#14753 - Formalities - GDL Equity and Trusts

Topic 3 – Formalities

• Formalities = building blocks for Express Trust.

• Creating an Express Trust

  • The ‘Three Certainties’

  • Statutory Formalities

  • Constitution

  • = all essential for express trusts

• Statutory Formalities = Basic element of Trusts law but is often misunderstood and misapplied.

  • KEY = Essential difference between two statute sections of S53(1)(b) and 53(1)(c) LPA 1925

  • Need to know how and when they apply!

• Express Trusts – Approach:

  • 1. Identify what is happening

  • 2. Apply the appropriate formalities (to complete it)

  • 3. If appropriate Formalities not complied with – look any possible exceptions to the general rules if they are not satisfied

    • Important to talk about the general rule before talking about exception

• What do Formalities apply to?

• Settlor = absolutely entitled to the property in question, the person who wishes to set up the trust.

• Trustee = individual in whom legal title is reposed. The individual with powers over the property, but also very rigorous duties.

• Beneficiary = Individual who retains an equitable interest in the property and is the owner of the property in equity. Extensive rights that are enforceable against the trustee in court.

• Formalities apply:

  • When B1, for whatever reason decides to transfer their equitable interest in a trust to B2 (sell it, give it away whatever). The movement of equitable title within a pre-existing trust is also what S53(1)(c) applies to.

  • Whenever B1 transfers equitable interest to B2, think about Formalities.

Formalities (Testamentary trust)

• i.e. a trust that is set up in a testamentary document like a will, one that only takes effect after the settlor has passed away.

• Statutory formalities for setting up a testamentary trust (Section 9, Wills Act 1837) = for creation of a legal will

  • (a) In writing and signed by the testator

  • (b) Signature (Settlors) must be made or acknowledged in the presence of two witnesses present at the same time

  • (c) Each witness must attest and sign the will or acknowledge their signature in testator’s presence

Formalities (inter vivos trust)

• i.e. a lifetime trust, a trust declared before the Settlor has passed away.

• Maitland = pioneers in equity: “without deed, without writing, without formality of any kind” i.e. no formalities for inter vivos trusts.

  • Case = Paul v Constance – No real formality, no technical language and trust was still successful.

• Quote only true with Lifetime Trusts with property other than land. I.e. Personal property can be created without deed/formalities of any kind.

Exceptions = S53 LPA 1925

• S53(1)(b) LPA 1925 = declaration of a new trust of land (freehold or leasehold) and trust must be manifested and proved by some signed writing, must comply with this section. Unlike personal property, land is most valuable property, not interchangeable. Land by its nature is unique, nothing like it (intrinsic uniqueness) – so has additional formalities whenever a trust of land is declared.

  • NB: Manifested and proved = means the trust itself can be declared orally.

  • When declaration of new trust – validity is based purely on satisfaction 3 Certainties!

  • Until trust evidence in writing Settlor signs – the trust is unenforceable (beneficiary is out of luck, as even if the declaration is valid, unless they can produce something in writing which is evidence of the trust, and signed by settlor – they will not be able to enforce their interest under the trust in court i.e. they don’t have an interest in that property).

  • I.e. if Trust satisfies 3 Certainties but not S53(1)(b) LPA 1925 it is valid but unenforceable.

• What happens with valid declaration but something in writing years later = evidence in writing, doesn’t have to come at any point, so long as its in writing evidencing trust and signed by the Settlor.

  • Trust seen to be valid from point of declaration (when 3 Certainties satisfied), not from the point of writing. However, its not enforceable under S53(1)(b) is satisfied

• Exception to S53(1) is S53(2) LPA 1925 = deals with Implied Trusts (i.e. these do not have any Formalities)

  • Example – Lets say you don’t satisfy S53(1)(b); you declare a trust of land but you do not evidence it in writing or signed by the Settlor = it will be valid but unenforceable as an Express Trust. BUT could still be enforced as an Implied Trust under S53(2) LPA 1925

  • Good Example Hodgson v Marks (1971)

    • Case = Women left several properties by her deceased husband. She decides to rent out house to lodger. He moves in with good reference and says he’s a retired Colonel. He courts Mrs Hodgson with gifts and she trusts him. He then convinces her to sign over legal title in the house to him. She does it, but there’s an understanding that een though he’s a legal title holder, she can live in the house – it will be held on trust for her.

    • She didn’t comply with S53(1)(b) = even though clear in intention (subject/object), because there was no evidence of the trust in writing and signed by her the trust would essentially fail as an express trust [valid but unenforceable]. He relies on this, he then sells it to Mr Marks, who then has a problem as he has to deal with a women who claims he is the beneficiary of this trust who the house.

    • Court decides = yes you haven’t satisfied S53(1)(b) so valid but unenforceable trust nevertheless we will impose a trust, so Mr Marks now holds it on trust for Mrs Hodgson under a Resulting Trust.

    • Principle = Even though Formalities aren’t complied with in S53(1)(b), its an exception under S53(2) and you can gain a beneficial interest in a house despite the lack of formalities.

• Summary of above points:

  • Lifetime trust of personal property = No statutory formalities, only need to comply with 3Cs

  • Lifetime trust of land = 3Cs apply, and formalities of S53(1)(b) LPA 1925 and evidence the trust and have the Settlor sign it.

• S53(1)(b) LPA 1925 [only applies to declarations of new trusts of land] = clear

Formalities (Inter vivos Trusts)

• S53(1)(c) LPA 1925 = quite contentious, total havoc with the courts and individual claimants!

• Applies to a Disposition of a subsisting equitable interest in order to dispose of that SEI;

  • Disposition made in writing; AND

  • Signed by person disposing of the interest

  • = Both, otherwise void and nothing happens. The interest remains in place with original owner.

• Difference in timing between S53(1)(b) and (1)(c)

  • (1)(b) = evidence (in writing and signed) can come at any point as long as it is before the Testator dies.

  • 1(c) = evidence (in writing and signed) otherwise void.

• Subsisting equitable interest

  • = Trust already in existence (property divided)

Trustee (legal title)

Beneficiary (equitable title)

Subsisting equitable title = refers to the equitable title the beneficiary possesses, under pre-

existing trust.

• (1)(c) = does not refer to a declaration of a trust, even though the Settlor divides Legal and Equitable Title, the equitable interest with the declaration of a new trust passes through the declaration

  • (1)(c) only applies to the movement of equitable interest within a PRE-existing trust. So if trust not in place already (NOT a 1c situation)

• Example = pre-existing trust of personal property or land = makes difference, as when dealing with equitable interest held by beneficiary of either types of trust S53(1)(c) will apply

  • Dealing with equitable interest S53(1)(c) applies irrespective of property.

• Disposition = Not defined in LPA 1925, so when it came time to enforce S53(1)(c), needed to know what it means:

  • Timpson’s Executors v Yerbury (1936)

    • = Disposition refers potentially to a number of situations

    • 1. Assignment of the pre-existing equitable interest directly to 3^rd party

      • i.e. beneficiary of trust, decide to transfer equitable interest to someone else (3^rd party).

    • 2. Beneficiary, tell Trustee to hold equitable interest on trust for 3^rd party

      • Don’t assign it directly, but hold on interest

    • 3. Contract for valuable consideration

      • Don’t give to 3^rd party, you contract with them and sell it to them for you.

    • 4. Beneficiary say they hold equitable interest on trust for 3^rd party

      • i.e. a trust within a pre-existing trust.

  • 1. Scenario: Does disposition apply to a situation where a beneficiary of a pre-existing trust assigns their equitable interest directly to a 3^rd party?

  • = YES, this is exactly what S53(1)(c) was meant to govern.

    • = beneficiary of trust, decide to transfer equitable interest to 3^rd party – every time you must comply with S53(1)(c) formalities. Put disposition in writing and sign it otherwise void where interest remains with that original beneficiary.

  • 2. Scenario: Trustee holding interest for 3^rd party

  • = appeared in Grey v IRC

    • Went to HoL, end result was it must be in writing otherwise void

    • Case = Mr Hunter is owner of 18,000 shares in company. He only wants to have shares held on trust for 6 granchildren. He sets up 6 individual settlements (3,000 shares each). He wants to avoid stamp duty (levied), i.e. tax evasion which is usually levied on documents that confer value, he has to do this without the use of documents – coming up with complex scheme:

      • He sets up trust in own favour, transfers legal title to the trustees (no value conveyed as he is beneficiary, as he’s the one who still essentially owns those shares). Will have documentation for transfer of legal title but confers no value so no stamp duty.

      • Then he orally tells trustees and tells them to hold these shares on trust, for his grandchildren (equitable title). He believes trustees now holding them on trust.

      • = No documentation used to...