Creating an Express Trust

The creation of an Express trust is where a settlor, wishes to either hold property himself on trust for another person(s), or wants a 3rd party to hold it on trust for them. These are the other 2 criteria in Milroy v Lord which was discussed last Post.

A person can either create a trust in their life time, are in their will when they die. If they are creating one in their life time (Inter Vivos) there must be a valid transfer of property, as well as a valid declaration. If the settlor wishes to hold the property on trust themselves, they only have to make a valid declaration of trust.

With trusts made after death in someone’s will, they do not have to transfer the property, as they will be done on administration of the estate after the settlor dies. Therefore, the settlors will must be made validly (comply with the wills act) and there must be a valid declaration contained in this will.

Therefore, there are 3 methods of creating a trust

  1. Creation of trust with self as trustee (Method 1)
  2. Creation of trust with 3rd party as a trustee (Method 2)
  3. Creation of trust in a will (Method 3)

What all 3 have in common is that they require a Valid declaration of trust. A valid declaration of trust consists of:

  1. The Three Certainties (Knight v Knight)
  2. To comply with the beneficiary principle
  3. To comply with the rule against perpetuities.

 

Certainty of Intention

This criterion is all about whether the settlor intended to impose the duty on himself or a 3rd party or give the gift to the Donee/beneficiary. The main idea point behind this is that Precatory Words will not be sufficient in showing intension. For example, in ‘Adams’ the phrase ‘that they will do what is right’ is precatory. There is no definitive intention that the settlor was giving a gift of setting up a trust and therefore it lacks this certainty.

In the case of Paul v Constance, the phrase ‘as much yours as it is mine’ was interpreted to be sufficient as it still shows that there was a specific interest in that asset, specifically the % of this as well (which crosses over into subject matter more).

A small but very important point- the settlor/Donor must have sufficient mental capacity to make the gift/ set up the trust anyway.

 

Certainty of Subject Matter

This criterion is in relation to the actual trust property, as well as the beneficial interest in the property.

In the case of Palmer v Simmonds the term ‘bulk of estate was not sufficient as it did not specific which parts of the estate and which percentages.

The case of Re London Wine Co. it was held that there was no trust, as the wine was not separated up into which customer has which wine. Therefore, it was stated that the property was uncertain.

In the case of Hunter v Moss, it was held that shares in a company did not have to be specifically states. All shares are equal, so as long as the number of shares is stated, there will be no problem with certainty of subject matter.

The residue of a will is regarded to be clear enough as it is capable of being worked out once the rest of the estate has been given out. If it is not clear, then the property will result back to the settlor, or the settlor’s estate, and be divided out on intestacy rules, fall to the residue, or back to the live and well settlor.

The case of Re Golay stated that reasonable income would be sufficiently clear as they could work it out, however this case was back in 1965. As time has changed, the idea of a reasonable income has become a rather subjective one and therefore if this case come to court today, it may be found that this is not sufficiently clear.

 

Certainty of Objects

This criterion is in relation to the actual beneficiaries that are inline to receive the property and or benefit from it in some way. Sometimes this may be fairly obvious, when it expressly names the beneficiaries who will be entitled to the property and when. However, this also includes a class of beneficiaries. This is also fairly common, when someone will leave money to ‘all grandchildren in equal shares’.

It was said the case of Broadway cottages v IRC, that a complete list of all of the beneficiaries must be compiled for there to be sufficient certainty of objects. If there is any question as to whether someone is a beneficiary or not, the trust will fail. This case was in regard to a fixed trust.

As this was a very narrow view, this principle was developed in regard to discretionary trusts in the case of McPhail v Dalton, when the Given Postulence test was derived. It was said that there only needs to be conceptual certainty that there is an identifiable class of beneficiaries, and not evidential certainty which was required in Broadway Cottages.

In this case, Lord Sachs, with the most liberal approach, stated that he believed that as long as there was an identifiable class of beneficiaries, this was sufficient certainty of objects. Lord Megaw developed this principle and said that the burden to prove that they are within the class of beneficiaries will be on the beneficiaries themselves. It is not presumed that anyone is within the class. Lord Stamp was a dissenting judge and still relied on the Broadway cottages interpretation wishing to apply the ‘is or is not’ test too all potential beneficiaries. If this is not sufficient then the trust will fail.

The given Postulence test includes the discussion about administrative unworkability and capriciousness.

Administrative unworkability is where the class of beneficiaries is too wide that it is unworkable. In McPhail v Dalton, the example was given as ‘all residence of greater London, would be too wide as it would include thousands of people. This was backed up in the Yorkshire case, where it included 2.5 million people which was too wide work. Each person would receive such a small amount it would not be worth doing and it could cost more to distribute it to every person and therefore it unworkable. There have been cases which include thousands of people which have been said to be workable.

Capriciousness all rides of the principle of whether it was a rational thing for the settlor to do. The case of Re Manitsy stated that if it was so irrational for the Donee/settlor to benefit that class of people or to distribute the trust fund in that way, then the trust may also fail.

 

Beneficiaries Principle

This principle is in relation to those who will actually receive the benefit. This principle says that there must be a specific beneficiary that will receive the benefit, basically ruling out any purpose trusts (trusts that are set up with the purpose of doing something with the property). As always there are expectations to this as we will come onto later.

In the case of Morice v Bishop of Durham it was said that a trustee should not be left legal title to any property without someone to have the equitable benefit also, whether that be himself or another person.

In the case of Re Astor’s settlement, the purpose of ‘to ensure co-operation and harmony between member states’ was a purpose trust and therefore invalidated the trust as there was no one who would enforce this purpose.

In Re Shaw, money was made in order to promote and develop a 40-letter alphabet. This was a purpose trust and once again had no one to enforce this and as a result the trust failed.

 

Rule against Perpetuities

It is generally bad for the UK economy for money to be tied up for too long. If there were no laws restricting this, it may mean that more and more capital gets tied up for unlimited periods of time. This is bad as the economy is based on the circulation of money from consumers to businesses and back to consumers when they get paid for working.

In the Perpetuities and Accumulations act 2009, this tying up of capital is limited at 125 years. If the trust is definitely going to exceed this period it will be void. If it is going to be under this, then it will be fine. If it is uncertain, the then trust will exist until it is determined whether it will last that length of time or not.

In the William Burt trust, trust capital was tied up for 92 years. The gentleman who created the trust, did not like his current family and left it to decedents far down the line. If the trust had exceeded 125 years, it would have failed.

 

Valid Transfer

Different types of property require different methods of transfer. This has already been discussed in the previous Post.

 

Purpose trusts in relation to Beneficiary principle

Purpose trusts are generally not valid as seen in regard to the cases above. However, through time there are certain exceptions that can be used to get around this. One of the main areas are for charities.

If money is left on trust for a charity, this can be validated, as long as it is charitable, exclusively charitable and of public benefit. This is a fairly big area and will be looked at in closer detail in a later blog post. It is governed by the Charities Act 2011 with additional case law.

 

The next justification to the rule is in regard to maintenance of graves and tombstones and the care of specific animals. These are trust of imperfect obligations and said to be, in the case of Re Endacott, concessions to human weakness.

In Re Dean, income and upkeep of 8 horses and dogs was allowed under this head, and in Pettingall v Pettingall a mare was covered under this. There is a problem when care is not being taken of the animal as there isn’t a anyone to enforce this. In some cases, the remainderman may be able to bring a claim to get this enforced.

In Re Hooper income for various graves and tombs of his family were allowed maintenance. However, it still must comply with the rules of inalienability of capital

 

The third way in which a purpose trust may be validated is through Re Denley which created another method. In this case that it will be valid if:

  1. There is a tangible benefit
  2. For ascertainable beneficiaries
  3. Which is direct or indirect
  4. And complies with the rule if inalienability of capital.

Once again this is fairly vague but covered in further detail in a later post.

 

Inalienability of capital (perpetuities for purpose trusts)

For purpose trust, the rule against perpetuities is slightly different, and known here as inalienability of capital. Once again, it is bad for the economy if capital is tied up for too long, and therefore limits are placed on this. Charitable trusts are immune from this; however, it applies to all other purpose trusts. They cannot last for more that 21 years, therefore it does not allow any ongoing obligations such as maintenance.

As defined in Re Hooper, if the trust does not say anything, then it will be implied that it can only last for 21 years. After the 21 years, the rest of the trust capital results back to the settlor.

In the case of Re Denley, ‘as long as the law shall allow’ is also sufficient and will imply 21 years.

 

Method 3- Wills

In order for a will to be created validly, it must comply with section 9 of the wills act. It must be signed by the testator, in the presence of 2 witnesses who also sign the will. The will is successfully validated then and therefore, on death, will give instructions on who gets the property of the testator. It can also potentially create a trust, which requires a valid declaration (3 certainties, beneficiary principle and rule against perpetuities). It does not require a transfer of property.

 

By Woodrow Cox

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