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Trusts | Formation

Equity & Trusts: Overview

Revision Note | Degree

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  • settlor creates a trust & transfers property to trustee/s who are under duty to manage for beneficiary as prescribed by settlor
  • trust only exists if the trustee holds property which is subject to the trust
  • trustees act under an equitable obligation, which can be enforced by beneficiaries
  • trusts may be created expressly or impliedly

Split roles

  • property subject to a trust: trustees & beneficiaries have different roles & interests in relation to the same property

Control, management and benefit

  • trusts allow separation of control & enjoyment of property
  • control: trustee obliged to make sure that property is used in accordance with the trust & property not at free disposal of beneficiary
  • management: the onerous aspects of owning property, defined under Trustee Act 2000 (good return for beneficiary. seeking professional advice, monitoring investments & altering as necessary) & can be varied by settlor
  • trustee's duties: to invest trust fund, creating profit: capital (asset which can be sold at future date) & income receipts (such as interest on capital)
  • capital profit: if shares or property sold for a higher price than bought
  • trust income: shares dividends, investment/bank account interest, rent received on property purchased
  • if trustees breach duties beneficiaries have a personal right to sue trustees personally
  • no power for a settlor to enforce the trustees' duties
  • trustees & settlors can be beneficiaries
  • trust document: settlor specifies how & when beneficiaries should receive benefit under the trust

Legal and equitable interest

  • split ownership of the trust property: trustees hold legal title & beneficiaries have equitable interest
  • trust money used to buy property or other investments, similarly has split ownership
  • in contrast, if no trust the legal owner is the beneficial owner
  • trustees can be described as nominal owners & beneficiaries as real owners
  • beneficiary has a proprietary interest in the trust property (beneficiary can sell/gift the interest)
  • proprietary nature of interest: if trustee wrongly transfers legal title to X, beneficiary may be able to enforce trust against X (if not a bona fide purchaser without notice of the trust)
  • bona fide: in good faith, purchaser : for valuable consideration, without notice of the trust: no actual knowledge or notice (constructive: enquiries a reasonable purchaser or imputed: knowledge of agent)
  • proprietary nature of interest: if trustee dies trust continues as personal representatives are bound
  • proprietary nature of interest: if trustee made bankrupt , creditors unable to claim trust property

Beneficial interests

  • settlor's objectives vary giving rise to numerous types of trusts

Fixed trusts

  • terms of the trust define share of trust property each beneficiary will receive
  • trusts may be conditional
  • successive trusts: on trust for A for life remainder to B
    A (life tenant) has life interest & B (remainderman) has interest in remainder
    A receive trust income in lifetime
    when A dies, trustees transfer trust property to B (& trust will end)
  • bare trust: trustees hold for sole adult beneficiary who has full mental capacity, absolutely means no limitations or conditions attached, beneficiary dictate handling of trust property

Discretionary trusts

  • amounts which beneficiary receives at trustees' discretion
  • no equitable interests arise under a discretionary trust until trustees exercise their discretion in beneficiary's favour
  • flexible trusts to allow for future changes that settlor cannot predict

Purpose trusts

  • settlor may wish to trust property to benefit a purpose rather individuals
  • subject to exceptions, most purpose are void as a feature of trusts is that trustees have duty act in interest of beneficiaries

    Re Astor's Settlement Trusts [1952] Ch 534

    • void purpose trust: for the maintenance of... good understanding, sympathy and co-operation between nations & preservation of the independence and integrity of newspapers

    Re Shaw [1957] 1 WLR 729

    • void purpose trust: in George Bernard Shaw's will a trust for research into a proposed 40-letter alphabet
  • key exception: trusts to promote charitable purposes under the Charities Act 2011, where Attorney General enforces the trust

Vested and contingent interests

  • vested interest if beneficiary exists & not have to satisfy any conditions under terms of the trust before becoming entitled to trust property
  • contingent interest if conditional upon future event that may not happen or if beneficiary is not yet in existence
  • once condition satisfied interest becomes vested
  • if condition not met & trust fails, settlor can make provision of substitutional gift
  • resulting trust: if trust fails & no provision made, returns to the settlor (implied trust)

Interests in possession and interests in remainder

  • if beneficiary has interest in possession: he can enjoy immediately
  • if beneficiary has interest in remainder: he can enjoy once another beneficiary's right to enjoyment expires

Absolute and limited interests

  • limited interest: interest in trust income only
  • absolute interest: interest in trust capital

Nature of beneficial interests

  • beneficial interest may change with circumstances
  • beneficiary absolutely entitled: beneficiary's interest is vested & in possession & not limited in enjoyment
    • absolutely entitled if:
      1. vested interest, in possession & not limited &
      2. sole adult beneficiary
    • absolutely entitled beneficiary can end trust by requesting trustees hand whole trust fund over to him or other trustees
  • rule in Saunders v Vautier to include trusts with more than one beneficiary, if:
    all beneficiaries are in existence & ascertainable
    over 18 & of sound mind
    all agree
    then trust can be ended by calling for a transfer of trust property to themselves or other trustees
  • family trusts can be created under a will by a testator (male) or testatrix (female)

Collective ownership

  • trusts can be used to allow a collective investment schemes, such as occupational pensions
  • contributory scheme: employees & employers contribute to fund, held by trustees on trust for members (employees) & paid on retirement

    Air Jamaica v Charlton [1999] 1 WLR 1399

    • contractual nature of occupational pensions (consideration provided) must be recognised by courts when considering the trust instrument setting up the pension trust
    • places restraints on who could be appointed as trustees (to ensure sufficient representation of employees)
    • trustees must obtain professional advice
    • restricts employer's rights to surplus funds
  • public enforcement officers: Pensions Ombudsman & Pensions Regulator, Pension Protection Fund compensates beneficiaries who suffer shortfalls due to pension fund insolvency or fraud
  • unit trusts: collective investment schemes allows investors to diversify investments by pooling money with other investors, management company acts as trustees & each investor allocated units to represent their share of equitable interest
  • members' clubs also often hold property in trust on behalf of members (such as a golf club)


  • companies risk losing money due to other companies going into liquidation (X provides Y with goods, Y has 30 days to pay X, Y goes into liquidation)
  • trust can provide protection (Y (trustee) holds good on trust for X (beneficiary) until payment received)
  • money held on trust is not part of trustee's beneficially owned assets available for the trustee's creditors (Y's other creditors cannot claim trust property)
  • equitable interest in trust property belongs to beneficiary who can bring a proprietary claim/above creditors (X's claim priority over other creditors)

    Re Kayford [1975] 1 All ER 604

    • mail order company anticipated it may become insolvent
    • company received pre-payment for goods from customers
    • company's lawyers recommended paying money received into an account for benefit of customers
    • company went into liquidation
    • were creditors entitled to money in the account?
    • the money was held under trust & unavailable to creditors

Express trusts

  • express trusts created intentionally by settlor (in lifetime or by will & have effect on settlor's death)

Lifetime trusts

  • settlor declares self a trustee: declaring asset held for benefit of another
  • declaration of trust define terms of trust (beneficiaries, nature of benefits, define trust property & trustee powers)
  • declaration can be oral (unless land) but usually written in trust instrument/document/deed
  • settlor transfers property on trust to trustees: satisfy validity rules & transfer must follow correct procedure, depending on type of asset
  • if valid trusts made settlors can only recover property if they reserved power of revocation


  • settlors (testator or testatrix) can create testamentary trust in will
  • trust terms must be declared & declaration must comply with validity rules

Implied trusts

  • two types of implied trust: resulting & constructive
  • resulting trust form where a gap occurs in beneficial interest (conditional trust not fulfilled so resulting trust for settlor is implied)
  • constructive trust arise where it would be unconscionable for legal owner of property to deny an equitable interest

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