Creation of Express Trusts 1

Creation of Express Trusts 1

Jude Puech

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Creation of express trusts.

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There are four requirements to satisfy for the creation of a valid express trust. Firstly capacity to make a trust. Secondly formality. Thirdly certainty, and finally constitution.

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In general everyone who is over the age of majority and mentally competent has the necessary capacity to make a trust. A minor can create an inter vivos trust but it is revocable during minority. Also a minor cannot hold the legal title to land so cannot create a trust of land, and any land which a minor is entitled to has to be held on trust for him. Nor can a minor create a trust by will.

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The settler must understand the nature and the effect of the act and there are different rules for capacity depending on whether the trust is to be set up during the settler’s lifetime or is to be created by his will.

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For trusts created inter vivos, the test comes from the case of Re Beaney which says that the degree of understanding required varies with the circumstances of the transaction. Thus if the subject matter and value of the gift are trivial in relation to the donor’s other assets, then a low degree of understanding will suffice. However, if it’s effect is to dispose of the donor’s only assets of value and thus for practical purposes to pre-empt the devolution of his estate under his will or intestacy, then the degree of understanding required is as high as that required for a will.

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Trusts are often made in wills. The test for capacity for creating a valid will comes from the case of Banks v Goodfellow. The testator must be able to appreciate the nature of the act and its effect, the extent of his property and the moral claims upon his bounty.

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Formalities. For trusts set up inter vivos, the general rule is intention, not form. There are no formalities for the creation of a trust of personal property so a trust of such property can be made orally. A declaration of trust respecting land or anything interest in it must comply with the formalities of s 53 1b of the Law of Property Act 1925 and be proved in writing and signed by the person declaring it or be contained in his will. For equitable interests, by s 53 1c of the LPA 1925, any disposition of an equitable interest must be made in writing.

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Trusts to take effect on the settler’s death must be made by will and accordingly must comply with the requirements of formal validity for wills from s 9 of the Wills Act 1837. The will must be in writing signed by the testator in the presence of two witnesses who sign in the presence of the testator.

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Three certainties must be satisfied for the valid creation of an express trust. These were set out in the case of Knight v Knight by Lord Langdale as certainty of intention, subject matter, which is divided into two parts. There must be certainty of the trust property itself and there must be certainty of the beneficial interests in it. And thirdly certainty of objects.

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Certainty of intention. Has the settler shown an intention to create a trust rather than achieve some other end, for example a simple outright gift? The settler must make it clear that his intended trustees are under an obligation to carry out his wishes. The words must be imperative. The settler must have used words which impose a duty upon the trustees rather than ones which simply allow them a discretion whether to act or not. The words need not take a particular form. The word “trust” need not be used. It is the intention which is important.

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Precatory words such as wish, hope, desire are generally insufficient to indicate the existence of a trust. The courts used to consider them sufficient to establish an intention to create a trust but this is no longer the rule. A stricter approach has been adopted since cases such as Lambe v Eames and Adams v Kensington Vestry.

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In Adams v Kensington Vestry a testator gave his estate “to the absolute use of my wife in full confidence that she will do what is right as to the disposal thereof between my children”. The alternative interpretations were, firstly that the words created a trust under which the wife took no interest in the property personally but held it as trustee for the children, or secondly that the words created no trust at all, as a result of which the wife took the property outright and the children got nothing. The court held that the words were not sufficiently mandatory to impose a trust upon the wife in favour of the children. They were a mere expression of desire.

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It is not that a trust will not be found by precatory words, but that they will not automatically give rise to a trust. They still can if, on the construction of the words, that was the settler’s intention. Consider Comiskey v Bowring Hanburywhere as testator gave all his estate to his wife “absolutely in full confidence that … at her death she will devise it to one or more of my nieces as she may think fit. And in default of any disposition by her, I direct that all my estate shall, at her death, be equally divided among the said nieces ”. The wording is very similar to Re Adams but on construction the words created a trust.

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If words have created a trust in the past and a settler uses them as a precedent, even those words now would not create a trust because of the modern construction, they will be sufficient to show an intention to create a trust, as seen in the case of Re Steele’s Will Trust.

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The same principle applies where instead of making a third-party trustee, the settler declares himself to be the trustee. There must be an intention to create a trust. In Jones v Lock a father put a cheque in the hands of his baby son with the words “Look you here. I give this to baby. It is for himself and I am going to put it away for him and give him a great deal more along with it.” This was held not to be a trust because the words indicated an outright gift to the son. The father was not taking upon himself the duties of trustee for the child.

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Compare Jones v Lock with the cases of Paul v Constance and Rowe v Prance.

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Paul v Constance concerned the ownership of £950 paid by Mr. Constance into a bank account in his sole name on the advice of the bank manager because the parties were not married. Indeed Mr. Constance remained married, albeit separated from Mrs. Constance. Evidence showed that on a number of occasions Mr. Constance had said to Mrs. Paul “the money is as much yours as mine”. They had put into the account their joint bingo winnings and when they drew out money, it was shared between them. Mr. Constance died and his wife claimed the money in the account. Mrs. Paul, however, contended that Mr. Constance held the money on trust for them. The court found that Mr. Constance intended himself as trustee. His declaration and other evidence showed this. Half of the fund thus belonged to Mrs. Paul.

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Similarly in Rowe v Prance the court found an express declaration of trust from the repeated use of the word “our” on referring to the boat in the case together with the assurance given by Mr. Prance that Mrs. Rowe’s security was her interest in her boat and Mr. Prance’s explanation as to why he alone could be registered as the legal owner. The size of the shares should be equal. The regular use of the word “our” indicated an intention that there was no distinction to be drawn between the parties as to ownership of the interest. Alternatively the maxim that equality is equity applied to determine the shares as equal.

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The intention must be genuine and not a sham. That is there is no intention for the trust to be acted upon but some ulterior motive such as avoiding the consequences of insolvency. For instance, in Midland Bank v Wyatt a husband who was involved in trade executed a trust deed together with his wife, settling the matrimonial home on the wife and daughters. The husband subsequently mortgaged the house. His business failed and when the bank tried to get a charging order against the house, the husband pulled out the trust deed. The court refused to give effect to the declaration of trust as it was a sham. The settler’s true intention was that it would have no effect until wheeled out to put assets out of reach in the event of an insolvency.

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Certainty of subject matter. As already mentioned, the property subject to the trust and the beneficial interests in it must be ascertainable. Firstly certainty of the trust property. This deals with the question of what is the trust property. Trusts are proprietorial by nature. It is necessary to know the property, to which they relate. Otherwise how will the trustee know which assets he holds for the beneficiaries. For instance, in Palmer v Simmonds a trust of “the bulk of my estate” failed. Similarly, inSprange v Barnard the testatrix gave stock to her husband directing that “the remaining part of what is left he should bequeath in his will for her brother and sister”. The trust property was unclear as the remaining part, if any, would only be identifiable at his death.

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Similarly, where the trust is claimed over unallocated assets, it will generally fail. In Re London Wine Co the company bought and held wine in its cellars for customers. It went into liquidation and to avoid the claims of the company’s creditors to the stock, the customers that it was held on trust for them. The court held that there was no trust because the stock had not been allocated to the individual customers. Therefore there was no certainty of the trust’s property.

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In Re Goldcorp Exchange Ltd. a similar fate met claims for the stock of gold held on behalf of customers except those earlier customers who were able to show that for them the company did actually buy and hold the ordered amount of gold.

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In Hunter v Moss the settler owned 950 shares. He declared a trust of 50 shares and the court held that there was no need to segregate the shares provided that they were of the same class and in the same company. From this it would appear that there are different rules for intangible and tangible property. Note however the effect of the Sale of Goods Amendment Act 1995 which gives to the purchasers of unascertained bulk assets a tenancy in common of the bulk. This means that they are no longer so vulnerable in the event of an insolvency of the supplier and the imposition of a trust may not therefore be so necessary in future.

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The effect of uncertainty of subject matter, where a proposed trust fails in this regard, the property remains with the settler or, if dead, his estate. It is not an occasion for a resulting trust to apply as the property has never been effectively alienated to the trustees. However, note the effect of Hancock v Watson.

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The rule applies where there is an absolute gift of property in the first instance and trusts are subsequently imposed on that property. Then if the trusts fail for whatever reason, the property is not held on resulting trust but vests absolutely in the person to whom the property was first given absolutely.

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This rule can be seen to be operating in the cases of Palmer v Simmonds and Sprange v Barnard, where, by virtue of Hancock v Watson, the husbands took absolutely.

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The second aspect of certainty of subject matter is certainty of the beneficial interests in the trust property. The settler must identify what interest each beneficiary is to take in the trust property.

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For example, in Boyce v Boyce a testator gave his houses to his trustees on trust “to give one to his daughter Maria as she may choose and the other to his daughter Charlotte”. Maria died in the lifetime of the testator and was thus unable to make her choice. Charlotte’s interest failed for lack of certainty as it was impossible to establish which house she was to take.

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Compare Re Golay’s Will Trust, where a trust for the beneficiary to receive “a reasonable income” from the testator’s properties was upheld. The court felt able to determine what would be a reasonable income.

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The effect of uncertainty of beneficial interests. Lack of certainty of the beneficial interests will result in those interests which are uncertain failing whilst those which are certain will succeed. If all the interests are uncertain, the whole trust will fail and a resulting trust will arise unless the rule in Hancock v Watson applies. However, note other possibilities. Firstly, the shares might be at the trustee’s discretion, i.e. a discretionary trust. Secondly, the court might use the maxim equality is equity and order equal division of the property. Or thirdly the court might determine what is a proper division in the circumstances.

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Certainty of objects. This deals with the question of who are the beneficiaries. They must be ascertained or ascertainable. The test to be applied to determine certainty of objects depends upon the type of trust. In a fixed trust, the interest or share of the beneficiaries is specified by the settler. The rule as to certainty of objects is set out in Inland Revenue Commissioners v Broadway Cottages. The whole range of objects must be ascertained or capable of ascertainment. The requirement is that it must be possible to draw up a fully comprehensive list of all the beneficiaries. This is sometimes referred to as the class ascertainability test or the list test. In order for the trustees to administer the trust and to distribute the trust property in the specified way to the settler’s chosen beneficiaries, the trustees must know who all the beneficiaries are. If the beneficiaries are named in the trust instrument, this will not cause any problems. However, if the beneficiaries are identified as members of a class, then the class must be sufficiently defined in order for the trustees to know who each and every beneficiary is and thus administer the trust according to the settler’s instructions. They cannot therefore be any conceptual or evidential uncertainty in the description of the class.

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In a discretionary trust, distribution of the trust property is at the trustee’s discretion. The test for certainty of objects for discretionary trusts was established in the case of McPhail v Doulton, which decided that the trust is valid if it can be said with certainty that any individual is or is not a member of the class of beneficiaries. This is sometimes referred to as the individual ascertainability test and is the same test to determine certainty of objects in the case of powers of appointment, as established in Re Gulbenkian Settlement Trust.

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Prior to the decision of the court in the case of McPhail v Doulton the test to determine certainty of objects in a discretionary trust was the same as that for a fixed trust. The whole range of objects had to be ascertained. This was decided by the court in the Broadway Cottages case. The basis for this being that if the court was called upon to execute the trust, it would do so by ordering equal division in which every beneficiary would share. Hence complete ascertainment was necessary.

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However the decision on validity would turn on the question of whether a complete list could be drawn up of all the possible beneficiaries following the decision in Broadway Cottages. Was that test right in law, and if not what should the test be? Should it be assimilated with the test for powers? The effect of the decision in Broadway Cottages upon discretionary trusts was that in construing a disposition if a discretionary trust was found the test for validity often rendered the clause void. Whereas if a power was construed from a disposition then the test for certainty as decided by the House of Lords in Re Gulbenkian’s Settlement Trust would be easily satisfied. In McPhail Lord Wilberforce commented “differences there certainly are between trusts and powers but as regards validity, should they be so great as that in one case complete or practically complete ascertainment is needed but not in the other?”.

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As for the rationale of Broadway Cottages and applying equal division to such a trust as in McPhail would be paradoxical, contrary to the settler’s intention and would probably produce a result beneficial to none.

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A discretionary trust could be executed otherwise than by equal division. If the court were called on to execute the trust, it will do so in the manner best calculated to give effect to the settler’s intention. For example, by appointing new trustees or by directing representatives of the beneficiaries to prepare a scheme for distribution. Or, should the proper basis for distribution appear, by directing the trustees so to distribute.