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Trusts | Formation

Valid Trusts: Creation

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Valid Trusts: Overview

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  • 3 methods creating express trust: lifetime S declares himself T of property (require: valid declaration of trust) / lifetime S transfers property to Ts hold on trust (require: valid declaration of trust & transfer of property to Ts - constitution) / in will testator appoints Ts hold property on trust (require: valid declaration of trust in valid will)
  • 3 certainties / create valid trust / certainty of intention create trust / certainty of subject matter: trust property & interests of Bs / certainty of objects: sufficient identification of Bs Knight v Knight

Certainty of intention

  • S full mental capacity & over 18 / word trust not necessary / if words impose duty on person to hold property for benefit of another / precatory words insufficient: T takes property absolutely as beneficial owner
  • trust create obligations requests insufficient Re Kayford / full confidence precatory / whole will considered to construe meaning of words Re Adams & Kensington Vestry

Trust or gift

  • intention implied: use word holding & S continued to hold legal title & use word declaration Shah v Shah
  • without formal words lenient approach if not sought legal advice Paul v Constance / criticised conflict with Milroy v Lord
  • express trust exists if trust constituted by title to trust property vested in T / trust constituted by: declaration of settlor as T or transfer of property to T / if S declares himself T no issue constitution (possible declaration of trust / intention issue) / declaration & transfer cannot be combined
  • court not construe failed gift as declaration by donor he is holding item on trust for donee Milroy v Lord / confirmed in Jones v Lock
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Valid Trusts: Overview

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Certainty of subject matter trust property

  • essential for trusts & valid gifts: trust property clear in declaration of trust / bulk of my estate uncertain Palmer v Simmonds / uncertain if quantified but not separated Re London Wine Company (confirmed in Re Goldcorp) / money S declares held as T must be separated MacJordan v Brookmount
  • pre Re Goldcorp inconsistent / valid lifetime declaration no seperation by analogy with wills / distinguished Re London Wine (S retained legal title) Hunter v Moss / Hunter v Moss (intangible property) & Re London Wine (tangible property - chattels) Re Harvard Securites
  • if trust property uncertain: purported trust fails (S not disposed of property) / remains in S's beneficial ownership

Certainty of beneficial interest

  • general rule: S must define extent Bs' shares / discretionary trust exception: S leaves to Ts / Bs' shares regarded certain (if to be determined by Ts) / court intervene if Ts do not act / group of Bs exception: if trust or gift made to group & S not specify proportion / equal share assumed
  • nature of Bs interest must be clear: life or absolute or conditional / fixed trust: reasonable income / effective determinant / objectively reasonable Re Golay
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Valid Trusts: Overview

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Certainty of beneficiaries (objects)

  • beneficiary principle: Bs enforce trust through court action / make Ts carry out duties Morice v Bishop of Durham
  • if objects uncertain: Ts hold trust property on resulting trust for S / if S deceased resulting trust for residuary Bs or next of kin on intestacy
  • fixed trust: Ts hold trust property on trust for Bs in shares specified by settlor / certainty of Bs: complete list test IRC v Broadway Cottages
  • complete list test: comprehensive list of all Bs / or fixed trust fails / also applies to gifts of aggregate amount to be shared between donees in specified shares
  • conceptual uncertainty: description Bs lacks sufficient criteria or precise meaning / complete list not satisfied / trust fail
  • difficulty tracing B: not cause trust to fail if possible to compile complete list of known Bs (Ts can apply to court for directions in relation to missing Bs)
  • gifts subject to a condition precedent: gifts of fixed / individual amounts / to each person within description of objects / less certainty in definition of Bs required / valid if identify 1 or more person undoubtedly qualifies / friend sufficient Re Barlows WT
  • discretionary trusts: Ts hold trust property on trust for such objects & in such shares as Ts decide: T under obligation to distribute trust fund to objects / court intervene if not distributed
  • powers of appointment: P mere powers to distribute to X & Y / P not under obligation / court cannot compel P to distribute / will intervene if distributed to third party
  • fiduciary powers: F owe duty not applicable to mere powers / to consider from time to time whether to exercise fiduciary power by surveying objects & deciding if appointment is appropriate
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Valid Trusts: Overview

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Certainty of beneficiaries (objects)

  • necessary degree of certainty of definition of objects on creation of power of appointment: donee of power can carry out duties & court can exercise functions / complete list of objects not necessary: donee not obliged to share between all objects & court does not need complete list of objects but must be able to establish non-objects
  • certainty of objects test for powers: given postulant test / can it be said with certainty whether any given individual (postulant) is or is not a member of the class? / yes: power is valid, no: power is void Re Gestetner Settlement / approved in Re Gulbenkian's Settlements
  • certainty of objects test for discretionary trusts: previously same as fixed trusts (complete test list) / case law developing assimilation of powers of appointment & discretionary trusts
  • discretionary trusts: given postulant test applies / Ts not need complete list of every object to carry out duty to survey of objects or to select an object / linguistic or semantic uncertainty: makes objects uncertain & discretionary trust void (same as conceptual uncertainty) / if description of objects conceptually certain / discretionary trust valid even if Ts cannot ascertain existence or whereabouts of members of class McPhail v Doulton
  • postulant test requires conceptual certainty / evidential uncertainty not cause discretionary trust to fail / valid class: relatives construed as next of kin / postulant test satisfied: if substantial number of objects can be said with certainty whether fall within trust / existence of individuals known to qualify & don't knows immaterial Re Baden (No. 2)
  • administrative unworkability / invalidate discretionary trust which has certain objects McPhail v Doulton / size class of objects render administratively unworkable R v District Auditor, ex p. West Yorkshire Council / administrative unworkability not cause failure of powers of appointment Re Hay's Settlement
  • capriciousness (irrationality) voids: discretionary trusts & powers of appointment Re Manisty's Settlement
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Valid Trusts: Overview

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  • trusts can provide protection if company goes into liquidation / if B of trust equitable proprietary interest: recover money in full ahead of other creditors
  • company duty to safeguard customer's money if heading towards liquidation Insolvency Act 1986 s.214
  • usual rules determining whether trust exists same for companies / payment of customers' money into separate bank account indicates intent but not conclusive / trade creditors: should be more aware of risk of insolvency (can utilise trade indemnity) / trust money must be separate & cannot be used for Ts own purposes Re Kayford
  • certainty of objects: OT set up two bank accounts / valid: held on trust for customers / invalid: held on trust for urgent suppliers: trust void failed complete list & money shared among creditors OT Computers v First National
  • commercial insolvency situation / trust may be implied / if direction keep money or goods separate & dedicated for particular purpose / money not used for purpose implicit should be returned by way of trust Barclays Bank v Quistclose
  • loans not usually trusts / intended money will become property of borrower (who can dispose as he wishes) / Quistclose principle may create exception Twinsectra v Yardley / loan money not necessarily have to be in separate account Re EVTR
  • Quistclose principle not confined to loans / money for express purpose (pay off car creditors) Cooper v PRG Powerhouse
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Valid Trusts: Overview

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  • law tolerates trusts / last for acceptable length of time / 1st rule perpetuity: against remoteness of vesting (trust for people) / 2nd rule perpetuity: against inalienability (non-charitable purpose trusts) / 3rd rule perpetuity: against excessive accumulation of income (trusts before 6 April 2010 - commencement date Perpetuities and Accumulations Act 2009)
  • interest contingent: Bs not in existence or not ascertained (trust for Y's children & Y not have children yet) / size of Bs' interest unascertained (trust for all grandchildren equally, more may be born) condition attached to interest not yet satisfied (trust for Y at 18 yrs, Y not 18 yet)
  • vesting occurs: when all Bs born & ascertained / size of Bs' interest determined / any condition attached to B's interest satisfied
  • remoteness of vesting: trusts which create contingent interests / restricts duration of trusts: B's interest must vest (if at all) within perpetuity period / otherwise trust void
  • perpetuity periods: pre 6 April 2010 includes wills executed before even if testator died after / 80yrs if specified in trust instrument / if not a life in being (person connected with trust alive at date trust created) + 21 yrs / after 6 April 2010:
  • Perpetuities and Accumulation Act 2009 s.7
  • / 125 yrs
  • discretionary trusts: subject to rule against remoteness of vesting / objects have contingent interest (size of interest unascertained) / Perpetuities and Accumulation Act 2009 s.8: saving provision / if more Bs may be born after expiry of perpetuity period / possible exclude from class

Express trusts

  • satisfy 3 certainties / contingent trust: vesting will occur within perpetuity period
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Valid Trusts: Overview

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Lifetime: settlor declares himself trustee

  • valid declaration of trust / trust immediately constituted as no transfer of property ownership required / oral declaration trust valid personalty (shares), chattels or money / for land LPA 1925 s.53(1)(b) declaration must be written or oral & confirmed in writing / all terms of declaration (Ts, Bs, trust property, Bs' interests, any special powers or duties of Ts) must be evidenced in writing / must be signed by person able to declare trust (settlor possibly authorised agent) / S cannot change mind once trust effectively declared

Lifetime: settlor transfers property to trustee

  • S transfers property to T to hold on trust: valid declaration of trust & transfer property to T (constitution) / declaration: must comply with usual rules including 3 certainties / if trust property land: must comply with s.53(1)(b) LPA 1925 / constituting the trust: correct method for transferring type of property / if transfer not effected properly (incompletely constituted): Ts not acquire title to property & trust void
  • maxim equity will not assist a volunteer applies (Bs usually volunteer as no consideration provided) / incompletely constituted trust not saved by switching trust creation methods & making S T (by analogy with imperfect gifts not construed as declaration of trust Milroy v Lord)
  • effective transfer: chattels (delivery or deed) / transfer shares (settlor hands stock transfer form & share certificate to Ts who must register themselves at company) / transfer land (deed of transfer (s.1 LP(MP)A 1989, s.52 LPA 1925) & registration of Ts at Land Registry)
  • methods to save incompletely constituted trusts / same as imperfect gift / every effort test: S taken all necessary steps to transfer property but third party failed to take outstanding step (Milroy v Lord, Re Rose, Mascall v Mascall) / Strong v Bird rule: Ts acquire title to property other than by direct transfer by S (S dies & Ts are PRs)
  • S cannot change mind once trust effectively declared & constituted / if S property transferred correctly but trust not declared Ts hold property on resulting trust for S
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