy to writing these notes-summaries that eventually they paid off. Not only they allowed me to pass my PDGL with a distinction, but they were key to studying for the SQE e...
TOPIC 1: TRUSTS AND THE NATURE OF BENEFICIAL INTERESTS
Historical background:
Equity, body of law in its own right, originated in the Court of Chancery.
Judicature Acts 1873 and 1875: created one Supreme Court with different division: Chancery for equity
cases and the Queen’s Bench for common law cases. Each division may, however, determine a point of
equity in any case.
Equity has been described as “a body of rules which evolved from those principles applied and
administered by the Court of Chancery”
It has also been explained as something which “operates on the conscience of the owner of the legal
interest”.
Consistent guidelines: The essence of these equitable principles is to provide consistent guidelines at any
given time for judges in making their decisions.
The central tenet of equity today is still to achieve justice and fairness between the parties in each
individual case, having regard to the current principles, as established by the guidelines, to prevent an
unfair or unconscionable result.
Maxims of Equity:
Statement which embody core principles of equity:
o “He who comes to equity must come with clean hands.”
o “He who seeks equity must do equity.”
o “Equity will not suffer a wrong to be without a remedy.
Trusts:
A key concept of equity is the idea that there can be more than one type of interest or ownership in
property.
A trust ... is the relationship which arises wherever a person called the trustee is compelled in equity to
hold property ... for the benefit of some persons (of whom he may be one, and who are termed
beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property
accrues, not to the trustee, but to the beneficiaries or other objects of the trust. (Keeting and Sheridan, The
Law of Trusts, 12th edn, 1994)
A trust allows the separation of control of property from its enjoyment and use.
Trustee: management and control of the property subject to the trust (the ‘trust property’)
Beneficiary: ‘real’ owner in the sense that they enjoy the benefit of the property.
‘Settlor’: a person who sets up a trust in their lifetime.
‘Express trust’: a trust which is set up intentionally by the settlor. Many express trusts are created in a
written document which is called a ‘trust instrument’.
The settlor can give the beneficiaries a specific benefit without giving them outright ownership.
Features of a trust:
When a trust is created, the trustees hold the legal title or interest in the trust property and the
beneficiary has an equitable interest in the trust property (‘beneficial interests’).
Legal interest held by trustee:
Holder of legal title (trustee) is the owner of the trust property.
In contrast to an outright owner, trustees are obliged to hold the property for the benefit of those
possessing the equitable title. This obligation is the trust.
Beneficiaries get the benefits of the trust property indirectly by enforcing the trust obligation against the
trustee.
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, Duties of trustees:
o dispose of the trust property in accordance with the terms of the trust;
o duty to invest the trust property so that it brings in a reasonable return and must avoid speculative
investments.
If trustees breach a duty, the beneficiaries can sue them to make good any loss out of the trustees’ own
money (ie. Claim for breach of duty to invest trust money in non-hazardous investments).
Equitable interests held by the beneficiary:
Two rights stemming from equitable interest:
o personal right to enforce the trustees’ duties and to seek compensation for any breaches (nb.
enforceable against the trustees personally);
o proprietary right, ie, an ownership interest in the trust property itself.
Significance of proprietary right:
o 1) can be enforced against trustees and successors in title;
Exception: bona fide purchaser who has no notice of the beneficiaries’ rights (‘Equity’s
darling’);
o 2) beneficiary’s interest m is itself an item of property which can be sold or given away.
The trust is still alive if the trustee dies. By virtue of the beneficiary’s proprietary interest, the relevant
property is still held on trust for her.
Given that a trust involves separate ownership of the legal and equitable interests, a sole trustee cannot
hold on trust for themselves alone. In that situation, there is no trust – the ‘trustee’ is the outright owner.
Types of trust:
Fixed trusts: The terms of the trust define the share of the trust property which the beneficiary will
receive.
Discretionary trusts: gives the trustees a discretion as to the amounts any beneficiary may receive
and/or whether particular beneficiaries receive anything at all – ie ‘to hold on trust for such of my children
and in such shares as my trustees think fit’.
o No individual has an equitable interest under a discretionary trust until the trustees exercise their
discretion in that individual’s favour.
o Until such persons are allocated an interest by the trustees, they are called ‘objects’ rather than
beneficiaries.
Bare trusts: ‘On trust for C’ where C is an adult with full mental capacity: This is called a ‘bare trust’
because the trustees hold on trust for a sole adult beneficiary possessing full mental capacity absolutely
(with no limitations or conditions attached).
o The beneficiary can end the trust at any time, by demanding that the trustees transfer legal title to
them so that they become the outright owner (Saunders v Vautier (1841)
o Bare trusts also arise when a beneficiary under one of the other types of trust becomes solely and
absolutely entitled to the trust property.
Beneficial interests:
Interests in A beneficiary has an interest in possession if they can enjoy that interest immediately.
possession
A beneficiary has an interest in remainder if they cannot enjoy it immediately but instead has to wait
OR until some other beneficiary’s right to enjoyment expires. The interest is said to be ‘postponed’.
in remainder ‘On trust for X for life remainder to Y’: This type of trust creates ‘successive interests’; this means
that it creates beneficial interests which have effect one after the other.
X (who is called the ‘life tenant’) has a ‘life interest’ —> interest in possession: immediate
enjoyment;
Y (who is called ‘the remainderman’) has an ‘interest in remainder’.
The effect of the phrase ‘for life’ means that X will only be entitled to receive the income generated
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, from investing the trust property.
When X dies, his interest does not pass under his will. Instead, Y’s interest ‘falls into possession’ and
he is then entitled to enjoy the trust property.
If Y were to die before X, the vested interest in remainder would form part of Y’s personal estate
and would pass to whoever inherited from him.
Absolute From example above:
OR X has a limited interest as he has an interest in the trust income only. He will never have the right to
enjoy the capital. His interest in the income can also be described as vested and in possession.
Limited interest
Y has an absolute interest as his interest is in the capital. He will be entitled to this once X dies. His
interest in the capital can be described as vested and in remainder.
Vested A beneficiary has a vested interest if that beneficiary exists and does not have to satisfy any
conditions imposed by the terms of the trust before they become entitled to trust property.
OR
A beneficiary has a contingent interest if it is conditional upon the happening of some future event
Contingent that may not happen, or if the beneficiary is not yet in existence.
interest If/when the condition is satisfied, the interest becomes vested. If not, the interest fails.
If settlor does not provide for what happen when interest fails, the trust property will have to be
returned to the settlor = resulting trust.
The trustees will then hold the trust property on a resulting trust for the settlor.
‘On trust for A if A attains 21 but if A dies before then, for B’: A’s interest is conditional (or
‘contingent’) on A attaining 21. In the meantime, the trustees will look after the trust property for the
benefit of A. If A dies before attaining the age of 21, A’s interest fails, and B becomes entitled.
Changing nature of beneficial interests:
The nature of a beneficial interest may change according to the circumstances:
o An interest may begin as contingent and/or in remainder but eventually become vested and/ or in
possession.
If a beneficiary’s interest is vested and in possession and not limited in enjoyment, the beneficiary is
described as ‘absolutely entitled’. – that usually coincides with a bare trust.
The rule in Saunders v Vautier (beneficiaries bring trust to an end) been extended to include trusts which
have more than one beneficiary. The beneficiaries can end the trust by calling for a transfer of trust
property to themselves or to other trustees if all the beneficiaries under the trust who could possibly
become entitled:
(a) are in existence and ascertained;
(b) are 18 or older and of sound mind; and
(c) agree.
They must be absolutely entitled between themselves (ie there is no other person with a potential
interest in the fund). When it is not so, the rule in Saunders v Vautier cannot be applied.
However, there is authority (Re Smith) suggesting that between them, the class of beneficiaries under a
discretionary trust own the whole of the equitable interest. Saunders v Vautier could then apply.
Creation of trusts:
A settlor may create an express trust in their lifetime in one of two ways:
o Settlor declares self as the trustee: The simplest way to create a trust is for the owner of an asset
to declare that they hold the asset for the benefit of someone else.
However, the settlor cannot make themselves a sole trustee holding on trust for the settlor
alone.
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, o Settlor transfers property to trustees on trust: the settlor does not retain legal title to the asset but
transfers it to trustees to hold on trust for a designated beneficiary.
The trustees may number one or more; settlors commonly choose two trustees. The
trustees may be professionals, relatives or friends.
Once trusts have been created properly, settlors cannot change their minds and recover the property for
themselves beneficially (unless they reserved a power of revocation when the trust was created).
It is the beneficiaries who enforce the trustees’ duties and not the settlor. Thus, unless settlors make
themselves trustees or beneficiaries, they have no say in how the trust is run.
Creation of trust by will:
Settlors can create trusts in their wills. The settlor is then called a ‘Testator’ (or ‘Testatrix’ if female).
Such trusts have no effect until the testator dies.
Implied trusts:
Two types of implied trust:
Resulting trusts: the trustees hold on trust for the settlor. Resulting trusts are implied in certain defined
situations.
o Ie. where there is a gap in the beneficial ownership = settlor creates a trust for X if they attain 21
but does not say what is to happen if X dies before 21. Sadly, X’s interest never vests because
they die aged 20. The trustees will hold the trust property on a resulting trust for the settlor.
Constructive trusts: arise in certain circumstances when it would be unconscionable for the legal owner
of property to deny the claimant an equitable interest.
o Ie. Contribution to purchase of property but name not registered in legal title.
The Law of Succession on a Person’s Death:
Administration:
When a person dies, their ‘estate’ (all the property in which that person had a vested interest) is dealt with
by their personal representatives (‘PRs’).
The PRs will first use the estate to pay any inheritance tax due and the deceased’s debts, and then
distribute what is left to the persons who are entitled to it (‘beneficiaries’).
To achieve this, the PRs automatically become legal and beneficial owners of the property forming the
estate of the deceased when they died. The PRs can then pass on legal and beneficial title to the
beneficiaries.
Where the PRs are the persons named by the deceased in their will to carry out the administration of the
estate, the PRs are known as executors.
o Executors obtain a document called a Grant of Probate, which is confirmation by the court of
their authority given by the will.
Where there is no will, or a will does not name executors, or the persons named in the will cannot act as
executors (eg because they have died), there are statutory rules that govern who will be the PR. These PRs
are known as administrators. They obtain a Grant of Letters of Administration, which is the
authorisation by the court to deal with the estate of the deceased.
Wills:
A will can be split up into four main sections:
1. Appointments: appointment of Executors, Trustees and Guardians.
2. Dispositions: states who is going to get what from property from the deceased.
3. Administrative Matters: giving the Executors powers to make their administration of the testator’s
property as straightforward as possible.
4. Execution: It is imperative that the testator executes the will correctly otherwise it will not be valid.
Formalities:
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