The first part of this module is concerned, in the main, with the trust. However, there are other concepts with which you will need to be familiar throughout this part. These are the gift and powers.
Trusts
A trust is an equitable obligation where legal title is given to the trustee which he must hold for the benefit of the beneficiary. Traditionally, there are three parties to a trust. The settlor creates the trust, the trustee holds the legal title, while the beneficiary has the beneficial (equitable) title. This is the classic form of settlement on trust. If it were a self-declaration of trust, the settlor would also be the trustee; so called because the settlor declares himself to be the trustee.
Once a trust is established, the settlor drops out of the picture (unless it’s a self-declaration).
In a self-declaration of trust, the settlor makes himself the trustee. However, a trustee might also make himself a beneficiary of a trust. For example, Simon (settlor) transfers property to Trevor (trustee) to hold on trust for himself (beneficiary) and Brian (beneficiary). There might be many reasons why the settlor chooses to do this, but the important point to note is that a trust is a flexible device which allows the conferment of a benefit on a number of people.
Thus, a trust creates a separation between legal and equitable title. It is important to note that they are both forms of property and can be dealt with (to a degree) as one would deal with property. Thus, the equitable title can be transferred to a third party as a gift, for consideration (ie, sold), and so on.
Types of Trust
There are two basic types of trust: express and implied trusts. Within these categories, there are sub-categories:
For the purposes of this module, express trusts fall into the following categories:
a) Private people trusts;
b) Private purpose trusts;
c) Public purpose trusts (charities).
The following are implied trusts:
a) Resulting Trusts:
i) Automatic Resulting Trust
ii) Presumed Resulting Trust
b) Constructive Trusts:
i) Institutional Constructive Trust
ii) Remedial Constructive Trust
The express trust is the subject of the first part of this module, and especially private people trusts. We will explore implied trusts in part two of the module.
Fixed Trusts – This is a trust where the settlor has ‘fixed’ the beneficial interests which each beneficiary is to receive. Consider the following examples:
a) ‘to A and B equally’
It should be clear in this example that A and B each have a fixed interest, namely an equal interest in the trust property. The interests are concurrent, ie, exist at the same time.
b) ‘to A for life, remainder to B’
In this example, A has an interest for their life. This interest will, of course, expire when A dies. B’s interest is in the remainder and they will enjoy their interest when A dies. Again, as in example a), the interests are fixed at the date the trust is created. Where one interest follows another as here, the interests are known as successive.
Discretionary Trusts – With this type of trust, the trustees are given a discretion under the terms of the trust which they should exercise for the class of beneficiaries. Thus, the discretion is two-fold. First, they have discretion as to whether the income of the trust should be paid out and, if so, to whom it should be paid. A discretionary trust might be drafted as follows:
a) ‘£1,000,000 to my trustees such that they should distribute it at their discretion between such of my brothers and sisters as they, in their absolute discretion, shall determine’
Discretionary trusts such as this provide the trustees with the flexibility to respond to the needs of the beneficiaries which may vary from time to time. They have a discretionary class of beneficiaries (ie, the brothers and sisters of the settlor).
Discretionary trusts may be exhaustive or non-exhaustive.
A discretionary trust is exhaustive if the trustees are obliged to pay out all of the income each year within a reasonable time of its arising and have only two discretions –(i) to whom to pay the income and (ii) in what amounts (if more than one recipient). The trustees must consider the claims of the members of the class and they must make a selection from among the members and they must distribute the income.
A non-exhaustive discretionary trust arises where a trust is qualified by a power to accumulate income. The trustees now have three discretions – (i) whether to accumulate the income or to distribute it and, if they decide to distribute it, (ii) to whom to pay the income and (iii) in what amounts.
Discretionary trusts are sometimes referred to as trust powers. Lord Wilberforce uses this term in the leading case on discretionary trusts, McPhail v Doulton.
Protective Trusts – Section 33, Trustee Act 1925 will apply if a settlor or testator leaves property ‘on protective trusts’. The reasons for choosing to create a protective trust may vary, but the underlying purpose of such a trust is to protect the trust fund and “the principal beneficiary” (ie, the beneficiary with the life interest). It may be that the settlor fears the principal beneficiary may go bankrupt.
The effect of having a protective trust is that, at least initially, the principal beneficiary has a life interest. If he becomes bankrupt or attempts to assign (ie dispose of) his life interest, in whole or in part, the life interest automatically ends and is replaced by a discretionary trust of the income for the rest of the principal beneficiary’s life (called “the trust period” in s33).
The beneficiaries of the discretionary trust are the principal beneficiary, his or her spouse, and the children and remoter issue of the principal beneficiary. If the principal beneficiary has no spouse or issue, the beneficiaries are the principal beneficiary and those who would be entitled to the trust fund if the principal beneficiary were dead. So, in a trust “for A for life on protective trusts, remainder for B, C and D equally”, B, C and D would be potential beneficiaries of the income, along with A.
Terminology
There is much terminology respecting trusts which you will encounter throughout the module. You must familiarise yourself with this terminology. The following are the key terms: ‘income’; ‘capital’; ‘life interest’; ‘remainder interest’; ‘life tenant’; ‘remainderman’; ‘vested interest’; ‘contingent interest’.
‘Income’ – income is the sum which is generated from the trust fund. Thus, if the trust fund consists of a house, the income generated by it might be rent which is charged. Alternatively, if the trust fund consists of shares, then the income would be a dividend declared on those shares.
‘Capital’ – the capital is whatever comprises the trust fund. It might be a sum of money deposited with a bank, or a house, or a block of shares.
‘Life interest’ – a life interest, as its name suggests, is an interest which the beneficiary enjoys for their life. When they die, the interest dies with them; they cannot leave it under their will.
‘Remainder interest’ – the remainder interest is the interest which follows the life interest. After the person with the life interest dies, the beneficiary entitled then takes the ‘remainder interest’.
Life tenant’ – the beneficiary who holds the ‘life interest’. In this example, A is the life tenant (with a life interest), and a right to the income:
a) ‘to A for life, remainder to B’
‘Remainderman’ – the beneficiary who holds the ‘remainder interest’. In this example, B is the remainderman, with an interest in the capital:
a) ‘to A for life, remainder to B’
‘Vested interest’ – A vested interest is one which is enjoys without conditions attached to it. For example:
a) ‘to A for life, remainder to B’
In this example, A has a vested interest which they enjoy without having first to satisfy a condition. As they enjoy the right now, it is an interest vested in possession. It is a present right, to present enjoyment.
B also has a vested interest which they enjoy without having to satisfy a condition. However, B’s situation differs from A in that B has to wait for A to die before they can enjoy their interest. Thus, B’s interest exists now, but their enjoyment has to wait for A to die, therefore it is an interest vested in interest. It is a present right, to future enjoyment.
‘Contingent interest’ – A contingent interest is one which will only be enjoyed once a condition is satisfied. For example:
a) ‘to A for life, if they marry’
In this example, A has a contingent life interest, the contingency being that they should marry before they enjoy the benefit of the life interest.
If A marries, the interest then vests.
b) ‘to A for life then to B, if B qualifies as a solicitor’
In this example, A has a vested life interest, vested in possession. B has a contingent remainder interest, the contingency being that they should qualify as a solicitor before they enjoy the interest.
If B qualifies as a solicitor, the interest then vests. If A is still alive, the interest is vested in interest. If A has already died, the interest is vested in possession.
The Rule in Saunders v Vautier
The rule in Saunders v Vautier(1841) Cr & Ph 240 permits the beneficiary, or beneficiaries, to bring a trust to an end. Where the beneficiaries are together absolutely entitled, they can call for legal title to be transferred to them.
This applies, irrespective of the wishes of the settlor. The trust is brought to an end because legal and equitable title are with the same person(s). A trust cannot exist in such circumstances.
The rule does not apply to powers.
Gifts
A gift is an outright transfer of ownership of property (legal and equitable ownership, though they have never been separated) from the person making the gift (the donor), to the recipient (the donee). The difference between a gift and a trust is found in the intention.
Powers
A power may be described as an authority to deal with somebody else’s property. The essence of a power is the holder’s complete discretion. First, discretion as to the class of potential beneficiaries and, secondly, how much of the property subject to the power should be appointed.
Powers may be categorised according to the identity of the donee of the power (the person exercising the power). They may be either personal or fiduciary.
A personal power is given to someone who is not a trustee. For example:
a) ‘I give my shares to my trustees to hold on trust for A for life and subject thereto for such of my children and remoter issue as A selects and in default of selection for my children equally’
In this example, A is the donee of a personal power. A need not exercise it, nor even consider exercising it.A’s only obligation as donee is that, if he decides to exercise the power, hemay do so only in favour of the class of potential beneficiaries.
