Forms and formation of trusts (part two)

Creating an express lifetime trust

There are two basic ways to create an express lifetime trust:

(a)       the settlor appoints themselves trustee.

(b)       the settlor appoints someone else to be the trustee, in which case they must also transfer legal title in the trust property to that trustee.

Transferring land

If the trust fund includes land, the settlor must:

(a)       execute a deed (LPA 1925, s 52) that satisfies s 1 of the Law of Property (Miscellaneous Provisions) Act 1989, ie:

(i)         the document is stated to be a deed or is stated to be signed as a deed; and

(ii)        the person making the deed signs the document in the presence of a witness who also signs it.

Where the land is registered, Form TR1 is used to satisfy the above definition; and

(b)       either give the executed deed to the trustee to pass on to the Land Registry or send it directly.

The trustee will then be registered as the legal owner.

The transfer is not complete until all these steps have been completed.

Transferring company shares

Legal title in company shares can be transferred in one of two ways:

(a)       within the CREST system for certain shares in public quoted companies; or

(b)       outside the CREST system – for all other shares, especially in private companies.

CREST is a share transfer system that electronically records shares in designated publicly quoted companies so they can be transferred electronically and instantaneously without physical paperwork. Typically, the settlor will have to instruct a stockbroker to make the necessary transfer.

Transferring other shares does require paperwork, especially for private companies. If such shares are included in the trust fund, the settlor must:

(a)       execute a stock transfer form (usually as set out in Sch 1 of the Stock Transfer Act 1963); and

(b)       either give this form to the trustee, along with relevant share certificate, to pass on to the relevant company, or do that directly.

The trustee will then be added to the register of members by the company’s secretary.

The transfer is not complete until all these steps have been completed.

Transferring money

(a)       If the settlor hands over cash to a trustee, legal title follows automatically.

(b)       If the settlor transfers money electronically, legal title follows as soon as it arrives in the trustee’s bank account.

(c)       If the settler writes a cheque, legal title follows when it has cleared.

‘Equity will not assist a volunteer’

An important rule set out in the maxim of equity is that ‘equity will not assist a volunteer’. This means simply that, because the beneficiaries of a trust do not usually pay the settlor to create a trust in their favour – they are ‘volunteers’ rather than people paying for a service – the rigorous transfer rules cannot be loosened for their benefit. If the settlor fails to follow the rules, there is no trust, and equity cannot help, because it ‘will not assist a volunteer’ (the beneficiary).

The ‘every effort’ test

Equity means that a transfer may be regarded as complete even if the transfer of legal title has not yet been completed, provided that the settlor made every effort to transfer legal title.

To qualify, however, the settlor must have put the property being transferred ‘beyond recall’. This means completing all the steps they were supposed to take – including properly executing and sending out all relevant documents – leaving the rest of the transfer in the hands of a third party.

This rule is especially relevant where private company shares or land are involved, as they do require the involvement of a third party.

Strong v Bird

If a settlor intended to create a trust with a certain person as trustee, but died before doing so, it may be that the same person acquires legal title to the property in question as the executor or administrator of the deceased’s estate. In that case, the legal title thus acquired is sufficient to constitute the trust as long as certain conditions are met. These were established in Strong v Bird (1874) LR 18 Eq 315. They are:

(a)       the settlor intended to create an immediate trust with a third party acting as trustee;

(b)       that trust was not immediately created due to a failure to comply with a relevant transfer rule;

(c)       the settlor’s intention continued up to their death; and

(d)       the intended trustee acquired legal title to the trust property by becoming the settlor’s executor or administrator.

The extent of beneficial interest

When working with trusts, it is important to be able to work out the extent of beneficial interest, in order to establish:

(a)       whether the beneficiary’s interest is unconditional or conditional and liable to fail if the condition is not satisfied;

(b)       when the beneficiary will be able to call for trust property; and

(c)       to what the beneficiary is entitled.

A settlor might specify that a particular beneficiary should receive just capital, just income or both together. While shares, for example, have both capital value and an income value, the settlor may grant the beneficiaries both or just one or the other.

The settlor can also decide  whether a beneficiary will have a present entitlement to property, or whether it is conditional on, for example, reaching a certain age.

Vested and contingent interests

If a beneficiary does not have to satisfy any conditions before becoming entitled to trust property, they are said to have a vested interest. It is unconditional. If that beneficiary is a minor, the trustees will hold the property on trust until they reach the age of majority (18 years).

If the beneficiary’s interest is conditional on some future event that may not happen, or if the beneficiary is hypothetical (e.g., the settlor might create a trust for any future grandchildren), they are said to have a contingent interest.

Once the condition is satisfied, the beneficial interest vests in the beneficiary. They now have a vested interest.

Such a trust is often called a ‘contingent trust’, but it is still a fixed interest trust, because the settlor has explicitly determined what each beneficiary will receive, and when. The trustees have no discretion.

Successive trusts

Trusts can be created to distribute property over successive generations. This is often a discretionary trust, with the settlor identifying the class of people they want to benefit, but leaving the trustees to decide who in particular will benefit and in what amount.

In that case, no particular member of that class has a beneficial entitlement until the trustees distribute property at their own discretion. Until then, the individual members of the class are known as the ‘objects’ of the trust rather beneficiaries.

Bare trusts

A ‘bare trust’ is one that endows a sole, adult and mentally capable beneficiary with a vested interest. This beneficiary is thus ‘absolutely entitled’. This is an unusual type of trust in that the trustees must manage the trust property according to the beneficiary’s wishes. The beneficiary can even bring the trust to an end at any time. They simply instruct the trustees to transfer the whole trust fund to the beneficiary or to other trustees.

Saunders v Vautier

This principle has been extended to include trusts with more than one beneficiary. Those beneficiaries can call for the transfer of trust property to themselves or other trustees on certain conditions. These are that all the beneficiaries under the trust who could possibly become entitled:

(a)       are in existence and ascertained;

(b)       are aged 18 years or over and have mental capacity; and

(c)       they all agree.

‘All the beneficiaries under the trust who could possibly become entitled’ means those who want to bring the trust to an end must be absolutely entitled, ie no one else has a potential interest in the trust fund.

As long as the beneficiaries have absolute entitlement, they can even overturn the terms of the original trust. For example, the settlor might intend the fund to provide income for life for one individual, before passing to another. If those two cut a deal whereby the first takes a percentage of the whole and the rest passes to the second, they are within their rights.

Charitable or Purpose Trusts

Rather than creating a trust to benefit particular individuals, settlors may create one to serve a particular purpose or goal. To be valid, a purpose trust must meet two conditions:

(a)       the settler must make a valid declaration of trust  and

(b)       the trust must be constituted.

The declaration of trust must also meet the trust validity rules set out above, in terms of:

(a)       Certainty of intention

(b)       Certainty of subject-matter

(c)       Certainty of objects

(d)       The beneficiary principle

(e)       Rules against perpetuities

(f)        Formalities (if the trust property contains land, the declaration of trust must comply with s 53(1)(b) of the LPA 1925)

Clearly, (d) and (e) above pose particular challenges for purpose trusts.

The beneficiary principle

As a rule, trusts are only recognised as valid if they have clearly defined beneficiaries. It is those beneficiaries who could go to court to enforce them. In the case of purpose trusts, there is no individual who can go to court to enforce the trust, which means they cannot be valid in ordinary terms. This exception is charitable trusts, as explained below.

Rule against perpetuities

In general, a trust is void if it locks capital away (ie, ‘renders capital inalienable’) for more than 21 years. This is known as the ‘rule against inalienability of trust capital’. Again, there is an exemption from this rule for charitable trusts.

Charitable trusts

Most charities and charitable trusts are regulated by the Charity Commission and ultimately enforced by the Attorney General. Before registering a charity, the Commission must confirm that the trust satisfies the conditions set out in the Charities Act (CA) 2011:

(a)       the trust must be for a charitable purpose;

(b)       the trust must have sufficient public benefit; and

(c)       the trust must be exclusively charitable.

Charitable purposes are listed in s 3(1) of the CA 2011

(a) the prevention or relief of poverty;

(b) the advancement of education;

(c) the advancement of religion;

(d) the advancement of health or the saving of lives;

(e) the advancement of citizenship or community development;

(f) the advancement of the arts, culture, heritage or science;

(g) the advancement of amateur sport;

(h) the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity;

(i) the advancement of environmental protection or improvement;

(j) the relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage;

(k) the advancement of animal welfare;

(l) the promotion of the efficiency of the armed forces of the Crown or of the efficiency of the police, fire and rescue services or ambulance services;

More generally, to qualify as charitable, the purpose being promoted by the trust must have sufficient public benefit.  There are two aspects to this test:

  • the trust purpose must have an identifiable benefit or benefits; and
  • the benefit must accrue to the public or a sufficiently large section of the public.

It is vital to consider when advising clients whether any anticipated trust will meet these tests. It can be especially hard to show how a trust would benefit a sufficiently large section of the public. If the benefits are only intended for a restricted group, then what constitutes a sufficient section of the public will depend on which charitable purpose the trust is meant to achieve.

For example, contemplative religious orders that are cloistered and have no contact with the outside world are not likely to be considered charitable (Gilmour v Coats [1949] AC 426).

In IRC v Baddeley [1955] AC 572, a gift for the promotion of sports to people resident in West Ham was deemed not be to charitable because it was limited to people who were or were likely to become Methodists. While the promotion of sports is acknowledged as a general public good, the restriction of this benefit to Methodists was arbitrary.

Moreover, to be charitable, a trust must be exclusively charitable. It cannot have both charitable and non­charitable purposes. Specifically:

(a)       to be charitable, a trust must not have political purposes; and

(b)       if a charitable organisation charges fees, the profits from those fees must be invested back into the trust. Payments to private individuals, including the owners, would constitute a non-charitable purpose. If an institution is carried on as a commercial venture (e.g. a private hospital or residential home), it will not be recognised as charitable.

Political purposes

Political purposes include overtly supporting a political party, but also campaigning for a change in the law or a change in government policy. Charities can however engage in political activities that are ‘ancillary or incidental’ to their main purpose.

Non-charitable purpose trusts

Nevertheless, there are circumstances under which purpose trusts can overcome both the beneficiary principle and the rule  against inalienability of trust capital even if they do not qualify as charitable trusts. Namely:

  • if they are Re Denley trusts; or
    • it they are trusts of imperfect obligation.

In order to be a valid Re Denley trust:

  1. the purpose of the trust must be clear, giving rise to a sufficiently tangible   benefit. If the purpose of the trust is not sufficiently clear then the trust will fail.
    1. the persons standing to benefit must be ascertainable. The description of those persons who stand to benefit must satisfy the given postulant test. The description of this class of persons must therefore be ‘conceptually certain’; and
    1. the trust must not offend the rule against inalienability of trust capital.

Trusts of ‘imperfect obligation’ include:

(a)       trusts for the care of specific animals, such as a favourite pet; and

(b)       trusts for the maintenance of specific graves and tombs.

Because there is no human beneficiary who can enforce the trust in either case, such trusts come up against the beneficiary principle. In fact, while these trusts are unenforceable, they are nevertheless valid.