Forms and formation of trusts (part one)

Express trusts

An express trust is intentionally, or expressly, created by the settlor. There are two steps to this:

(a)       The settlor must make a valid declaration of trust.

(b)       The trust must be constituted, whichmeans the settlor ensures title to the property is given to the trustee, enabling them to manage it.

A declaration of trust sets out how the trustees should run the trust and for whose benefit. It must:

(a)       identify trustees;

(b)       identify the property to be held in trust;

(c)       identify the beneficiaries either by name or description; and

(d)       identify the powers and duties the trustees have.

Under a fixed interest trust, the settlor stipulates once and for all both who the beneficiaries are and what proportion of the trust property is theirs.

By contrast, a discretionary trust allows the trustees to decide the amounts any given beneficiary receives.

To be valid, a declaration of trust must satisfy three ‘certainties’ (set out in Knight v Knight (1840) 3 Beav 77):

(a)       certainty of intention (or words): ie, that the settlor intended to create a trust;

(b)       certainty of subject-matter: ie, what property is being held on trust for each individual beneficiary; and

(c)       certainty of objects: ie, who the beneficiaries are.

Further reading can be found here: THE THREE CERTAINTIES REQUIRED TO DECLARE A TRUST – OR IS IT FOUR? “DISTRIBUTIONAL CERTAINTY” | The Cambridge Law Journal | Cambridge Core

Certainty of intention

There are two aspects to certainty of intention:

(a)       the trust property itself must be described with certainty; and

(b)       the settlor must define the beneficiaries’ interests with certainty.

Ultimately, certainty of intention means the settlor has explicitly imposed a duty on someone to act as a trustee on behalf of the beneficiaries.

Moreover, a trust can only be validly created over property owned by the settlor at the time. It cannot be created for ‘future property’, such as an anticipated inheritance.

Certainty of subject-matter

A valid declaration of trust must specify exact amounts of property. For example, it cannot be valid if it refers to ‘some money’ or other inexactly described property.

Ideally the settlor should use the word ‘trust’ to make it clear what they are doing, but this is not strictly necessary, as long as their words or actions show a clear intention that someone must hold property for the benefit of someone else. See the case of Paul v Constance {1977) 1 WLR 527

Nevertheless, obligatory or mandatory wording must be used to create a trust. Precatory words, which express a wish, hope or expectation, do not count.

Where someone transfers property to someone else, and what they intended has not been made clear whether through words or conduct, the law must determine the right outcome based on various presumptions.

If the beneficiaries’ shares or interests in the trust fund are not defined with sufficient certainty, the trust will fail. For example:

(a)       If the settlor intended to create a trust, naming themselves as trustee, no trust is created unless there is certainty regarding trust property. Otherwise, the settlor will remain the outright owner.

(b)       If the settlor transfers property to a third party, making them trustee over ‘some of it’ with the rest as a gift, then again no trust is created. The third party owns the property absolutely, free from any trust.

(c)       If the settlor appoints a trustee, intended to create a trust but without specifying the interests the individual beneficiaries will take, the outcome is that the trustee holds the trust fund under a ‘resulting trust’, for the benefit of the settlor rather than any beneficiaries.

Beneficiaries must be identified with sufficient certainty for the trustees to know to whom they are to distribute property. They will be in breach of trust if they distribute property to someone who is not a beneficiary.

It is usually a simple matter to identify beneficiaries who are named individually. If those beneficiaries are described as a class, however, different certainty-of-objects tests apply depending on whether it is a fixed interest or discretionary trust.

Fixed interest trusts

In the case of fixed interest trusts, that test is the complete list test. That is, it must be possible to list each and every beneficiary.

If the beneficiaries are a class of people, what is required is:

(a)       Conceptual certainty. The description of that class must be clear and objective. Otherwise, the trust will fail; and

(b)       Evidential certainty. Without sufficient evidence to identify all the beneficiaries, again the trust will fail.

Discretionary Trusts

In the case of discretionary trusts, the trustees do not necessarily have to be able to list all possible beneficiaries before exercising their discretion. That means instead of the complete list test, the ‘given postulant’ (or ‘given individual’) test is used: the question is whether it is clear that any given postulant (individual) is a member of the class in question or not.

Moreover, the trust must also overcome a separate test: that of administrative workability. If the class is defined so vaguely as ‘not to form anything like a class’ (McPhail v Doulton [1971] AC 424), the trust will be invalid.

Discretionary trusts must also not be capricious. If there is absolutely no rational reason for the trust’s existence or on which the trustees can exercise their discretion, it is deemed capricious and therefore invalid.

Rules against perpetuity

Settlors sometimes want to use trusts as a kind of insurance policy extending many years into the future. This can prevent the circulation of money for long periods, which is not in the public interest, so the law will only trusts that last for a limited period, not in perpetuity.

The declaration of trust

The declaration of trust must come in a will that complies with the Wills Act 1837. This means it is made in writing and signed by the testator in the joint presence of two witnesses. These witnesses must then also sign the will in the testator’s presence.