#2530 - Constitution Of Trusts - Trusts and Equity

Constitution of Trusts

What do you have to do to set up your trust and make it work?

General rule: A trust will not be completely constituted until the relevant trust property has been vested (legal title transferred) in the intended T. It will fail and be inoperable (imperfect) if it has not been transferred by the correct legal rules unless:

• all the formal steps necessary to vest the property in the trustee have been completed, or

• the trustee or intended beneficiary have an equitable right to compel the settlor to carry out the remaining steps necessary to vest the trust property in the trustee (cf. lectures on formalities and the right of the beneficiary to enforce an informal trust arising by operation of law).

Justification: “Equity does not assist a volunteer” – When the person to whom the transfer is intended to be made has not given valuable consideration they are said to be a ‘volunteer’. Most trusts are donative transactions (ways by which the settlor makes a gift to the B, where B has given no consideration). Once the trust is properly constitutive and operative the B can enforce the T’s duties, even though they are a volunteer. But if the trust is not properly constituted and operable, the court won’t generally assist the B because they will have no legally enforceable rights.

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Transferring the Legal Title

• Milroy v. Lord (1862); Identified three ways in which an absolute owner of property could benefit another with property:

1. Make an outright gift.

2. Settlor declares that certain property vested in him or her is henceforth to be held on trust for B (self-declaration).

3. S effectively transfers certain property to T and declares the trusts upon which T is to hold the property for B.

Rules for valid transfer of property:

• Land – S.52 LPA 1925; A transfer of land or an interest in land must be by deed and completed by registration at the Land Registry.

• Stocks and shares – Stock Transfer Act 1963, Companies Act 1985; For a private limited company there must be a memorandum of transfer, registration of shares. For a public limited company (plc) there must be compliance with the electronic CREST system and then the correct instruction will be adequate.

• Chose in action – Includes things such as cheques, debts, or rights under a contract. Requires compliance with s.136 LPA 1925, which requires endorsement.

• Chattels – Can be transferred by deed or compliance with Re Cole [1964]; delivery and intention that legal ownership is transferred.

• Money – Merely requires delivery.

Transferring the Equitable Title

S.53(1)(c) LPA 1925; must be signed by the person disposing of the interest. Applies to any type of property held beneficially, not just land.

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Methods of Constituting a Trust

1. S declares himself or herself trustee for B

Rule: The main question is whether the transaction evidences an intention to make an immediately effective declaration of trust under which the trustee retains the legal interest in the property (certainties).

• Paul v. Constance [1977]; Requires a clear expression on S’s part that he intends to hold the property on trust for B.

Issue: Often you only know the settlor means to give a gift, but not how they intend that gift to take effect. Possibilities:

• It may be that settlor means to make a gift by transferring the entire legal and beneficial interest to B; or

• S means to keep legal interest themselves but will keep and hold it on trust for the B.

!! But these two intentions are incompatible – mutually exclusive.

‘Equity does not assist a volunteer’:

• Jones v. Lock (1865);

Facts: J wants to make a gift of money to his baby son. J puts a cheque for 900 into the son’s hands – ‘look thee here, I give this to baby’. J dies later so there is an inheritance dispute. Baby was child of a second marriage, and other children from first marriage dispute.

Issue: Obviously he wanted to make a gift. How is J’s gift to take effect?

Decision:

1. He failed to give both legal and equitable title to the baby, because he did not endorse this statement by putting his signature on the back of the cheque and give to son. Only did the second. Ineffective.

2. Was there a declaration of trust of the cheque for the son? No, the failed transfer cannot be saved. Cannot save outright failure of transfer by treating it as a trust.

= Gift fails.

• Richards v. Delbridge (1874); involved the attempted gift of the lease of a mill. Grandfather was lessee and wanted to make gift to grandson. He took the deed of lease and simply notes on the back that he will assign to his grandson – endorsement. This is an ineffective form of legal transfer because there was no deed of assignment. Attempted outright transfer failed. No question about intention but an imperfect transfer cannot be solved this by a trust. Cannot construe a declaration of trust out of the failed transfer of property.

Intermediate case showing interaction of the 2 principles:

• T. Choithram International S.A. v. Pagarani [2001];

Facts: Underlying intention was to transfer assets by the way of trust, but it was an interim intention to hold same assets as trustee until the final completion of the trust was carried through. Mr C wants to make a gift of all wealth across to a charitable foundation. He has already set up trust – already completing constituted by a 1000 token gift. Now wants to make substantial transfer of assets (shares and bank balances) to fully fund the trust. Whilst on his deathbed in the presence of witnesses he said, ‘I give all my wealth to the trust’ so all shares held by C are on trust for the charity.

Issue: But no official transfer had been executed by C, but he died, although his intention was clearly to divest himself of his assets. If u took a Richards v Delbridge ‘equity does not assist a volunteer’ approach then the trust would fail.

Decision: Lord B-W by a benign ‘but one ought not to strive to defeat a gift’ but if one could find on facts a present declaration of trust by C, when they was only intended to act as an interim measure, until the final transfer took place = halfway house between full transfer and declaration of trust. [Neither a gift, nor an actual transfer to a third party]

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2. S transfers property to T to hold on trust for B

Rule: A trust intended to be constituted by transfer to a trustee cannot be treated as a declaration by the settlor that he or she holds as trustee for B.

The problem is the converse of that described by Maitland – unless the intended T actually becomes the legal owner of the property the trust cannot actually be constituted. If S intends to transfer his or her legal interest in the property to T to hold on trust for B but the transfer is ineffective, then he or she cannot also intend to retain that legal interest on trust for B. Cannot construe a failed transfer as a dec by the settlor than he will hold assets on trust for himself.

• Milroy v. Lord (1862);

Facts: Would-be settlor (M) owns shares in the Louisiana bank. M wants to make gift of shares to daughter Eleanor, and wants the gift to take effect in the form of transfer to trustees. M executes trust and delivers shares to L (would-be intended trustee), but M does not complete a transfer of those shares.

Decision: CA held trust not completely constituted so E (would be B) has no interest under the trust and no equity to compel completion of the trust. Trust fails.

Reasoning: In order to be full transferred, L would have to have the legal transfer. The share transfer would need to be executed but it was not. The share certificate and transfer doc would need to be delivered to the transferee L. Transfer would need to be registered in the company’s books.

Principle: M has kept legal title in shares by default – can we construe his intentions as a declaration that the settlor intends to hold on trust himself for his daughter to save it? No, these are incompatible.

Issue: Can an agent for S carry out the remaining steps necessary to complete the constitution of the trust? For example, L happened to have a power of attorney over M (settlor). So L had agent’s power in respect of M’s property. Can L use his power of attorney to execute the share transfer document and deliver the property to the co. for registration?

Held; no. The existence of an agency relationship is irrelevant – the agency relationship terminates on death, so any authority the agent had terminates.

Exceptions – Equitable principles which perfect a transfer

The intended B may have an equitable right to compel the complete constitution of the trust.

(i) Every effort has been taken by the transferor

Principle: Where power to complete the transfer is out of the hands of the transferor then equity will ‘look as done what ought to be done’.

If some formal steps can only be performed by the would-be settlor, they must be performed by the settlor to make the transaction complete in equity. But if another person can complete it too, if those outstanding steps have still not been taken, then that is not fatal to the gift.

Question: Has S taken all the steps that lie exclusively in his or her power to complete the transfer of the legal interest in the property to the intended...