Basic Principles of Trusts
What is a Trust?
Property is ‘owned’ in two ways: in law and in equity. In most cases the same person owns both the legal and the equitable title: ‘absolute ownership’. Where someone makes an absolute gift of property, they transfer both the legal and equitable title to another.
In some cases, however, different people own the legal and equitable title. If so, the property is held ‘on trust’.
The owner of the legal title is the ‘trustee’.
The owner of the equitable title is called the ‘beneficiary’. A person with a future or contingent interest in the equitable title is also called a beneficiary, even if they do not currently own the equitable title.
So, the trustee holds the property ‘on trust’ for the beneficiary.
A person might declare themselves a trustee of their own property in favour of someone else. Alternatively, they may transfer the legal title to property to another so that the latter can act as trustee. A person creating the trust in either of these ways is called the ‘settlor’.
The Nature of a Trust
A person with absolute ownership has the exclusive right to possess and use property for their own benefit. By contrast, while the trustee owns the legal title to the property, they do not have exclusive right to possess or use the property. Rather, they must apply the property subject to the trust terms for the beneficiary’s benefit.
Unlike rights created under contract, both the trustee and the beneficiary have property rights in the trust. This is significant as it can give them rights over third parties and successors-in-title. However, equitable rights cannot bind someone who buys the property for consideration, in good faith and without notice of the equitable right: Pilcher v Rawlins (1872) LR 7 Ch App 259.
Trusts can be express or implied. An express trust is created deliberately and consciously in words by the settlor. An implied trust is not created deliberately or consciously. There are two kinds of implied trust: resulting and constructive trusts.
Fixed and Discretionary Trusts
Trusts are either fixed or discretionary. Under a fixed trust, the trustee must apply the property to a specific beneficiary or beneficiaries in a particular way. Under a discretionary trust, the trustee has discretion as to the beneficiaries’ identity or how to apply the property. For example:
- A Fixed Trust: ‘The house at 3 Celestine Street, to be held for my husband for as long as he lives and then in remainder for my daughter’ or ‘£10,000 for my three sons, held in equal shares’.
- A Discretionary Trust: ‘£10,000, to be used to promote my daughter’s education and health until she turns 18’ or ‘£10,000, to be distributed between my three sons or given in its entirety to my husband’.
Constitution of Trusts and Gifts
An express trust or gift must be completely constituted. It is not enough that the settlor promises or intends to make a gift or trust. This is an application of the equitable maxim that ‘equity will not assist a volunteer’.
To completely constitute a gift, the donor must successfully transfer legal and equitable title to the donee. There are two ways for a settlor to completely constitute an express trust:
- The settlor must declare themselves to be the trustee. They do not need to explicitly use the word ‘trustee’, but their intention to be a trustee must be clear: Richards v Delbridge (1874) LR 18 Eq 11. This can be done informally, unless the trust property is land in which case signed writing is required.
- The settlor must transfer legal title to the intended trustees, with a declaration of trust. If the trust involves legal title to land, this must be executed by deed.
Problems arise in the second case where the law does not allow the property to be transferred without certain formalities or some action by a third-party. A transfer of shares in a private company is a common example. The donor must fill in a transfer form, deliver it to the donee, and then the company must register the new owner before they count as legally transferred.
In these cases, the courts have relaxed the rule that the property must be successfully transferred to the trustee or donee for the trust/gift to be valid. Instead, it is enough that the settlor has done everything within their power to transfer the property, even if the transfer has not taken effect yet because some third-party action is necessary: Re Rose [1952] Ch 499.
It is also possible for estoppel to arise where the settlor has taken steps to affect the transfer, provided the donee detrimentally relies on this: Pennington v Waine [2002] 1 WLR 2075; Curtis v Pulbrook [2011] EWHC 167 (Ch).
The rule in Strong v Bird (1874) LR 18 315 is another exception. If:
- A dead person intended to make a gift in their lifetime to the donee;
- That intention continued up until the time of their death but the gift was never actually made;
- The donor did not treat the property as their own during that period: Re Gonin [1979] Ch 16; and
- The donee incidentally acquires the legal title (usually by being named the donor’s executor);
then the gift is treated as effectively constituted.
Beneficiaries: The Basics
The beneficiary is the person the trust is supposed to benefit. They have an equitable interest in the property. This gives them the right to apply to the court to enforce the trust and have various remedies if they suspect misuse or misconduct.
Who can be a Beneficiary?
The flexibility of who can take benefit under a trust is one of its key advantages: any human or legal person can be a beneficiary. For discretionary trusts, any class or description of human or legal persons can be the beneficiary, provided the class or description meets the test for certainty of objects.
It is possible to make a trust in favour of a person who cannot take absolute ownership: such as making a trust of land for an infant. It is even possible to make a trust for someone that doesn’t exist yet, such as your future grandchildren.
Powers of Appointment
A trust will commonly oblige the trustee to hold the property for a particular beneficiary or class of beneficiaries. However, a trust may alternatively include ‘powers of appointment’.
Powers of appointment are powers to appoint someone as the beneficiary. The power might allow the trustee to choose anyone, or they might exclude certain possibilities or specify that the beneficiary must be from a particular class.
These powers are completely discretionary. The trustee is free not to appoint anyone – the court will not compel them. The court can only get involved in the following ways:
- If the trustee holds the power in a fiduciary capacity, they are obliged to consider whether to appoint a beneficiary from time to time: Re Abraham’s Will Trusts [1969] 1 WLR 202. The court can direct the trustee to consider whether to use the power if they fail to consider the matter themselves.
- If the trustee chooses to exercise the power, they must do so non-capriciously and in compliance with the terms of the power. They must also make a proper survey of the range of possible beneficiaries: McPhail v Doulton (No 1) [1971] AC 424. The court can intervene if they exercise the power improperly.
Types of Beneficiary: Key Terms
You will commonly see different terms used to describe different kinds of beneficial interest or beneficiary. Here are some key terms:
A beneficiary has a ‘vested interest’ if they do not have to fulfil any conditions to be entitled to the property. For example, under a trust of ‘£1000 for C’, C has a vested interest. Essentially, they already own the equitable title to the property.
A beneficiary has a ‘contingent interest’ if they are only entitled to the interest if a condition is fulfilled. Under a trust of ‘£1000 for C if they becomes a barrister’, C does not have a vested interest until they become a barrister. Before then, they have a contingent interest.
A future interest is one which does not vest immediately, but based on a condition which is guaranteed to happen at some point. For example, a trust ‘for C, to take effect in 10 years’.
A remainderman is the person entitled to the property once another beneficiary’s life interest has expired. For example, under the trust of ‘£100,000 for B for life, and after B dies for C’, C is the remainderman.
Trustees: The Basics
The trustee owns the legal title to the property. They have all the powers of a normal legal owner of property, but do not have complete freedom to exercise those powers. Instead, they are required to use those powers for the benefit of the beneficiary and in accordance with the trust instrument.
Requirements to be a Trustee
Certain individuals cannot act as trustees:
- Those under 18, unless the trust is implied and does not concern land;
- Those lacking mental capacity;
- A corporation, unless permitted to be so by their Article of Association (so-called ‘trust corporations‘).
The usual maximum number of trustees is four: Trustee Act 1925, s.34(2). There is no maximum number of trustees for charitable, ecclesiastical and public trusts, however: s.34(3).
If there are no trustees, an existing trust will not fail. However, it is unenforceable until a trustee is appointed. This may be a judicial trustee in some cases. By contrast, an attempt to create a trust may fail if no one agrees to act as trustee in the first place: Re Lysaght [1966] 1 Ch 191; though cf Mallott v Wilson [1903] 2 Ch 494.
Ending Trusteeship
There are various ways a trustee can cease to be a trustee:
Trustees hold property as legal joint tenants, so the survivorship rule applies. If a co-trustee dies, their legal ownership is extinguished. Their heirs have no right to the trust property or to act as trustees.
If there is only one trustee, the personal representatives of that trustee’s estate can appoint new trustees.
A trustee can only retire if the trust instrument permits them to or they have permission from the court.
The court can grant permission under s.36 of the Trustee Act 1925 if a replacement is appointed in place of the retiring trustee.
They can also grant permission under s.39, which does not require a replacement. The trustee must declare their intention to retire by deed, obtain the other trustees’ consent (certified by deed), and two trustees or a trust corporation must remain after the retirement.
If all beneficiaries are capable of exercising the rule in Saunders v Vautier, they can remove a trustee by written direction: Trusts of Land and Appointment of Trustees 1996, s.19(2)(a).
The court can also remove/replaced a trustee if they lose capacity, go bankrupt or are a liquidated trust corporation: Trustee Act 1925, s.41.
The court also has inherent jurisdiction to remove trustees if required for the beneficiary’s welfare: Letterstedt v Broers (1884) LR 9 App Cas 371.
Appointing Trustees
Trustees have two methods for appointing new trustees:
The trust instrument may grant existing trustees the power to appoint new trustees or replace existing ones.
The scope of the power depends on the terms of the trust instrument: Re Wheeler [1896] 1 Ch 315. The person who possesses this power cannot exceed its terms.
If the trust is silent on replacing existing trustees, trustees have a statutorily implied power. This allows them to replace another trustee by written direction if that trustee is dead incapable, unfit, abroad for 12 months or if they consent to being removed: Trustee Act 1925, s.36(1)(b). The replacement cannot become the sole trustee, however, unless they are a trust corporation.
If all the trustees are dead, the above powers fall to the personal representatives of the last trustee’s estate: s.36(1)(b).
There are also instances in which beneficiaries can appoint new trustees:
The trust instrument might give beneficiaries the power to appoint new trustees.
If the trust instrument gives no one the power to appoint new trustees, the beneficiaries can unanimously appoint new trustees by written direction: Trusts of Land and Appointment of Trustees Act 1996, s.19. They must all be capable of exercising the rule in Saunders v Vautier, however.
If a) a trustee becomes incapable, b) there is no one able or willing to use a power to replace them, and c) all the beneficiaries are capable of exercising the rule in Saunders v Vautier, the beneficiaries can appoint a replacement the trustee by written direction.
Finally, the court can appoint new trustees if:
- It is expedient to do so; and
- It is expedient, difficult or impractical to achieve this without the courts’ intervention.
The court can use this power to replace an existing trustee or appoint additional trustees. Relevant factors include: the settlor’s intentions; the capacity of the existing trustees to properly administer the trust; and whether it is possible for the parties to agree on a particular person (Re Tempest (1866) LR 1 Ch App 485).
A person can only become trustee by consent. If a nominated person does not want to accept, he must ‘disclaim’ the trust. This should normally be done by deed as soon as possible. Mere inactivity may not be enough: Montford v Cadogan (1810) 17 Ves Jr 485. A trustee cannot partially disclaim a trust: it is all or nothing – Re Lord and Fullerton’s Contract [1896] 1 Ch 228.
Powers to appoint new or replacement trustees are fiduciary in nature. This means that anyone exercising them must abide by their fiduciary duties.
