Tag: Milroy v Lord
Trusts (An Overview)
Insight | May 2017
Unknown artwork by Jon Krause
Originating from the latin phrase ad opus, the purpose of a trust is to provide the safe containment of assets (whether those of property or money) on condition that they will be of benefit to another party or parties. There are many instances in which a trust can be created, and it is the intention of this article that we have a look at the more common trusts used today, before explaining their application through suitable case law propositions.
Purpose Trusts
Subject to the same qualifying criteria as that of a will bequest, the terms of a valid trust require that three certainties must be readily ascertainable:
(i) The intention of the settlor
(ii) The subject matter of the trust
(iii) The identity(s) of the beneficiary(s)
The inherent problem with purpose trusts is that they are by nature, constructed so as to benefit an unlimited number of people, although often under a charitable intention. An excellent example of a purpose trust is the one described in Re Denley, where the use of recreational ground was exclusively reserved for the current and future employees of an aircraft manufacturer, and that despite presupposition of its failure, the judge upheld its validity on grounds that an approximation of the staff was, in the immediate sense, obtainable. This allowance was expressed by Goff J who remarked:
"[T]here may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust, quite apart from any question of uncertainty or perpetuity. Such cases can be considered if and when they arise.The present is not, in my judgment, of that character…"
Ironically, resulting trusts are express trusts that have, by their lack of specificity, wound up benefiting the settlor, despite the very wish to relinquish title or interest. As with the third element of a successful trust, where the identities of the beneficiaries are either remitted or withheld, the principles of equity would defer the construction of the trust to that of the settlor's gain. While in some instances the outcome causes little damage, there are equally those where a resulting trust inflicts financial loss, as was seen in Vandervell v IRC. Appreciably, there is rarely if ever, any intention to create a resulting trust, and so the instances where they do emerge rely upon clear conditions, as explained by Lord Millet in Air Jamaica v Charlton when he remarked that:
"Like a constructive trust, resulting trust arises by operation of law, though unlike a constructive trust it gives effect to intention. But it arises whether or not the transferor intended to retain a beneficial interest – he almost always does not – since it responds to the absence of any intention on his part to pass beneficial interest to the recipient. It may arise even where the transferor positively wished to be part with the beneficial interest…"
One of the advantages of a charitable trust is that it enjoys exemption from the otherwise exactness of both beneficiary and subject, although in many cases the charity of choice is typically named so as to avoid confusion within the court, or a need to invoke the cy-pres doctrine. Another is the avoidance of taxation, as charities are free from the burden of inheritance tax, capital gains tax and occupancy rates (where circumstances allow). As also outlined in s.1(1) of the Charities Act 2006, the trust beneficiaries must fall within the scope of legislation in order for the trust to succeed, and as can be found under s.2(2) of the 2006 Act, the possible forms such charities might take are reasonably extensive.
Sharing a close relevance to the strictness of fiduciary duties, constructive trusts are a means of remedy where a trustee has immorally profited from another's property through the dysfunction of their relationship. Where evidence is found to support wrongful gain, a constructive trust is created that serves to hold the assets on trust for the now slighted settlor. An example of this is Attorney-General of Hong Kong v Reid where Lord Templeman stressed that:
"As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured."
As with purpose trusts, an express trust is the standard form of trust, whereby the settlor (i) makes a clear expression of his wish to create a trust (ii) deliberately illustrates what form the trust takes (property or funds) (iii) who the beneficiaries are (iv) takes the correct steps to transfer the property in accordance with statute and where necessary makes it known who the acting trustees will be. The reason for this is to facilitate court intervention in the event of contention, particularly where the settlor has since died, leaving instructions within their final will or codicil. Failure to demonstrate evidence of those key elements will result in a void trust, and in death, eventual lapse into the residual estate of the deceased.
An example of the exactness required for an express trust is found in Milroy v Lord where despite having made verbal declarations as to his wish for his company shares to benefit his niece, his associate had failed to officiate the trust through the legal channels; resulting in the shares remaining on trust for himself (as would be the case in a purpose trust). This was elaborated by Lord Justice Turner, who remarked:
"[I]n order to render a voluntary settlement valid and effectual, the settlor 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."
Cestuis Que Trusts
Cestui que is an abbreviated version of 'cestui a que use le foeffment suit fait', which means 'the person for whose use the foeffment was made.' Further simplified, 'foeffment' represents any grant of freehold property, therefore a cestui que trust would be those holding property upon trust for the benefit of another named individual who retains legal title; although any beneficial interest remains in the hands of the cestui que trust (or person assigned the interest).
This translates that unlike other forms of trust, the legal owner acts as a trustee, while the actual beneficiary serves as operator of the trust, much like a reversal of roles. The result of this is that should the trustee decide to convey the property, the cestui que trust can sue for breach of duty where no permission has been granted and no profits enjoyed. This was explained by Austin Wakeman Scott in his Columbia Law Review article 'The Nature of the Rights of the Cestui Que Trust' (1917), when he wrote:
"If a trustee should destroy the trust res, or should sell it to a purchaser without notice of the trust and dissipate the purchase money, the cestui que trust may maintain a suit in equity against the trustee for breach of trust, and recover a sum of money, either the value of the trust res, or the amount of profits which should have accrued if no breach had been committed."
Fixed Trusts
These are typically used where multiple beneficiaries exist, while the nature of the fixed trust is to state exact figures or quantities of benefit to each party, so as to avoid inequitable profit by those in receipt or miscalculation by the appointed trustees. The criteria for this form of trust was established by Jenkins LJ in Inland Revenue Commissioners v Broadway Cottages Trust, where having examined the specificity of the trust, there was insufficient evidence to obtain certainty of the beneficiaries, thus the trust failed with the reasons given that:
"[T]he trust of the capital of the settled fund for all the beneficiaries living or existing at the termination of the appointed period, and if more than one in equal shares, must be void for uncertainty, inasmuch as there can be no division in equal shares amongst a class of persons unless all the members of the class are known."
Secret Trusts
Undoubtedly designed to protect the identity and interest of the beneficiary(s), the settlor is able to draft and execute a secret trust that can be both observed during life, and inserted into a will under the pretence that a named beneficiary will inherit absolutely, when in fact they will act as trustees for those with the intended benefit (similar arrangements can fall under intestacy provided prior agreement was arranged by the deceased). Similarly, there are half-secret trusts that operate beyond the terms of a will but under the duties of a trustee, this translates that the dispositions of the trustee remain unknown, although there is no uncertainty as to where the trust property resides. The framework of secret trusts was outlined by Peter Gibson LJ in Kasperbauer v Griffith, when he said:
"[T]he authorities make plain that what is needed is: (i) an intention by the testator to create a trust, satisfying the traditional requirements of three certainties (that is it say certain language in imperative form, certain subject matter and certain objects or beneficiaries); (ii) the communication of the trust to the legatees, and (iii) acceptance of the trust by the legatee, which acceptance can take the form of acquiescence…it is an essential element that the testator must intend to subject the legatee to an obligation in favour of the intended beneficiary. That will be evidenced by appropriately imperative, as distinct form precatory language."
While operating much like a typical trust, the discretionary trust allows the trustee(s) to regulate and thus self-determine, the extent of the distribution to assigned beneficiaries. With two differing types, the exhaustive discretionary trust provides full and complete distribution of trust assets; whereas the non-exhaustive trust allows the trustee(s) to decide how much is awarded, and to specify what, within the trust, is granted to the beneficiaries.
Statutory Trusts
Brought about through the disposition of land under co-ownership and the rules of intestacy, these trusts are designed to protect the interests of those in title. First introduced through s.34-36 of the Law of Property Act 1925 the intervention, or at least creation of such trusts, was also enforced through s.33 of the Law of Administration Act 1925, before consolidation of both Acts came through the Trusts of Land and Appointment of Trustees Act 1996. In the former instance, there is an automatic trust power to sell and retain under co-ownership, and in the latter, a power to sell through personal representative where no will was executed.
Public Trusts
There is little to explain here other than that unlike a private trust, a public trust is created by the settlor with the express intention of benefitting certain members (or sections) of the general public. This is often achieved through the use of a charitable trust, as deemed valid through the requirements of rules required by the Charities Act 2006.
Bare (or Simple) Trusts
Perhaps the most basic of trusts, the bare or 'simple' trust serves only to hold property or funds in favour of a beneficiary, yet with no trustee duties attached. In this instance, the trustee is replaced with the title of nominee until transfer is required.
Special Trusts
Unlike the previous trusts, these are created with prerequisite trustee instructions, albeit divided into two categories, namely ministerial and (as above) discretionary trusts. In the former, those duties may include rent collection and administrative functions, whereas the latter affords the trustee with powers to decide how best go about his or her role.
Quistclose Trusts
Running parallel to laws of contract, the quistclose trust was brought about in Barclays Bank v Quistclose Investments Ltd, in which the lender took steps to clarify that the money loaned was on condition of use, and held within the bank until the borrower chose to redeem the funds. When the borrower lapsed into liquidation, the lender asserted property rights against the bank under the principle that the funds were held on trust, and that the bank was now acting as a trustee; thus circumventing the rights of other creditors, while holding the funds in safe reserve for the lender as acting settlor. This unique approach was supported by the House of Lords, and explained well when Lord Wilberforce remarked:
"In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it."
Author Neil Egan-RonaynePosted on May 2, 2017 December 24, 2018 Categories TrustsTags ad opus, Air Jamaica v Charlton, Attorney General for Hong Kong v Reid, Barclays Bank v Quistclose Investments Ltd, Bare Trusts, Cestuis Que Trusts, Charitable Trusts, Charities Act 2006, Christine Lytwynczuk, Constructive Trusts, cy-prés, Denley's Trust Deed Re, Discretionary Trusts, Express Trusts, Fixed Trusts, Inland Revenue Commissioners v Broadway Cottages Trust, Kasperbauer v Griffith, Law of Property Act 1925, locus standi, May 2017, Milroy v Lord, Neil Egan-Ronayne, Public Trusts, Purpose Trusts, Quistclose Trusts, Resulting Trusts, Secret Trusts, Simple Trusts, Statutory Trusts, Trusts, Trusts of Land and Appointment of Trustees Act 1996, Vandervell v IRC, www.theblackletter.co.ukLeave a comment on Trusts (An Overview)